Systems: topline gains

After a strong first quarter, the leading Lahore-based software house saw its momentum slowed down a bit in the second quarter. As per its latest financials released to the bourse yesterday, Systems Limited (PSX: SYS) posted a decline in consolidated profits despite scoring healthy growth in revenues in the three-month period ended June 30, 2020.

A closer look reveals that the holding company, Systems Limited, did much better than the subsidiaries during the so-called corona quarter (Apr-Jun). Topline at the holding company, which provides software development, software trading and BPO services to clients in North America, Europe, and the Middle East, grew by a solid 30 percent year-on-year in 2QCY20 to reach Rs1.8 billion.

Speaking with BR Research, Asif Peer, the Systems Limited MD and CEO explained that the company’s BPO services and other offerings were more in demand during the lockdowns, for Pakistan’s IT sector remained open even as West was practically shut down for a number of months. He noted that the Covid-era enhanced interest in Pakistan’s IT services bodes well in the post-pandemic world.

Aiding the revenue boost, normalization in ‘other operating expenses’ helped the holding company to double its operating profits in 2QCY20. However, the company’s net profits only grew by a sharply lower 6 percent year-on-year to settle at Rs0.5 billion, due to the massive reduction in ‘other income’. The decline in the windfall income is due to lower foreign exchange gains as currency was not that volatile in the period.

The subsidiaries seemed to lag their prior performance, resulting in a decline in operating and net profits for the group in the quarter. Together, the EP Systems (which provides local market with cellular recharge platforms like OneLoad) and TechVista (which deals in software development solutions for businesses in Middle East and North Africa), saw their topline decline by 9 percent year-on-year in 2QCY20. Less than stellar financials accumulated down the line, as net profits were down by a much larger 74 percent.

Asif highlighted the fact that during the lockdown, EP system business was affected as retail shops, which drive business for OneLoad, were closed. Similarly, for TechVista, the decline in business reflects the market shift where clients with whom the company used to provide services on-site are requiring that work be moved offshore, as clients’ employees are also working remotely. This trend of work going offshore (coming to Pakistan) means lesser revenues in the immediate but higher profitability for SYS.

Be that as it may, SYS’ dependence on holding company increased during the quarter, as the duo accounted for 24 percent of group topline (2QCY19: 31%) and 4 percent of group profits (2QCY19: 14%). Overall, SYS consolidated financials have closed the first half with a 27 percent increase in topline to Rs4.6 billion and a 22 percent growth in bottomline to Rs1.1 billion. That is not a bat entry at all into the second half amid economic recovery. Meanwhile, the SYS scrip continues to rally, gaining almost 70 percent in value year-to-date.