After a disappointing first quarter financial performance which resulted into a net loss, NetSol Technologies Limited is back on its feet, thanks to a relatively better show in the second quarter ended December 31, 2011. The leading software house of Pakistan scored a decent profit of Rs.1,76.8 million in 2QFY12, thereby closing the first half of the ongoing fiscal year on a positive note. Yet the year-to-date performance of the software developer-cum-IT service provider is far from impressive, as the Companys top-line, bottom-line and traditionally lucrative margins are on a secular decline. Owing to a dismal 1QFY12 performance, the overall financial performance will likely remain lackluster for FY12, unless there is a major uptick in revenues. And that is precisely a difficult proposition given the persistent erosion in Companys revenues. NetSols bread and butter overwhelmingly remain its overseas business of software licensing and IT services, which accounted for over 90 percent of total revenues during the preceding two fiscal years. The firms top line went down by 9.12 percent in the first half ended December 31, 2011. Much like previous quarter, a slowdown in the exports of IT and licensing services appears to be the cause here. Contrary to the slide in revenues; the cost of revenue for the leading software house-comprising mostly of expenditure on software licenses, salaries and benefits, travelling and conveyance-increased by a whopping 28.6 percent in 1HFY12 over the same period of last year. For every buck earned during the period, the firm spent roughly half in its pursuit. Naturally, the gross profits went down considerably during the period under review. Though the gross margin sill looks healthy at 53.7 percent, it is still 1,359 bps lower than the one scored in 1HFY11. In keeping with the declining revenues, the administrative expenses declined during the period by 10.25 percent, whereas the selling and promotion expenses showed a marginal increase of nearly 3 percent. Companys other income-derived from foreign currency translation gains and dividend income-continued its slump, and decreased by nearly 93.5 percent during 1HFY12. This pretty much resulted into squeezing the operating profits by roughly 58.6 percent during the period, thereby bringing the operating margin down to 23.12 percent in 1HFY12, compared to 50.81 percent in 1HFY11. Nonetheless, a relatively better second quarter performance helped the software giant lift its bottom line for 1HFY12. During the period, NetSols net margin came out to be 21.7 percent, shedding 2728 bps over 1HFY11. The second quarter results do not indicate a growth trajectory; but they somehow helped limit the further narrowing down of profit margins in 1HFY12 after a gloomy first quarter. The unresolved eurozone crisis, fragile recovery in the US economy and the twos impact on Asian economies seem to have taken their toll on the Pakistani IT firms. NetSols case is no different, as the firm has been banking on and intends to go deeper into the markets of Asia-Pacific, Middle East and Europe. Can such a business environment offer any solace to NetSol? Only time will tell!
====================================================== NetSol ====================================================== (Rs mn) 1HFY12 1HFY11 c hg ====================================================== Revenues 774 852 -9% Cost of revenue 358 278 29% Gross profit 416 573 -27% Gross margin 54% 67% Administrative expenses 162 181 -10% Other income 7 112 -94% Operating profit/(loss) 179 433 -59% Net Profit 168 417 -60% Net margin 21.7% 48.9% ======================================================
Source: KSE announcement
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