NetSol: Back in black

Building on the gains made in earlier quarters, NetSol Technologies Limited (PSX: NetSol) has closed FY16 on a profitable note. Recall, the Lahore-based software firm had an uncharacteristic run of loss-making years FY14 and FY15, as its flagship product transition led to a lackluster top line. As the transition matures, a rejuvenated top line is behind the turnaround in FY16.

The revenue surge appears to be fuelled by the ongoing implementation works for 'Ascent'. Ascent is NetSol's flagship lease-finance software product that was launched in FY14. The company is marketing Ascent to its clients in its core market, the Asia-Pacific region. Meanwhile, some new business is still said to be coming in for legacy software product, 'NetSol Financial Suite'.

It must be noted that NetSol is heavily dependent on its overseas business. Back in FY14 and FY15, the firm derived about 99 percent of its revenues from its overseas sales of software licenses, services, and maintenance.

Late last year, NetSol had announced that it won a $100 million deal to implement Ascent for a major client in twelve countries. That "twelve-country deal" is expected to provide steady top line growth for some time. As per the management, the deal implementation got underway earlier this year in four countries: Australia, China, South Africa, and South Korea.

It's not just the revenue revival that helped NetSol's cause in FY16. Core costs - cost of revenue - remained under control, growing by just 5 percent year-on-year and exhausting 71 percent of net revenues in FY16, as opposed to 80 percent in FY15. This perhaps reflects the fact that with a relatively fresh product in hand, the firm does not have to spend much on product development at this stage.

But NetSol has had to aggressively spend on marketing and implementing Ascent and other offerings. The selling expenses and administrative overheads grew in double digits in FY16. They collectively depleted 28.75 percent of net revenues, 63 bps more than in FY15. In the end, thanks to support from 'other income', the company posted first operating profit in three years, eventually leading to profits.

While NetSol is not in the red anymore, its profit margins are still below the tallies seen in previous years. For instance, between FY08 and FY13, NetSol's gross margin and operating margin had averaged 60 percent and 45 percent, respectively. If it scores more clients and maintains a steady implementation calendar for Ascent, NetSol may get there in a couple of years.