Patti L. W. McGlasson - SVP, Legal and Corporate Affairs Najeeb Ghauri - Founder, Chairman and CEO Roger Almond - CFO Naeem Ghauri - President, Global Sales

Howard Halpern - Taglich Brothers Scott Reed - Griffin Partners

Good day and welcome to the NetSol Technologies, Inc. First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Patti McGlasson, Senior Vice President, Legal and Corporate Affairs, General Counsel and Corporate Secretary. Please go ahead, ma'am. Patti L. W. McGlasson: Good morning everyone and thank you for joining us today to discuss NetSol Technologies fiscal 2015 first quarter results. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; and Naeem Ghauri, President, Global Sales. Following a review of the Company's business highlights and financial results, we will open the call up for questions. The call is scheduled for one hour. First, some housekeeping before we start. Please note that all of the information discussed on today's call is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. The Company's discussion may include forward-looking information reflecting management's current forecast of certain aspects of the Company's future, and our actual results could differ materially from those stated or implied. These forward-looking statements are qualified by the cautionary statements contained in NetSol's press releases and SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. I would also like to point out that NetSol will be discussing certain non-GAAP measures and the release issued earlier today contains a reconciliation of these non-GAAP financial results to those most comparable GAAP measures. In addition, I'd like to remind everyone that today's call is being webcast at www.netsoltech.com. Following the conclusion of the call, the webcast may be accessed on the NetSol Web-site where it will be archived for 90 days. With that, I will now turn the call over to Najeeb. Najeeb?

Good morning. Thank you, Patti, and thank you everyone for joining us today. The results reported this morning indicate that we are now in the early stages in our return to growth with multiple new developments that are yet to fully contribute to our financial results. Specifically, we have multiple NFS Ascent contracts in place, including the largest single contract we have signed to date. Also new wins are once again emerging in China for NFS and we are pleased to announce two new contracts on the call today. Naeem will provide further details later in the call. We're also expanding relationships throughout the world, including in North America and Australia, where utilization of our products and services is increasing. In addition, Southeast Asia remains a hotbed of our new business activity and an area where we remain the clear market leader. And in Europe, we're making excellent progress with discussions with potential new clients, so much so that we opened a new office in Hamburg, Germany. We also hired three new senior industry specialists to develop and run our new German and European operations, and will soon share more details on their backgrounds. Clearly, we have a number of activities going on throughout the world and the investment we have made is allowing us to implement complex agreements at a faster pace than in the past, and with tighter implementation schedules for some large value projects, we will be able to recognize revenue at quicker pace. To provide more color on our financial performance, I will now turn the call over to Roger Almond, our CFO, and then to Naeem Ghauri to discuss our new business activities. Roger?

Thank you, Najeeb. As mentioned, we are on the cusp of seeing results from some of our recent agreements which will contribute to our top line results, results that we expect to continue to improve as we move through the implementation of our recently announced $16 million NFS Ascent contract. Total net revenues for the quarter were $10.2 million, up from $8.9 million last year. License revenue was $1.6 million compared to $2.3 million last year. The license component of the $16 million NFS Ascent contract has not yet been recognized. Our maintenance fees were $2.8 million, up from $2.4 million last year. Quantified on an annual basis, maintenance revenue is trending north of $10 million. Services revenue was $4.4 million, an increase from $3.3 million last year. Services revenue will remain robust as we implement the newly signed NFS Ascent agreement. In addition, we are now breaking out revenue from our joint venture with Innovation Group called NetSol Innovation. NetSol Innovation provides support services to the Innovation Group. As we discussed on prior calls, some of the hiring we have done was to service increased need for this joint venture. Service revenue from the joint venture, which we call services related party, was $1.4 million, up from $960,000 last year. Cost of sales for the current quarter were $7 million, up from $5.3 million for the same period last year. The increase is related to higher depreciation and amortization expense of nearly $1 million, as we began amortizing NFS Ascent development cost, as we had described last quarter. The remaining increase relates to the hiring of new employees to achieve our growth objectives. Operating expenses remained consistent with last year at $5.5 million for the fiscal 2015 first quarter, up by approximately $500,000. The increase relates to higher selling and marketing expenses for new business development as well as additional general and administrative expenses to support our expected growth. This brings our net loss to $1.8 million, equal to $0.20 per share, compared with a net loss of $1.1 million or $0.10 per share. On a non-GAAP basis, removing depreciation and amortization and non-cash expense, we were EBITDA positive at nearly $600,000 for the first quarter of 2015 or $0.07 per adjusted diluted share. This compares to a positive EBITDA of approximately $300,000 or $0.03 per adjusted diluted share. For the period ended September 30, 2014, our cash and cash equivalents balance was $10.4 million versus $11.5 million at June 30, 2014. With that, I would like to now turn the call over to Naeem to provide an update on our new business activities. Naeem?

Thank you, Roger. As you heard, the transformative investment we have made is now beginning to pay off and it will become more evident as results start trickling into our financials. As Najeeb mentioned earlier, we signed two new deals in China valued at more than $4.5 million, which will be recognized over the next year as they are implemented. We are now seeing some easing of new license grants for financing and leasing providers in China by the China Banking Regulatory Commission, a positive development that opens up more new business opportunities. In light of this, we are again optimistic about our opportunity to advance our leadership position in China and recently hired nearly a dozen new employees. Moving on to Southeast Asia where interest in NFS Ascent and NFS continues to remain robust, new opportunities in Australia and throughout Asia-Pacific continues to be strong. In Thailand, we are nearly complete with an implementation of the WFS module of NFS Ascent, now expected to be live in late November. And in Indonesia, an NFS Ascent CMS implementation is due to go live in late December. This client conducts a very large volume of business and the implementation represents just the very first phase for a complex program that will continue well into the calendar 2015. In North America, we recently expanded our relationship with a leading capital finance company. We purchased additional licenses and also plan to transition to Ascent late in 2015. Our marketing efforts in the region are in full force, recently presenting at the Auto Finance Summit in Las Vegas and at the Equipment Leasing and Finance Association Conference in San Diego. NFS Ascent and our mobility solutions were well received and we are in the process of conducting custom demos for potential clients. Concluding with Europe, as Najeeb mentioned, we recently opened a new office in Germany, staffed the senior people, some with more than 25 years of experience in the financing and leasing sector. The new office enhances our competitive position locally and in neighboring countries and Europe. We are very excited about the opportunities in the market and we look forward to updating you on our progress. To sum it up, our new business pipeline remains very strong and healthy. With that, I'll turn the call over to Najeeb. Najeeb?

Thank you, Naeem. With new agreements of increased size and scope for NFS Ascent, new deal in China for our legacy NFS, expanding relationships in North America, and possible new business wins for our solutions in Europe, we are confident as we move throughout this fiscal year and beyond. This is one reason why we, the management and Board, have begun to purchase our shares on the open market. Today, NetSol is stronger than it has ever been. We have cutting edge technology solutions, highly skilled and motivated employees throughout the world, a much enhanced infrastructure and a strong pipeline with large value projects that are coming to fruition. We are confident in the investment we have undertaken and look forward to reporting to you on our progress. Our teams across the globe are committed and dedicated to provide best solutions and services to our clients and partners worldwide. With that and for the time remaining, we would now like to open the call for the questions. Operator?

(Operator Instructions) We'll move to our first question from Howard Halpern of Taglich Brothers. Howard Halpern - Taglich Brothers: Congratulations on the progress being made. It's starting to show up, that's a good thing. My first question for the NFS Ascent product, could you just say how many customers that you have signed, signed and/or in the process of being implemented, and what is the total value of those contracts that are signed, but within those customers how much more value do you think you could potentially get out of them?

Howard, I'll ask Naeem to jump in. It's been very positive as you heard, but Naeem will give you more color. Naeem, please?

Yes, Howard, so currently we are live with one client already in Thailand, and then in the process of going live with three other additional clients. So the aggregate size of volume of these three projects that we are currently running would run into in excess of about $20 million plus, so probably closer to $25 million. And the second part of the question was, what are the additional possible revenue opportunities? So these are the initial phases of implementation. Typically clients after they go live, they enhance the system further and there's more opportunity to obviously customize. So that even without current product, that continues. So with Ascent, after it goes live, we see opportunity to continue to service the client and they would require more customization over time. Howard Halpern - Taglich Brothers: Okay. And I'd like to know what your plans are for mobile applications, how do you see that fitting in to the products that you have over the next two, three, four years?

Mobility is a natural extension within the business space that we work in. So there's a lot of interest. We are currently implementing a very large solution in China for our client and we found over the last two months or so there is a growing interest, as you would imagine, that executives on the move they need data, need to know what's happening in the business, and so there we provide them with dashboards and business intelligence. As well as the dealer networks at our auto finance companies, a lot of those guys do business on the road, so they can use the application on a tablet. So really for us this is a natural extension and there is a lot more development going on. We are doing R&D, internal R&D also to bring more innovation into mobility and into our own applications. So really on all accounts, this is an exciting growth area and we'll see over the years Ascent is a natural extension because of its architecture, it's a more natural fit to mobility than was our current generation product. Howard Halpern - Taglich Brothers: Okay. Another question I have is, where would you guys see I guess GAAP rate even coming in on terms of revenue, and I guess that sort of fits in with, because I think probably your operating expenses are probably in a good place from where first quarter results is, so really it depends I guess on revenue growth and is there a potential for gross margins to expand?

I think I can add and Naeem will jump in also from the sales perspective. I think what we are seeing is, Howard, that this year we are not hiring as many as we did in last year, last fiscal year, but we're hiring more in the European markets and as Naeem mentioned we hired some new employees in China given the backlog and opportunity we see in both of these markets. And then of course we are investing in other sales and marketing activities to really get the word out on the Ascent launch in our business community. So we really see some more expenses in next quarter or so to expand our business in Europe especially, we hired some senior executives, but I think gradually you'll see improvement in the bottom line as you've seen at least – if you back out the non-cash item of $1 million for the amortization and depreciation in the Q1, we were in much better shape. But that's exactly how it is on the GAAP basis. But I believe we are on the improvement side both on the top line and definitely on the cash basis. Naeem, you have any more comments on how you think sales activities?

Generally, as we've been sharing, that there is good traction, there is a lot of interest in Ascent, and that we'll reach an inflection point where we will start to exceed the current revenues from the current product and Ascent will overtake, and that period is not far away. So I believe that we are getting closer and the deal sizes are typically bigger for Ascent than they have been for R1. So I feel that we will start to see numbers which are more towards the investment we have made at the start to give us a more justifiable ROI on the big investment we've made on Ascent and we are getting a better dollar value per contract, per license, and also our mandate rates are hitting kind of a number which we have never experienced with R1. So really from all metrics if you look at Ascent, we are higher in value to what the R1 was.

Further about gross margin, let me just quickly answer about this gross margin point. I believe as we start recognizing more license revenue for Ascent and even R1, you will see a much improved gross margin. That's a direct impact on the gross profit as you see more license revenue recognized. So, quite optimistic this to happen in the coming quarters. Howard Halpern - Taglich Brothers: One last one, the $16 million deal, will we start to see some of the revenue kick-in in Q2 or is it going to be Q3?

Roger, you want to answer, or Naeem, you want to answer? I'd answer too.

I think Naeem should probably go in to see where we are in the process because we started to recognize just a small portion of the services revenue in Q1, very small. So I know that the CMS timeline is I guess a six-month period in which they'll be customizing the product and that's where the largest portion of the services revenue is going to come from. And so I'm not sure where we are exactly in that project. So I'll turn that over to Naeem to let us know where we are in there.

Actually there are two distinct phases of this very large program. The fact it is that big a number, $16 million, it's broken into two deliverables. So one deliverable will be this year, which is on December, by the end of next month, we would have implemented the first phase which is a much smaller piece. So that revenue I suppose, Roger, you will recognize after we deliver and this being signed off. But the bigger piece is supposed to go live by November/December of 2015, and so that revenue should be getting recognized as we deliver. I think according to the U.S. GAAP revenue recognition policy that we have, we only recognize after we delivered and the client accepts. So we have broken that next program in pieces. So as we deliver and those pieces get accepted, I think some revenue will come in. But I think the biggest piece will come in the second to third quarter of next year, calendar year. Howard Halpern - Taglich Brothers: Okay. Thanks and keep up the progress.

(Operator Instructions) We'll move onto our next question from Scott Reed of Griffin Partners. Scott Reed - Griffin Partners: Congratulations on a good quarter. If I could start, I have three questions actually, I guess all sort of asked in a sequence here, but first of all, if you could comment on – I do see a bit of a jump in your accounts receivable, and I know in the past you've had some pretty long collection periods, have you changed your policies regarding collection or should we expect to see that number increase in the quarters ahead?

Go ahead, Roger.

You would expect to see this continuing to increase as our revenues begin to increase. I think our policies haven't really changed, we try to collect the receivables as quickly as we can, but we had a decline in our revenues over the last year and as such our AR decreases we collected upon those, but you'll probably see an increase as we begin to recognize or begin to bill and record the accounts receivable. So you'll probably see an increase going there but nothing has changed in our policies as we try to collect those as quickly as we can. Scott Reed - Griffin Partners: Got it, that's great, that's very helpful. Next question, certainly we've seen a lot of strengthening of the U.S. dollar, particularly as compared to Pakistan for example, but worldwide the dollar is very strong. Is that impacting the competitiveness of your bids or should we expect to see some foreign currency translation losses going forward as a result of any of that, do you see any impact on your business at all?

I don't think so. Really if you look at last two years, it kind of averages out. Absolutely in Pakistan the currency of U.S. is strong. Have you noticed any drop or changes, Roger?

No, not on our side. A lot of our receivables are over in euros, a lot of that's…

And dollars.

In dollars and euros, et cetera, and I'm not sure how that affects the bids and our competitiveness or non-competitiveness on that. I can let Naeem focus any questions there, but from a business standpoint I don't see too much of a change there.

Where the markets we are operating in, for example Europe, we're bidding in sterling or euros. So our local cost base is pretty static. So typically if we win a project in the U.K., we sell in sterling and we bear expenses in sterling, so there is really no impact. It's really only when we're selling in Asia in dollars or euros, there is an impact. And honestly I haven't seen us losing a deal based on the currency movement. In general our rates are going up anyway in dollar terms. So there is an upward trend. So when we convert to rupees, rupee actually gained a few rupees six months ago but it's back to where it was, so rupee against the dollar is more or less the way it was the last few months. So I don't see any – that's why you don't see any major currency translation expense as opposed to what it was those again I guess, Roger, last quarter, right, currency gain?

Right, a slight gain, just a minor…

Exactly. So it's almost – so what I was saying was, so for us $300,000, $400,000 in currency gain or loss, that's cost of doing business or sometimes you benefit but certainly these don't change results in any meaningful way, unless the dollar gets weaker. I think the stronger dollar is always good for us because our costs are in rupees, so that helps us. The dollar is gaining some strength. So I think that bodes well for us generally. Scott Reed - Griffin Partners: Great. And the final question is with regards to – first of all it's great that you're breaking out your revenue from the NetSol Innovation joint venture. I wanted to know a little bit more about the nature of that relationship with the Innovation Group, particularly as it pertains to your dividend policy and sort of what we can expect to see there, and that's my final question.

Dividend policy in terms of our – how we are…

Go ahead, Naeem, you're in the Board, you can give the better detail, go ahead.

The relationship is excellent. In fact the reason we started to break out the numbers from our consolidated numbers for Innovation is because it's now becoming more material and meaningful as a number. So we wanted to give some visibility to the shareholders and the market that this is starting to make progress. So, we are actually about 100% up from where we were two years ago in revenue. The revenue quarterly was less than $1 million, about $700,000, $800,000. So now we are hitting $1.4 million, $1.5 million a quarter. So this is about $6 million a year. That's an excellent growth rate, and then our profit margins are very healthy on this, and then as JV partners we split the dividends and that's, Roger, from an accounting perspective I guess that goes straight to the bottom line, the dividend as a profit item. So, yes, this is really exciting and the plans that I have heard from our partner are to further grow this relationship, and the headcount is getting closer to 200 as opposed to it was about 100 two years ago. So, they plan to grow further. And our bigger issue at the moment is infrastructure and more office space, so we need to provide more working space. So that's what we're working on at the moment, but it's a good problem to have.

One best thing about this partnership, Scott, is really the predictability of the service revenue every quarter. And secondly, about 200 employees, most of them are all billed on daily rate. So maybe we hardly have any bench, maybe 10 or 12 people, Naeem? So that's really very productive business for us. Any other questions?

(Operator Instructions) As we have no further questions, I'd like to turn it back over to our speakers for any further or closing remarks.

Thank you. In closing, I'd like to express my deep gratitude to our shareholders for their continued support. Thank you again for joining us today. We'll see you next time.

That does conclude today's conference. Thank you for your participation.