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  • Muted 1Q22 results; slightly lower gross margin
  • SaaS insurance to see sequential improvement with gradual re-opening of the economy; expect higher project-related revenue
  • Order backlog of RM560m. Healthy project pipeline, more than half for MOBIUS system
  • Maintain BUY, TP S$0.38. We like Silverlake for its high recurring revenue contribution and high gross margin while MOBIUS could be a game changer
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Muted 1Q22 results. 1Q22 revenue of RM152.5m was 3% higher compared to 1Q21. Total recurring revenue comprising maintenance and enhancement services, insurance ecosystem transactions and services, and retail transactions processing remain a key revenue driver for the group and contributed 83% of total revenue.
Slightly lower gross margin. Gross profit margin of 58% in 1Q22 was a tad lower than the 60% in 1Q21. This was mainly due to a change in the revenue mix, with a lower revenue contribution from higher margin segments such as software licensing in 1Q22.
1Q22 inline, expecting stronger quarters ahead. 1Q22 net profit of RM35.2m (+7% y-o-y) accounts for 23% of our FY22F projections, inline as we are expecting stronger quarters ahead. 
Revenue breakdown by business activities

(RMm)1Q221Q21Change (%)
Software licensing5.48.0-33
Software project services20.317.2+18
Maintenance and enhancement services118.2113.5+4
Sales of software and hardware products0.580.6+5
Software-as-a-Service   
Insurance processing7.78.8-13
Retail0.270.16+69
TOTAL152.5148.2+3
Source: Company: DBS Bank: Company; DBS Bank

SaaS insurance to see sequential improvement with gradual re-opening of the economy. Revenue for the insurance ecosystem transactions and services (SaaS) was 13% lower y-o-y, largely from varying degrees of lockdowns in the countries in which the group operates in. With the gradual re-opening of the economy, this segment is expected to see sequential improvement going forward.

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Expect higher project-related revenue. For the project-related segment, which comprises software licensing and software project services, recorded only a 2% y-o-y increase in revenue in 1Q22, as a major licence revenue from a bank in Thailand that was closed in 4Q21 was not yet recognised. This contract would be recognised in 2Q22. The group is also pursuing more contracts in other regions, including Indonesia and Malaysia. We can expect the group to clinch a few more mid size contracts (<RM100m each) for FY22.

Silverlake has also announced various smaller contract wins from banks and financial institutions during 1Q22, total RM90m. The total contract value is similar to other quarters.

Order backlog of RM560m.Healthy project pipeline, more than half for MOBIUS system. Total pipeline of potential deals the group is pursuing at the end of 1Q22 is valued at RM1.3 bn with RM122.6m (mid size + small projects) of contract wins closed in the quarter, generating secured revenue/backlog of RM560m. The deals closed in 1Q22 was 47% higher y-o-y, and is one of the highest in a single quarter. Out of the RM1.3bn project pipeline, more than half is for the new MOBIUS system.

MOBIUS system gaining traction. Silverlake’s new open banking platform, MOBIUS, that combines the customer-facing digital capabilities with core banking processing capabilities, is gaining traction. The group has signed a significant MOBIUS deal in Thailand in 4Q21 with a new customer. It is pursuing more deals for the new MOBIUS as well as existing systems in countries like Malaysia, Indonesia, and Thailand.

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Opportunity to participate in Malaysia digital banking. Silverlake is also working with three other bidders for the Malaysia digital bank licence, to provide technical support for the core banking system. With over 40% market share in the core banking system space in South East Asia, we believe Silverlake stands a chance to participate in the implementation of digital banks in Malaysia, though contract values may not be big.

Expect minimal impact from the prosperity tax. The group has many different legal entities in Malaysia. Though the  total group earnings are expected to be >RM100m in 2022, contribution comes from many different subsidiaries. Hence, the impact from the prosperity tax could be minimal.

Maintain BUY, TP S$0.38. No change in earnings estimate; maintain BUY with TP of S$0.38. We like Silverlake for its high recurring revenue contribution of at least 60% of total, and impressive gross margin of c.60%. In 1Q22, recurring revenue formed 83% of total revenue. Furthermore, its new open banking platform, MOBIUS could be a game changer.