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At the close of its financial half year, a leading software house is struggling to return to profitability. As per its latest financial results announced for six months ended December 31, 2019, NetSol Technologies Limited (PSX: NetSol) recorded a nominal topline decline. However, a spike in non-core expenses led to a massive slump in its bottomline, as compared to the same period the previous year.

The two quarters that made up the half-year offer a contrast. The first quarter recorded a net loss of Rs190 million, despite a revenue growth of 8 percent. The second quarter yielded net profits worth Rs140 million, despite the topline going south by 9 percent. The factor that perhaps explains this difference is a rather controlled growth in 2QFY20 in cost of sales, administrative and selling/promotion expenses.

NetSol is focused on selling the licenses of its flagship product, NFS Ascent, mainly in the lease-finance market of the Asia-Pacific region. As PKR was considerably weaker in 1HFY20 compared to 1HFY19, the company’s topline, bulk of which comes from export of software licenses, and, services & maintenance fees, should have ameliorated in double-digits, even if all else had remained constant.

Netsol Technologies Limited
Rs (mn) 1HFY20 1HFY19 Chg
Revenue-net 2,588 2,611 -1%
Cost of revenue 1,667 1,547 8%
Gross profit 921 1,064 -13%
Selling & promotion expenses 273 263 4%
Administrative expenses 395 365 8%
Operating profit 253 436 -42%
Other income 315 363 -13%
Other operating expenses 447 76 485%
Finance cost 21 20 6%
Share of loss from Associate 38 0 -
Profit before taxation 61 702 -91%
Taxation 111 35 213%
Profit after taxation -50 667 -107%
EPS - Rs -0.56 7.42 -107%
PSX announcement

However, the negative half-yearly topline growth indicates a significant decline in sales in “real” terms. This suggests that the company’s “licensing” revenues may be under pressure. Speaking to BR Research, NetSol CEO Salim Ghauri said that the company has brought in a subscription-based pricing model, which changes the way NetSol used to sell its products, and focuses on adding a lot of new customers, especially in Europe and North America.

“One-time license sales used to be a major revenue source in the past. We used to target big, tier-1 customers. We will continue to target the active first-tier license sales; in addition, we are also moving towards subscription-based selling. This will help us capture a bigger market, especially in the second tier. This way, clients who do not want upfront costs can pay a rental of sorts and use our products,” he explained.

Meanwhile, the “other operating expenses” blighted the income statement. This expense head – equating to 17 percent of net revenues in 1HFY20, as opposed to just 3 percent in 1HFY19 – is almost entirely responsible for plunging operating profits into a net loss during the half-yearly period. The management has previously pointed out that PKR appreciation caused significant “currency exchange loss”. NetSol CEO said that this was a kind of a “bookkeeping loss” that they must contend with.

Over at the bourse, the NetSol stock has declined by almost a third in value over the last twelve months. The stock is trading at a value that is almost Rs100 below the peak of Rs157 touched in September 2018. Going forward, to regain investor interest, the company will need to sell more licenses and optimize its expenses to return to a profitable close in FY20.