Can SYS maintain profitable momentum?

With nearly 50 percent bottomline expansion, a prominent local software house had a great profitable year. As per the company notice sent to the stock exchange yesterday, Systems Limited (PSX: SYS) managed a solid consolidated topline growth, which, despite significant uptick in overheads, went on to post amelioration in profit margins for the year ended December 31, 2019.

It is natural for an export-oriented software company to score windfall profits when the rupee goes down in value against the greenback. Between January and July 2019, PKR slid considerably against the dollar, directly helping SYS topline.

Breaking down consolidated results, the holding company Systems Limited – which maintained its share of 71 percent in the group topline – grew its net revenues by 42 percent year-on-year. The company’s software development, software trading and BPO business are expected to have become more competitive with the PKR depreciation last year, but there is more to growth than that.

Asif Peer, Systems Limited CEO and Managing Director, told BR Research that while the PKR depreciation helped Systems gain a competitive advantage, the financials improved considerably because of the focus on “quality revenues” as well as keeping “cash flows” positive.

“We successfully followed those two objectives; we were also successful in our target to secure over 80 percent of standalone revenues from our export markets in North America and Middle East. In the local market, we were selective as cash flow and profitability were our priorities here as well. So we focused more on the private sector clients in the telecom and banking sectors,” the CEO explained.

While the holding company has done well to post significant growth in gross, operating and net profitability, the group’s two subsidiaries – the 59 percent-owned EP Systems (which caters Pakistani market with airtime products like OneLoad) and the fully-owned TechVista (which is based in Dubai and targets software development market in MENA region) – have done even better.

Having grown their collective topline at a rate similar to the holding company, the two subsidiaries posted a combined growth of 69 percent in gross profits, 164 percent growth in operating profits and 293 percent growth in net profits. The subsidiaries still have some way to go as they represented 29 percent of the group topline but only 13 percent of the group bottomline. But the trend-line is encouraging.

“TechVista focused on large clients instead of small-ticket clients for reasons of cash flows and profitability. Meanwhile, EP Systems is growing its volumes rapidly. With new funding from the IFC, this firm is on its path to become cash-flow positive as the objective is to sustainably grow the user base of retailers,” Asif Peer pointed out.

In the end, SYS closed CY19 with record profits, with a healthy net profit margin of 21 percent. But what lies ahead in these uncertain times? The CEO noted that many export-driven companies will be affected as demand takes a hit in the West and it isn’t clear how things will look a quarter from now.

“For us, thankfully the diversifications that we undertook in 2019 are now paying off. Some of our customers in segments like insurance, telecom and mortgage are not much affected, and neither are digital-only companies. If the crisis is over in two to three months, SYS will be just fine. However, if the US and Europe remained shut down for a longer time, the company’s profit margins will reduce.”

Sounding hopeful, Asif Peer also thinks that the coronavirus crisis is an unforeseen golden opportunity to put Pakistan on global digital map. “Companies who wouldn’t work with us before are now calling us to provide back-end BPO services. This is volume-driven work, and right now India is completely offline. Local industry can cater such new clients, who will stick around in long run, if the government makes exception for call-center professionals to go to work. This is the time to showcase Pakistan’s digital capabilities”.