After posting healthy financials in the first two quarters of FY21, NetSol Technologies Limited (PSX: NetSol) seems to have struggled in the third quarter ended March 31, 2021. As per the latest financial results sent to the bourse, the Lahore-based leading software exporter had posted a net loss of Rs180 million in 3QFY21, as opposed to a net profit of Rs201 million in the same period the previous year.

The about-turn in performance in the recent quarter has occurred despite NetSol managing to grow its topline by 7 percent year-on-year to Rs1.24 billion. In fact, Jan-Mar period is the only quarter this fiscal with sizable revenue growth for the firm. Besides the flagship NetSol Financial Suite (NFS) Ascent and the NFS Digital products, a ‘subscription-based’ NFS Ascent on Cloud is also being marketed by the firm.

Depending almost entirely on exports, these are challenging times for NetSol during an active pandemic. However, despite the continuing waves of the virus in the overseas markets, NetSol continues to receive demand from its customers, and the firm is able to deliver the requirements remotely.

Within export revenues, the leading revenue stream of “Services” declined by 27 percent year-on-year to come down to Rs523 million in 3QFY21. Help came from “Subscription and Support” segment, which posted a 26 percent year-on-year growth to become the top-scoring segment with Rs559 million. But the real difference was made by “License” revenues, which came in at about Rs159 million, as opposed to nil such revenues in 3QFY20. NetSol reported zero local revenues in the quarter.

During the quarter, efficiencies were visible in core costs, as cost of revenue consumed 63 percent of net sales, which is lower by 6 percentage points over 3QFY20. Meanwhile, the impact of double-digit rise in selling expenses was neutralized by the the decline in administrative expenses. These developments helped NetSol to more than double its operating profits to Rs141 million in the quarter.

Beyond this point is where things get bleak. A sharp drop in ‘other income’ and a massive expansion in ‘other operating expenses’ swiftly took what could have been fine pre-tax profits into negative territory. Management has attributed earnings loss to PKR appreciation in the quarter, which resulted in a “foreign currency exchange loss” of Rs290 million, compared to Rs229 million gain in 3QFY20.

Overall, in the nine-month period, NetSol topline stood at Rs3.6 billion (down 3% YoY) and net profits at Rs77 million (down 49% YoY). The recent revitalization in license revenues is a good omen for topline growth in the future. But it remains to be seen how sticky this growth is. A lot depends on the final quarter for NetSol to post profitability growth in FY21.