Profits surge for NetSol

Buoyed by strong operating performance and currency-related gains, one of Pakistan’s leading IT companies has had a robust year in FY22. As per the latest results posted to the bourse, NetSol Technologies Limited (PSX: NetSol) saw its topline grow by a quarter to reach Rs6.11 billion, with a nearly five times expansion in its bottomline to Rs913 million, for the year ended June 30, 2022.

Analyzing the core operating performance during FY22, NetSol – which sources majority of its sales by exporting products/services such as NetSol Financial Suite (NFS) Ascent, NFS Digital, and NFS Ascent on Cloud to clients in Asia-Pacific, North America and Europe – posted 13 percent yearly growth in operating profits to Rs559 million. The net-revenue growth of 24 percent year-on-year was presumably due to strong growth in license revenues as well as exceptional growth in revenues from ‘subscription and support’ services.

Considering that human resource is the main factor of production for IT firms, the inflationary pressures have elevated HR costs across the board. Those cost pressures are apparent in NetSol’s more-than-proportional growth in cost of revenues (27% YoY growth) and administrative expenses (30% YoY growth) relative to topline growth of 24 percent. It helped that the selling and promotion expenses’ growth was almost flat at 1 percent. In the end, operating margin was at 9 percent in FY22, down one percentage point compared to the fiscal before.

The Bottom half of NetSol’s FY22 income statement is where the financial strength was really amplified for the IT software and services exporter. The firm’s ‘other income’ jumped by more than 600 percent – or seven times the level in FY21 – to reach Rs1.07 billion in FY22. That absolute increase of Rs920 million relative to the last fiscal owes mainly to the exchange-gains resulting from the large amount of depreciation that PKR witnessed against the US dollar and other global currencies.

As a result, despite a large loss coming in from NetSol’s share in associate, the firm’s pre-tax profits showed 509 percent growth year-on-year to Rs1.05 billion. Due to the above factors (and, in part, helped by proportionally-lower corporate income tax booked in FY22 relative to FY21), NetSol closed FY22 with 377 percent year-on-year growth in net profits to Rs0.91 billion.

As a result, the net profit margin jumped from 4 percent in FY21 to 15 percent in FY22. The scale of net profit achieved by NetSol in FY22 is the highest since FY19. This potentially sets up the firm strongly for what may turn out to be a challenging year for IT exporters due to the growing economic weakness and resulting slowdown in IT spending in key markets for IT exports. Let’s see how things turn out in FY23.