Enabling Digital Transformations : Silverlake Axis (SGX:5CP)

As the global march toward digitization continues and more people embrace technology, it’s clear to businesses that going “digital” is the only way they can attract more customers, capture market share, and drive efficiencies across their business models.

But it may not be simple as it seems. Executing on a successful digital transformation requires deep specialization, experience, and expertise in the technological field, with a strong understanding of the specific industry facing reconstruction. The entity leading the transformation, whether in-house or out-sourced, would have to interpret and maximize dedicated budgets, conduct data migration and integration, and minimize or even avoid system downtime.

While it’s definitely possible for organizations to assemble their own transformation teams, it might be less time-consuming and much more cost-effective to rely on the knowledge and expertise of a external vendor to conduct the overhaul. This setup would give establishments access to high quality expertise while simultaneously allowing them to focus on their core businesses.

The Company

Enter Silverlake Axis. The company is an enterprise tech, software, and services company focused on the asia-pacific region. Silverlake focuses on Software-as-a-service, as well as Maintenance and Enhancement services for it’s software to create value for its customers. They claim that over 40% of the top 20 largest banks in South East Asia use their core banking solutions, with over 380 customers using their software and services. 

The group is headquartered in Malaysia, and mostly serves the banking, insurance, retail, and logistics industries, with seemingly more emphasis on the banking and insurance industry.

Most of their revenue is derived from Malaysia (40%), Singapore (13%), Indonesia (10%), and Thailand (7.4%). They also have relatively sizable business operations in Europe, North-east Asia, and South Asia.

Some of the company’s highly touted software solutions include the Straight Through Banking platform and also the FERMION insurance ecosystem. The company also has subsidiaries offering software products for various other areas such as government payment solutions, core banking, insurance processing platform and analytics, inventory management, omni-channel retail, and merchandising.

Silverlake Axis also maintains an investment arm for investing in attractive and suitable technology companies. The company also conducts M&A activities to acquire promising businesses to enhance their product offerings.

Business Segments

Silverlake splits it’s revenue into six segments, SAAS Retail, SAAS Insurance processing, software project services, software licensing, sale of software and hardware products, and maintenance & enhancement services. 

SAAS Retail is a new segment which was presented recently. This portion involves the revenue derived from the software services rendered to the retail industry and makes up less than 1% of the total revenue. This segment doesn’t seem to be a strong point of Silverlake Axis.

SAAS Insurance processing involves the revenue derived from the Merimen group, a subsidiary of Silverlake. Most of the revenue is derived through the processing of claims; more volume, more revenue. Additional revenue is also derived from the services rendered by their insurance ecosystem platform business, and analytics services.

Silverlake has recently expanded its insurance ecosystem in the Philippines, Vietnam, Thailand, Hong Kong and Japan. It has also implemented new pricing structures in Malaysia, Singapore and Indonesia. Revenue from this segment has been growing but at a relatively slow pace. However, the group has announced contracts for Merimen in Japan and UAE, and is cautiously optimistic about this segment. 

Software project services involve the provision of software customisation and implementation services to deliver the core banking, payment and retail solutions to Silverlake’s customers as per their request. Revenue from this segment has been choppy, as it depends on the signing of contacts to drive revenue. Project revenue recognition usually spreads across more than one financial year. This segment reached a high of RM$139m in 2012, and has been hovering around RM$50-100m afterwards.

Software Licensing revenue comes from the group’s proprietary software products such as MOBIUS and PROFIT. Like Software project services, this segment is also highly dependent on the signing of contracts to drive revenue. Management has stated that they have encountered difficulty in signing contracts due to the pandemic and slowing economic conditions. Revenue for this segment has also been lumpy.

Sale of software and hardware products involves the retailing of non-proprietary software and IBM products in Malaysia. It is a relatively low margin business and makes up a very small percentage of the group’s total revenue.

Finally there is the group’s main and recurring segment, Maintenance & enhancement services, which provides the company’s customers with round-the-clock software support services as well as enhancement services to support them in the delivery and execution of their strategies in making new capabilities available to their customers. These capabilities can be in the areas of new channels, to augment customer experience and to address any new regulatory and emerging governance, risk and compliance requirements.

The company secured a number of new enhancement contracts in FY2020 in response to requests for support and digital transformation activities for banks in Singapore. Modifications to systems to cater for Covid-19 financial relief and the integration of new front-end applications helped to drive this revenue segment. In addition, revenue is being progressively recognized for ongoing long-term maintenance contracts for a large number of customers and is recurring and stable by nature.

Growth in this segment is dependent on the installed base of their software. Maintenance contracts are typically for a period of up to five years beginning upon cutover of project implementation and are recurring in nature. The Group’s installed base has remained stable throughout the year and there is a large pipeline working to close. As customers tend to defer large IT spend due to the uncertainties, their moves to enhance their existing systems has contributed positively to this segment.

Revenue from this segment has shown relatively solid growth through the years, growing by 400% since 2010. However, total revenue as a whole tends to be distorted due to the project based revenue which seesaws depending on contract wins. 

Financial Performance

Silverlake’s revenue growth has been unpredictable, surging from 2010 to 2016, then starting to deteriorate. Over the past couple years, revenue has been languishing at around the same level. Silverlake previously enjoyed very high profit margins, commanding net profit margins of around 50% in its heydays. In recent years, net profit margins have fallen to 25 to 35% of total revenue.

We can see from their annual reports that between 2017 and 2018, when maintenance & enhancement services contributed a much larger share of their total revenue, the company’s net profit margins responded negatively and dropped to it’s current level. Clearly the margins for the maintenance segment is much lower than that of the project segment.

The Lowdown

Silverlake’s business model is well-proven, sticky, and easy to scale, with relatively high profit margins. The company does not derive more than 10% of revenue from any major customer. Furthermore, with Covid-19 accelerating the transition to digital, the company is likely to benefit greatly from the demand for their products.

The company has also been investing in and conducting M&A with other promising software companies to expand their portfolio of services and capabilities as well. With their innate IT knowledge and industry experience, they should be able to yield satisfactory results.

However, with project work/contracts being one of their main business segments, the company tends to experience irregular revenues and profits. This would mean that investors need to be mentally prepared for such factors.

Another point is that although the company offers software solutions for a wide suite of industries, the ones which have really taken off seem to be only the banking and insurance units. Projects catered to the government and retail sectors do not seem to be as successful.

With the pandemic accelerating digitization trends, Silverlake might once again start to see more contacts being secured. This would boost the company’s revenues and rerate the share price. Furthermore, the company currently trades at a PE ratio of about 15x, which can be considered a reasonable price for a company with such metrics.

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