NetSol Technologies Limited

NetSol Technologies Limited (PSX: NETSOL) was incorporated in Pakistan as a private limited company in 1996 and was later converted into a public limited company. The company is engaged in developing and selling computer software and allied services locally and internationally.

Pattern of Shareholding

As of June 30, 2023, NETSOL has a total of 87.837 million shares outstanding which are held by 7907 shareholders. NetSol Technologies Inc. which is the holding company of NETSOL, has a majority stake of 67.62 percent in the company followed by the local general public holding 26.38 percent of its shares. Public sector companies account for 3.43 percent of the outstanding shares of NETSOL. Directors, CEO, their spouses, and minor children hold 1.45 percent shares of NETSOL. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

NETSOL’s topline posted a year-on-year decline in 2020. In the remaining years under consideration, the topline rode an upward trajectory. Its bottomline shrank in 2020 and 2021 but rebounded staggeringly in the subsequent years. NETSOL’s gross profit margin which had been dropping until 2020 showed improvement in 2021 only to slide back in 2022 and 2023. Conversely, operating and net margins kept dipping until 2021 and recovered from then on. The detailed performance of the period under consideration is given below.

In 2019, NETSOL’s topline grew by 25.59 percent year-on-year which came on the back of global implementation of its flagship product NFS Ascent. The company also finalized contracts with leading blue-chip organizations locally and globally in 2019. The implementation of NFS Ascent in China was the largest implementation of NETSOL to date. As of 2019, 99.8 percent of NETSOL’s total revenue was from the international market. Cost of revenue jacked up by 40.25 percent year-on-year in 2019 which largely included payroll expense followed by travelling and conveyance charges. While gross profit grew by 7.85 percent year-on-year in 2019, GP margin plummeted from 45.24 percent in 2018 to 38.85 percent in 2019. NETSOL’s distribution expense grew by 17 percent year-on-year in 2019 while its administrative expense inched up by 1 percent. The main growth propellers in the operating expense category were salaries and benefits as well as R&D expense. The company recorded tremendous 75.93 percent year-on-year growth in its other income on account of exchange gain as it drives its major revenue from foreign markets. Other expense drastically grew from Rs.4.30 million in 2018 to Rs.261.83 million in 2019, signifying a jump of around 60 times on account R&D cost. While operating profit grew by 17.10 percent year-on-year in 2019, OP margin dropped from 27 percent in 2018 to 25.24 percent in 2019. The company generally financed its operations through equity finances which is evident from the fact that its finance cost as a percentage of its topline stayed under 1 percent in all the years under consideration. NETSOL’s debt-to-equity ratio stood at 16.8 percent in 2019. Finance cost shrank by 9.66 percent in 2019. Its bottomline grew by 16.65 percent year-on-year in 2019 to clock in at Rs.1243.48 million with NP margin of 23.11 percent versus NP margin of 24.88 percent posted in 2018. EPS also grew Rs.11.87 in 2018 to Rs.13.84 in 2019.

In 2020, NETSOL’s topline shrank by 12.5 percent year-on-year. The company achieved major milestones in 2020 which included a major American multinational automaker that went live in China with NFS Ascent’s Retail Platform. Besides, the company also deployed its NFS Ascent in Hong Kong and Malaysia for a leading German auto captive. However, the drop in sales came due to on-site services which came to a standstill due to COVID-19-related lockdowns and travel restrictions. Cost of sales also shrank by 4.5 percent year-on-year mainly on account of a drop in travel and conveyance charges. Gross profit for 2020 plunged by 25.10 percent year-on-year with GP margin sliding down to 33.26 percent. Distribution expense dropped by 31.99 percent year-on-year in 2020 on the back of a considerable drop in commission on sales. There was a drop in the number of new deals signed with customers in 2020 as the majority of customers were in their maintenance phase after successful implementation in previous years. This is also evident from a drop in license fees in 2020 while maintenance fees grew by a good momentum. Administrative expenses ticked up by 2.88 percent in 2020 due to higher payroll expenses. Other income dropped by 49 percent year-on-year in 2020 due to a 90 percent drop in exchange gain on the back of a huge decline in export revenue. This was partially offset by handsome dividend income from M/S Netsol Innovation (Private) Limited. Other expense grew by 15.56 percent year-on-year in 2020 as while R&D expense dropped, the company booked huge provision against doubtful debts in 2020. Operating profit shriveled by 66.52 percent year-on-year in 2020 with OP margin falling down to 9.66percent. Finance cost grew by 21.94 percent year-on-year in 2020 due to an increase in short-term and long-term financing in 2020 as the company availed the SBP Refinance Scheme for the payment of salaries and wages. This increased NETSOL’s debt-to-equity ratio to 24 percent in 2020. In 2020, the company also recorded a share of loss of an associate company worth Rs. 66.79 million. Consequently, bottomline crashed by 80.31 percent year-on-year in 2020 to clock in at Rs.244.84 million with NP margin of 5.2 percent. EPS also posted a steep fall to stand at Rs.2.73 in 2020.

In 2021, NETSOL’s topline posted a marginal 5 percent year-on-year growth. The license revenue mainly came on the back of provision of license to the sister concern’s client for the deployment of NFS Ascent in China and Thailand. Besides, there was a regular stream of customization and enhancement requests from the existing clientele which boosted the maintenance fee in 2021. During 2021, the company didn’t make any local revenue. The cost of sales remained almost the same as it was in the previous year. This drove gross profit up by 14.97 percent year-on-year in 2021 with a slight improvement in GP margin which clocked in at 36.4 percent. Distribution expense grew by 20.28 percent year-on-year in 2021 primarily due to a rise in commission on sales. Administrative expense shrank by 1 percent year-on-year in 2021. While payroll expense significantly rose in 2021, the drop in administrative expense came on the back of a plunge in travelling and conveyance and entertainment expense. Rent, rates and taxes also contributed to a drop in administrative expense as short-term leases dropped during the year. Other income dropped by a massive 68.48 percent year-on-year in 2021 as the company didn’t receive any dividend income. Furthermore, there was no exchange gain as the year ended with a stronger Pak Rupee. Other expense also contracted by 1.79 percent year-on-year. While the company incurred a massive exchange loss of Rs. 119.655 million in 2021 as against the exchange gain of Rs.83.461 million in the previous year, the drop in other expense in 2021 was on account of a drop in R&D cost as well as lesser provision booked for expected credit losses. Higher distribution expense coupled with thin other income culminated into 29.63 percent year-on-year drop in operating profit with OP margin tapering off to 6.47 percent in 2021. Finance cost grew by 21.33 percent year-on-year in 2021 despite lower discount rate during the year. This was due to increase in short-term borrowings under the export refinance scheme. NETSOL’s debt-to-equity ratio grew to 26 percent in 2021. The share of loss of an associate company reduced by 59 percent year-on-year in 2021 yet net profit trimmed down by 21.75 percent year-on-year to clock in at Rs.191.59 million. NP margin clocked in at 3.87 percent in 2021 – the lowest among all the years under consideration. EPS also inched down to Rs.2.13 in 2021.

2022 proved to be the most fortunate year for NETSOL as not only did its topline grew by 23.63 percent year-on-year but its bottomline expanded exponentially during the year. The sales growth was on account of the implementation of NFS Ascent at various destinations in Japan, Australia, South Africa and Taiwan which increased its license revenue. Maintenance revenue also grew remarkably during the year while there was a drop in services revenue. The company also made revenue from local market in 2022. The cost of sales inched up 27.47 percent year-on-year in 2022 due to higher payroll expense, software license charges, travel and conveyance charges as well as depreciation expense incurred during the year. This culminated into a drop in GP margin to 34.41 percent in 2022 although gross profit grew by 16.92 percent year-on-year during the year. Distribution expense grew by a marginal 4 percent in 2022. While salaries expense grew considerably in 2022, the drop in commission on sales diluted the growth in distribution expense. Administrative expense grew by 28.64 percent year-on-year in 2022. What made an astounding contribution in the bottomline growth in 2022 was a marvelous 607 percent growth in other income on account of a fat exchange gain worth Rs.790.317 million. Other expense grew by 18.64 percent year-on-year due to higher R&D cost and higher provision for expected credit losses. NETSOL’s operating profit magnified by 247.52 percent year-on-year in 2022 with OP margin climbing up to 18.18 percent. Finance cost grew by a mere 0.55 percent in 2022 despite multiple rounds of monetary tightening. This was due to lesser borrowings in 2022 which pushed down NETSOL’s debt-to-equity to 23 percent in 2022. Although share of loss of an associate company grew by 509.14 percent in 2022 yet the company was able to report 376.66 percent year-on-year rise in its bottomline which clocked in at Rs.913.22 million in 2022 with NP margin of 14.93 percent. EPS ticked up to Rs.10.18 in 2022.

The lucky streak continued in 2023 as NETSOL posted year-on-year growth of 25.40 percent in its topline. While local revenue took a plunge in 2023 on account of deprived revenue from license, export sales continued to outshine the previous year. In the export category too, license revenue fell and the growth was led by revenue emanating from subscription and support as well as services segments. During the year, NFS Ascent was rolled out in the Northern Europe. Besides, the company also launched a number of new products & services, the most prominent being Flex, which is the API based calculation engine for credit, finance and leasing industry. Cost of sales multiplied by 34.81 percent in 2023 mainly on account of higher payroll expense, software licenses as well as travelling & conveyance expenses incurred during the year. Gross profit ticked up by 7.47 percent in 2023, however, GP margin slid to its lowest level of 29.49 percent. Selling & distribution expense multiplied by 17.54 percent in 2023 and administrative expense surged by 38.83 percent in 2023. The main growth propellers of operating expense were salaries & benefits, sales commission as well as travelling & conveyance. It is to be noted that NETSOL right-sized its workforce as the company is in the process of becoming a SaaS-based entity. Other expense mounted by 55.22 percent in 2023 due to higher R&D cost and elevated provisioning for ECL. Other income picked up by 87.62 percent in 2023 mainly on account of hefty gains recorded on foreign currency translation. Operating profit strengthened by 49.92 percent in 2023 with OP margin climbing up to 21.74 percent. Finance cost surged by 220.46 percent in 2023 on account of monetary tightening. Net profit improved by 40.74 percent to clock in at Rs.1285.23 million in 2023 with EPS of Rs.14.59 and NP margin of 16.76 percent.

Recent Performance (9MFY24)

NETSOL was able to drive its revenue up by 27.59 percent in 9MFY24. During the period under consideration, a number of existing customers subscribed to the newly launched Appex Now products. Furthermore, the company achieved advanced tier Partner Status with Amazon Web Services (AWS). The calculation engine “Flex” also got traction during the period. Despite all the developments, NETSOL was able to cut down its cost by 1.95 percent in 9MFY24 by implementing cost optimization measures, particularly streamlining of its workforce in line with global structural changes. Gross profit built up by 104.41 percent in 9MFY24 with GP margin standing at 44.5 percent up from 27.78 percent during the same period last year. Selling & distribution expense inched up by 7.32 percent during 9MFY24 while administrative expense recorded 6.9 percent uptick during the period. The main components of operating expense were payroll expense and travelling & conveyance expense. Other expense escalated by 76.81 percent during 9MFY24maybe on account of elevated R&D cost incurred during the period. Other income fell by 80.59 percent during 9MFY24 as the company didn’t record any translation gain on foreign currency translation due to stable Pak Rupee.NETSOL’s operating profit contracted by 26.81 percent during the period, with OP margin sliding to 17.75 percent down from 30.95 percent during 9MFY23. Finance cost surged by 99.82 percent during 9MFY24 due to high discount rate. Net profit dwindled by 39.27 percent during 9MFY24 to clock in at Rs.869.92 million with EPS of Rs.9.84 versus EPS of Rs.16.25 posted during the same period last year. NP margin fell from 26.15 percent during 9MFY23 to 12.45 percent during 9MFY24.

Future Outlook

NETSOL is expected to post robust sales in the coming times as it continues to stretch its wings in the new geographical markets as well as launch new product offerings by leveraging emerging technologies. Cost optimization measures will further aid the company’s financial performance. However, stable local currency has put a dent on the company’s other income by wiping off translation gain off-late.