NetSol on the mend

Skilled at finding ways to penetrate new markets, NetSols management was able to turn FY10 into a good year. The companys growing presence in foreign markets, coupled with an economic turnaround in Asia helped it record a blistering topline growth in FY10.
FY09 remained quite a challenging year for the software provider, as recessionary fears resulted in a lower demand for IT products and services.
With around 90 percent of the companys revenue tilted towards exports, speedy economic growth in Asia, primarily Far Eastern countries lifted consolidated export revenue of the NetSol group to Rs1.9 billion from Rs1.17 billion a year earlier.
Growth came about as business restored IT spending, which was curtailed during the financial meltdown, while other customers renewed their software. On the flip side, the local revenue basket squeezed to around Rs123 million from Rs153 million a year earlier.
Given the minimal incremental cost on additional license sales, gross profit margin of the group surged by a massive 26 percentage points to 67 percent.
Cost-cutting measures adopted earlier have started reaping fruits for the management, as it managed to trim its administrative expenses by 8 percent. Growing marketability and expansion into new markets inched selling and promotion expenses slightly higher, though, as a percentage of revenue, it fell to 5 percent in FY10, from 6 percent in FY09.
Slim exchange rate gains, on the account of a relatively stable rupee in FY10 compared to a year earlier, resulted in lower other income. With lower variable cost and financial leverage, the bottom-line of the company nearly tripled to Rs977 million in FY10.
The companys outlook seems bright, since lately Carnegie Mellon Software Engineering Institute has appraised NetSol technologies at maturity level 5 of CMMI version 1.2, a key quality standard in the IT industry, which will help it sell its services and products to blue chip companies.
However, lately the company is in a process to acquire two of its sister firms to increase its presence in European and North American markets. The move is expected to strengthen confidence of its potential customers, who are reluctant to sign deal with a Pakistani-based company due to geopolitical tensions.
Though, the acquisition deal has been approved by the companys majority shareholders, the minority share holders have showed resistance, claiming that acquisition price is high and would only benefit the dominant shareholder of NetSol, i.e NetSol Technlologies Inc. In this regard, minority shareholders are demanding greater transparency to reduce ambiguity.
Whether or not the synergies are realized is yet to be seen, but high growth in demand for IT products from Asian and Australian markets would help the company see profitability growth down the road.

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NetSol Technologies Ltd (Group)

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Rs (mn)                   FY10   FY09   %chg

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Revenue                  2,031  1,324    53%

Cost of revenue            665    781   -15%

Gross profit             1,366    543   152%

Gross margin               67%    41%    64%

Selling & promotion exp     97     85    14%

Admin exp                  235    256    -8%

Other income                 9    196   -95%

Net profit                 977    341   187%

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Source: KSE Announcement

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