Systems Limited (PSX: SYS), a key player in the technology sector, has reported an 8.8% year-on-year (YoY) decline in its after-tax profits for the third quarter ending September 30, 2024. The company’s profits shrank to Rs1.74 billion, compared to Rs1.9 billion in the same period last year. This translated into earnings per share (EPS) of Rs5.95, down from Rs6.55 in Q3 2023.
Revenue Growth and Rising Costs
Although the company’s profits declined, Systems Limited’s revenue saw a significant increase. The company reported an 11.37% YoY growth in its revenue, reaching Rs9.87 billion, up from Rs8.87 billion in the corresponding period last year. This increase was primarily driven by the company’s successful expansion in export markets, which now make up approximately 87% of total sales.
However, the revenue boost was offset by a steep 23% rise in the cost of sales, which grew to Rs7.25 billion, compared to Rs5.89 billion last year. This surge in costs led to a decrease in gross profit, which fell by 11.78% YoY to Rs2.62 billion. The sharp rise in costs is a key factor behind the decline in overall profitability for the quarter.
Operating Performance and Margin Challenges
The company’s operating profit dropped by 17.8% YoY, falling to Rs1.72 billion from Rs2.1 billion in Q3 2023. The rising costs, coupled with inflationary pressures, have made it difficult for Systems Limited to maintain its profit margins. Despite these challenges, the company has taken steps to mitigate the impact by conducting 90% of its business in U.S. dollars, protecting itself against currency fluctuations.
In its Director’s report, the company acknowledged these pressures but emphasized its ongoing efforts to improve cost efficiency and streamline operations. The company’s management is optimistic that these measures will bear fruit in the coming quarters, as they start to see positive results from cost rationalization and efficiency improvements.
Segment Highlights and Strategic Shifts
On a segment basis, Systems Limited’s European and Middle East & Africa (MEA) regions are showing positive growth, particularly in dollarized terms. The company has continued to invest in these high-potential markets, which are now contributing significantly to its revenue. Additionally, the U.S. market, which had been stagnant for some time, is now showing signs of recovery and is expected to maintain positive momentum into 2025.
Domestically, Systems Limited is actively reducing its exposure to the Pakistan market by winding down unprofitable contracts. This strategic shift is expected to improve profitability in the local segment by the end of the year. The company is focusing on higher-quality revenue streams within Pakistan to drive efficiency and profitability.
Strategic Partnerships and Innovation
Systems Limited is also leveraging its regional presence to form key strategic partnerships with major technology players, such as Microsoft. These partnerships are creating new opportunities for growth and are expected to generate additional business leads and accounts. Moreover, the company’s shift toward offering Artificial Intelligence (AI) as a Service is a key part of its long-term strategy. This move will allow Systems Limited to capitalize on the growing demand for AI-driven solutions, positioning the company as a leader in industry innovation.
The company is also developing specialized AI tools for sectors like banking, financial services, insurance (BFSI), and pharmaceuticals, which it hopes will drive future growth. By building industry-specific AI accelerators, Systems Limited is establishing itself as a key player in the tech landscape, particularly in niche industries.
Future Outlook
Looking ahead, Systems Limited’s management remains optimistic about the company’s growth prospects. The company has a solid sales pipeline and a strong order backlog that is expected to drive future growth. Additionally, the company’s ongoing focus on export markets, cost optimization, and its growing AI capabilities are expected to support profitability and ensure long-term success.
Despite the challenges posed by inflation and rising costs, the company’s geographic diversification, particularly in Europe, the Middle East, and the U.S., provides resilience. With the domestic market de-prioritized, the company’s international operations will likely be the main drivers of growth going forward.
Financial Summary for Q3 2024
For the three months ending September 30, 2024, Systems Limited’s key financial metrics are as follows:
- Revenue: Rs9.87 billion (up 11.37% YoY)
- Cost of Sales: Rs7.25 billion (up 23% YoY)
- Gross Profit: Rs2.62 billion (down 11.78% YoY)
- Operating Profit: Rs1.72 billion (down 17.8% YoY)
- After-Tax Profit: Rs1.74 billion (down 8.8% YoY)
- EPS: Rs5.95 (down from Rs6.55 YoY)
Conclusion
While Systems Limited has faced significant cost pressures and inflationary challenges in Q3 2024, its strong revenue growth, driven by international markets, provides a solid foundation for future performance. The company’s strategic focus on exports, cost rationalization, and technological innovation, particularly in AI, is expected to support profitability and growth in the coming quarters. As Systems Limited continues to expand its global footprint and invest in emerging technologies, it remains well-positioned to weather market challenges and capitalize on new opportunities.
