Captii Limited

Investor Relations.
(Extracted from Annual Report 2018)

An overview of our business

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

Throughout 2018, Unifiedcomms 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 startup 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 2018 Captii Ventures added two new investees to its portfolio of start-up investments while also supporting the thirteen existing investees from 2017 in realising the development plans for their business.

As at end-2018, there are a total of 189 people that are employed in our Group. The majority of these personnel are located in Malaysia, where our operational headquarters is situated, while the rest work out of Singapore, Pakistan, Brunei, Thailand, Indonesia and Vietnam.

Generally a positive year for Group revenue

The 2018 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$31.5 million for the financial year 2018, an increase of 26.9% as compared to the S$24.8 million recorded in the previous year.

GlobeOSS posted revenue of S$19.7 million in 2018, an increase of 50.3% from the S$13.1 million recorded in 2017. Unifiedcomms recorded a slight increase 0.7% in revenue, turning in total revenue of S$11.8 million in 2018 versus S$11.7 million the year before.

Slightly higher revenue at Unifiedcomms is attributable to the marginal increase in both system sale contracts and managed service revenues. The PostPay unit within the Unifiedcomms business that focuses on amongst others, advanced prepaid credit solutions on a managed service model continued to show good progress in 2018 to countervail the decline or slow growth in other managed service contracts.

The Unifiedcomms customer base has traditionally been concentrated in the SEA region. This has not changed in 2018, with Unifiedcomms SEA region revenues accounting for 90.7% of the total revenue achieved for the year.

GlobeOSS delivered an improvement in both system sale and managed service contract revenues in 2018. System sales increased significantly by 53.1%, from S$10.4 million in 2017 to S$15.9 million in 2018, while managed service revenue increased by 39.6%, from S$2.7 million in 2017 to S$3.8 million in 2018.

GlobeOSS continues to have both its system sale and managed service business concentrated in the SEA region. The S$6.6 million increase in revenue from the SEA region is driven by the S$5.5 million increase in system sales and a S$1.1 million improvement in managed service revenues between 2017 and 2018.

Growth in both system sale and managed service revenues

The increase in Group revenue this year against last year is mainly attributable to the 48.1% or S$5.5 million significant increase in GlobeOSS system sale contract revenues.

We expected 2018 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.

SEA once again served as the principal driver for the improvement in Group revenue for the year, growing by 28.9% or S$6.8 million against last year's contribution. The regions that turned in a disappointing performance were SA and MEA.

In 2018, SEA, our Group's home region, continues to be the largest geographic source of revenue, accounting for 96.5% of Group revenue.

Higher gross profit achieved, in line with higher revenue

In line with the higher consolidated revenue of S$31.5 million for 2018, a 26.9% gain on 2017 revenue, absolute gross profit achieved for the year was higher compared to 2017.

Group gross profit for 2018 was S$12.0 million, up by S$0.7 million or 5.7% against what was recorded in 2017. Gross profit grew slower than revenue due to the sales mix achieved in 2018 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 38.1% as compared to 45.7% achieved the year before.

System sale contract average gross profit margin declined markedly to 25.2% in 2018, primarily due to the higher contribution of GlobeOSS to system sale contract revenues of the Group as compared to 2017. Gross profit margin earned on managed service contract revenues was relatively flat, showing only a gentler decline from 54.5% in 2017 to 53.5% this year. This decrease was mainly attributable to higher third-party costs on certain managed service contracts.

System sale contract revenues grew significantly this year, which resulted in managed service contract revenues contributing to less than half of Group revenue. This year managed service contract revenues accounted for 45.7% of Group revenue, down from 53.5% in 2017.

Higher total opex this year, before and after exceptional Items

Our Group's operating expenditure for the year increased to S$9.4 million as compared to S$8.7 million in 2017.

In 2017, we had a fair value loss assessed on our Group's venture investment portfolio and a foreign exchange loss due to the unfavourable exchange rate movement of US Dollar, Malaysia Ringgit and Pakistan Rupee against the Singapore Dollar. The fair value loss, which is unrealised, was a result of the lower estimated fair valuation of the venture investment portfolio following the adoption of the most appropriate valuation technique.

This year we had a foreign exchange loss due to unfavourable exchange rate movement of Pakistan Rupee against the Singapore Dollar, and impairment loss on goodwill and investment property to take into our income statement. The impairment on goodwill this year relates to the acquisition of Ahead Mobile Sdn Bhd, which is now believed to produce lower than expected profitability and returns. The impairment loss on investment property meanwhile had arisen following an open market valuation of the property at end-2018.

Excluding the effect of exceptional items such as the impairment loss this year, our opex for 2018 was slightly higher at S$8.5 million compared to S$8.4 million for 2017.

Improved bottom line, both organic and from investments

2018 marks our tenth consecutive year of being in the black. Group net profit for the year, at S$3.4 million, is 47.1% higher than the S$2.3 million recorded in 2017. This increase in our Group's bottom line reflects the fair value gain on investment that we enjoyed on the revaluation of Captii Ventures investment portfolio. This fair value gain amounting to S$0.9 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 movement in the revaluation of the Captii Ventures investment portfolio in 2016 to 2018, the profit performance of the Unifiedcomms and GlobeOSS business is made more apparent. The 'adjusted' net profit generated by these two businesses have declined from S$4.0 million in 2016 to S$2.5 million and S$2.2 million in 2017 and 2018 respectively.

In terms of bottom line margins, our Group recorded a net profit margin of 10.8% for 2018 versus 9.3% for 2017. If the effect of any fair value gain or loss is removed, our Group net profit margin for 2018 would be lower at 7.0% while our 2017 results would show a higher margin of 9.9%.

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

EBITDA rose to S$4.6 million in 2018, an increase of 24.4%, in tandem with the 47.1% increase 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. Removing the effect of this significant non-cash item in 2018, and also excluding exceptional items for the year, the cash generation performance at our underlying business can be identified. EBITDA before exceptional items and fair value gain stood at S$4.6 million for 2018 a 12.9% improvement against what was recorded in 2017.

Because of the higher net profit delivered in 2018, our Group's return on equity (ROE) for the year improved to 6.2% from the 3.2% recorded in 2017. Another year with single-digit outcome is certainly a disappointing result, even in the context of an improvement of ROE compared to previous year. Of course the positive outcome of 2016 was aided by the outsized contribution from the significant fair value gain on the venture investment portfolio that year. Without the benefit of this gain from our venture investment portfolio our Group 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 GlobeOSS and PostPay. With the performance of our businesses being maintained if not improved further in 2019, we are optimistic of further extending 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-2018, 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.

Throughout 2018, 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-2018, we have a total of fifteen investments in new technology ventures and start-ups. Out of these fifteen investments, two were made during the year.

Reviewing our 2018 balance sheet positions

Now to turn to our Group's balance sheet as at the end of the 2018 financial year: we ended 2018 with higher current assets of S$28.1 million, as compared to S$27.8 million as at end-2017. This is mainly attributable to the increase in Group cash and cash equivalents as a result of collection received in 2018 relating to trade receivables and other assets from late 2017, and proceeds from disposal of one of the venture investments and borrowings. This improvement in cash and cash equivalents was partly offset by higher investment in an associate and other financial assets (classified under non-current assets) totalling S$1.6 million in cash being been utilised during the year on investments made by Captii Ventures. After these investments, Group cash and cash equivalents as at end-2018 was S$8.7 million as compared to S$7.4 million as at end-2017.

Our total non-current assets increased from S$26.2 million as at 31 December 2017 to S$27.7 million as at 31 December 2018. 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 on goodwill (classified as intangible assets) in connection with the acquisition of Ahead Mobile Sdn Bhd.

Total liabilities of our Group as at 31 December 2018 decreased from S$13.8 million to S$12.6 million. This decrease was mainly due to the reduction in trade and other payables, following repayment made accordingly to the vendors.

Reviewing movements in Group cash

Our Group's net cash flows generated from operations for 2018 was S$2.8 million, a decrease of 26.9% as compared to the net cash flows generated from operations of S$3.8 million in the previous year. This decrease is mainly attributable to higher working capital incurred of S$1.7 million for 2018, as compared to S$0.2 million for 2017. The higher working capital incurred this year was mainly caused by higher repayment to trade payables in 2018 as compared to 2017.

Our Group's net cash used in investing activities for 2018 amounted to S$1.8 million, a decrease of 53.2% as compared to the S$3.8 million invested in the previous year. The lower net cash used in investing activities this year is attributable to lower volume of venture investments and investment in plant and equipment.

The Group's net cash flow from financing activities for 2018 was S$0.9 million, in contrast with the net cash flow used in financing activities of S$2.4 million for 2017. This increase was mainly due to proceeds from borrowings and lower dividend payout for the year.

2018: an improvement on 2017 but below expectations

We expected system sale market conditions to continue to be somewhat challenging for our Group in 2018 and for our managed service contract portfolio to deliver growth. However yet again this year, GlobeOSS managed to secure a substantial increase in system sale contract revenues to complement more steady growth in managed service contract revenues, in spite of the competitive operating environment. Several hardfought and won system sale contract opportunities during the year resulted in the significant revenue growth achieved by this business segment for the third consecutive year. However, this improvement in revenue performance came at the expense of thinning margins. Unifiedcomms meanwhile managed to maintain managed service contract revenues with 2017 levels, courtesy largely of the continue good progress achieved by PostPay business.

Although the growth in system sale business of GlobeOSS in 2018 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 2019 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 2019 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 region. This same region is also expected to drive managed service contract revenue growth.

Our Group's managed service contract portfolio continues to have emphasis in our Group's 2019 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.