I read up JW’s write-up on Silverlake and here are my views on it before going deep:
Software Development and Maintenance is High in Margins
When you are selling knowledge products such as software and pharmaceuticals, you embed a lot of value add into it. As such the company normally quotes high margins for it.
Cost is really low because the main cost is manpower cost which is seriously loopsided because being in the industry, using indians and chinese developers and engineers but quoting european engineers cost as part of maintenance and development quotations allow the company to have a large margin of safety.
Silverlake’s recent high receivables and cash position
I note that in its recent Jun 2010 Annual figures that receivables was very high. In the software industry you do experience a fair bit of problems and the need to act as “Ah Long” once in a while.
What Silverlake has is not surprising. But a look at the balance sheet shows that Cash Holdings which was 101 MYR Mil in 2007 dwindle down to 32 MYR mil in 2010. Assets increase by 120 mil in this period. Revenues was steadily increasing from 137 mil to 185 mil but gross profit largely fluctuates around 102 to 110 mil.
To me, it is disappointing when margins cannot be maintained and probably shows how tough software development competition is.
Zero Debts to Net Cash
Debt Finance wise, Silverlake is in a clean bill of health. The most this company will be come is a ghost company with no business but will not bleed excessive cash.
Manpower can be readily cut and thus expenses minimized. Likely case this company can go into “suspended mode”.
Recurring Income from Software Maintenance
Probably I see 2 sides to software maintenance. How sustainable this is depends on the value customer placed on maintenance.
My view is that banks tend to think critically of applications that is the basis of what their business revolves around. There are 2 parts to it:
- The people that delivers it (Bankers, Traders and Analyst)
- The means to deliver this (Software, Processes)
If any of these breaks down it will affect them. More and more you see how important IT services are to banks and while they will merciless try to keep costs down, they really cannot live without it.
Maintenance Contract tends to be 1-3 years (Short), and customers will negotiate for it to go down. So look for maintenance earnings to grow less, unless there is an increase in maintenance scope.
The opportunity is that systems revolves around a lifecycle that moves from Conceptualizing, Development, Testing, Delivery, Maintenance, Monitoring and Retiring of system.
Silverlake will then be a contender if the clients are satisfied with the current application and trust them enough to deliver the next version.
If you look for Silverlake as a dividend stock, it should always need to be monitored because
- The management can easily fark it up
- The company can easily not deliver a solution that is current to the technological landscape
- The re-contract of each customer
- The road-map for application. Certain major applications go end of life and no new system comes on board to take its place (not very likely I feel)
Note that this is prior to in-depth analysis, so most points are up for discussion.