One of the country’s leading software houses has closed the half-year ended December 31, 2018 on an upbeat note. NetSol Technologies Limited (PSX: NetSol) grew its top line by more than a third over same period last year. This potentially sets the firm strongly on the path to crossing the Rs5 billion revenue mark later when FY19 draws to a close.
With over a decade-long specialisation in developing software products for lease-finance majors in the Asia Pacific, the firm, with offices in several locations abroad, is currently implementing its NFS Ascent and POS Mobility solutions, thanks to multi-million dollar deals signed last year.
Saleem Ghauri, CEO NetSol, told BR Research that the firm’s efforts remain focused on product upgrades of its flagship platform (NFS Ascent) and taking this next-generation platform to markets beyond Asia Pacific. (NetSol derives majority of its revenues from foreign sales).
Top line growth in 1HFY19, however, didn’t lead to a proportional growth in bottom line, as NetSol’s costs and expenses considerably slipped in the period under review. Cost of revenue – the core of software development and servicing costs – jumped 40 percent year-on-year. It accounted for 59 percent of net sales, nearly three percentage points higher than 1HFY18. Gross margin settled lower at 41 percent.
Similar pattern was evident in selling & promotion expenses and administrative expenses. Both these expense heads consumed 27 percent of net revenues – nearly two percentage points more than same period last year. Some help came from ‘other income’ – thanks to gains on foreign currency translation of the proceeds of this export-dependent firm.
But that didn’t stop operating margin from dropping five percentage points over 1HFY18 to settle at 28 percent. In the end, the firm scored a decent bottom line expansion of 10 percent but with a reduced net margin of 26 percent, down from 31 percent in 1HFY18.
The NetSol CEO attributed the jump in core costs to product upgrades to keep abreast of latest market trends. The firm is aggressively marketing its existing ware to score more clients in additional markets overseas, he said, hence the rise in selling expenses. This spending will yield results through top line growth in coming quarters, he noted.
Despite the hike in opex, NetSol looks set to again cross billion-rupee profits in FY19, and perhaps also score its highest net profits ever. Over at PSX, the NetSol scrip saw notable volatility in the year-to-date period. Though the stock is currently trading at about half of its YTD high of Rs169.8 on September 5, 2018, it has gained more than a fifth in value during that period. Shareholders seem satisfied.