Products and services SYS revenues come from two kinds of activities. One is the software development on products and services, which are the firm's mainstay and a major source of export revenues. The firm also engages in sales (trading) of leading business and IT software.
The IT solutions and services provided by the firm include systems integration, database administration, application development and maintenance, process consulting, information security, business process management (BPM), business intelligence (BI), enterprise resource planning (ERP), customer relationship management (CRM), and product life-cycle management. SYS also provides business process outsourcing (BPO) services such as data entry, scanning, indexing and archiving, and staff augmentation.
The company's main software products span a number of industries. For the export market, it has EdgeAX, which targets the apparel and retail industry clients overseas.
SYSHCM targets the human resource management market through providing an automated solution for HR operations.
For the local market, OneLoad is a product for both the telecoms and banking industries, providing smart e-payment solutions. The company positions itself as a one-stop-shop, or a complete solution provider, for its clients, having decades of experience in deploying and supporting solutions like ERP, BPM, and CRM. The company has over 2,500 employees in its Pakistan and overseas offices.
Recent financial performance The story of SYS in recent years is one of profitable growth. Between CY11 and CY16, the firm grew its top line in high double-digits every year. Both the export and local sales have flourished in this period. From Rs 0.6 billion in CY11, export sales - mainly software development work done by the company - had grown to over Rs 2 billion by CY16. That gives an average growth of 28 percent in the last five calendar years.
Main thrust for export sales has been coming from the US market, where the company derives its revenues mainly from the apparel and retail markets. Meanwhile, local sales have also had a surge between CY11 and CY16 on account of growth in both software development and trading revenues, with a significant growth in the latter. Local net revenues grew from Rs 0.25 billion in CY11 to Rs 0.68 billion in CY16.
The company's partnership with IBM and Microsoft, along with its expertise in implementation of ERP, BPM, and CRM solutions makes it an attractive local source for procurement of software services and solutions.
Lately, company's flagship local product, OneLoad, has seen volumes going through the roof, to about a million e-transactions per month. OneLoad is said to be successfully integrated with all the telco's and most major banks. It must be noted that in recent years, the company has lately begun to drive an increasing portion of its net revenues from local business. Local sales represented 25 percent of overall net sales in CY16 - up from 22 percent in CY15 and also up from an average of 20 percent in previous five years.
While the company has more than tripled its top line since CY11, its core costs have been depleting more and more of the top line. The cost of sales consumed 70 percent of net revenues in CY16. This is higher compared to an average of 62 percent in the previous five years.
However, higher spending on core costs, mostly wages, is understandable given the continuing overseas expansion and a continuous focus on product improvements to remain competitive. But the immediate result is that gross margin came down to 30 percent in CY16, as opposed to an average of 38 percent between CY11 and CY15.
Operating expenditures are coming down in terms of net sales. In CY16, distribution expenses exhausted 1 percent and administrative expenses 9 percent of net revenues, as opposed to the previous five-year average of 3 percent and 11 percent, respectively. During CY16, distribution costs saw a massive decline of 46 percent year-on-year, mainly due to lower salaries, allowances and amenities. Administrative expenses also went down, by 4 percent year-on-year, due to a visible drop in legal and professional fees besides travelling and conveyance expenses.
Those improvements helped the firm score a 143bps better operating margin over previous year in CY16, of 19 percent. However, a massive 64 percent slump in 'other income' - mostly on account of lower gains on short-term investments and smaller exchange gains on translation of export debts - ensured that the firm closed the year with a slightly lower net margin in CY16. The 19 percent net margin was lower than the 25 percent average seen in the previous five years. But SYS returned to double-digit expansion in its bottom-line last year with a year-on-year growth of 14 percent. So, the positive story continues.
Outlook On both external and local fronts, things look rosy for Pakistan's oldest software house. Exports from the US market are poised to remain strong, as economic indicators of that country, including in the firm's target market (retail and apparel) seem headed in a positive direction.
In addition, SYS is also expecting a return on its investment made in the Middle East market through its subsidiary. Locally, the firm's top line should receive more support from expansion in trading income coming in from software sales to local public and private sector companies. More local business is in the offing in a new vertical, as the firm has recently signed a contract with the Civil Aviation Authority to provide services of Airport Master System Integrator for the new Islamabad Airport.
Perhaps the biggest boon would be OneLoad, which is said to be catching on among the banking and telecom services providers. Based on such prospects, the company has recently garnered interest from institutional investors. It appears that the firm will remain in the spotlight for some time to come. In the year-to-date, the scrip has largely outperformed KSE100 in the latter half, with average daily trading volume staying over 3 lac shares.
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SYS: Pattern of shareholding (as at December 31, 2016) No of Shares % of total
shareholders held shares
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Directors and their spouses and minor children 9 37,192,799 33.42%
Associated companies, undertakings and related parties 2 6,291,610 5.65%
Insurance companies 3 514,342 0.46%
Mutual funds 20 14,882,496 13.37%
of wihich:
Tundra Pakistan Fund 1 4,220,000 3.80%
Tundra Frontier Opportunities Fund 1 2,153,500 1.94%
Tundra Sustainable Frontier Fund 1 1,200,000 1.08%
General public 2,541 43,171,685 38.79%
Investment companies 6 7,842,600 7.05%
Joint stock companies 27 1,402,283 1.26%
Total 2,608 111,297,815 100%
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Source: Company accounts.
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SYS: FINANCIAL SNAPSHOT
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Rs (mn) CY16 CY15 CY14 CY13 CY12 CY11
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Operating results
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Net revenues 2,680 2,263 1,923 1,421 1,081 852
Gross profit 797 757 680 561 465 323
Operating profit 507 396 419 367 322 205
Profit after tax 515 453 427 415 328 218
Earnings per share (Rs) 4.64 4.14 4.47 4.91 7.76 5.61
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Financial position
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Property and equipment 558 359 202 182 133 129
Trade debts 1,297 1,097 817 591 476 411
Unbilled revenue 321 244 197 99 63 -
Trade and other payables 227 237 269 57 38 31
Share capital 1,111 1,107 872 429 423 389
Total shareholders' equity 2,916 2,496 1,628 1,284 941 726
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Financial ratios
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Gross margin 29.8% 33.4% 35.4% 39.5% 43.0% 38.0%
Operating margin 18.9% 17.5% 21.8% 25.8% 29.8% 24.1%
Net margin 19.2% 20.0% 22.2% 29.2% 30.3% 25.6%
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Source: Company accounts