This article first appeared in The Edge Malaysia Weekly, on April 11 - 17, 2016.
ACE Market-listed Microlink Solutions Bhd is best known for its work in providing specialised software solutions for Islamic banking in Malaysia. But the company’s newly appointed CEO, Chia Yong Wei, is leading a “shift” in its growth strategy.
In Chia’s words, “We have a pie today. We are growing that pie and we are baking another pie.”
Microlink has rearranged its existing operations into three main pillars after its parent company, Omesti Bhd, injected five subsidiaries into it for RM43.2 million in 2014. The first is Microlink’s new financial services arm that incorporates its bread-and-butter work of providing banking solutions as well as core insurance solutions. The second is its distribution business, which involves the distribution of hardware and software from brands such as Oracle, IBM, Lenovo, EMC and Hitachi Data Systems. Finally, there is the solutions delivery division that is responsible for the implementation of the company’s solutions for clients.
A closer look at each of the three segments will reveal reasons for investors to be excited about Microlink, says Chia.
For its financial services arm, Microlink has enjoyed a stable flow of business, serving banking groups such as RHB Bank and Bank Rakyat. Chia, however, wants the group “to do more”.
Last December, the company entered into a new partnership agreement with a German software solutions company to help SAP’s customers design, implement and integrate SAP banking solutions, optimise Islamic banking processes and provide strategic business consultation. As an SAP partner, Microlink will take an active part in the support customisation and deployment of SAP banking solution-based systems.
According to Chia, the agreement allows the company “to create a Microlink product with a world-class engineering platform underneath”, giving it the opportunity to compete with other players for larger clients and a share of the licensee fee that comes with it.
Microlink is tendering for a contract to update Bank Rakyat’s core banking systems under the partnership. It is understood that the company has been shortlisted for further consideration. Chia remains tight-lipped about possible earnings from a successful tender but stresses that the company is out hunting for more work.
“That is why we tied up with SAP. We cannot be complacent and stay with tier-two banks. We want to compete for jobs from tier-one banks.
“In the next three to five years, some of the banks will update their core banking systems to gear themselves up for the next 10 to 15 years. New systems that are more in tune with today’s technology and customer demands will be more cost-effective,” says Chia.
He adds that the successful implementation of core banking solutions will entitle Microlink to a share of the annual licensing fee, which can come up to 23% of the original cost of the software. Since Microlink owns the intellectual property of its banking and insurance solutions, almost everything from the sale of the licences will contribute to the company’s bottom line.
Chia is also in the process of transforming the company’s traditional distribution business into opportunities for recurring income.
“The distribution business today will slowly and surely head south from a revenue and growth standpoint. Today, you can sell hardware but moving forward, you have to sell cloud. All principals — the IBMs and Oracles of today — are incentivised to sell cloud to end users.
“What happens is the distribution play will become smaller. So, what we have done is that we have created a team to find ways to make us the intermediary party between the principal and the end user by adding value to the cloud service. This means that we no longer sell hardware — we sell solutions to help end users take advantage of the cloud.”
As an example, Chia says Microlink has developed a prototype document management system using existing software to help companies in various industries manage large volumes of documents and store them safely in the cloud. The company has not started selling the product commercially but is confident that it will be well-received if it is priced correctly. Chia adds that new products will most likely be introduced in the market in the second quarter of this year.
The traditional distribution business has high sales value but thin margins. Currently, Microlink’s distribution business is its largest revenue generator, contributing RM147.5 million or 85% to its top line in the nine months ended Dec 31, 2016 (9M2016). So, moving into selling subscription-based cloud solutions that have higher margins will, again, add to the company’s recurring revenue stream.
Its solutions delivery division, meanwhile, is occupied with the delivery of the second phase of the e-Courts system — an end-to-end court management solution — on behalf of Omesti. Omesti secured the RM31 million e-Courts contract in January and will implement the new online platform in 20 locations.
The company has a market capitalisation of RM162.8 million.
In 9M2016, Microlink reported revenue of RM174 million, 166% higher than the same period a year ago. Net profit stood at RM577,000, a turnaround from a loss of RM1.4 million in the previous corresponding period. Much of the improvement was the result of contribution from the new subsidiaries acquired from Omesti. So, it is not hard to see the reasons behind Chia’s optimism about Microlink’s plans going forward.
However, the act of securing new and larger clients as well as commercialising new solutions are still works in progress.
To that, Chia assures shareholders, “What I would like investors to know is that we are not what we used to be. We are changing and pushing the boundaries, putting bets in places where we previously did not. It will take time. A lot of thinking has gone into it and we want to make sure we are able to deliver on what we have planned.”
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