Captii Limited

Investor Relations.
(Extracted from Annual Report 2015)

2015 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 2015 financial year.

An overview of our business

Going into our 18th year of operation, the most visible change our Group has undergone in 2015 is in our reporting business segments. We have now consolidated our Mobile Technology Business Unit (TECH BU) and Mobile Value-Added-Service Business Unit (VAS BU) into one business under the common brand 'Unifiedcomms'. Our Operation Support System Business Unit (OSS BU) has meanwhile been simply renamed as a business segment to 'GlobeOSS' with no change in its operations or organisational structure. Our third and final business segment described as 'Others', represents the combination of our Operational Headquarters Business Unit (OHQ BU) and the newly established Captii Ventures business into one reporting segment.

Throughout 2015, our Unifiedcomms and GlobeOSS businesses continued to address mobile network operators and integrated telecoms service providers with solutions that optimise performance in specific areas of their operations, or that provide their customers, the end-user mobile subscriber, with utility applications and services.

Unifiedcomms and GlobeOSS operate primarily in the telecommunications markets of three regions: South East Asia (SEA), South Asia (SA) and the Middle East and Africa (MEA). 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.

Through our Unifiedcomms and GlobeOSS businesses, we continue to offer various solutions that address the business problems of our customers (mobile network operators and integrated telecoms service providers) or the more human problems of their customers, the end-user service subscriber. Each solution comprises first a technical component made up of one or several of our application or platform software products and professional services for their adaptation and implementation, and secondly a commercial component that allows election of the most suitable business model for customers' needs, ranging from an outright purchase model to a managed service, revenue-sharing and pay-per-use/pay-as-you-go model.

As at end-2015, there are a total of 158 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.

A broadly positive year for Group profit though lower revenue

The Group recorded consolidated revenue of S$19.3 million for the financial year 2015, a decrease of 10.6% as compared to the S$21.6 million achieved in the previous year.

Both Unifiedcomms and GlobeOSS businesses recorded a decline in revenue against their 2014 results. Unifiedcomms had a 4.4% decline in sales, turning in total revenue of S$13.5 million in 2015 versus S$14.1 million the year before. GlobeOSS meanwhile had a 22.6% decline in sales, turning in total revenue of S$5.6 million in 2015 versus S$7.2 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 the year before.

Lower revenue at the Unifiedcomms business was not accompanied by any change in the sales mix of the business. Unifiedcomms revenue from system sale contracts decreased slightly to S$2.4 million in 2015 versus S$2.5 million in 2014, while managed service revenues declined by S$0.5million to S$11.1 million.

The Unifiedcomms customer base has traditionally been concentrated in the SEA region. This has not changed in 2015, with Unifiedcomms SEA region revenues continuing to account for above 80% of the total revenue achieved for the year.

Our GlobeOSS business experienced a decline in both system sale and managed service contract revenues in 2015 after the significant increase in system sales enjoyed in 2014. System sales decreased to S$3.6 million in 2015, while managed service revenue also declined by S$0.3 million to S$1.9 million.

GlobeOSS continues to have both its system sale and managed service business concentrated in the SEA region. The S$1.6 million decline in revenue from the SEA region is mirrored by the combination of a S$1.3 million drop in system sales and a S$0.3 million drop in managed service revenues between 2014 and 2015.

Group-wide system sale revenue decline

The decline in Group revenue this year against last year was mainly attributable to the 19% or S$1.4 million decline in GlobeOSS system sale contract revenues, and a decline of S$0.8 million in the managed service contract revenues across both Unifiedcomms and GlobeOSS businesses.

We expected 2015 to continue to be a challenging year for our businesses on the system sale front. The region that proved most disappointing was SEA, which had its contribution fall from S$18.3 million to S$16.9 million. The MEA region's contribution to the total Group revenue also declined in 2015 to S$1.4 million from S$2.1 million the year before. The SA region remained disappointing, due yet again to the underperformance of certain managed service contracts.

In 2015, SEA, our Group's home region, continues to be the largest geographic source of revenue, accounting for 87.8% of Group revenue.

Higher gross profit achieved, despite having lower revenue

Although Group revenue was lower in 2015, gross profit achieved for the year was higher compared to 2014. Group gross profit for 2015 was S$11.7 million, up by S$0.8 million or 7.2% against 2014. The higher gross profit was mainly due to higher overall gross profit margin earned on Group revenue of 61.0% as compared to 50.9% recorded the year before. Average gross profit margin on system sale revenues improved to 60.4% in 2015, primarily due to lower third-party component cost incurred at both GlobeOSS and Unifiedcomms. Gross profit margin earned on managed service contract revenues also improved from 56.8% in 2014 to 61.2% this year. This improvement was primarily due to lower amortisation of intellectual property in 2015.

The sales mix of our Group continues to exceed 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 68.7% of Group revenue, up from 65.4% in 2014.

Lower total opex this year, before and after exceptional items

Our Group's operating expenditure for the year decreased to S$8.4 million as compared to S$9.0 million in 2014. In 2014 we had a foreign exchange gain due to the strengthening of the Pakistan Rupee and US Dollar against the Singapore Dollar and a provision that was made for the impairment of intellectual property that had been assessed as being no longer able to generate previously expected future cash flows.

This year, we had a higher foreign exchange gain due to the strengthening of the US Dollar against the Singapore Dollar and an impairment loss on plant and equipment - that was lower against 2014's impairment loss on intellectual property assets - to take into our income statement. The impairment this year relates to a managed service contract that has been assessed as being no longer able to generate previously expected income and returns.

Excluding the effect of exceptional items such as the impairment loss this year, our opex for 2015 was S$0.4 million lower at S$8.2 million compared to S$8.6 million for 2014. This decrease was due to a reduction in the technical, and sales and business development headcount of the Group.

Improved bottom line - a further year of improvement in our underlying business

2015 marks our eighth consecutive year of being in the black. Group net profit for the year, at S$3 million, is 33.1% higher than the S$2.3 million achieved in 2014. The double-digit growth of our Group's bottom line reflected the improvement in the performance of our underlying businesses.

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, the improvement in profit performance of our underlying businesses is more pronounced. The 'adjusted' net profit generated by our businesses grew more than seven-fold, from S$0.4 million in 2013 to S$3 million this year.

In terms of bottom line margins, our Group achieved a much improved audited net profit margin of 15.6% for 2015, versus 10.4% for 2014 and 6.3% for 2013. If the effect of the fair value gain on AMSB is removed, our Group net profit margin for 2013 would instead decline to 2.0% while our 2014 and 2015 results, the years devoid of any fair value gain, would remain unchanged at 10.4% and 15.6%.

The flow-down effect of the improvement in Group net profit is very clearly reflected in our EBITDA results for the year.

EBITDA rose to S$5 million in 2015, an increase of 21.5%, in tandem with the 33.1% rise in net profit. The disproportionately slower rise of EBITDA is accounted for by the significant impact of non-cash items on reducing Group net profit in 2014. The negative impact of provisions for impairment that were made in 2014 do not, of course, have any bearing on EBITDA. Excluding exceptional items for the year, EBITDA before exceptional items and fair value gain stood at S$5.2 million for 2015 - a 14.6% improvement against that achieved in 2014.

Because of the higher net profit delivered in 2015, our Group's return on equity (ROE) for the year improved to 7.7% from the 6.3% achieved in 2014. Another year with a single-digit ROE outcome is certainly a disappointing result, even in the context of an improvement of ROE compared to the previous year. The considerably higher ROE outcome in 2012 was aided by the exceptional outsized income contribution from the AMSB fair value gain. Excluding the effect of this exceptional item on the 2012 bottom line results, 2015 actually represents an extension of the improvement in the ROE performance of the Group from 2012 to 2014.

Although the performance of our underlying business in 2015 was not as strong as I would have liked to see, we did manage to secure some progress in growing our profits. This year the gross profit contribution of system sale contracts was considerably higher, arising from the improved gross profit margin of both Unifiedcomms and GlobeOSS businesses. The managed service contract gross profit contribution of our business was maintained and in-line with 2014. Application services delivered on a managed service, revenue sharing model, especially several of those launched in 2013 through 2014 moved positively towards achieving their expected revenue potential in 2015 and underpinned the steady gross profit contribution of managed service contracts. With the continued improvement expected in the performance of our underlying business in 2016, I am optimistic of our being able to 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 acquisition and strategic investment

As at end-2015, we continued to have more than sufficient capital to augment our organic growth plans with growth-by acquisition and 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. So far, we completed the acquisition of our investment property in MSC-status Plaza Sentral, Kuala Lumpur in 2011, and in 2012, the acquisition of the remaining equity interest of AMSB which we did not already own, to turn AMSB into a subsidiary of our Group. Both these acquisitions continue to positively contribute to the revenue and profits of our Group in 2015.

Throughout 2015, the Group through our Captii Ventures business persisted in identifying and evaluating many investment opportunities in the SEA region. I am happy to report that six investments in new technology ventures and start-ups were made during the year.

Reviewing our 2015 balance sheet positions

Now to turn to our Group's balance sheet as at the end of the 2015 financial year: we ended 2015 with slightly lower current assets of S$20.2 million, as compared to S$22.1 million as at end-2014. This can be attributed to the decrease in trade and other receivables from S$9.7 million to S$6.3 million as a result of an improvement in collections. This improvement in collections however did not proportionately increase the cash and cash equivalents to offset the decrease in receivables, given that S$1.5 million in cash had been utilised during the year on investments by the Captii Ventures business in other financial assets (classified under non-current assets). After these investments, Group cash and cash equivalents as at end- 2015 was S$13.4 million as compared to S$11.9 million as at end-2014.

Our total non-current assets decreased from S$19.7 million as at 31 December 2014 to S$18.0 million as at 31 December 2015. This decrease was mainly due to the on-going depreciation and amortisation changes on plant and equipment and the intangible assets and the effect of foreign exchange movement on the Group's MYR denominated investment property and intangible assets. This movement in non-current assets was however partly mitigated by the increase in investment by the Group's recently incorporated subsidiary, Captii Ventures Pte Ltd, in other financial assets.

Total liabilities of our Group as at 31 December 2015 decreased from S$5.8 million to S$4.6 million. This decrease was mainly due to the reduction in trade and other payables. In terms of debt, we continued to be debt free at the close of the 2015 financial year.

Reviewing movements in Group cash

Our Group's net cash flows from operations for 2015 was S$7.2 million, an increase of 63.2% as compared to the S$4.4 million in the previous year. This significant increase was mainly contributed by the favourable working capital changes, from S$0.3 million for 2014 to S$2 million for 2015, and the improvement in profit before tax, from S$2.9 million for 2014 to S$3.9 million for 2015.

Our Group's net cash used in investing activities for 2015 amounted to S$1.9 million, in contrast with the net cash from investing activities of S$0.3 million for 2014. The significant higher net cash used in investing activities this year is attributable to the absence of the withdrawal of interest bearing deposits amounting to S$2.4 million in 2014 relating to contingent consideration payable for the acquisition of AMSB. The withdrawal amount in 2014 is in connection with the final payment of contingent consideration of S$0.9 million made in 2014. Further, in 2015, the higher net cash used in investing activities was spurred by investments totalling S$1.5 million in six technology ventures and start-ups. This higher net cash used in investing activities was partly mitigated by lower investment in plant and equipment and intangible assets.

2015: an improvement on 2014 but still disappointing

I expected system sale market conditions to continue to be somewhat challenging for our Group in 2015 and for our managed service contract portfolio to deliver significant growth. This proved not to be the case this year, as both Unfiedcomms and GlobeOSS businesses recorded a lower managed service contract revenues, due to the underperformance of certain managed service contracts coupled with the adverse effect of unfavourable foreign exchange translation on contract revenues.

Although the improved gross profit margin on system sale revenues of GlobeOSS and Unifiedcomms in 2015 had effectively counteracted the slower than desired growth of our Group's managed service contract portfolio, I do not expect this to be a trend that can readily be extended in the years ahead. Significant uncertainty and hence lumpiness is still to be expected in the contribution of system sale contracts. 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 2016 and beyond

Apart from the contribution of existing long-standing managed service contracts, the bulk of the revenues that are expected to be realized by our Unifiedcomms business in 2016 is expected to continue to be system sale contracts 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 remains the focus for growth in 2016. Group and business-segment level management will need to continue to find 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, new media and applications delivered on an advertisement-supported or advertisement-funded model continues to be recognised by Group management. It remains our intention to participate in the growth opportunities offered by these developments.

Investing in Growth

Pursuing the opportunities relating to internet-delivered application services such as marketplaces and those that address enterprise problems as well as 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 existing businesses.

In gratitude

In closing my report to you on the 2015 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 2016 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. I will continue to work hard with our management team in delivering 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 2015, my thanks for their guidance and support.


Anton Syazi Ahmad Sebi
Group Chief Executive Officer

22 March 2016