FY20 was not impressive for the leading Lahore-based software house. As per its latest financials sent to the bourse yesterday, NetSol Technologies Limited (PSX: NetSol) fetched lower revenues and even smaller profits for the year ended June 30, 2020. The disproportionate slump in annual profits, relative to topline, indicates that the IT software & services exporter also let its costs and expenses slip in the period.
Majority of the firm’s sales come from exports of software licenses, and services & maintenance, mainly in the lease-finance market of the Asia-Pacific region. The flagship product is NetSol Financial Suite (NFS) Ascent, which provides over 90 percent of revenues. This is followed by some revenues from BPO operations, with local market providing just a fraction of annual sales.
It was a mixed second half of the last fiscal for many firms owing to the global pandemic, as some IT exporters have done well, others not quite so. For its part, NetSol was already in a mild state of net loss at the end of first-half ended December 31, 2019. The firm may well pat itself on the back for returning to profits in the second half, albeit the profits in 2HFY20 were almost halved on a year-on-year basis.
Still, business suffered during peak Covid-19 period of Apr-Jun. In 4QFY20, calculations show that NetSol topline declined by more than a quarter, gross profits reduced by over a third, and net profits came down by three-fourth, on a year-on-year basis. Some of the topline woes are also owed to transition, as NetSol has recently moved to ‘subscription-based’ pricing model to broaden its target market for sales growth.
The topline drop, (13 percent in FY20) had worsened in Jan-Jun period. Calculations show that in the second half, net revenue declined by 23 percent year-on-year, as opposed to 1 percent lower revenues year-on-year in 1HFY20. This can be attributed to drastically lower sales of software ‘licenses’, even as software ‘services’ held their ground. There is presumably tremendous growth in ‘maintenance’ fees due to the change in foreign client needs under Covid-19, but it could not offset decline in other revenue streams.
Meanwhile, the firm’s spending has not come down in proportion with the revenue fall (albeit the second half was better for profit margins compared to the first half). As a result, cost of revenues consumed 67 percent of net revenues in FY20, up six percentage points compared to FY19. The administrative overheads showed a marginal growth amid topline decline, thereby eating up 16 percent of net revenues, which is 2 percentage points more than its share in FY19.
In part due to reduction in marketing activities in the pandemic, the saving grace was the selling & promotion expenses, which receded in amount by nearly a third year-on-year. In effect, it balanced out the relative increase in administrative expenses by consuming 2 percentage points less of topline, at 10 percent. But along came the halving of ‘other income’ in the period, owing to presumably lower foreign exchange gains, thus wiping out potentially 8 percentage points from pre-tax profit margin.
What did not help in the end was the double-digit growth in ‘other operating expenses’ (exhausting 6 percent of topline) mostly in prior quarters and a Rs67 million charge under ‘share of loss from associate’ (equivalent to 1 percent of topline). In the end, net profit margin shrank to 5 percent for the fiscal, compared to a heathy 23 percent in FY19. At the start of a new fiscal, work is cut out for management. If there is a second Covid wave in the fall, perhaps NetSol can deploy this summer’s experience to make its business more resilient.