NetSol: gaining strength

Things are looking up for NetSol Technologies Limited (KSE: NetSol). Though the firm has posted a loss-making quarter, a continually expanding top line curtailed the losses, the KSE notice shows.

Recall that NetSol had closed FY15 with 47 percent expansion in net revenues, which had helped to contain its net loss that year to Rs187 million, 70 percent less than the previous year. The story remains the same for the Lahore-based lease-finance software maker: strong top line gradually eating away at the losses.

FY14 was a bad year for revenues as the export-dependent firm was transitioning from its legacy software product to a new product. Revenues picked up in FY15, as the new product, Ascent, generated initial licensing deals. Besides the legacy product, NetSol Financial Suite also kept generating more maintenance revenues in the firms core markets of China, Thailand, Australia, and a few other Southeast Asian markets. The firm had also reported expansion in its IT consulting and services business.

Now at the outset of FY16, too, healthy revenue growth - seemingly on account of the same three factors - has led to a notable amelioration in all three profit margins. More help was offered by controlled increase in cost of revenue, which consumed 79 percent of net revenues in 1QFY16, way lower than 94 percent in 1QFY15. Similarly, there is double-digit decline in administrative expenses as well as selling expenses.

But the favourable revenue-expense combine was still inadequate to pull the firm back to black in the first quarter. With a net margin at negative 10 percent, the firm still has some more miles to go in terms of top line growth before profitability is restored. Growth at the top would come as a result of more selling, which the firm has traditionally not shied from.

To remain relevant in the market, NetSol has to keep churning out new software products. Besides Ascent, NetSol has been investing in building a new product, NetSol Mobility. The firm, going forward, has three product streams to focus. One, further penetrate the market for NFS. Two, promote Ascent among potential and existing clients. And three, keep on investing in new products. So far, the efforts are paying off, but there is some distance to cover in terms of a return to year-end profitability.