NetSol: better profits

Profitability continues to improve for the leading software exporter. As per the latest results reported to the bourse last week, NetSol Technologies Limited (PSX: NetSol) had closed the half-year ended December 31, 2020 with net profits of over half a billion rupees, in contrast with a Rs50 million net loss in the same period the previous year.

Bulk of NetSol sales is derived from exports, mainly in Asia-Pacific region. Specializing in asset-finance and leasing software, its top revenue streams are software licenses, IT services, and maintenance. Top two products include the flagship NetSol Financial Suite (NFS) Ascent and the NFS Digital. The firm is also expanding its target market by promoting ‘subscription-based’ NFS Ascent on Cloud.

Thanks to visible curtailment of core costs and operating expenditures, the 1HFY21 financials have ameliorated on a yearly basis despite an 8 percent drop in the topline. Revenues are under pressure mainly due to the ‘license’ stream lacking vigor during the pandemic months. However, exports of IT services and maintenance projects are providing a healthy backstop to the topline in uncertain times.

Double-digit decline in cost of revenues helped the firm to improve its gross margin in the half-yearly period to 40 percent, 400 basis points (bps) higher than previous year. Further help came from declines in selling expenses and administrative expenses in sync with the topline fall. This helped the firm expand its operating profits by nearly a third, and as a result operating margin rose up nearly 400 bps to 14 percent.

NetSol did well to significantly curtail its ‘other operating expenses’ in the period, saving close to Rs400 million relative to 1HFY20. However, about 60 percent of this saving was consumed by the significant decline in ‘other income’. Still, the overall cost savings and the significantly lower tax bill booked during the half-yearly period, helped the after-tax profits to grow manifold relative to previous year.

The pandemic has affected many businesses’ ability to reach out to clients overseas. NetSol has also had to rely on virtual platforms for fresh customer outreach and to bring to fruition existing leads. While the Chinese market is doing well from the firm’s perspective, the second wave in rest of the relevant markets has slowed business down. Whether topline recovery can take place later this year remains to be seen. Shareholders, however, seem optimistic, as NetSol stock has rallied by 22 percent year-to-date on PSX.