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After an impressive run in FY19, a leading IT services exporter is feeling the burn at the start of the ongoing fiscal year. As per the latest company notice sent to the stock exchange, NetSol Technologies Limited (PSX: NetSol) closed the first quarter ended September 30, 2019 with a significant net loss. No wonder the Lahore-based software house didn’t feel like announcing an interim dividend.

However, it isn’t the topline that is at fault. Revenue growth came in healthy for the quarter. Mostly it is due to a surge in ‘maintenance’ revenues that kick in after implementation of company’s software at customer sites. NetSol also posted some growth in its ‘service revenues’ as its clients continued to upgrade their IT systems.

There was a dip in ‘license’ revenues in the quarter, with license money coming in mainly from deployment of NFS Ascent for two customers in Asia-Pacific region. In all, the three revenue segments’ competitiveness was also helped by the PKR devaluation.

Netsol Technologies Limited
Rs (mn) 1QFY20 1QFY19 Chg
Revenue-net 1,318 1,222 8%
Cost of revenue 807 737 9%
Gross profit 511 485 5%
Selling & promotion expenses 143 118 21%
Administrative expenses 302 227 33%
Other operating expenses 249 0 -
Other income 47 34 39%
Operating profit -136 173 -178%
Share of loss from Associate 21 0 -
Finance cost 9 12 -24%
Profit before taxation -166 161 -203%
Taxation 24 25 -5%
Profit after taxation -190 135 -240%
EPS - Rs -2.11 1.51 -240%
PSX announcement

While the increase in ‘cost of revenue’ was managed, the topline gain was dissipated by operating expenditures growing out of step with the revenue expansion. The double-digit growth in selling & promotion expenses and administrative expenses meant that these two opex heads collectively consumed 34 percent of net revenues in 1QFY20, up from 29 percent in the same period last year.

The company’s rise in marketing expenditure is due to the fact that networking and promotion has to be continually undertaken overseas in order to secure future leads for software license and IT service products. But what really blighted the 1QFY20 profits was a quarter of a billion rupees that were booked under ‘other operating expenses’, besides a Rs21 million loss arising from a company associate.

The ‘other operating expenses’ alone exhausted almost a fifth of the topline in the quarter under review. These expenses have been attributed by the NetSol management to “currency exchange loss” resulting from appreciation in PKR in the Jul-Sep 2019 quarter, compared to a gain of Rs7 million in the Jul-Sep 2018 quarter.

In the end, a negative 14 percent net margin isn’t an ideal situation to commence the fiscal. However, continued topline growth, amid a stable PKR, may help the company to come back to profits in the subsequent quarters.