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Systems Limited Q2/H1 2026: Growth Accelerates as Cash Conversion Turns Negative

Systems Limited grew Q2 revenue 37.9%, but net-margin compression and negative H1 operating cash flow put cash conversion at the center of the next result cycle.

Sep 19, 2026

Company Name: Systems Limited

Ticker: SYS

Reporting period: three and six months ended 30 June 2026. Primary analytical basis: consolidated, unaudited interim financial statements in Pakistani rupees; the statutory limited review applies to the cumulative unconsolidated half-year statements, while the separate three-month unconsolidated figures were not reviewed.

AlphaGen model outputs

Alpha QoQ Score: 61.7

TTM Performance Score: 81.22

3Y Business Perf Score: 72.46

Sector Leadership Score: 76.8769

These four measures are AlphaGen model outputs, not figures reported by Systems Limited.

Verdict

Systems Limited delivered another quarter of rapid top-line expansion, but the earnings mix became more demanding. Consolidated Q2 revenue rose 37.9% year on year to Rs25.74 billion, gross profit increased 40.4% to Rs6.65 billion and operating profit rose 30.9% to Rs3.42 billion. Profit after tax increased a slower 14.1% to Rs3.02 billion. The difference matters: gross margin edged higher, but operating margin softened and the below-operating lines became less supportive as finance cost rose and other income fell. Official Q2/H1 result

The six-month picture is similar. H1 revenue grew 35.3% to Rs49.72 billion and gross profit 36.6% to Rs12.69 billion, while operating profit rose 28.6% and profit after tax 17.4%. Management attributes the expansion to a combination of organic growth and acquisitions, notably Confiz and the BAT shared-services business, while also pointing to wage inflation and an appreciating rupee as margin headwinds. The more important weakness is cash conversion: despite Rs6.05 billion of H1 profit, consolidated operating cash flow after finance costs, retirement benefits and taxes was negative Rs649 million. Official half-year report

Results at a glance

  • Q2 revenue: Rs25.74bn, up 37.9% YoY; gross profit: Rs6.65bn, up 40.4%; operating profit: Rs3.42bn, up 30.9%; PAT: Rs3.02bn, up 14.1%.
  • Q2 gross margin improved to 25.84% from 25.38%, while operating margin eased to 13.30% from 14.02% and net margin fell to 11.75% from 14.21%.
  • H1 revenue: Rs49.72bn, up 35.3%; gross profit: Rs12.69bn, up 36.6%; operating profit: Rs6.54bn, up 28.6%; PAT: Rs6.05bn, up 17.4%.
  • H1 finance cost rose 83.0% to Rs304m and reported other income fell 30.9% to Rs567m, largely because the prior period included a sizeable exchange gain while H1 2026 carried an exchange loss.
  • Consolidated net operating cash flow turned negative Rs649m from positive Rs3.07bn a year earlier as working capital absorbed most of the cash generated before working-capital movements.

What was reported — and on what basis

Pakistan Stock Exchange records Systems Limited’s half-year financial result on 27 August 2026 and transmission of the half-year report on 28 August 2026. The filing contains both standalone and consolidated statements. This article uses the consolidated statements as the main economic view because they capture the group businesses and the acquired operations that now materially influence growth. PSX announcement record

The consolidated interim statements are labelled unaudited. A.F. Ferguson & Co.’s limited-review report covers the cumulative unconsolidated interim statements for the six months ended 30 June 2026 and concludes that nothing came to its attention indicating they were not prepared, in all material respects, in accordance with applicable interim financial reporting requirements. The auditor also states that the separate three-month unconsolidated profit-or-loss and comprehensive-income figures were not reviewed. That distinction is important: the headline group numbers below are official issuer disclosures, but they are not audited annual figures. Independent review report in official half-year filing

Q2: growth accelerated, but profit did not keep pace with revenue

Q2 was stronger than the first quarter on revenue, with consolidated sales reaching Rs25.74 billion. Against Q2 2025, revenue grew 37.9%, gross profit 40.4% and operating profit 30.9%. The 46-basis-point rise in gross margin to 25.84% shows that direct delivery economics did not deteriorate despite the stronger rupee and wage pressure described by management. Official Q2 result

The pressure appears lower in the income statement. Distribution expenses rose to Rs882m from Rs676m and administrative expenses to Rs2.05bn from Rs1.44bn. Research and development expense increased to Rs55m from Rs7m, while impairment losses on financial assets were Rs240m versus a small reversal in the comparable quarter. Together these items explain why operating-profit growth trailed gross-profit growth and why operating margin slipped by roughly 72 basis points. Official Q2 result

Below operating profit, the comparison became tougher. Q2 other income fell to Rs227m from Rs487m and finance cost more than doubled to Rs174m from Rs76m. Consequently, PAT grew only 14.1%, well below the rate of sales growth, and net margin compressed by about 2.46 percentage points. This is not a weak quarter in absolute earnings; it is a quarter in which the quality of growth shifted from unusually supportive non-operating items toward operating expansion. Official Q2 result

What improved

The strongest evidence is breadth of revenue growth. Management’s H1 segment presentation shows every reported vertical growing year on year. BFSI remained the largest vertical at Rs13.90 billion of H1 revenue, up 25.5%, while Telco grew 36.8% to Rs12.41 billion. Technology rose 61.5% to Rs6.98 billion and Retail & CPG 53.5% to Rs5.97 billion, the two fastest-growing verticals in the company’s presentation. Their gross margins were also high at 32.8% and 32.1%, respectively. H1 investor presentation

Geographically, Middle East & Africa remained the largest region, with H1 revenue up 36.1% to Rs28.38 billion. North America increased 36.4% to Rs10.13 billion. Asia Pacific was the fastest-growing region at 84.6% to Rs2.27 billion, although management explicitly says that growth included a one-off, high-margin project. That qualification is important: the region’s 39.0% gross margin should not automatically be treated as a new steady-state margin. H1 investor presentation

Pakistan & Others also improved: revenue rose 24.0% to Rs6.68 billion and the investor presentation shows gross margin improving to 17.1% from 8.9%. This supports management’s description of a domestic turnaround, but the domestic business is still a relatively small part of a group whose revenue is heavily foreign-currency-linked. H1 investor presentation

Acquisitions are now part of the growth bridge

The Confiz merger is not merely a post-result narrative item. The half-year report says the Lahore High Court-sanctioned merger became effective from 1 January 2026 and that the transaction is accounted for as a business combination under IFRS 3. Systems records consideration of about Rs9.79 billion through 57.58 million shares to be issued to eligible Confiz shareholders. The report also records provisional goodwill of roughly Rs5.13 billion and notes that the purchase-price-allocation exercise is not yet final. Official interim report — Confiz note

The acquired Confiz business contributed Rs1.75 billion of revenue and Rs426 million of net profit to the company for the six months from 1 January to 30 June 2026, according to the official interim report. That makes the distinction between organic and inorganic growth concrete. Confiz is already contributing to reported earnings, while future cross-sell and North American synergy claims remain management expectations rather than realized financial facts. Official interim report — acquisition contribution

Management also says the Confiz and BAT shared-services acquisitions performed well from a revenue-growth perspective and expects further Confiz synergies in the second half. Those expectations should be monitored against actual segment growth and margins rather than assumed in advance. Directors’ review

What weakened / needs attention

The first issue is operating leverage. H1 gross margin improved modestly to 25.52% from 25.27%, but operating margin fell to 13.15% from 13.84%. Management says roughly 80% of cost is human-resource related and that wage and other employee costs were adjusted by more than 12%, while the rupee appreciated by about 2% from June 2025. With more than 90% of foreign-currency-based revenue, a stronger rupee reduces the translation benefit on foreign revenue while local salary costs continue to rise. Directors’ review

The second issue is non-operating volatility. H1 underlying other income excluding exchange effects was higher, but the total reported other-income line fell to Rs567m from Rs821m because H1 2026 included a Rs158m exchange loss versus a Rs528m exchange gain a year earlier. This swing explains a meaningful part of the gap between operating-profit growth and PAT growth. Exchange gains should not be treated as a recurring operating driver; equally, the current exchange loss should not be extrapolated mechanically. Official H1 result and directors’ review

The third issue is credit and receivable risk. H1 impairment losses on financial assets increased to Rs269m from Rs28m. In Q2 alone the charge was Rs240m. The increase does not by itself establish a deterioration across the full customer base, but alongside the expansion in contract assets and receivables it makes collection quality a more important next-quarter test. Official Q2/H1 result

Cash conversion is the biggest financial contrast

The cash-flow statement is much weaker than the income statement. Profit before working-capital changes was Rs9.07 billion, but working-capital movements absorbed Rs8.58 billion. Contract assets alone used Rs4.69 billion, while trade debts used another Rs327 million and trade deposits/prepayments about Rs775 million. Trade and other payables also fell, creating a Rs2.20 billion cash outflow. After finance costs, retirement-benefit payments and taxes, consolidated operating cash flow was negative Rs649 million versus positive Rs3.07 billion in H1 2025. Consolidated cash-flow statement

The balance sheet shows the same expansion. Contract assets increased 34.7% from December to Rs18.83 billion and trade debts 17.9% to Rs20.73 billion. Cash and bank balances fell 39.4% to Rs8.18 billion, while short-term borrowings rose 42.4% to Rs8.48 billion. Liquidity is not tight on a simple current-ratio basis — current assets of Rs64.38 billion still cover current liabilities of Rs23.50 billion by about 2.74 times — but more of that liquidity is tied up in contract assets and receivables rather than cash. Consolidated statement of financial position

Investment cash use also stepped up. Cash purchases of property and equipment were Rs1.15 billion versus Rs326m a year earlier, and net investing cash outflow was Rs4.15 billion, including the Confiz acquisition cash adjustment and a large increase in short-term investments. Financing included a Rs2.48 billion increase in short-term borrowings and Rs2.93 billion of dividend payments. The result is a materially more capital- and working-capital-intensive half than the profit growth alone suggests. Consolidated cash-flow statement

Sector context: Systems grew faster than an already strong export market

The industry backdrop was supportive rather than weak. Pakistan’s Finance Division reported that IT exports reached about US$4.6 billion in FY2026, a record, and later reached US$417 million in July 2026, up 17.8% year on year. Systems’ H1 consolidated revenue growth of 35.3% therefore came in a generally expanding sector, although fiscal-year export data are not directly comparable with the company’s January-June reporting window or its consolidated accounting revenue. Finance Division, August 2026

Regulatory conditions also became somewhat easier for exporters during the half. On 6 April 2026, the State Bank of Pakistan simplified processing for IT exporters and freelancers, including streamlined export-realization documentation, a one-working-day turnaround target for certain inward receipts and outward remittances from exporters’ special foreign-currency accounts, and faster complaint handling by banks. These measures improve transaction plumbing for the sector; they do not explain Systems’ reported earnings growth on their own. SBP exporter-facilitation circular

Recurring versus exceptional

  • More recurring or structural: broad growth across BFSI, Telco, Technology, Retail & CPG and major geographies; ongoing foreign-currency service revenue; the post-merger inclusion of Confiz so long as the business remains consolidated; and the cost base associated with a larger workforce and delivery footprint.
  • Less recurring or volatile: the exchange gain/loss swing, the explicitly identified one-off high-margin Asia Pacific project, provisional acquisition-accounting effects that may change when purchase-price allocation is finalized, and quarter-to-quarter impairment charges.
  • Not a cash substitute: accounting profit from growth and acquisitions should be judged alongside contract-asset conversion, receivable collections and operating cash flow.

What to monitor next

  • Cash conversion: whether contract assets and receivables begin converting fast enough to return operating cash flow to positive territory.
  • Margins after wage resets: whether gross margin can remain near the current level and whether operating margin recovers as revenue scales.
  • Confiz integration: realized North American cross-sell, segment growth and margins rather than management synergy targets alone.
  • FX sensitivity: the balance between foreign-currency revenue, local HR inflation and translation gains or losses if the rupee moves materially.
  • Credit quality: whether the H1 impairment charge normalizes or remains elevated as the receivable base expands.
  • Growth quality by region: particularly Asia Pacific after the disclosed one-off project, and whether Middle East & Africa and North America sustain broad-based growth.

Overall, Systems Limited’s June 2026 result is best read as a strong operating-growth quarter accompanied by two clear trade-offs: thinner conversion from operating growth into net profit, and much weaker conversion from accounting profit into cash. The next result cycle will show whether those are temporary consequences of rapid expansion and integration, or a more persistent feature of the larger post-acquisition group. This analysis is informational and does not constitute buy or sell advice.

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