+ Recurring revenue rose 8% YoY. Recurring revenue comprises maintenance and enhancement services, insurance ecosystem transactions and services, and retail transactions processing revenue. Maintenance and enhancement services increased 7% YoY to RM124mn as the dip in enhancement services revenue was more than offset by the increase in maintenance revenue. The decline in enhancement services revenue was mainly due to the timing and progress of contracts fulfilment and delivery, and Silverlake anticipates this will be recognised and booked in the following quarter. Insurance ecosystem transactions and services revenue increased 18% YoY as there was broad-based growth
across all segments, from vehicle claims processing, insurance policies processing, productivity and analytics solutions, and integration services. Revenue from retail transactions processing surged 102% YoY mainly due to higher subscriptions for Silverlake's cloud-based retail solution, AgoraCloud, from both retail and pharmaceutical customers in Malaysia and Singapore.
+ Order backlog healthy. Silverlake has a long track record and a proven client base in Southeast Asia. Three of the 5 largest Southeast Asia-based financial institutions use its core banking platform, and it has largely retained all its clients since bringing them on board its platform. Silverlake’s project pipeline is healthy, at RM1.8bn (2QFY23: RM1.8bn), with a record contract wins of RM259mn in 3QFY23 and an order backlog of RM261mn on the verge of closing in 4QFY23. Furthermore, Silverlake has recently secured their first multi-million 10-year core and channels digital banking MOBIUS deal with a client in Malaysia. Silverlake is beginning to close more deals and is witnessing an uptick in inquiries about its financial services market solutions and capabilities.
- OPEX rose 14% YoY. Operating expenses were 14% higher YoY mainly due to the current inflationary environment and a need to support long-term growth and sustainability. The increase was across all segments, with increases in staff costs due to additional headcount, increase in finance costs due to a revolving credit facility drawdown, increase in foreign currency exchange losses due to the fluctuation of foreign currencies, and higher costs for internal and external branding activities as markets opened up. Nonetheless, the expense over revenue ratio was kept at 30%.
- Project-related revenue fell 27% YoY. Software licensing revenue fell 65% YoY to RM7mn. This was mainly due to the progression of actual project delivery varying from quarter to quarter, resulting in a lag in revenue contribution. However, this was offset by software project services revenue increasing 6% YoY to RM26mn as there was additional revenue recognised from recently closed contracts from countries such as Thailand, UAE, and Malaysia. In addition, progressive project revenue recognised from on-going secured projects remained at a stable level.
Collaboration with Siam Commercial Bank
In December 2022, Silverlake announced an agreement with Siam Commercial Bank (SCB), one of Thailand’s top five banks, to deploy an innovative transformation strategy with the use of the MOBIUS platform. MOBIUS was deployed under AutoX, SCB’s microlending arm, and designed to reach Thailand’s unbanked and unbankable population. With the use of MOBIUS, which is available on both hybrid and public clouds as a Software-as-a-Service (SaaS) offering, AutoX was able to deliver new products at a faster speed and lower cost. For example, with MOBIUS, customers were able to submit an unsecured loan application directly online with immediate account opening, credit scoring and funds dispersed. New products can be launched in a few hours by just defining parameters such as loan type, fees, price, etc. Current mainframe core banking software requires the programming of new code to add features or create a new product.
AutoX has a targeted loan portfolio of THB70bn by 2025 – generated from potentially 3,000 sales points. Furthermore, it is on track for its targeted IPO by 2027. We feel that Silverlake has shown the proof of concept and significant reference site for MOBIUS and we could see more inquiries for the rest of 2023.
*Link to Silverlake and SCB’s collaboration: https://www.silverlakeaxis.com/img/pdf/newsletter_Jan23.pdf
Potential for replacing core banking systems
Fidelity National Information Services (FIS), which provides core banking systems, has 5-6 banks with core banking systems in the region approaching their end-of-life by end 2023. This presents an opportunity for MOBIUS. Silverlake can offer MOBIUS as a core cloud banking system to these banks. Previously, it was hard to move a bank away from its existing core banking system as it was too costly and time-consuming to switch to a brand new core. However, with these banks existing core banking systems reaching expiration, Silverlake would be able to promote MOBIUS as a core without the previous limitations. We feel that this could provide a big boost to Silverlake as banks start to move from a traditional core to a fully cloud based core. Cloud reliefs the bank of many security challenges at scale and SAAS provides continuous updates with less costly upfront licensing.
Creating opportunities in Malaysia
In March 2023, Amazon Web Services (AWS) revealed an investment of US$6bn into Malaysia and the launch of an infrastructure region. Silverlake is currently an AWS partner and uses its cloud infrastructure for MOBIUS. With the development of infrastructure in Malaysia, Malaysian banks would be more likely to collaborate with Silverlake for either an upgrade to MOBIUS or to utilise it to expand its digital capabilities.
Outreach to smaller regional banks
As MOBIUS is cloud native, Silverlake is able to run a multi-tenanting platform, where several banks share the same cloud platform but are differentiated by their own passwords and security. In a way, this is like a building with multiple tenants, and each has his own “house” with keys to access the data and information. This is much more cost effective and products are released faster, which allows smaller banks to compete with the bigger players who would take months to configure and release a product. We feel that this would allow MOBIUS to reach smaller players who would otherwise not have the opportunity to use such a system.
We maintain a BUY rating on Silverlake Axis Ltd with an unchanged target price of S$0.49. Our FY23e estimates remain unchanged. Our target price is pegged to 20x P/E FY23e. It is at 20% discount to peer valuations of around 25x PE (Figure 1).
Our target PE of 20x is 8% higher than the historical average PE of 18.5x (Figure 2). In our view, Silverlake should trade at a higher premium to its historical PE with the introduction of MOBIUS and the resumption of bank IT spending after the pandemic.
+ Recurring revenue rose 7% YoY. Recurring revenue comprises maintenance and enhancement services, insurance ecosystem transactions and services, and retail transactions processing revenue. Maintenance and enhancement services increased 5% YoY to RM141mn as the dip in enhancement services revenue was more than offset by the increase in maintenance revenue, due additional contributions from new maintenance contracts that have become operational. Furthermore, the decline in enhancement services revenue is temporary as the Group will direct more resources to fulfil their enhancement services contract backlog in 2HFY23. Insurance ecosystem transactions and services revenue increased 32% YoY as volumes have rebounded to pre-COVID-19 levels, with sizeable volume increases coming from new operations in Japan and the UAE. Revenue from retail transactions processing also surged 137% YoY mainly due to higher subscriptions for Silverlake's cloud-based retail solution, AgoraCloud, from both retail and pharmaceutical customers in Malaysia and Singapore.
+ Order backlog healthy. Silverlake has a long track record and a proven client base in Southeast Asia. Three of the 5 largest Southeast Asia-based financial institutions use its core banking platform, and it has largely retained all its clients since bringing them on board its platform. Silverlake’s project pipeline is healthy, at RM1.8bn (1QFY23: RM2.1bn), with an order backlog of RM275mn on the verge of closing in 3QFY23. Silverlake is beginning to close more deals and is witnessing an uptick in inquiries about its financial services market solutions and capabilities.
- Project-related revenue fell 22% YoY. Software licensing revenue fell 51% YoY to RM17mn. This was mainly due to the progression of actual project delivery varying from quarter to quarter, resulting in a lag in revenue contribution. However, this was offset by software project services revenue increasing 25% YoY to RM27mn as there was additional revenue recognised from recently closed contracts from countries such as Thailand, UAE, and Malaysia. As for the ongoing implementation of two new MOBIUS contracts secured in FY22, one has been completed and went live in 2QFY23 while the other is near completion and will be entering maintenance mode sometime in mid-2023.
+ Project related revenue increased 66% YoY. Software licensing revenue increased by 110% YoY to RM84mn largely contributed by the delivery of new software licensing contracts and banking deals secured in Indonesia and Thailand. Software project services revenue increased 39% YoY to RM91mn mainly due to the ongoing implementation of two new MOBIUS contracts, which accounted for 37% of total project services revenue. Progressive revenue came from other ongoing projects.
+ Stable recurring revenue growth. Maintenance revenue grew 8% YoY while enhancement services revenue grew 2% YoY. The increase was from the commencement of new maintenance contracts upon completion and cutover of several key implementation projects as well as new enhancement contracts secured from customers. Insurance ecosystem transactions and services revenue also increased by 15% YoY as vehicle claims processing activities recovered. The addition of processing activities from new Hong Kong customers upon completion of system integration also contributed positively.
+ Record order backlog. Silverlake has a long track record and a proven client base in Southeast Asia. Three of the 5 largest Southeast Asian based financial institutions use its core banking platform, and it has largely retained all its clients since bringing them on board its platform. Silverlake’s project pipeline is healthy, at RM1.9bn, with a record-high order backlog of RM570-600mn. Silverlake is beginning to close more deals and is witnessing an uptick in inquiries about its financial services market solutions and capabilities.
- Lower GP margins in FY22. Gross margin was lower in FY22, at 57% compared with 60% in FY21. This was mainly due to higher provisions taken for bonus pay-outs in FY23. Management also said that there was a higher percentage of hardware sales, which usually has a lower GP margin.
Silverlake Axis Ltd provides customized software solutions and core banking systems. It provides digital economy software solutions and services to the banking, insurance, payment, retail and logistics industries. To date, it has been the banking solutions provider for 40% of the 20 largest banks in Southeast Asia. As at Dec 2021, the balance sheet is in a net cash position of RM493mn (S$154mn).
Silverlake has several revenue segments: 1) Software licensing (making up 6% of FY21 revenue); 2) Software project services (11%); 3) Maintenance and enhancement services (76%); 4) Sale of software and hardware projects (2%); and 5) Software-as-a-Service (6%).
Software licensing: Silverlake is a digital economy solutions provider to the financial services, retail, and logistics industries. The group’s main products include Silverlake Axis Integrated Banking Solution (SIBS) and Silverlake Digital Banking MÖBIUS Open Banking Platform (SDE). Revenue from software licensing fell 29% YoY in FY21 as customers continue to be cautious in committing to significant new software licensing deals in the first 3 quarters of FY21. Significant new software licensing deals began to pick up in 4Q21 and it is anticipated that this will continue through to FY22.
Software project services: Silverlake’s software project services business is related to the provision of software customisation and implementation services to deliver the core banking, payment, and retail solutions. Software project services revenue declined 12% YoY in FY21 as several key projects were completed, nearing completion or delayed due to client requests. Nonetheless, the decrease in FY21 was mitigated by smaller scale contracts for SIBS technology refresh contracts secured in Malaysia in 2H20 and new MÖBIUS and banking implementation contracts secured in Sri Lanka, Thailand, and Malaysia in 2H21.
Maintenance and enhancement services: This segment is where Silverlake provides round-the-clock software support services as well as enhancement services to support its customers in the delivery and execution of their strategies in making available new capabilities to them. These capabilities can be in the areas of new channels, to augment customer experience and address any new regulatory and emerging governance, risk, and compliance requirements. This segment recorded a growth of 10% YoY in FY21 due to new maintenance contracts secured as well as revision of maintenance fees for existing contracts.
Sale of software and hardware projects: This refers to Silverlake’s non-proprietary software and where its acts as a reseller to customers who require bundled one-stop solutions. The Group is an authorised reseller of IBM hardware and system software in Malaysia. Hardware sales are seasonal by nature and dependent on the requirements and specifications to support the implementation of new or enhancement of existing systems. This segment declined by 60% YoY in FY21, and the lower sales were due to the deferment of capital expenditure during the pandemic period as well as they wait for the launch of the latest IBM iSeries in September 2021.
Software-as-a-Service: This segment consists of insurance processing, where Silverlake’s Merimen built platform processes insurance claims and premiums, and retail, and where Silverlake is a cloud-based SaaS solution provider in the retail industry. Software-as-a-Service revenue for Insurance processing was flat in FY21 while Retail processing grew 47% YoY in FY21 as the Group pivots to SaaS offerings to the larger SME market.
The cost of sales fell 12% YoY in FY21, which was in line with the drop in revenue. Operating expenses include selling and distribution costs (15% of total operating expenses), administrative expenses (79%) and finance costs (6%). Selling and distribution costs fell 9% YoY in FY21 as a result of cost control measures during the pandemic period. Selling and distribution costs include staff costs and Silverlake has a total of 2,076 employees in FY21. Expense categories remain largely unchanged over the last 3 years. Notably, Silverlake spent 4% of FY21 revenue (~RM25mn) on research and development.
Gross profit margin improved from 57% in FY20 to 60% in FY21 mainly due to better margins generated from software project services as well as maintenance and enhancement services in FY21.
Net profit margin fell from 28% in FY20 to 23% in FY21 mainly due to non-operational losses of RM15.6mn and RM8.6mn from remeasurement of put liability for put option and remeasurement of derivative asset in relation to call option on the remaining 20% equity interest in XIT Group respectivly.
Assets: Cash and bank balances fell by 16% in FY21 to RM417mn mainly due to the full repayment of their revolving credit line and the cash payment for the acquisition of SISG Group. Intangible assets grew 6% in FY21 to RM317mn mainly due to the capitalisation of software development expenditure incurred on core and digital banking, Fintech and other solutions during the year.
Liabilities: Total liabilities fell 57% in FY21 to RM310mn mainly due to the settlement of the EOC for the acquisition of SISG Group and the full repayment of revolving credit line mentioned above. We expect total liabilities to remain stable as the revolving credit facility has been cancelled.
Free Cash Flow (FCF) fell 10% in FY21 to RM155mn as operating cash flow fell 6% in FY21 to RM197mn. FCF averaged RM206mn for the past three years. Capital expenditure (CAPEX) fell 10% in FY21 to RM44mn with majority of CAPEX concentrated in Southeast Asia (95% of total CAPEX). Nonetheless, we expect FCF to improve as operating cash flow should increase with the increase in revenue.
Silverlake's primary business is the development of core banking and payment processing technologies. The company also makes money from the license fees for its corporate software platforms. Following the completion of projects for customers, Silverlake gets contracts for maintenance and enhancement services, which pay a recurring fee. The maintenance and improvement services are normally recurring for a period of five years and are strongly tied to the installed base of its core banking system.
Silverlake’s recurring revenue from maintenance and enhancement services makes up the bulk of revenue, at 76% of FY21 total revenue. Nonetheless, it has expanded its services, primarily through acquisitions, to provide digital transaction processing in other industries such as retail and insurance.
Silverlake’s flagship product, the core banking system Silverlake Axis Integrated Banking Solution (SIBS), runs primarily on the IBM AS400 (Power Systems) Platform. SIBS offers the full range of commercial banking functions including financing (loans), funding (deposits), remittances, a general ledger module and the Customer Information Facility (CIF). Over the years, Silverlake has broadened its platform capabilities to include a credit card system, internet banking, trade finance, and treasury solutions.
Silverlake has also introduced its Open Banking Platform, MOBIUS, which combines customer-facing digital capabilities with core banking processing capabilities, i.e., SIBS, to create a digital, unified, open end-to-end platform for commercial banking. This means customers can expand their core banking platforms to the MOBIUS platform, thus integrating their systems into one end-to-end banking platform. Furthermore, MOBIUS can be integrated across different core banking systems, without the need to switch to SIBS. Silverlake is able to target both new and existing customers. With MOBIUS being a cloud-based system, the cost is lower than traditional systems which are usually on-site platforms.
Core banking is evolving to meet the challenges of significant shifts in the banking industry, especially in digital banking. It is essential to provide enabling technologies that increase business agility and reduce operational costs in order to adapt to these changes.
An increasing number of banking segments and geographies are implementing cloud-only core banking system (CBS) strategies. Gartner estimated that 6.5% of core banking commercial off-the-shelf (COTS) CBS installations ran from the cloud in 2020, and this percentage is predicted to increase to 10% by 2023 when public cloud usage will equal private cloud at 5% each. The increased agility and operational excellence that cloud technology may provide to CBS installations have been the main drivers for this rise. Silverlake is able to offer these services with its MOBIUS platform.
Banks are also keener on buying their software, rather than building it. Purchasing software rather than producing it can be more convenient because it eliminates the need for the bank to maintain a software house with current skills and capabilities. The majority of banks with proprietary CBS aim to replace it with COTS applications. This deliberate choice leads to the need to select reliable suppliers that can quickly deploy the CBS, as well as maintain it in the after-sales process.
CBS's services are moving away from being isolated islands of functionality and toward becoming open, collaborative platforms. Banks are rethinking many parts of their business models as a result of digital business, and ecosystems are critical to this. With a digital business, banks can expand their digital business platform model options, connect to new sales channels, boost the variety and value of client interactions, and link to new sales channels.
Gartner notes that the number of net new deals for core banking replacement increased in 2021, despite the COVID-19 pandemic. There is a growing demand for core banking renewal, driven mainly by digital banking initiatives for which legacy systems prove to be inadequate.
According to Gartner, there are four market leaders. Gartner's Magic Quadrant analysis identified four leaders in the CBS industry. However, vendors whose offerings do not fit Gartner's stated criteria, such as Islamic banking vendors, are excluded from this research, which is why Silverlake was left off the list.
The analysis' main thesis is that this is a highly competitive field dominated by four big corporations. These four companies have a worldwide installation base of between 400 and 800 users. Silverlake, on the other hand, has between 70 and 80 installations worldwide, mostly in Asia.
Market leaders highlighted by Gartner:
We initiate coverage on Silverlake Axis Ltd with a BUY rating and a target price of S$0.38. Our target price is pegged to 20x P/E FY22e. It is an 11% upside to peer valuations of around 18x PE (Figure 7).
Our target PE of 20x is 15% higher than the historical average PE of 17.5x. In our view, Silverlake should trade at a higher premium to its historical PE with the introduction of MOBIUS and resumption of bank IT spending post pandemic.