NETSOL TECHNOLOGIES LIMITED

NetSol Technologies (KSE: NETSOL) is a leading software house in Pakistan. NetSol is a multi-dimensional technology company, providing a variety of information technology services and custom software offerings including technology outsourcing, systems integration, application development, processes and business intelligence consulting as well as information security consulting.
NetSol is listed on both the Karachi and Lahore stock exchanges. Its majority shareholding remains with NetSol Technologies, Inc, which is listed on Nasdaq Dubai. NetSol Technologies has offices in the USA, UK, Pakistan, China, Australia and Thailand.
NetSol's clientele includes Fortune 500 manufacturers, global automakers, and financial institutions. Among the industries served by NetSol include lease finance, manufacturing, banking, health and education, information technology, insurance, e-government and defence. It acquired CMMI Level 5 certification in 2006, a distinction shared by only 178 IT companies across the world.
Financial performance REVENUES NetSol earns bulk of its revenues from outside Pakistan. It adopted an aggressive strategy to capitalise on business opportunities in China and Asia-Pacific. Last year, the company reportedly consolidated its position in the Chinese market as a leading supplier of financial solutions to the captive financing divisions of leading car manufacturers and distributors in China.
It has also expanded its Thailand operations through increasing the human resource in the country. It is also on the lookout to exploit the business potential in the American and European markets. In FY10, NetSol's license exports got a tremendous boost due to higher sales in China and Thailand. NetSol Financial Suite (NFS) continues to be the corporate flagship product.
With NFS, the company is catering to needs of major blue chip companies, along with customising the product offering for smaller companies. Software licenses and IT related services provided the growth in revenues in FY10. Maintenance fees comprise the third largest source of revenue. There has been a shift away from software services to software licensing, made possible due to the success of NFS product abroad.
Over 93 percent of the company's revenues came from overseas sales in FY10, compared to roughly 86 percent in FY09. Overseas license sales grew almost threefold, while revenues from software services and maintenance also showed handsome double digit growth. Local sales continued to dip in FY10, owing to sluggish proceeds from software services and maintenance. Very little activity was witnessed in government automation projects during the year.
COST OF SALES While revenues increased by over seventy percent in FY10, NetSol management has also been able to bring its costs of services down significantly during the year by roughly 16 percent compared to FY09. As sales are driven by exports, over 70 percent of the cost is incurred there, mainly on salaries, benefits, travelling and conveyance, and software licenses.
Major impact on cost of services comes from lower expenditures on salaries and benefits, hardware installation, repair and maintenance, as well as technical and consultancy charges. Cost of services represented 29 percent of revenues in FY10, compared to 49 percent in FY09 and 41 percent in FY08.
OPERATING EXPENDITURES Although selling and promotion expenses increased during the year by roughly 14 percent, they have actually declined as a percentage of revenue to five percent in FY10, compared to nine percent in FY09 and seven percent in FY08. Over three-fourths of these expenses were incurred on foreign sales.
NetSol continued in FY10 with its cost-cutting approach after reducing the head-count and streamlining human resources. As a result, not only did the administrative expenses decline by roughly nine percent during the year, they have also gone down as a percentage of revenue to twelve percent in FY10, compared to 21 percent in FY09 and eighteen percent in FY08. Provision for doubtful debts, a one-off event in FY09, distorts the picture somewhat.
Besides cost management, the NetSol is now aiming to orient itself as a sales and marketing driven company to capture the business opportunities in various regions.
OTHER INCOME AND EXPENDITURES Owing to paltry gains on foreign currency translations, income from other sources is down 86 percent in FY10. Not to mention dividend income was not received during the year! Expenditures on worker welfare funds during the year swelled 'other expenditures' by 27 percent in FY10, compared to FY09.
Finance cost for NetSol increased by 27 percent in FY10 due to higher interest payments on foreign loans. Export of computer software and its related services developed in Pakistan are exempt from tax up to the year 2016 (clause 133, 2nd schedule, ITO 2001). NetSol paid roughly Rs 2.5 million in corporate taxes during FY10.
PROFITABILITY Due to higher export sales coupled with less than proportionate rise in cost of services and operating expenses, NetSol was able to register a handsome net profit of Rs 951.8 million - roughly 2.25 times the profits earned in FY09. This is in sharp contrast to FY09, during which cost of services and administrative expenses spiked despite falling revenues, thereby leading to a year-on-year decline of net profits by 58.3 percent.
MARGINS NetSol's profitability has improved a great deal in FY10. It has been an all-round performance for the software leader, which is evident in its margins as well. Gross and EBIT margins improved to 71 percent and 53 percent, respectively in FY10; compared to 42 percent and 30 percent in respective margins in FY09. Resultantly, net margin rose to 52 percent in FY10, compared to 27 percent in FY09.
FUTURE OUTLOOK Lately, Carnegie Mellon Software Engineering Institute has appraised NetSol for maturity level 5 of CMMI version 1.2, a key quality standard in IT industry. This certification will boost the company's sales pitch to the international blue chip companies. It is well poised to leverage its international experience in Pakistan if opportunities arise out of favourable business environment in the future.
Finding new growth avenues is critical for the company to maintain its highly attractive margins. It will be interesting to see how NetSol brings about top line growth from its local and international operations.
Tomorrow: Colgate-Palmolive Pakistan Limited
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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