It has been a solid start to the new fiscal for NetSol Technologies Limited (PSX: NetSol). In the just concluded quarter, the Lahore-based software firm has posted a net profit that is bigger than its net profit in all of FY16. Recall, that after making losses in FY14 and FY15, NetSol had returned to nominal profitability in FY16.

Now, in 1QFY17, the firm has capitalized on a robust topline growth, alongside cost efficiencies, leading to a visible turnaround in all three profit margins.

Behind the revenue surge appears to be the continuing roll out of Ascent, which is NetSol's flagship lease-finance software product launched in FY14. Gradual progress on the $100 million deal signed late last year to deploy Ascent for a major European car manufacturer in twelve countries is going to be critical to sustain a decent topline growth. Besides, steady sales from legacy product, NetSol Financial Suite, may also provide support.

Revenue growth in the quarter under review has been made sweeter as NetSol saved nearly 17 percentage points in terms of revenues spent on cost of sales compared to same period last year. The relatively lower growth in cost of sales likely owes to lower core costs, as NetSol is in the midst of marketing a relatively fresh product.

The huge spike in selling and promotion expenses during 1QFY17 is perhaps explained by NetSol's need to market its products overseas, mainly Ascent, its new software offering. (Roughly 99 percent of NetSol revenues originate from abroad.) Administrative expenses saw a normal growth rate of roughly 8 percent.

The firm closed the quarter with a roughly 8 percent net margin - healthy enough, but still lower compared to NetSol's characteristically high double-digit margins. But the first quarter has been a great start. As more licensing and services deals materialize in the later quarters of the fiscal, one expects NetSol to not only close the year yet again on a profitable note, but also with expanded profit margins.

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NetSol Technologies Limited


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Rs (mn)                          1QFY17    1QFY16        Chg


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Revenue-net                         963       674      42.9%


Cost of revenue                   (603)     (535)      12.8%


Gross margin                      37.4%     20.6%          -


Selling & promotion exp.           (91)      (44)     107.0%


Administrative exp.               (164)     (152)       7.9%


Operating margin                   8.7%     -8.5%          -


Net profit / (loss)                76.5    (70.5)     208.5%


Net margin                         8.0%    -10.5%          -


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