Captii Limited

Investor Relations.
(Extracted from Annual Report 2017)

An overview of our business

Our Group comprises three main segments: Unifiedcomms, GlobeOSS and Captii Ventures.

Throughout 2017, our Unifiedcomms business 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. In 2016 a unit within Unifiedcomms called PostPay (formerly Mobilization) was revitalised into a fresh start-up and given prominence as part of a wider reorganisation of the Unifiedcomms business. PostPay now focuses mainly on providing advanced solutions for prepaid credit on a managed service model.

GlobeOSS meanwhile, continued to grow from strength to strength into Malaysia’s leading systems integration and solution provider in the telecoms big data and analytics field.

Unifiedcomms operates primarily in the telecoms-tech markets of three regions: South East Asia (SEA), South Asia (SA) and the Middle East and Africa (MEA) while GlobeOSS focuses exclusively on SEA. For Unifiedcomms, 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, the venture investment arm of our Group, focuses primarily on the SEA market for start-up investment opportunities. 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 co- investor following the lead investor. In 2017 Captii Ventures added four new investees to its portfolio of start-up investments while also supporting the ten existing investees from 2016 in realising the development plans for their business.

As at end-2017, there are a total of 168 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 2017 financial was a positive year for our business in terms of Group revenue growth but a mixed one when we examine the performance of each of our business segments. The Group achieved consolidated revenue of S$24.8 million for the financial year 2017, an increase of 5.8% as compared to the S$23.5 million recorded in the previous year. Only one of our business segments however, showed an increase in their 2017 revenues.

GlobeOSS posted revenue of S$13.1 million in 2017, an increase of 19.2% from the S$11.0 million recorded in 2016. Unifiedcomms recorded a 4.5% decline in sales, turning in total revenue of S$11.7 million in 2017 versus S$12.3 million the year before.

Lower revenue at Unifiedcomms was caused by revenue from system sale contracts declining sharply to S$1.2million in 2017 from S$2.5 million in 2016. Unifiedcomms managed service revenues improved from S$9.7 million to S$10.5 million but the growth achieved was not enough to offset the sharp decline in system sale revenues. The PostPay (formerly Mobilization) unit within the Unifiedcomms business that focuses on amongst others, advanced prepaid credit solutions on a managed service model continued to show very good progress in 2017 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 2017, with Unifiedcomms SEA region revenues accounting for 89.4% of the total revenue achieved for the year.

GlobeOSS delivered an improvement in both system sale and managed service contract revenues in 2017. System sales increased significantly by 19.4%, from S$8.7 million in 2016 to S$10.4 million in 2017, while managed service revenue increased by 18.2%, from S$2.3 million in 2016 to S$2.7 million in 2017.

GlobeOSS continues to also have both its system sale and managed service business concentrated in the SEA region. The S$2.1 million increase in revenue from the SEA region is driven by the S$1.7 million increase in system sales and a S$0.4 million improvement in managed service revenues between 2016 and 2017.

Growth in both system sale and managed service revenues

The increase in Group revenue this year against last year was mainly attributable to the 19.4% or S$1.7 million increase in GlobeOSS system sale contract revenues, which had more than offset the decline in Unifiedcomms system sale contract revenues.

We expected 2017 to be a 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 for the GlobeOSS business. Coupled with improved success rates for sale opportunities, significant growth in GlobeOSS system sale contract revenues was delivered in the second half of the year. Our Unifiedcomms business did not fare as well and recorded a sharp decline in system sale revenues.

SEA once again served as the principal driver for the improvement in Group revenue for the year, growing by 8.3% or S$1.8 million against last year’s contribution. The region that turned in a disappointing performance was MEA, which had its contribution fall from S$0.9 million to S$0.4 million. The SA region’s contribution to the total Group revenue maintained at S$0.8 million this year.

In 2017, SEA, our Group’s home region, continues to be the largest geographic source of revenue, accounting for 94.9% of Group revenue.

Lower gross profit, in contrast with higher revenue achieved

In spite of the higher consolidated revenue of S$24.8 million for 2017, representing a 5.8% gain on 2016 revenue, absolute gross profit achieved for the year was lower compared to 2016.

Group gross profit for 2017 was S$11.3 million, down by S$1.1 million or 9.2% against what was recorded in 2016. Gross profit grew slower than revenue due to the sales mix achieved in 2017 – 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 45.7% as compared to 53.2% achieved the year before.

System sale contract average gross profit margin declined markedly to 35.6% in 2017, primarily due to the higher contribution of GlobeOSS to system sale contract revenues of the Group as compared to 2016. Gross profit margin earned on managed service contract revenues was relatively flat, showing only a gentler decline from 60.3% in 2016 to 54.5% this year. This decrease was mainly attributable to higher third-party costs on certain managed service contracts, coupled with the relatively lower revenue contribution of certain mature, higher-margin managed service contracts.

Although system sale contract revenues grew 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 53.5% of Group revenue, up from 52.2% in 2016.

Higher total opex this year, before and after exceptional items

Our Group’s operating expenditure for the year increased to S$8.7 million as compared to S$8.3 million in 2016.

In 2016, 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.

This year we had a fair value loss assessed on venture investment portfolio and a higher foreign exchange loss as a result of unfavourable exchange rate movement of US Dollar, Malaysia Ringgit and Pakistan Rupee against the Singapore Dollar. The fair value loss, which is unrealised, is a result of lower estimated fair valuation of the venture investment portfolio following the adoption of the most appropriate valuation techniques.

Excluding the effect of exceptional items such as the impairment loss this year, our opex for 2017 was S$0.5 million lower at S$8.4 million compared to S$7.9 million for 2016. This increase was due to the higher foreign exchange loss recorded in 2017.

Reduced bottom line, both organic and from investments

2017 marks our tenth consecutive year of being in the black. Group net profit for the year, at S$2.3 million, is 64.4% lower than the S$6.5 million recorded in 2016. This substantial decrease in our Group’s bottom line reflects the absence of any fair value gain on investment that we enjoyed in 2016 on the revaluation of the Captii Ventures investment portfolio. In 2016 this fair value gain amounted to S$2.4 million.

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 across 2012 and 2013 and in the revaluation of the Captii Ventures investment portfolio in 2016 and 2017, the profit performance of the Unifiedcomms and GlobeOSS business is made more apparent. The ‘adjusted’ net profit generated by these two businesses declined by almost half, from S$4.0 million in 2016 to S$2.5 million this year.

In terms of bottom line margins, our Group recorded a net profit margin of 9.3% for 2017 versus 27.5% for 2016. If the effect of any fair value gain or loss is removed, our Group net profit margin for 2017 would increase to 9.9% while our 2016 results would reduce to 17.1%.

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

EBITDA dropped to S$3.7 million in 2017, a decrease of 55.2%, in tandem with the 64.4% decrease in net profit. A significant proportion of this EBITDA decrease is accounted for by the absence of any fair value gain on the Captii Ventures investment portfolio this year, as explained earlier. Removing the effect of this significant non-cash item in 2016, 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$4.1 million for 2017 – still strongly positive but a 29.4% decrease against what was achieved in 2016.

Because of the lower net profit delivered in 2017, our Group’s return on equity (ROE) for the year dropped sharply to 3.2% from the 15.7% achieved in 2016. This single-digit outcome for 2017 was certainly an unwelcome one after an encouraging 2016. Of course the positive outcome of 2016 was aided by the outsized contribution from the fair value gain on the the venture investment portfolio that year. Without the benefit of this gain from our venture investment portfolio we certainly would have had a much lower ROE for 2016.

This year the contribution of system sale contracts was considerably higher, arising from significant growth in revenue performance of GlobeOSS. Managed service contracts showed steady revenue growth across both businesses. With the performance of our businesses being maintained if not improved further in 2018, we are 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.

Investing in (external) technology and innovation

As at end-2017, 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, doubledigit Group profit growth and a significant uplift of our ROE performance.

Throughout 2017, our venture investment 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-2017, we have a total of fourteen investments in new technology ventures and start-ups. Out of these fourteen investments, four were made during the year.

Reviewing our 2017 balance sheet positions

Now to turn to our Group’s balance sheet as at the end of the 2017 financial year: we ended 2017 with higher current assets of S$27.8 million, as compared to S$26.8 million as at end2016. This was mainly attributable to the increase in trade and other receivables from S$17.3 million to S$20.1 million as a result of higher revenue achieved by the Group in respect of major system sales contracts that were awarded to and billed by the GlobeOSS business late in 2017. This, together with the rise of other financial assets (classified under non-current assets) namely S$2.8 million in cash being been utilised during the year on investments by Captii Ventures, gave rise to the decrease of the cash and cash equivalents at year-end.

Owing to the increase in year-end receivables and the capital deployed for venture investments, Group cash and cash equivalents as at end-2017 was S$7.4 million as compared to S$9.1 million as at end-2016.

Our total non-current assets increased from S$23.1 million as at 31 December 2016 to S$26.2 million as at 31 December 2017. 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 non-cash fair value loss assessed on the venture investment portfolio as at end-2017, as well as on-going depreciation charges on plant and equipment.

Total liabilities of our Group as at 31 December 2017 increased from S$11.6 million to S$13.8 million. This increase was mainly due to the higher cost of sales incurred related to the system sale awarded in late 2017 by the Group in 2017. In terms of debt, we continued to be debt free at the close of the 2017 financial year.

Reviewing movements in Group cash

Our Group’s net cash flows generated from operations for 2017 was S$3.8 million, an increase of 248.8% as compared to the net cash flows generated from operations of S$1.1 million in the previous year. This significant increase was mainly attributable to lower working capital incurred of S$0.2 million for 2017, as compared to S$4.7 million for 2016. The lower working capital incurred this year was mainly contributed by higher collection related to trade receivables from late 2016.

Our Group’s net cash used in investing activities for 2017 amounted to S$3.8 million, an increase of 11.1% as compared to the S$3.4 million invested in the previous year. The higher net cash used in investing activities this year is attributable to the higher investment cost made in the plant and equipment invested for new managed service contracts.

2017: a mixed year overall and disappointing for some

We expected system sale market conditions to continue to be somewhat challenging for our Group in 2017 and for our managed service contract portfolio to deliver significant growth. This proved not to be the case this year yet again as GlobeOSS managed to secured a substantial increase in system sale contract revenues and steady growth in managed service contract revenues in spite of the competitive operating environment. Several hard-fought and won system sale contract opportunities during the year resulted in the significant revenue growth achieved by this business segment this year yet again. However, this improvement in revenue performance came at the expense of thinning margins. Unifiedcomms meanwhile managed to return managed service contract revenues to 2015 levels after a decline in 2016, courtesy largely of the outperformance of the PostPay business. This outperformance at PostPay had more than offset to the underperformance of certain other managed service contracts within Unifiedcomms.

Although the growth in system sale business of GlobeOSS in 2017 had significantly augmented the slower than desired growth of our Group’s managed service contract portfolio, 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 and to continue to grow our venture investment portfolio as the basis for delivering steady, if not rapid yet sustainable future growth, remains.

Challenges and opportunities in 2018 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 2018 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 2018 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, fintech as well as internet and handset-app delivered digital media will guide our Group’s venture investment activities.

The Group’s venture investment plan in the year ahead will continue to focus primarily on these growth businesses in the SEA region and will complement the organic growth strategy in place for our Unifiedcomms and GlobeOSS businesses.