While FY10 was the year when NetSol Technologies Ltd. (NetSol) bounced back on the heels of extraordinary export sales, financial results for the third quarter ended March show that the ambitious software house is all set to consolidate that position and maintain its characteristic attractive margins in FY11.
Software exports constituted 97 percent of total revenue proceeds in 9MFY11. Despite a 20 percent slowdown in export revenues from software licenses, NetSols total revenues surged by 15 percent over the same period. An 80 percent rise in proceeds from software services and solutions (SSS) rendered to foreign clients, provided a major chunk of this gain.
NetSol Financial Solutions (NFS) remains the companys flagship product and the thrust behind the double-digit growth in its export revenues. NFS has consistently been providing more than three-fourths of total revenues over the last three years.
Impressive economic growth in Asian countries, primarily Far Eastern countries, lifted consolidated revenue of the NetSol group to Rs1.59 billion in 9MFY11 from Rs1.36 billion a year earlier.
The Business Process Outsourcing (BPO) segment showed a growth of 20 percent and contributed 14 percent to the revenue figure in 9MFY11. NetSols local revenues have gone down considerably, especially in the SSS segment.
Gross margins continue to remain very healthy at 67 percent of revenues in 9MFY11. This is possible because of lower incremental costs of licensing, while servicing and maintenance costs of NFS are very low, hovering around twenty percent of revenues from this segment.
Information security and SSS segments continue to remain in loss due to higher costs. Gross margin for the BPO segment stood at 33 percent.
Administrative expenses shot up by a whopping 105 percent in 9MFY11. As a percentage of sales, they now stand at 18.19 percent in 9MFY11 compared to 10.25 percent in 9MFY10.
Increased marketing owing to expansion into new markets jacked up selling and promotion expenses by 39 percent in 9MFY11 compared to same period last year.
Operating profit has increased but operating margin has slightly declined by 2 percentage points over the period under review. With strong export revenues, lower variable & finance costs, and negligible tax liabilities, the bottom-line of the company showed double-digit growth in 9MFY11 compared to the same period last year. NetSol, along with other IT companies, enjoys tax exemption until 2016.
The companys outlook seems bright, since lately Carnegie Mellon Software Engineering Institute has appraised NetSol technologies for maturity level 5 of CMMI version 1.2 - a key quality standard in IT industry. This certification will help it to easily sell its services and products to blue chip companies.
NetSol is well poised to leverage its international experience in Pakistan if opportunities arise out of favorable business environment in the future. It has its eyes set on upcoming projects in the public sector, particularly in healthcare as well as private sectors.
NetSol consolidated its operations in China and expanded in Thailand during the last year. The management is now interested in expanding their corporate footprint to developed markets. However, its bid to acquire two sister companies in Europe and North America has recently been turned down by the SECP on the basis of high acquisition price. Minority shareholders are reportedly reluctant towards this acquisition.
NetSol has had periods of huge revenue growth in the past four years. Finding new growth avenues is critical for the company to maintain its highly attractive margins. It will be interesting to see how NetSol brings about top line growth from its local and international operations.
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NetSol
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Rs (mn) 9MFY11 9MFY10 chg
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Revenue 1,407 1,219 15%
Cost of sales 461 397 16%
Gross profit 945 822 15%
Gross margins 67.2% 67.4% -0.4%
Admin & general expenses 256 125 105%
Selling and marketing 93 67 39%
Other income 86 48 79%
Operating profit 714 646 11%
Operating margin 51% 53% -4%
PAT 692 625 11%
Net Margin 49% 51% -4%
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Source: KSE notice, Company Accounts