KGJI

WNC

NTWK

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COMPETITION

Competition in the credit-based business software industry is highly fragmented. Traditionally, banks and other lending institutions have tended to buy solutions on an ad hoc, function by-function basis.Consequently, many of these companies currently have dozens of systems running independently, some of which are decades old.
Though some of the multi-billion dollar companies identifi ed as potential strategic acquirers later in thisreport (such as FISV, DST, LPS, and FIS) offer lending software suites that bundle multiple functions,none of them offer an equivalent combination of:
• end-to-end capability
• geographic fl exibility, including the ability to handle a variety of currencies, tax codes, and local considerations “under one roof”
• low prices, as well as the fl exibility to price on a “per transaction” basis
• worldwide implementation by local subsidiaries and joint venture partners
• ISO 9001, ISO 27001, and CMMI Level 5 quality assurance

In order to accurately defi ne NTWK’s competitive position, it is necessary to defi ne the Company’s business in broader terms. While approximately 60% of NTWK revenues are currently derived from NFS, it must be noted that the Company is involved in varying degrees with several initiatives that could ultimately surpass the scale of its business with credit-based businesses. These opportunities include defense, health care, land records management, property and casualty insurance, and SAP-compatible software. Rather than defi ning NTWK’s business by the products it develops or the markets it currently serves, it is more useful to defi ne the Company in terms of its unique strengths and competitive advantages, as well
the ways in which it has been successful historically in exploiting those strengths and advantages.

The Company and its predecessor businesses have been sustained by the entrepreneurial energy, complementary skills, and shared vision of the three Ghauri brothers, as well as their ability to function as a team. Naeem, for instance, facilitated the most important deal in the Company’s history (Mercedes Benz Thailand) when he was a full-time Mercedes Benz employee. Later, he became NTWK’s CEO during the Company’s bleakest hours in 2001 and voluntarily “demoted” himself in 2006 to refocus on deal making.

The Company is particularly likely to attract the attention of strategic acquirers because NTWK has:
• a grossly undervalued stock
• a blue chip client list offering signifi cant cross-selling opportunities, particularly in the banking, auto, and equipment leasing industries
• a reputation for quality
• a valuable software library
• the ability to effectively use low cost, highly trained Pakistani technical personnel – thereby creating an opportunity to offer attractively priced “bundles” of acquirer and NTWK products and services
• striking similarities to CMC Limited, which attracted expressions of interest from two large IT
consultancies and a hardware manufacturer (Tata Consultancy, Wipro, and Hewlett Packard) when put up for sale by the Indian government in 2001 – a diffi cult time to fi nd bidders for IT businesses
• exalted status in the Pakistani business and political communities that might be leveraged by an acquirer seeking to enhance its own sales to Pakistan
• Pakistani government assistance in the form of preferential tax treatment and low cost export financing.

By Bill Matson, CFA

In his 2007 book, The Black Swan, Nassim Nicholas Taleb prophetically argued – prior to the 2008 market meltdown and the May 2010 flash crash – that the potential risks and opportunities in the financial markets are not nearly as limited as money managers employing conventional, bell curve-based assumptions would have us believe. In order to prosper in such an environment, he advocates a “barbell strategy,” wherein a significant percentage of one’s portfolio is allocated to extremely low-risk assets while the rest is invested in risky assets having the possibility of extraordinarily high returns.

According to Taleb, “A black swan is an event, positive or negative, that is deemed improbable yet causes massive consequences.” Seeking out exposure to positive black swans, while carefully controlling exposure to the negative, makes particularly good sense in view of the increasing frequency with which low-probability events are occurring in our financial markets.

It is in this context that NetSol Technologies, Inc. (NASDAQ: NTWK) (NASDAQ DUBAI: NTWK) must be viewed if it is to be properly evaluated. The company’s existential risks, most notably its operations in an unstable region, are well recognized and undoubtedly overly-discounted by investors. Its potentially game-changing opportunities, however, possess strong likelihoods of coming to fruition and have been systematically downplayed in management’s forecasts.

Nobody will be shocked if NetSol ultimately nets tens if not hundreds of millions of dollars from contracts with the Pakistani government. Or, it could be the company’s Saudi Arabian joint venture that ultimately dwarfs the profitability of NetSol’s current operations.

If the company were seeking venture funding, these opportunities would certainly be reflected in its business plan and given serious consideration by the venture capital community. But Wall Street is understandably a far more cautious place than Sand Hill Road. Hordes of lawyers stand ready to initiate class-action litigation when quarterly earnings disappointments causing stocks to crater. And analysts are far more comfortable being wrong in the company of their peers than in taking bold positions diverging sharply from consensus views.

4Q10 was a tremendous quarter for NetSol in several respects. Its $0.04 EPS blew away our estimate of $(0.00), and its $10.7 million revenue figure far surpassed our $7.9 million estimate. Moreover, earnings quality has strengthened during the past year, with accounts receivable turnover for FY10 increasing YoY from 2.4 to 3.1 and management noting a sharply declining trend in bad debt expense. In addition, cash from operating activities jumped 603.9% on a YoY basis.

Having been overly conservative, along with our peers, with respect to 4Q10, we are developing a strong appreciation for the conservatism of NetSol’s management insofar as its guidance is concerned. So we listened especially carefully to the company’s 9/8/10 conference call for the soft pedaling of potentially favorable future developments, such as:

1) The omission of Pakistani government contracts from NetSol’s revenue forecast, due to the recent floods. None of the company’s Pakistan locations were affected by this disaster, but delays are anticipated in the country’s public sector projects. The company, however, remains a leading contender for significant contracts relating to Pakistan’s land records management system and the digitization of the nation’s military. To the extent that any of NetSol’s Pakistani government contracts result in FY11 revenues, this will be, in essence, a positive revenue surprise and likely trigger an upward revision of earnings guidance.

2) The company being likely to increase its ownership of NetSol Pakistan from 58% to 76% within the next two months, a transaction expected to be accretive to NTWK EPS. Again, the Company is exercising an abundance of caution in not reflecting this transfer of ownership in its current guidance.

3) Interest on the part of potential acquirers. Management acknowledged briefly that approaches had been made during the past year, but noted that the asking price would be in the range of $8.00 to $10.00 per share.

4) The extremely guarded approach NetSol has taken to publicizing the strengths, benefits, and revenue potential of its next-generation product.

NetSol’s management has given EPS guidance of $0.15 to $0.20 for FY11. But given the conservatism observed in the company’s management insofar as its forward-looking statements are concerned, we would not be surprised to see them far exceed these projections.

Consequently, NetSol’s status as a public company may harshly constrain the ability of management and analysts alike to pin numbers on its most enticing possibilities.

So black swans they will remain. At least for now.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

TCCO

TechnicalCommunications Corporation

CONCORD, MA, August 2, 2010 – Technical Communications Corporation (NasdaqCM: TCCO) today announced its results for the fiscal quarter ended June 26, 2010. For the third quarter of the Company’s 2010 fiscal year, the Company reported net income of $2,423,000 or $1.33 per share, on revenue of $6,350,000, as compared to net income of $277,000, or $0.19 per share, on revenue of $2,087,000 for the quarter ended June 27, 2009. For the nine months ended June 26, 2010, the Company reported net income of $4,692,000, or $2.87 per share, on revenue of $14,690,000, as compared to net income of $708,000, or $0.49 per share, on revenue of $5,987,000 for the nine months ended June 27, 2009.

The Company also announced that on July 29, 2010 its Board of Directors declared a dividend of $0.10 per share of common stock outstanding. The dividend is payable in cash on September 7, 2010 to all shareholders of record on August 23, 2010.

Commenting on corporate performance, Carl H. Guild, Jr., President and Chief Executive Officer of TCC said, “Revenue and operating income increased during the third quarter due to the extraordinary sales volume generated by deliveries of TCC’s DSP 9000 RF Encryption Systems currently being deployed in Afghanistan. As previously reported, the Company received orders in April 2010 valued at approximately $9.7 million for encryption equipment to provide secure national communications in Afghanistan. TCC is making shipments on these contracts on an accelerated basis and expects to substantially complete deliveries in the fourth quarter of 2010, which we expect will result in record revenues for fiscal 2010. Upon completion of these deliveries, our revenue is expected to return to the more modest levels achieved during the recent past. The Company continues to expand its market for the DSP9000 RF Encryption System to new customers that can benefit from a universal security solution which can be applied to their existing radio communications suite of equipment.”

Mr. Guild continued, “For the remainder of fiscal 2010 and fiscal 2011, TCC expects to maintain its increased investment in internal product development. We are evaluating several technical options for enhancing the DSP 9000 Radio Encryption product line, which may include cryptography modifications, hardware and software changes and partnering with radio manufacturers to incorporate imbedded solutions. Driven by customer demand, TCC has proceeded with the development of variants of its DSD72A-SP Bulk Encryptor, which will provide higher speeds and additional interfaces for the encryptor’s many commercial and government applications. A new multi-mode interface for the DSD72A and a new family of high performance path sensitive encryptors are in development. Market introduction of the initial versions of these products is expected in the fall of 2010. The CX7000 family of IP and frame sensitive encryptors also is expected to be expanded to provide high speed solutions for enterprise networks and satellite communications systems requiring tailored operational and network characteristics.”

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