Good year for NetSol

A prominent local software house has just had a blockbuster year. As per a company notice sent to the bourse last week, NetSol Technologies Limited (PSX: NetSol) has closed the year ended June 30, 2018 with a sizable improvement in profit margins, with a billion-rupee+ haul in net profits.

When a single-digit topline growth leads down to a triple-digit growth in the bottomline, something else must be at work handsomely recompensing the firm. So it is the case with NetSol in FY18: there was more than a 9 percent topline growth helping the firm land its second-highest net profits in a decade. Calculations attribute bulk of growth in pre-tax profits to two accounts.

First one is the ‘cost of revenue’, which showed a double-digit decline despite some topline growth. These core costs consumed roughly 55 percent of net sales – a drop of 14 percentage points over FY17. This helped the gross margin show a yearly improvement by the same magnitude, to clock 45 percent in FY18. As NetSol is in the implementation phase of already-developed products (e.g. NFS Ascent and POS Mobility Solutions), the firm has only incremental product-development costs.

The corporate focus these past years has been more on promotion and deliveries of its lease-finance software and services within key markets of the Asia-Pacific region. That explains the associated spend (selling & promotion expenses) going up two percentage points over previous year to consume 13 percent of net sales in FY18. Meanwhile, administrative expenses had their growth under check, exhausting 17 percent of topline – down 43 basis points over FY17.

The other account delivering for NetSol last year was ‘other income’. The rupee’s fall in FY18 blessed the software-maker with a windfall in the vicinity of half a billion rupees. (NetSol derives the bulk of its revenues from IT exports.) That helped the operating margin reach 27 percent in FY18, up from 10 percent the previous year.

While a 25 percent net margin (FY17: 8%) scored in FY18 is the highest since FY13, NetSol topline looked jittery towards the end of FY18. Calculations suggest that quarter-on-quarter topline growth came in about 20 percent lower in the latest quarter (4QFY18) and the ‘other income’ account had a negative reading, both of which precipitated a quarterly net loss of over Rs150 million, compared to Rs617 million in net profits in 3QFY18.

The FY18 topline growth seemingly came mainly from “service revenue”. But software “licensing revenue”, which is key to securing service-revenues later on, presumably didn’t grow much. Discussing latest financials with BR Research, Salim Ghauri, NetSol CEO, explained that NetSol focused in FY18 more on implementing an existing Ascent contract with a major automaker. He sounded confident about healthy topline growth in the future, as NetSol has recently landed two similar multimillion-dollar deals.

Meanwhile, over at the bourse, the NetSol stock has done well in the year-to-date period, by almost doubling in value, with an average daily trading volume of roughly half a million shares. Since late April this year, NetSol has also outperformed the KSE-100 index consistently.