SilverLake Axis

SilverLake Axis

Sources
1)http://sgyounginvestor.blogspot.sg/2015/12/reflection-on-silverlake-axis.html
2) https://sg.finance.yahoo.com/news/silverlake-axis-ltd-why-did-080000700.html
3) http://fifthperson.com/12-things-i-learned-from-silverlake-axis-agm-2015/
4) https://apenquotes.wordpress.com/2015/11/12/silverlake-axis-whats-behind-the-numbers/
5) http://whatsbehindthenumbers.blogspot.sg/2015/06/silverlake-axis.html#comment-form


Types of acquisitions and reasons
1) ATM Front End Processing for banks and front end sales management system

2) Silverlake Banking Systems Solution allows integrated end to end universal banking solutions through Silverlake Integrated Banking Solution (SIBS) – The one used at OCBC

3) Silverlake Japan which provides outsourcing services for credit cards systems and operations for many countries.

4) Structured Services Business (SSB) , and QR Tech. SSB contributes in application maintenance service portion to user of SIBS whereas QR Tech does developing, licensing, implementing, and servicing retail management systems to retail industry. QR Tech have a substantial clientele base and comprising large Japanese companies with operations overseas which they enjoyed that recurring income and could tap into their clients. – Singapore push towards QR code and Fintech by PM LEE

 
5) Through the acquisition, they could also serve a variety of sectors/conglomerates other than just banks and financial institutions alone. (Might be unsustainable in the long run)

6) Isis International Pte Ltd, which principally engaged in computer software sales and provide technical support. Their rational for acquisition was that its Isis flagship EPOne and VCos Software Platform would complement SIBS Core Software Offerings in meeting the complexity in digital economy business requirements.

7) Merimen with 20% in the form of call and put options. Their main business is provision of cloud computing software where they allow insurance companies to interact with clients in handling of claims and checking their policy and updates. Their value added service is also in providing secure connections between the server to computers and mobile phones which also complements SIBS with the increasing use of mobile and tablets with growing relevance of cyber security. With this acquisition, they could now serve insurance industries.

8) Cyber Village Sdn Bhd (CVSB), which provides internet and mobile financial service, customer loyalty and e-commerce solutions in various industries. Customers include BonusLink and Hong Leong Bank. This in turn would benefit Company as they can leverage on CVSB solutions capabilities to expand their client base.

9) Silverlake HGH Limited to make a full take over of Finzsoft Solutions Limited. It's principle service includes software development, hosting and services and SaaS (Software as a Service). By the way, SaaS works like a software, just that you access it through web browser instead of installing in your computer. Unlike normal software; it's hard to come out with pirated versions to use it for free. Generally they get recurring income for maintenance and support services and of course licensing fees too. I see this becoming more relevant moving forward as Internet speeds becomes faster, and the need to be accessible on the go via mobile devices and tablets via cloud computing, which saves the need and time for software installation. Today many insurance solutions and Client Relationship Management (CRM) are deployed on cloud computing SaaS platform  (picture). In the same year Finzsoft acquired Sush Mobile, with focus on helping companies develop innovative mobile apps with to boost work productivity or self service solutions; which means Silverlake effectively owns Sushmobile and Finzsoft.

10) Silverlake is a provider of Core Banking Systems (CBS) which is basically a software for the purpose of supporting bank's most common transactions such as processing cheque and payments, managing client's accounts, keeping transaction records and calculating the interest rates etc. Prominent banks such as OCBC, UOB and CIMB are using Silverlake's CBS. They subsequently penetrated into the insurance sector to provide a collaborative and information exchange platform for the insurance industry after acquring Merimen. They adopted the Software as a Service(SaaS) to improve efficiency in information exchange between different parties through the hub-and-spoke online model. Prominent clients include Etiqa Insurance, Aviva, Tenet Sompo. With the rising medical costs and aging population, there will be a greater demand for insurance. These days, filling up of insurance application forms are increasingly done with ipads and clients can track their claims status online through SaaS which makes Merimen's Insurance Ecosystem more relevant than ever.

11) To cater for retail sector, they provide an integrated enterprise solution called PROFIT^TM for retailers to keep relevant and meet the challenges in the industry. QR Retail Merchandising System (PROFIT). For instance, tracking their business performance and managing transactions and suppliers where large number of stores are concerned. This will be very relevant with the rise in e-commerce, as more buying and selling processes are done online and hence a very efficient system is needed to track such progress and monitor the stocks supply and demand.

12) Software Licensing (30%) (Highly cyclical and sensitive to investment expenditure in technology)
This segment has the highest and consistent profit margin of about 90% and I like the fact that this portion of revenue shown a steady growth and currently accounts for half of the total revenue. The source of revenue is mainly driven by securing new contracts from banking/retail sector or earning additional licensing fee from clients expanding their bank branches. This makes it very one off and the group have to continually secure contracts .Hence to sustain its growth they have been acquiring companies which provides software licensing to other sectors such as insurance and retail. In their website: http://www.silverlakeaxis.com/digital-economy-solutions.html, they are also software providers to many sectors such as healthcare and government, etc, which I believe could be future sectors they could focus on to propel its growth.

13) Maintenance and enhancement services (42%) (predictable, dependent on ability to secure clients and renew contracts)
After software licensing, users have to pay a maintenance fee to continue using their service, which makes this revenue portion a more recurring and predictable one. Revenue could also be derived whenever there's an upgrade or improvement in their software where clients pay enhancement fee. It is also the key contributor for revenue attributed from key existing customers in Malaysia, Indonesia and Singapore. So, going forward their revenue will be dependent on the majority of the renewed contracts and its ability to securing new software licensing contracts. The stable profit margin of 60% is also relatively high. Hence to stay relevant and have an edge over their competitors, they have been continually acquiring companies to improve their services such as SSB for maintenance and Finzsoft for their SaaS.

14) Software Project Services (decreasing profitability)
This segment consists of software upgrades services and startup services and contracts could be derived from new and existing customers. Despite implementing new project services such as card system projects ,the revenue and profit for this segment has been declining over the years due to banks preference in reliance on internal resources to minimize costs. It's profit margin was 40% and decreasing marginally. (Not sure if this claim is reliable, my personal opinion is that banks are procuring new processing systems that are internet based / blockchain technology / SWIFT linked / STP processing. Most banks do not have the risk appetite to assume the risks of investing in unknowns in a balance sheet, and they may get terminated way before the project is successful. They will rather get a reliable company with high success of implementation rate and buy their products and seek to integrate the new system into their core banking systems. If the project fails, it is the vendor’s and not the Banks’s fault. The reason why banks are collaborating with fintech start-ups is to profit from their success. If they are successful, they will buy over the team / company and implement its successes. If they fail, they will terminate their services and write off the spent investment capital as expenses.

15) Sale of Software and Hardware Products
This segment constitutes the selling and upgrading of software and IBM hardware as it serves as an authorized reseller of IBM hardware and earn rebates from the sale of it.  It has all along occupy a small portion of the total revenue with relatively unstable net profit margin of 20%.

16) Credit Card Processing
It started off as a loss making till Yr 2012 where it reported a profit and subsequently net profit margin began to increase from there. It's revenue contribution only came in after 2009 after acquired SBCIP has remained stable till Yr 2014 with 17% increase YoY. The loss was actually due to depreciation and amortization and not actual impairment loss. Today Silverlake Japan accounts for full scale processing of credit cards issued by its customers ie. services include credit card fraud monitoring, business fraud monitoring and processing of sales transactions. Their present clients are OCBC, UOB, Hong Leong Bank and Maybank. In my opinion, this segment would remain stable as long as these banks continue to outsource their processing services to Silverlake Japan. (Highly Probable!) One point to watch out is the depreciation of PPE and amortization of intangible assets across the years. Though the cost has declined over the years but when it's useful lives ended it will incur another one time huge costs.

17) Insurance Processing
Revenue for this segment only came in after acquiring Merimen in 2013. Going forward I forsee this to be a main driver for growth since more applications forms are filled online via tablets or PCs and many insurance companies have yet to fully upgrade and utilize online submission function. It's cloud computing SaaS allows insurance companies to interact with clients and agents more efficiently and effectively especially where it comes to claims handling and policy updates get bounced back and forth. With increase in demand for compliance, application forms gets thicker and hence the use of cloud computing in submit applications online serve as a checker to ensure nothing gets left. With Merimen, medical reports could be directly sent to underwriters online instead of mails and telephone conversations in the future. Also clients will also get to check their policies and investment portfolio just a click away.

18) The recurring maintenance division has grown significantly to RM178 million in revenue; up 44% from the previous year. A good sign that customer retention is high and customers are doing more enhancement work. Kwong also mentioned that recurring revenues from the company’s insurance business is likely to continue to grow strongly. Sale of software and hardware, which is lumpy in nature, has declined to RM2.4 million (65% drop from the previous year). Customers make major software/hardware upgrades in cycles and the next major upgrade is not due yet.

19) According to a long-time shareholder, competitors in the core banking software industry have been acquiring new customers and seeing double-digit growth. Silverlake Axis’s growth, on the other hand, remains flat and have no new customers acquired for the year. The chairman reiterated he is not excited about a business model of expansion for the sake of growth, which he feels his competitors subscribe to. “It (the model) has a heavy cost,” he said and pointed out that Silverlake Axis’s recent acquisition of SunGard Ambit, a retail banking software firm, had incurred heavy costs of $120 million expanding. He also highlighted that his competitors employ their CEOs which may lead to a short-term focus on hitting KPIs before leaving a company. In essence, he feels it is not right to follow others blindly.

20) Newly appointed director Mohd Munir (ex-CEO of CIMB) made it clear to all shareholders he is not aware of any bribery involved in Silverlake Axis winning contracts during his tenure in the banking industry.

21) A business needs a solid foundation to be successful in the long term. What builds a solid foundation? Since no one can predict the future, Goh says he uses a mathematical foundation to run the company. Although the company has been successful for the past 27 years, Goh remains uncertain about the future but he believes the statistical chance that Silverlake Axis will continue being successful is high. That’s the reason why he still holds on to his stock today and hasn’t sold a single share of his in the open market. Despite many offers to buy out the whole company, he refuses to sell out but he has sold blocks of shares privately as many have complained about the company’s tightly-controlled shares and liquidity.

22) Experts in their respective fields run the various business functions of Silverlake Axis. For example, PricewaterhouseCoopers has advised Silverlake finances and accounting since the very start. Silverlake only has a small team of accountants and outsources most of the work to these professionals. The same goes for its legal team – the company engages external lawyers when needed to save on fixed costs.

23) The intellectual property of its core banking software belongs to Silverlake Axis itself. Should anyone, including Goh himself, want to use the software, they have to pay for it. The fees are charged according to the rate that Silverlake Axis charges its regular customers (i.e. banks). Goh personally owns several private entities to carry out research in his twin passions of mathematics and technology. As part of his research objectives, Goh thinks that he can apply Silverlake Axis’s core banking system in other industries (e.g. airline reservation systems) but since Goh’s private entities do not own the IP of the software, they need to pay the licensing and other related costs to Silverlake Axis for the use of the software.

24) Silverlake Axis’s business model create separate legal entities / subsidaries to pursue the riskier ventures Goh’s private entities participate in. For example, SunGard was acquired for only S$12 million but it had invested $120 million in R&D over twenty years. A risk that many of SunGard’s investors had to stomach over the years. Next, Silverlake Axis prefers to keep its expenses as low as possible and acquiring Goh’s private companies means increasing head count and business expenses. This now explains the related party transactions between Silverlake Axis and Goh’s privately-owned entities. Firstly, ‘sale of goods and rendering of services to related parties’ amounting to RM150 million was payment for the use of the core banking system owned by Silverlake Axis. Secondly, ‘service fees paid to related company’ amounting to RM46.4 million was paid for engaging the services of the professionals working under Goh’s private companies. Silverlake Axis doesn’t require them 24/7 so this arrangement works better for the company. Acting CEO Raymond Kwong then added that the model has been working very well for Silverlake Axis since the company can focus on continuous improvement in its core business while Goh’s private entities can focus on new developments. Goh did point out that should his personal research arm strike gold, Silverlake Axis has the first right of refusal for any new technological developments. Having said that, shareholders must take note that this only works if Goh decides to sell the use of any new tech developments.

Risk of Ownself pay ownself risk to inflate profits
May be legitimate reason to manage costs and risks
Minority shareholders most likely will not have a voice in the AGMsPossible creative accounting and confusing corporate structure

25) Goh thinks China is a very difficult market to penetrate and that the only way to succeed there is to fully immerse in the country and conduct business the “Chinese way”. Goh personally thinks the best strategy to get a foothold in China is to acquire companies that are synergistic with Silverlake Axis while continuing to analyze potential acquisitions, the ins and outs of China’s business landscape, and how future technological disruption will take place in China. Silverlake Axis’s acquisition of Global InfoTech Software took Goh 25 years of observation and studying market trends in China. He quipped:

“Everyone has a love/hate relationship with China. This is the country you love because you can’t ignore but it’s also a country you hate because it’s so difficult and competitive.”

26) a company with a very profitable and sticky business, boasting high margin and high return on equity. The company is experiencing cyclical slow down in the banking sector at the moment, but it appears to continue to make smart investments and acquisitions for sustainable long term growth. The stock currently trades just under 12 P/E, which is already cheap for this type of business. Further adjusting for its 20% stake in the Chinese software company (Global InfoTech Co. Ltd.) – worth about 25% of Silverlake’s current market cap, the P/E comes down to around 9. What’s more? Investors get a 5+% dividend in waiting. Ultimately, the make or break of this investment rests on whether the company and its management is legitimate, given all the concerns around its lack of transparency in general and fuzziness around its related party transactions in particular. If the business is indeed legitimate, it’s worth a whole lot more; otherwise, there is no bottom for the downside. In defense of the company and its management, the company has been paying out a very high percentage of its earnings over the last 5 years, in fact close to 100% for the last two years. If the company has been faking revenue and earnings through shady transactions, it would be much harder to fake cash flows and certainly still harder to pay out all the fake earnings in hard cash. Additionally, reading about the company’s chairman and what he has to say in speeches and interviews, it appears to me the guy comes across as more geeky, eccentric rather than being a fraud.

27) Silverlake Axis is facing a structural problem that is always at the mercy of perception. By shifting the start-up companies out of the parent company, the short-seller can always claim that the management is hiding its losses under private entities and thus making the parent company look extremely profitable. But if Goh strikes a goldmine in his private entities, he may be seen as stealing public money.

Integrating the loss-making companies into the list-co seems like a good option but from the meeting, I could tell that the majority of shareholders don’t want to carry on such a burden. It is a structural problem and unlikely to be resolved anytime soon.

Legally, it might be hard to accuse Silverlake of fraud as the company has followed the proper procedures:
1) The mandate for IPT was approved by shareholders annually since 2008 and had always been disclosed since the 2003 IPO
2) The details of the IPT was disclosed in the annual circular (inclusive of pricing)
( http://www.silverlakeaxis.com/investor-relations/financial-information/circulars.html )
3) Auditors will review every IPT transactions every year
Unquote

Everything is properly accounted for under the MLA, inclusive of the minimum fee of US$20 million and how the points are allocated. Under the Master License Agreement (MLA), the interested person is granted the right to "resell, implement, copy, customise or use the software" and to "sub-license the right to use the Software to End-Users". Essentially, when the interested person wins a new software contract, Silverlake will earn a license fee while the implementation and employee costs are borne by the interested person. This explains the 90% profit margin for the software licensing revenue. You don't expect to pay any cost other than your R&D amortization and expenses.

Silverlake sub-contracts or outsources part or whole of the implementation and maintenance job to the interested party for a fee. Once again, everything is properly accounted for with the use of "Man-Day Rates" and "estimated man-days required to complete the work" Legally correct but still a governance concern (MLA and MSA contracts) (ownself pay ownself)(Possible Enron)

Quantitative review

1. It has a strong balance sheet. Almost SGD85 mil in cash after deducting debt. Very low Total Debt/Equity. High current assets as compared to current liabilities. With a profit margin of 53.75% & operating margin of 54.89%, ROE at 45.69%, Dividend Yield(%) is relatively high at 3.4.
2. Operate in a niche segment. Maintenance is a recurring revenue and predictable business to be in. Alongside with credit card and insurance processing
3. Recent Share buyback
4. Huge pile of cash from its sale of stake in Global Infotech during its recent IPO. Paying on special dividend on 06/11/2017
   https://sginvestors.io/sgx/stock/5cp-silverlake-axis/company-announcement 
5. Undervalue stock (low PE) due to razor99 spreading fear and attacking stock (Distress play
6.  Board believed that its results speak for themselves and it also confirmed that it had no undisclosed contingent liabilities. 
7. Deloitte Singapore to undertake an independent review of the allegations. No proof of fraud 
8. Exposure to Forex risk.  Silverlake Axis' costs are mostly denominated in Malaysian Ringgit (MYR) but it collects part of its revenue in Singapore Dollars and US Dollars. Net benefits from a weaker MYR 
9. ) Importance of doing a independent in depth valuation to find its intrinsic value