Run-of-the-mill show for NetSol

The financial results for NetSol Technologies Limited (NetSol) for FY11 reveal that the highly attractive, characteristic margins of the leading software house of the country are under pressure once again, advancing like a sinusoidal curve.
NetSols top-line, heavily dependent on sale of software licenses and provision of IT services (mostly) to foreign clientele, declined by 182 bps over FY10. In the absence of detailed accounts, it can be assumed in view of past performance that overseas sales - which were over 93 percent of total sales in FY10 (led by license sales) - failed to register any growth in FY11.
Despite the dip in revenue, the cost of revenue shot up by a significant 27.29 percent in FY11. It consumed 37.2 percent of the revenues compared to 28.7 percent in FY10. As a result, gross margins have shrunk over the year to 62.78 percent.
Selling and promotion expenses, over three-fourth of which are usually incurred on foreign sales, have increased by a whopping 48.2 percent in FY11 - unfathomable in the face of declining revenue. Moreover, it seems like the cost-cutting zeal dissipated during the year as the administrative expenses shot up by 47 percent. The extraordinary growth in the two expense heads has led them to eat up a larger percentage of revenues in FY11.
Operating profit of the company was supported by a 5.5 times increase in other income, which includes gains on foreign currency translations. However, this could not lift the operating margin which deteriorated to 45.35 percent in FY11 from 53.07 percent in FY10.
Finance cost for the company showed a modest increase of 2.5 percent in FY11. NetSol paid only Rs2.3 million in corporate taxes as the export of computer software and related services developed in Pakistan are exempt from tax upto the year 2016.
Sluggish revenues, higher cost of sales and rising operating expenditures have led to a downfall in the software giants profitability, down by 16.6 percent. As a result, net margin for the year 43.2 percent, shedding 777 bps during the year.
For a multi-dimensional technology company like NetSol, it is absolutely critical to diversify its portfolio and expand its footprint. Its focus on the Asia-Pacific region, having presence in China, Australia and Thailand, hold out immense promise for the future. However, it is very important that NetSol churns out innovative products like NetSol Financial Suite, its flagship product, to attract new business.

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NetSol

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Rs (mn)                   FY11     FY10      chg

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Revenues                1,811    1,845       -2%

Cost of revenue           674      529       27%

Gross profit            1,137    1,315      -14%

Gross margin               63%      71%        -

Administrative expense    338      229       48%

Other income              181       28      546%

Operating profit          821      979      -16%

Net Profit                793      951      -17%

Net margin               43.8%    51.6%        -

EPS (Rs)                  9.83    12.83     -23%

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Source: KSE announcement