Captii Limited

Investor Relations.
(Extracted from Annual Report 2016)

2016 Year in Review
Chief Executive's Message

Dear Captii Shareholder:

It gives me a great pleasure to present to you my review of operations and the financial results of our Group for the 2016 financial year.

An overview of our business

Since I last wrote to you there have been some evolutionary changes in the business of our Group. Throughout 2016, our Unifiedcomms and GlobeOSS businesses continued to address mobile network operators and integrated telecoms service providers with application and platform software, turnkey solutions and systems and a variety of professional and managed services. During the year a unit within Unifiedcomms called Mobilization was revitalised and given prominence as part of a wider reorganisation of the Unifiedcomms business. Mobilization focuses mainly on providing advanced solutions for prepaid credit on a managed service model. Captii Ventures, our venture investment business continued to identify promising startups in 2016 culminating in four further investments while also supporting six existing investees in realising the development plans for their business.

Unifiedcomms and Mobilization, along with GlobeOSS, operate primarily in the telecomunications technology markets of three regions: South East Asia (SEA), South Asia (SA) and the Middle East and Africa (MEA). For all these businesses, with the exception of Malaysia, Singapore and Pakistan, where engagement with the customer is conducted directly by our own personnel, the majority of our engagements with customers are carried out through various sales channel partners. This two-tier sales and distribution approach enables us to cost-effectively reach customers within each region of focus and to tap into the local knowledge and insights of our partners to build and deliver compelling solutions.

Captii Ventures meanwhile focuses almost exclusively on the SEA market for start-up investment opportunities with a view to exploring the SA and MEA opportunities in future. Our venture investment business regularly interacts with other venture capital (VC) management companies in the region and participates in funding rounds as either lead investor or as a coinvestor following the lead investor.

As at end-2016, there are a total of 161 people that are employed in our businesses. The majority of these personnel are located in Malaysia, where our operational headquarters is situated, while the rest work out of Singapore, Pakistan, Indonesia and Vietnam.

Generally a positive year for Group revenue, but mixed for business segments

The 2016 financial was a positive year for our business in terms of Group revenue growth but mixed one when we examine the performance of each of our business segments. The Group achieved consolidated revenue of S$23.5 million for the financial year 2016, an increase of 21.5% as compared to the S$19.3 million recorded in the previous year. However, not all our business segments shown an increase in their 2016 revenues.

GlobeOSS posted revenue of S$11.0 million in 2016, an increase of 96.9% from the S$5.6 million recorded in 2015. Unifiedcomms meanwhile had a 9.1% decline in sales, turning in total revenue of S$12.3 million in 2016 versus S$13.5 million the year before. At S$0.2 million, the rental income recorded by the Others segment in relation to our sole investment property in Malaysia remains similar to what was delivered in 2015.

Lower revenue at Unifiedcomms was caused by revenue from managed service contracts decreasing to S$9.7 million in 2016 from S$11.1 million in 2015. Unifiedcomms system sale contracts revenues however increased slightly by S$0.1 million to S$2.5 million. The progress in growing managed service contract revenues at Unifiedcomms was hampered by continued delays in the initiation and completion of several new contracts coupled with the disappointing performance of certain existing contracts. The revitalised Mobilization unit within the Unifiedcomms business that focuses on amongst others, advanced prepaid credit solutions on a managed service model however showed promising progress and achieved significant growth. The growth achieved was unfortunately not sufficiently large to countervail the slow growth or decline in other managed service contracts.

The Unifiedcomms customer base has traditionally been concentrated in the SEA region. This has not changed in 2016, with Unifiedcomms SEA region revenues accounting for 86% of the total revenue achieved for the year.

GlobeOSS delivered an improvement in both system sale and managed service contract revenues in 2016. System sales increased significantly by 138%, from S$3.6 million in 2015 to S$8.7 million in 2016, while managed service revenue increased by 19%, from S$1.9 million in 2015 to S$2.3 million in 2016.

GlobeOSS continues to have both its system sale and managed service business concentrated in the SEA region. The S$5.4 million increase in revenue from the SEA region is driven by the combination of a S$5.0 million increase in system sales and a S$0.3 million improvement in managed service revenues between 2015 and 2016.

Significant growth in system sale revenues

The increase in Group revenue this year against last year was mainly attributable to the 138% or S$5.0 million increase in GlobeOSS system sale contract revenues, which had more than offset by the decline in Unifiedcomms managed service contract revenues.

We expected 2016 to be another challenging year for Unifiedcomms and GlobeOSS on the system sale front. However contrary to earlier expectations, market conditions improved in the second half of the year, especially for the GlobeOSS business. Coupled with improved success rates for sales opportunities, significant growth in system sale contract revenues was delivered in the second half of the year.

SEA once again served as the principal driver for the improvement in Group revenue for the year, growing by 28% or S$4.8 million against last year's contribution. The region that turned in a disappointing performance was MEA, which had its contribution fall from S$1.4 million to S$0.9 million. The SA region's contribution to the total Group revenue also declined although more marginally from S$0.9 million last year to S$0.8 million this year.

In 2016, SEA, our Group's home region, continues to be the largest geographic source of revenue, accounting for 92.7% of Group revenue.

Higher gross profit achieved, in line with higher revenue

In line with the higher consolidated revenue of S$23.5 million for 2016, a 21.5% gain on 2015 revenue, absolute gross profit achieved for the year was higher compared to 2015. Group gross profit for 2016 was S$12.5 million, up by S$0.7 million or 6.1% against what was recorded in 2015. Gross profit grew slower than revenue due to the sales mix achieved in 2016- where the typically lower gross profit margin GlobeOSS system sale contract revenues accounted for the majority of the improvement in Group revenue. This, by extension, acted to reduce the overall gross profit margin earned on Group consolidated revenue to 53.2% as compared to 61.0% achieved the year before.

System sale contract average gross profit margin declined markedly to 45.5% in 2016, primarily due to the higher contribution of GlobeOSS to system sale contract revenues of the Group as compared to 2015. Gross profit margin earned on managed service contract revenues was relatively flat, showing only a marginal decrease from 61.2% in 2015 to 60.3% this year. This decrease was mainly attributable to the lower revenue contribution of certain mature high-margin managed service contracts, that was partly mitigated by lower amortisation of intellectual property in 2016.

Although system sale contract revenues grew significantly this year, the sales mix of our Group continues to meet our target of having greater than fifty percent of Group revenue being derived from managed service contracts. This year managed service contract revenues accounted for 52.2% of Group revenue, down from 68.7% in 2015.

Lower total opex this year, before and after exceptional Items

Our Group's operating expenditure for the year decreased to S$8.3 million as compared to S$8.4 million in 2015. In 2015 we had a foreign exchange gain due to the strengthening of the US Dollar against the Singapore Dollar and a provision that was made for the impairment of plant and equipment relating to managed service contracts that have been assessed at yearend to be likely to produce lower than expected profitability and returns.

This year, we had a foreign exchange loss due to the strengthening of the US Dollar against the Malaysia Ringgit and impairment losses on certain plant and equipment, investment property and intellectual property assets to take into our income statement. The impairment on plant and equipment and intellectual property assets this year relates to a managed service contract that has been assessed as being no longer able to generate previously expected income and returns. The impairment loss on investment property meanwhile had arisen following an open market valuation of the property at end- 2016.

Excluding the effect of exceptional items such as the impairment loss this year, our opex for 2016 was S$0.3 million lower at S$7.9 million compared to S$8.2 million for 2015. This decrease was due to a reduction in the technical support headcount of the Group.

Improved bottom line, both organic and investment-driven

2016 marks our ninth consecutive year of being in the black. Group net profit for the year, at S$6.5 million, is 115.2% higher than the S$3.0 million recorded in 2015. This substantial increase in our Group's bottom line reflected the large fair value gain on investment that we enjoyed on the revaluation of the Captii Ventures investment portfolio. This fair value gain amounting to S$2.4 million had no cash impact on our business.

When the bottom line numbers are examined more closely, to exclude exceptional gains such as the fair value gains enjoyed on the acquisition of Ahead Mobile Sdn Bhd ('AMSB') across 2012 and 2013 and in the revaluation of the Captii Ventures investment portfolio in 2016, the improvement in profit performance of the Unifiedcomms and GlobeOSS business is more pronounced. The 'adjusted' net profit generated by these two businesses grew ten-fold, from S$0.4 million in 2013 to S$4.0 million this year.

In terms of bottom line margins, our Group achieved a much improved net profit margin of 27.5% for 2016 versus 15.6% for 2015. If the effect of the fair value gain is removed, our Group net profit margin for 2016 would instead decline to 17.1% while our 2015 results, a year devoid of any fair value gain, would remain unchanged at 15.6%.

The flow-down effect of the improvement in Group net profit before and after exceptional items and fair value gain is very clearly reflected in our EBITDA results for the year.

EBITDA rose to S$8.3 million in 2016, an increase of 65%, in tandem with the 115.2% rise in net profit. A significant proportion of this EBITDA improvement is accounted for by the impact on Group net profit of the fair value gain on the Captii Ventures investment portfolio, as explained earlier. Removing the effect of this non-cash item, and also excluding exceptional items for the year, a clearer picture of the cash generation performance at our underlying business can be obtained. EBITDA before exceptional items and fair value gain stood at S$5.8 million for 2016- a 10.8% improvement against what was achieved in 2015.

Because of the higher net profit delivered in 2016, our Group's return on equity (ROE) for the year improved sharply to 15.7% from the 7.7% achieved in 2015. This double-digit outcome for 2016 was certainly a welcome one after a disappointing 2013 to 2015. Of course this positive outcome was aided by the outsized contribution from the fair value gain on investment at Captii Ventures. Without the benefit of this gain from our venture investment activities we certainly would have had a much lower ROE for 2016. The considerably higher ROE outcome in 2012 meanwhile was aided by the exceptional outsized income contribution from the AMSB acquisition-related fair value gain.

Although the sales growth performance of our Unifiedcomms business in 2016 was not as I had hoped, we did manage to secure some progress in growing our profits across all businesses. This year the contribution of system sale contracts was considerably higher, arising from significant growth in the sales performance of GlobeOSS and system sale contract revenues at Unifiedcomms being maintained at previous year levels. The managed service contract gross profit contribution of our business was overall slightly lower compared to 2015. With the performance of our businesses being maintained if not improved further in 2017, I am optimistic of our being able to also further extend our dividend payout track record- to at minimum, maintain the dividend per share that was paid to all shareholders last year.

Growth by strategic investment

As at end-2016, we continued to have more than sufficient capital to augment our organic growth plans with growth by strategic investment. This remains an essential element of our current business plan that targets sustained, double-digit Group profit growth and a significant uplift of our ROE performance. The early results of this plan are apparent in this year's financial results with the venture investment business contributing substantially to our Group bottom line and improvement in ROE. Our investment property in MSC-status Plaza Sentral, Kuala Lumpur acquired in 2011, and the acquisition of the remaining equity interest of AMSB which we did not already own in 2012 to turn AMSB into a subsidiary of our Group, both continue to positively contribute to the revenue and profits of our Group in 2016.

Throughout 2016, the Group through our Captii Ventures business persisted in identifying and evaluating many investment opportunities in the SEA region. As a direct result of these efforts by the Captii Ventures team, as at end-2016, we have a total of ten investments in new technology ventures and start-ups. Out of these ten investments, four were made during the year.

Reviewing our 2016 balance sheet positions

Now to turn to our Group's balance sheet as at the end of the 2016 financial year: we ended 2016 with higher current assets of S$26.8 million, as compared to S$20.2 million as at end- 2015. This was mainly attributable to the increase in trade and other receivables from S$6.3 million to S$17.3 million as a result of higher revenue achieved by the Group in respect of major system sales contract were awarded to and billed by the GlobeOSS business late in 2016. In addition, there were delays in collection from the Group's major account receivables, payment from whom was only received subsequent to year end. If the effect of the delay in collections is excluded, trade and other receivables would amount to S$10.4 million as at year-end, corresponding to a debtor ratio of 4 months which in line with our ratio as at end-2015.

This delay in collections gave rise to the decrease of the cash and cash equivalents at year-end, together with the rise of other financial assets (classified under non-current assets) namely S$2.7 million in cash being been utilised during the year on investments by Captii Ventures. Owing to these collection delays and capital deployed for strategic investment, Group cash and cash equivalents as at end-2016 was S$9.1 million as compared to S$13.5 million as at end-2015.

Our total non-current assets increased from S$18.0 million as at 31 December 2015 to S$23.1 million as at 31 December 2016. This increase was mainly due to the increase in investments by Captii Ventures which are classified as other financial assets. This increase was however partly offset by the impairment loss provision made on our investment property and certain intangible assets, as well as on-going depreciation charges on plant and equipment.

Total liabilities of our Group as at 31 December 2015 increased from S$4.6 million to S$11.6 million. This increase was mainly due the higher cost of sales incurred by the Group in 2016. In terms of debt, we continued to be debt free at the close of the 2016 financial year.

Reviewing movements in Group cash

Our Group's net cash flows from operations for 2016 was S$1.1 million, a decrease of 84.8% as compared to the S$7.2 million in the previous year. This significant decrease was mainly attributable to the unfavourable working capital changes of S$4.7 million for 2016, in contrast with the favourable working capital changes of S$2.0 million in 2015. The unfavourable working capital change this year was mainly caused by higher trade and other receivables coincident with the substantial increase in system sale revenues as well as a delay in collection for certain trade receivables. Substantial inflows in connection with payment of these receivables was however received post year-end.

Our Group's net cash used in investing activities for 2016 amounted to S$3.4 million, an increase of 79.4% as compared to the S$1.9 million invested in the previous year. The significant higher net cash used in investing activities this year is attributable to the higher investment cost in intangible assets, and investment in four new technology ventures and start-ups.

2016: an improvement on 2015 but still disappointing

I expected system sale market conditions to continue to be somewhat challenging for our Group in 2016 and for our managed service contract portfolio to deliver significant growth. This proved not to be the case this year as GlobeOSS managed to secured an increase in both system sale contract and managed service contract in spite of the competitive operating environment. Several hard-fought and won system sale contract opportunities during the year resulted in the substantial revenue growth achieved by this business segment this year. However, this improvement in revenue performance came at the expense of thinning margins. Unifiedcomms meanwhile recorded lower managed service contract revenues, due to the underperformance of certain managed service contracts and continued delays with new contract opportunities.

Although the growth in system sale business of GlobeOSS in 2016 had effectively counteracted the slower than desired growth of our Group's managed service contract portfolio, significant uncertainty and hence lumpiness is still to be expected in the contribution of system sale contracts to our Group's future results. The need for our Group to continue to strengthen our managed service contract portfolio as the platform for delivering steady, if not rapid yet sustainable future growth remains.

Challenges and opportunities in 2017 and beyond

Apart from the contribution of existing long-standing managed service contracts, the bulk of the system sale revenues that are expected to be realised by our businesses in 2017 are expected to be driven by new solution implementation for new and existing customers, as well as solution enhancement, system upgrade and system capacity expansion activities of existing customers within the SEA and MEA region. The SEA and SA regions are meanwhile expected to drive managed service contract revenue growth.

Our Group's managed service contract portfolio continues to have emphasis in our Group's 2017 business plan. Group and business-segment level management will continue to work on means to better manage execution risk in respect of our strategies and tactics to grow. This includes maintaining if not growing the more mature managed service contracts in our portfolio and to more quickly translate secured contracts into substantial sources of recurrent revenue for our Group.

The growing interest and opportunity in internet-driven application services for enterprises and marketplaces as well as internet and handset-app delivered media continues to be recognised by Group management and guides our venture investment activities.

Investing in Growth

Our pursuit in 2017 of opportunities relating to internetdelivered application services including marketplaces and those that address enterprise problems as well as ones that fall under the category of digital and mobile media, will continue to involve a combination of organic and growth-by-acquisition or strategic investment initiatives.

The Group's strategic investment plan in the year ahead will continue to focus primarily on these growth businesses in the SEA and SA regions and will complement the organic and growth-by-acquisition strategy already in place for our Unifiedcomms and GlobeOSS businesses.

In gratitude

In closing my report to you on the 2016 financial year, I would like to express my gratitude to all the dedicated, determined and talented people that make up our Group. I believe that we can improve further in 2017 by continuing to work with passion, integrity and creativity.

To you, our shareholder, I thank you for your belief and patience in our management, our people and our business. We will continue to work hard to deliver the returns that you deserve from the investment you have made in our Group.

Last but not least, to the government agencies and regulatory bodies from whom we have received counsel and advice from throughout 2016, my thanks for their guidance and support.


Anton Syazi Ahmad Sebi
Group Chief Executive Officer

21 March 2017