NetSol in 1QFY23

One of Pakistan’s leading IT exporters has had a mixed scorecard at the start of the new fiscal FY23, in a bit of a contrast with the remarkable financial performance achieved during FY22. As per the latest financial results posted to the bourse for the three-month period ended September 30, 2022, NetSol Technologies Limited (PSX: NetSol) expanded its topline by an impressive 37 percent year-on-year to Rs1.71 billion, and yet, its bottomline was recorded almost flat at Rs191 million.

For a background, NetSol sources most of its revenues from exports of IT services. Its portfolio which offerings such as the NetSol Financial Suite (NFS) Ascent, NFS Digital, and NFS Ascent on Cloud. Its clients – which are present in the asset finance and leasing industry – are spread in the markets across the regions of Asia-Pacific, North America and Europe.

During 1QFY23, the firm’s ‘services’ revenues jumped by 58 percent year-on-year, and its ‘subscription and support’ revenues increased by 34 percent year-on-year. However, NetSol recorded zero export sales of its ‘license’ segment in the quarter under review. That was nearly compensated by a significant boost from local proceeds coming from sales of ‘license’ and ‘services’.

Meanwhile, the cost pressures seem to have intensified, with core costs (cost of revenue) and administrative expenses increasing more than the topline growth. Industry-wide, there has been a marked increase in the cost of maintaining/retaining IT human resource, as the demand for IT workers is reported higher than supply. Due to higher costs and expenses, NetSol recorded an operating loss of Rs23 million in the quarter under review, as opposed to a Rs15 million operating profit in the same period last year.

What really helped the firm down the line was the 30 percent year-on-year increase in ‘other income,’ which reached Rs388 million during 1QFY23. This was mainly due to the exchange-related gains arising out of significant PKR depreciation in the analysis period compared to the same period last year. Such a windfall is not unique to NetSol, however; other IT exporters have also been reaping such large gains on their export business.

Despite a spike in ‘other operating expenses,’ NetSol was able to post 6 percent year-on-year growth in pre-tax profits to Rs233 million. In the end, a proportionally-higher income-tax bill relative to the same period last year (presumably due to higher local sales) pushed the net profits lower by 1 percent year-on-year to Rs191 million. This led to a net margin of 11 percent, a reduction of over 4 percentage points vis-à-vis 1QFY22. Let’s see what the rest of FY23 has in store for the Lahore-based IT exporter.