Systems Ltd reported a Profit After Tax (PAT) of Rs5.2 billion, equivalent to an Earnings Per Share (EPS) of Rs18.23 per share. This marked a significant increase compared to the PAT of Rs2.9 billion (EPS: Rs10.21 per share) during the same period last year. However, on Quarterly basis, the Profitability was down by 64% to PKR 1.4bn.

Here are the key points which led to lower profitability in the June-2023 Quarter

Gross Margins: The company’s gross margins for the second quarter of CY23 declined from 32% to 27%. This decrease was attributed to factors such as high inflation, increased amortization costs, rising energy costs, and the devaluation of the PKR/USD exchange rate. These factors led to higher expenses for licenses and subscription fees.

Depreciation and Amortization: SYS faced substantial depreciation and amortization charges due to its acquisition of intellectual property (IP) from NDC Tech in the previous year.

Outlook: The outlook for the company, particularly for JOMO, is described as neutral to negative, mainly due to adverse economic conditions.

Other Income: Out of the $2.8 billion in other income, $1.7 billion was generated through realized exchange gains.

Cost of Sales: The cost of sales included significant amortization costs ($0.25 million per month) related to the purchased intellectual property (IP) from NDC Tech during the second half of CY22.

Operating Profit: SYS reported a 47% increase in operating profit to PKR 3,513 million during the first half of CY23. In dollarized terms, the operating profit increased by 1% year-on-year to USD 12.9 million.

Operating Margins: Operating margins for 1HCY23 were recorded at 14%, compared to 21% in the same period last year. The lower operating margins were attributed to one-off investment adjustments in JOMO and IFRS9 adjustments on receivables considering the current macroeconomic conditions.

Growth Sectors: The company is experiencing strong growth in the retail and Consumer Packaged Goods (CPG) sectors, where it believes it has significant expertise.

Jugnu: SYS is shifting its focus on Jugnu towards a more tech-centric approach with an emphasis on holding fewer assets, making the company more efficient and technology-driven.

Taxation: The company is currently subject to a 0.25% tax rate on exports, and the super tax is levied at 4% on both local and foreign income.

Share Buyback: SYS currently has no plans for a share buyback. Instead, the company’s strategy is to focus on exports and growth through investments to enhance shareholder value.

Revenue Diversification: The top 20 clients contributed to approximately 51% of revenue for 1HCY23, compared to 53% in the same period last year, indicating a diversification of revenue sources.

Global Expansion: SYS continues its global expansion into the Middle East regions and invested $15 million last year to secure exclusive licensing rights for the Banking and Financial Segments in the GCC region.

Recurring Clients: The management stated that 81% of revenue is generated from recurring clients.

Revenue Breakdown: The company derives nearly all of its earnings from exports, with approximately 82% of earnings generated through this channel. The Middle East represents the largest share at 52%, followed by North America at 24%, Pakistan at 18%, and Europe at 3%.

Currency Mix: Most of the company’s revenue (82%) is in USD, while 18% is in PKR. However, when it comes to costs, the majority (66%) are incurred in PKR, with the remaining 34% in foreign currency.

Cost Rationalization: The management expects that the additional costs related to incorporated subsidies and NDC will be rationalized over time as economies of scale are realized.

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