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Netsol lagging behind as revenue streams dry up

 

KARACHI: After recording a massive top line growth in FY17, the country’s leading software house has to deal with a lackluster top line decline this fiscal. Latest financial results released to the PSX  showed NetSol Technologies Limited (PSX: NetSol) undergoing a nine percent year-on-year revenue drop in the half-year period ended December 31, 2017.

Still, the company was able to more than double its bottom line in the period, besides significantly improving its operating and net margins compared to same period last year. The decline in operating expenditures – precipitated by the top line drop – wasn’t the main factor, though that did help the matters somewhat.

It’s the favourable movements in ‘other income’ and ‘other expenses’ – both non-core accounting activities – that are mostly at work behind the massive year-on-year bottom-line amelioration in 1HFY18. The PKR depreciation against USD in the second half of CY17 came in handy for NetSol, which earns most of its revenues through software exports.

The handsome gains on foreign exchange translation helped bloat ‘other income’ and minimize ‘other expenses’ during the period. Thanks to that, 1HFY18 net profits have already beaten those recorded in entire FY17, and by some distance. The half-yearly operating margin of 33 percent is also looking great compared to the 14 percent operating margin seen in the year-ago period.

Be that as it may, the top line slump – which has now persisted for three successive quarters – must be concerning. While sales of software services have proven resilient, software license sales have been under pressure this fiscal. The company must sharpen its focus on scoring new licensing deals and implementing existing deals for its flagship product, NetSol Ascent, in its main market, the Asia-Pacific region.

In spite of the top line troubles, over at the stock exchange, the results excited investors yesterday when NetSol closed five percent higher at Rs68 per share. On a longer horizon, however, the stock has lost 19 percent of its value in the year-to-date period, largely underperforming the KSE-100 index.

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