The first quarter of a fiscal year has always been lean for Netsol Technologies Limited. This year, though, the three-month period ending September 30 concluded profitably, compared to a net loss last year, as per the KSE announcement. The maiden quarter lacked vigor nonetheless, given that revenues clocked in at Rs383 million when last fiscal years total revenue was Rs2.18 billion. Good luck catching up!
While speaking to BR Research yesterday, Salim Ghauri, Netsols Chairman and CEO, explained this incidence. "In the initial months, we build up the pipeline, by focusing exclusively on attracting new clients. Rest of the year, we focus on materialising the deals and service delivery. By the end of the year, greater push goes towards realisation of bills and receipts. Therefore, revenues in subsequent quarters are higher."
NetSols topline still thrives on the overseas demand of its software licensing and IT services. The Companys 1QFY13 revenues surged remarkably by 29 percent YoY. Ghauri told BR Research that "licensing and services segments performed well during this quarter. Netsol landed new clients from its stronghold in the Asia-Pacific region. Increased licensing fees have also supported the revenue growth".
On the flip side, cost of revenue grew by more than revenues did. This major expenditure head exhausted 60.34 of the revenues in 1QFY13, which is 55bps more than same period last year. Ghauri attributed this cost increase to the Companys market making activities - meaning more expenses are incurred on brining in new clients, which translates into rising salaries, benefits, travelling expenses, etc.
He expects a declining growth trajectory for this cost and a robust growth in revenues in the future.
In line with topline growth, the administrative expenses also swelled by almost similar percentage. But the selling and promotion expenses showed a marginal decline of 3.29 percent YoY. Both these expense heads consumed 34.43 percent of revenues in 1QFY13, 257bps less than same period last year.
It is the Companys non-operating performance which really helped consolidate the gains from a healthy topline growth and controlled operating expenses. Netsols other income, which derives from foreign currency gains and dividend income, increased by more than 10 times YoY - thanks to falling rupee. The other operating expenses declined by a whopping 92.5 percent during the period under review.
This shows in operating margins, which improved to 15.4 percent in 1QFY13 compared to negative 0.81 percent same period last year. In the end, a sizable expansion in topline and an all-round operating and non-operating performance ensured that Netsol nudged back to profitability from the net loss same period last year.
Though the IT spending outlook in key EU markets is still blue, Ghauri has spotted the opportunity there in the medium term. "Currently, there is little investment going into IT. But European companies need a 100 percent replacement of their old software deployments within five years. We have a keen eye on that and expect demand to pick up in 2013. By 2015, we are hopeful to materialize some good deals".
Meanwhile, the focus remains on the Asia-Pacific region. "We have strengthened our portfolio in Australia, China, Korea, Thailand and Singapore. We are getting fresh business from Malaysia and Indonesia. We will concentrate this year particularly in China, Japan and Thailand. Japan is a complex but lucrative market for us and our recent partnership with Abeam Consulting - a globally renowned technology consulting company headquartered in Tokyo - will help us get a break there."
With the expected launch of the latest, R3 version of Netsol Financial Suite - Companys flagship software licensing product - the management expects licensing fees to grow in the future, which will also drive growth in maintenance and service fees. Scoring new clients is the key here.
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NETSOL TECHNOLOGIES LIMITED
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Rs (mn) 1QFY13 1QFY12 chg
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Revenues 383 296 29%
Cost of revenue (231) (177) 30%
Gross margin 39.66% 40.21% -
Adm. expenses (104) (81) 29%
Other income 40 3 1059%
Operating profit / (loss) 59 (2) 2557%
Net Profit 56 (9) 739%
Net margin 14.57% -2.95% -
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Source: KSE announcement
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