Some positives for NetSol

NetSol is not quite out of the woods yet, but its management can take solace in some small positives brought out by the quarter ending March 2015. During the third quarter, the Lahore-based software licensing firm generated a whopping Rs702 million in revenues, more than double in the same period last year. This top line jump, however, was still not good enough to save the bottom line from falling into red again.
NetSol, which generated over 95 percent of its revenues from its overseas clients, has been reeling from a product transition process for over one and a half year now. Migrating from its erstwhile flagship financial software product, NetSol Financial Suite (NFS), NetSol introduced a new software product, NetSol Ascent, in October 2013.
Immediately after the Ascent launch, revenues slumped: NetSol closed FY14 with revenues down 30 percent year-on-year and an unusually-high net loss of Rs618.5 million. The situation started improving by the second quarter of the ongoing fiscal, as the quarterly revenues went up by 70 percent on a year-on-year basis and by 25 percent on a quarter-on-quarter basis.
Now, thanks to healthy second and third quarter performances, NetSol has closed 9MFY15 with a top line growth of 47 percent year-on-year. It seems that the firm has been giving initial success rolling over some of its existing clientele over to Ascent. As per the management, there has been growing interest for Ascent in NetSol’s markets in the Asia-Pacific region.
But the firm is still in loss for the nine-month period, of about Rs296 million, which is nearly 8 percent higher compared to 9MFY14. The losses have been lurking because of continually-high operating expenditures, which are necessitated when creating a new product and penetrating it in the target markets. So, core costs have remained high in the third quarter, as shown in the illustration, and so have the promotion expenses.
As NetSol CEO told BR Research few months ago, the company’s focus from Ascent’s product development has now moved to Ascent’s product delivery. So, one doesn’t expect pressure from operating expenses to relent in the coming quarters. The company must keep using its marketing dollars to generate licensing deals for the new software.
But what has been impressive is NetSol’s ability to generate massive top line gains in recent quarters. A couple of more quarters like that and NetSol will be back to profitability.

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NETSOL TECHNOLOGIES LIMITED

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Rs (mn)                     3QFY15    3QFY14       Chg

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Revenue-net                    702       341    105.7%

Cost of revenue               (571)     (457)    25.0%

Gross profit                   131      (116)        -

Gross margin                  18.6%    -33.9%        -

Selling & promotion exp.       (56)      (41)    37.7%

Administrative exp.           (119)     (127)    -6.4%

Other income                    14        88    -84.1%

Operating margin              -7.0%    -76.4%        -

Net profit / (loss)            (62)     (274)   -77.3%

Net margin                    -8.9%    -80.3%        -

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Source: KSE announcement.

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