Management Discussion Analysis

Scicom provides worldwide services from four centres in Kuala Lumpur and Colombo. These centers are served by an IT infrastructure in the Scicom Private Cloud and linked via OCEAN, our high-performance, resilient, Omni-Channel Easy Access Network.

Our suite of services include integrated BPO and Contact Centre Solutions (including CRM, Customer Experience & Lifecycle Management), Education Solutions as well as e-Commerce, e-Government (Gov-Tech), and Digital Solutions. We have embraced an Omni-channel strategy and specialise in multi-lingual, premium level customer experience solutions.

We are an incredibly diverse people-oriented company with employees from dozens of countries serving worldwide clients in more than 40 languages and dialects.

Scicom talks, emails, tweets, chats, processes and interacts with millions of customers annually in over 40 languages through over 190 million distinct contacts which resolve, enhance, provide value and serve our clients' customers.

Our portfolio of business solutions and industry expertise enables us to address our clients' business challenges and translate their strategic vision into roadmaps that rapidly create new sources of value and differentiation.

 

Dear Shareholders,

FY 2018 has been a challenging year for Scicom (MSC) Berhad ("Scicom" or "the Company") and its group of companies ("the Group"). The economic uncertainty in global markets has led to a corresponding impact for our clients which has resulted in a decrease in contact volume. The resulting effect on the Group is a decrease in revenue by 17.1% to approximately RM165.3 million for the FY 2018 as compared to the FY 2017.

Profit after taxation decreased in line with the decrease in revenue and the Group registered a profit after taxation of approximately RM31.9 million for the FY 2018.

Despite the lower profitability, the Group’s balance sheet continues to strengthen as the Group ended FY 2018 with approximately RM52.3 million (FY 2017: RM37.1 million) in cash and a zero-debt position. The Group generated free cash flows of approximately RM48.5 million for the FY 2018.

 

GROUP FINANCIAL PERFORMANCE

Compared to the preceding year, the Group’s revenue decreased by 17.1% from approximately RM199.5 million in FY 2017 to approximately RM165.3 million in FY 2018. The decrease is due to the reduction in contact volume for the majority of the Group’s existing BPO client base. The Group continues to build up its client base and has managed to secure new projects during FY 2018 which are expected to grow organically in the next financial year.

In FY 2018, the Group recorded a profit before taxation (“PBT”) and profit after taxation (“PAT”) of approximately RM37.0 million and RM31.9 million, respectively, registering a decrease in PBT and PAT of 25.6% and 29.2%, respectively as compared to the FY 2017. The decrease in profitability is in tandem with the reduction in revenue for the Group.

EPS for the FY 2018 stands at 9.06 sen, a decrease of 29.1% from 12.77 sen for the FY 2017. The Group's Return on Capital Employed ("ROCE") is 30.5% for the FY 2018.

 

Taxation

During the financial year, the Company recognised a tax incentive representing 70% tax exemption on its statutory income from outsourcing services for the period from 1 July 2017 to 6 November 2017. The administrator has confirmed in a letter dated 31 May 2018 that the Company has completed the Customised Incentive Project (“the closure letter”) successfully. Management has also confirmed with the administrator that the closure letter confirmed that the Company has met the required conditions under the Customised Incentive for the incentive period. The final approval of the Customised Incentive would still be subject to the approval of Ministry of Finance, which however is procedural in nature given that it will follow the administrator’s recommendation.

 

Group Financial Position

The Group continues to maintain a healthy balance sheet to support its operations requirement and dividend commitment. The Group ended the financial year 2018 with a total cash position of approximately RM52.3 million and a zero-debt position. Total free cash flows generated by the Group for financial year 2018 amounted to approximately RM48.5 million as compared to approximately RM30.2 million for the preceding financial year 2017. The Group’s Current Ratio has decreased from 10.43 in the preceding financial year 2017 to 8.15 in 2018 while Cash Over Total Assets Ratio remained at a high of 44.7% for financial year 2018.

 

Capital Expenditure

During the year, the Group incurred approximately RM7.5 million in capital expenditure comprising of hardware equipment and software licenses, office furniture and fittings and renovation both in Malaysia and Sri Lanka. Of the total RM7.5 million capital expenditure incurred for financial year 2018, RM5.1 million is procured specifically for BPO project requirements and the balance of RM2.4 million for enterprise wide usage. The total net book value of fixed assets comprising of plant and equipment and software licenses amounted to approximately RM18.0 million as at 30 June 2018. The Group’s Fixed Assets Turnover Ratio stands at 9.2 indicating a healthy utilization of the Group’s fixed assets to generate revenue.

 

Shareholder Value

Scicom’s share price ended financial year 2018 at RM1.90 per share, with a corresponding market capitalization of RM675.4 million.

Since our IPO in 2005, Scicom shares have delivered a Compound Annual Total Return to Shareholders (including dividends reinvested at spot prices) of 1,616.65%.

 

Dividend

The Group is committed to rewarding its shareholders with a sustainable dividend pay-out. Although there is no formal dividend policy in place, the Group has over the last 5 years, declared an average pay-out of approximately 83% of its net profit to shareholders in the form of declared dividends.

For the financial year 2018, the first, second and third interim dividend of 2 sen each equivalent to RM7.1 million each was paid on the 12th of December 2017, 8th of March 2018 and 21st of June 2018 respectively. A fourth interim dividend of 3 sen equivalent to RM10.6 million was paid on the 28th of September 2018. This brings the total dividend declared for the financial year to 9 sen equivalent to approximately RM32.0 million or 100% of the Group's PAT for the financial year 2018. The dividend yield is 4.7% for the financial year 2018 against 3.9% in the preceding year.

 

Innovative Human Capital Strategies

Scicom is a People Centric company serving people all around the world.

Our highly trained employees are a crucial component of the success of our business. We have made significant investments in proprietary technologies, management tools, methodologies and training processes in the areas of talent acquisition, learning services, knowledge management, workforce collaboration and performance optimization. These capabilities are the culmination of more than two decades of experience in managing large, global workforces combined with the latest technology, innovation and strategy in the field of human capital management. This capability has enabled us to deliver a consistent, scalable and flexible workforce that is highly engaged in achieving or exceeding our clients’ business objectives.

Since the Group’s human capital is its most important asset, human capital development remains one of its top priorities. Continuous initiatives and investment in training, upskilling, employee development and retention, sourcing and recruitment of new talent are essential components to ensuring competitiveness and improving productivity. The Group has in place various strategies in developing its human capital by focusing on education, career advancement, skills enhancement and leadership development.

In testament to Scicom’s continuous commitment to its employees, the Group has been awarded the Malaysian Employer of Choice (Gold Award) for 5 consecutive years by the Malaysian Institute of Human Resource Management (MIHRM) and in 2018, the Group was honored with the ultimate Grand Gold Award in this category.

With 2,035 employees as of 30th June 2018, Scicom is strongly positioned as one of Malaysia’s largest and most experienced providers of integrated solutions.

 

Globally Deployed Best Operating Practices

Scicom’s ISO 9001 and 27001, PCI DSS and SCP certified and globally deployed best operating practices assure that we deliver a consistent, scalable, high-quality experience to our clients’ customers. Standardized processes include our approach to attracting, screening, hiring, training, scheduling, evaluating, coaching and maximizing associate performance to meet our clients’ needs. We provide real-time reporting and analytics on performance across the globe to ensure consistency of delivery. This information provides valuable insight into what is driving customer inquiries, enabling us to proactively recommend process changes to our clients to optimize their customers’ experience.

The Group received its ISO 27001 certification during the financial year 2017 and recertified in financial year 2018. ISO 27001 (formally known as ISO/IEC 27001:2005) is a specification for an information security management system (ISMS). An ISMS is a framework of policies and procedures that includes all legal, physical and technical controls involved in an organisation's information risk management processes. With this certification, clients and potential clients are assured that all information and documents are secured and handled in a confidential manner.

Scicom is an SCP (Service Capability & Performance standards – US) certified company which is a global benchmark standard for service excellence in the BPO industry.

Scicom has been certified by SCP since 2004 and our audit scores have consistently increased year on year. In its last certification in 2017, Scicom achieved its highest score of 155.81 versus the global SCP community score of 125.08. Scicom’s score of 155.81 is amongst the highest that any organization has achieved.

SCP has also classified Scicom as an Innovating company which is the highest classification of companies by SCP.

 

Technological Excellence

Scicom's Technology Platforms are based on secure, private, 100% internet protocol based infrastructure. This architecture enables us to centralize and standardize our worldwide delivery capabilities resulting in improved scalability and quality of delivery for our clients, as well as lower capital, and lower information technology (“IT”) operating costs.

 

SEGMENTAL REVIEW

For the financial year 2018, the Group’s business activities are segmented into 2 primary business streams, Business Process Outsourcing (“BPO”) and Education Solutions. BPO’s suite of services include integrated solutions in Customer Lifecycle Management, Digital/e-Commerce Solutions and e-Government (Gov-Tech) Solutions. The Group’s Education Solutions is focused on meeting the internal training requirements of the Group’s BPO division as well as providing external educational solutions for both government and corporate entities.

 

BUSINESS PROCESS OUTSOURCING (“BPO”)

The BPO division manages every customer touchpoint for its clients, including face to face interactions, telephonic voice interactions, chat, email and social media. The BPO division talks, emails, tweets, chats, processes and interacts with millions of customers annually. Over 190 million distinct transactions resolve, enhance, provide value and serves our clients customers in over 40 languages. The BPO division operates from its centers in Malaysia and Sri Lanka, linked and fully redundant via state of the art multi-channel technology platforms, serving a discerning client base.

 

Current Financial Year Performance

The Group’s BPO revenue has decreased from approximately RM199.5 million for the financial year 2017 to approximately RM165.0 million for the financial year 2018. The decrease in revenue is attributable to a lower number of contacts performed by the BPO division in the financial year 2018.

Projects that have ceased operations during the financial year due to change in the clients’ customer service strategy, which includes relocation to countries with lower cost base or bringing the operations in-house, reduced the BPO division’s revenue by RM50.1 million. The loss of revenue is mitigated by revenue contribution from new projects secured and organic growth for existing projects, amounted to RM15.6 million. BPO’s revenue for financial year 2018 recorded a net decrease of RM34.5 million or 17.3% against the preceding financial year 2017.

 

The BPO division consists of the following verticals

 

Customer Lifecycle Management

Segment Overview

Scicom is a global customer experience company that designs, builds and operates omnichannel customer experiences on behalf of some of the world's most innovative brands. We help these large global companies increase revenue and reduce costs by delivering personalized customer experiences across every interaction channel and phase of the customer lifecycle as an end-to-end provider of customer engagement services, technologies, insights and innovations. Since our establishment in 1997, we have helped clients strengthen their customer relationships, brand recognition and loyalty by simplifying and personalizing interactions with their customers. Our end-to-end approach differentiates the Company by combining service design, strategic consulting, data analytics, process optimization, system integration, operational excellence, and technology solutions and services. To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and growth businesses, diversifying and strengthening our core customer care services with consulting, data analytics and insights technologies, and technology-enabled, outcomes focused services.

 

Our Market Opportunity

Our end-to-end customer experience approach is designed to drive retention, affinity, growth, and customer protection, all with savings for our clients. Our transition from multichannel to true omnichannel service requires agility and speed and Scicom’s integrated approach is growing in strategic relevance because of the following trends:

  • Increasing focus on customer engagement to sustain competitive advantage. The ability to sustain a competitive advantage based on price or product differentiation has significantly narrowed given the speed of technological innovation. As our clients’ customers become more connected and widely broadcast their experiences across a variety of social networking channels, the quality of the experience has a profound impact on brand loyalty and business performance. We believe customers are increasingly shaping their attitudes, behaviors and willingness to recommend or stay with a brand on the totality of their experience, including not only the superiority of the product or service but more importantly on the quality of their ongoing service interactions. Given the strong correlation between high customer satisfaction and improved profitability, we believe more companies are increasingly focused on selecting third-party partners, such as Scicom, that can deliver integrated insights-driven strategy, service and technology solutions that increase the lifetime value of each customer relationship versus merely reducing costs
  • Increasing percentage of companies consolidating their customer engagement requirements with a few select partners who can deliver measurable business outcomes by offering an integrated, technology-rich solution. The proliferation of mobile communication technologies and devices along with customers’ increased access to information and heightened expectations are driving the need for companies to implement enabling technologies that ensure customers have the best experience across all devices and channels. These two-way interactions need to be received or delivered seamlessly via the customer channel of choice and include voice, email, chat, SMS text, intelligent self serve, virtual agents and the social network. We believe companies will continue to consolidate to third-party partners, like Scicom, who have demonstrated expertise in increasing brand value by delivering a holistic, integrated customer-centric solution that spans the customer experience from strategy through execution versus the time, expense and often failed returns resulting from linking together a series of point solutions from different providers.

 

Our Strategy

We aim to grow our revenue and profitability by focusing on our core customer engagement operational capabilities linking them to higher margin, insights and technologyenabled platforms and managed services to drive a superior customer experience for our clients’ customers. To that end we plan to continue:

  • Building deeper, more strategic relationships with existing global clients to drive enduring, transformational change within their organizations;
  • Pursuing new clients who lead their respective industries and who are committed to customer engagement as a differentiator;
  • Investing in our sales leadership team at both the segment level to improve collaboration and speed to-market and consultative sales level to deliver more integrated, strategic, and transformational solutions;
  • Investing in technology-enabled platforms and innovating through technology advancements, broader and globally protected intellectual property and process optimization; and
  • Building customer journey maps to create service design across automated, human and hybrid interaction with the development and implementation of strategies around Interactive Virtual Assistants (chat bots).

 

Competition

Our competitors vary by geography and business segment, and range from large multinational corporations to smaller, narrowly-focused enterprises. Across our lines of business, the principal competitive factors include: client relationships, technology and process innovation, integrated solutions, operational performance and efficiencies, pricing, brand recognition and financial strength. Our strategy in maintaining market leadership is to prudently invest, innovate and provide integrated value driven services, all centered around customer engagement management. In our Customer Management Services business, we primarily compete with in-house customer management operations as well as other companies that provide customer care including: Alorica, Convergys, Sykes, and Teleperformance globally, and VADS, Aegis, SRG and Teledirect among others locally.

 

Moving Forward

Moving forward, our CLM proposition is evolving to focus on an OMNI Channel, multi-lingual service offerings from our centres in Malaysia and Sri Lanka. Our targeted client base has now expanded to include the US and Europe. Our new OCEAN offering encompassing a cloud based telco, data and application strategy allows us to provision technology and provide telco and connectivity to any part of the globe in a timely and cost efficient manner. The emergence of Artificial Intelligence and Machine Learning will impact traditional low value services significantly in the near future. Scicom's strategy has always been in the provision of high value technical support and premier care services coupled with associated back office services. Secondly our focus on robotic process re-engineering for our clients has improved our value proposition resulting in increased margins and enhanced client retention.

 

Gov-Tech Solutions

We are progressively generating a greater proportion of revenue through a platform and service proposition for governments as well as entering new markets with innovative funding strategies.

Our Market Opportunity

Emerging governments worldwide are looking for ways to better protect their citizens and secure their nation. To address the challenges they face, more and more countries are turning to the new opportunities presented by the global digital transformation. By shifting from a paper-based culture to a digital one, nations can better meet citizens’ expectations while also lowering costs and delivering more efficient and effective e-Government services. At the heart of this digital transformation is a need to provide strong civil ID schemes which help identify citizens and secure countries and their borders. When deploying digital government services, countries are increasingly turning to biometrics and mobile technology to take the strong identification that exists in a physical context into the digital world.

Scicom provides a comprehensive suite of products and services in Identity Management Solutions as depicted below:

Our Strategy

Scicom’s go to market strategy is to focus on the public sector in emerging markets and offer integrated solutions from a software and services perspective. The acquisition of these targeted public sector clients are secured in part through innovative payment and funding structures.

Moving Forward

Scicom's focus has been in the provision of an integrated software and service proposition to governments in emerging markets. Uniquely we build our own IP in Identity Management Solutions through our innovation centres in Malaysia and Sri Lanka. Scicom has been very successful in Malaysia in the provision of government services and our solutions have been in use since 2012. Our proven track record and operational experience in the provision of integrated software and service solutions has allowed us to participate in opportunities all over the world. Over the last four years, we have established a healthy pipeline with emerging governments in their quest to digitize citizen services through a myriad of innovative funding structures including public private partnership and private funding initiatives. Our entry into these markets include traditional tender participation with strong local partners. However, while revenue and associated margins in the provision of these services maybe significant, it is off set by long sales cycles. Scicom is confident that these opportunities will come to fruition in the near future as a result of our intensive business development activities for the last four years.

 

Digital / E-Commerce Solutions

Segment Overview

Scicom has an established footprint and an inherent DNA (part of its culture and business strategy) in combining the physical areas of customer experience (CX) with the digital realms (DX) of business to create connected and personalised commercial experiences for the new-age business. Th is integral business expertise, powered by its people who bring decades of experience and domain knowledge in the areas of customer experience, technology, marketing, communications and business strategy, is what makes Scicom Digital.

 

Our Market Opportunity

The digital transformation market is projected to grow from USD 206 billion in 2017 to USD 432 billion by 2021, at a Compound Annual Growth Rate (CAGR) of 19.1% from 2017 to 2022. Th e market is primarily driven by innovation in businesses, changing customer preferences, the proliferation of mobile devices and apps, increasing penetration of Internet of Things (IoT), and rising adoption of the cloud platform. Sixty percent (60% )of Asia’s top 1,000 enterprises will have placed digital transformation at the centre of their corporate strategies. By the end of 2018, many of these enterprises will be looking for independent consultants to drive the implementation of their digital transformation strategies.

The focus of Scicom Digital will be to intensely penetrate the Asian and emerging market segments to cater to the vast demand for digital products and services.

According to Forbes’ survey of 300 companies in Asia-Pacific, digital transformation has the potential to double revenues by 2018. Asian firms therefore spend an average of 15% of their total revenues on digital initiatives, higher than the global average of 11%.

By providing an integrated digital solution to its clients, Scicom Digital can deliver a guided, meaningful bridge for businesses to step into the digital space and enhance all its customer focussed touchpoints to create a truly powerful commercial experience. Th is is our roadmap to creating value for our clients in this digital age. It signifies our entry into the digital realm - the future of business with a purpose-led, demand-driven digital proposition.

 

Our Strategy

Scicom Digital has formulated its go-to-market strategies which initially rely on tapping the demand from its existing clients. The current stable of clients managed by Scicom would be the first point of engagement for Scicom Digital.

Scicom Digital Product & Service Offerings:

The go-to-market strategies for Scicom Digital are as follows:

  1. Cross selling digital solutions to the Group’s existing customers.
  2. Build strategic partnerships with government agencies in third world countries to implement Digital Transformation Services.
  3. Embark on intensive Business Development activities led by Scicom to sell its Digital services across Asia and emerging markets.
  4. Implement targeted digital marketing campaigns for Scicom Digital for branding and lead generation throughout the year.

Business development work has already generated a sales pipeline which is expected to come to fruition by the end of the financial year 2019.

To unlock these powerful digital solutions for its clients, Scicom Digital has partnered with Adobe, a leader in designing and delivering exceptional digital experiences. Headquartered in San Jose, California, Adobe is one of the largest software companies in the world, with a revenue of approximately US$7.3 billion in fiscal year 2017.

Adobe combines artificial intelligence (AI), machine learning and deep learning platforms to help our clients discover hidden business opportunities, make tedious processes fast, and offer highly personalized and targeted digital experiences to every customer. Adobe's artificial intelligence and machine learning engine, helps build more intuitive experiences that will reach customers based on their interests, preferences and most importantly, through their online behaviours.

Adobe is a multi-award winning global corporation whose accolades include ‘Top 100 Global Brands’, ‘Most Innovative Companies for AI’, ‘Forbes World’s Most Innovative Companies’, and ‘World’s most Ethical Companies. Scicom Digital has embarked on this journey with two major clients in the public and corporate sectors, currently in its business portfolio. Scicom Digital is charged with driving intensive business development and marketing effort to acquire more clients from across Asia and other emerging markets in Africa, in the coming year.

Illustrated below is the Adobe Experience Unified Digital Business Platform which will actively drive the business for Scicom Digital:

 

EDUCATION SOLUTIONS

Current Financial Year Performance

Scicom Education Group (SEG)'s primary focus for the financial year 2018, is to provide internal training which meets the training requirements of Scicom (MSC) Berhad. The training programmes offered to staff were aimed at enhancing operational knowledge and capability, imparting specific skills in data science and analytics, innovative customer engagement skills along with leadership and management training.

A total of 2000 staff of the Group have been oriented and trained by SEG for the FY 2018. A total of 82 personnel from the Operations Management Team were also evaluated with psychometric assessments under the Talentlens Pearson Psychometric Assessment exercise, where senior employees were appraised and rated according to their respective skills and strengths. The data and insights gathered from this exercise provided valuable direction in determining the way forward in fortifying our management team.

The Education Group has also been engaged by businesses to conduct upskilling and training programmes for them in 2018. Some of the corporate clients which have undergone training programmes under the Group include Hong Leong Bank, The Employees Provident Fund (EPF) and U Mobile Berhad.

 

Segment Overview

In this digital age of rapid technological change with the constant shifts in both the domestic and global market place, each of these talent development initiatives are necessary to achieve full employee potential. Committed to the belief that education is the key to success, Scicom Education Group partnered with Pearson, the World’s Learning Company to offer a range of Pearson products in skills development, psychometric and aptitude assessment and English language proficiency testing.

This partnership, signed on 23rd April 2018 by Scicom Academy under the witness of the British and Australian High Commissioners, has enabled Scicom Education Group to open doors to a globalised pathway to education and career success for students, not only from Malaysia but from all over the world.

 

Our Market Opportunity

A keystone of the partnership with Pearson is the set-up and administration of a Pearson Test of English Academic (PTE Academic) Test Centre at Scicom Academy. PTE Academic is the world’s leading computer-based test of English for study and migration abroad. Scicom’s PTE Academic Test Centre, located in the heart of Kuala Lumpur, provides both Malaysian and international test takers a premier experience with the state-of-the-art, computer-based testing with advanced security measures in a controlled environment that is pleasant and reliable.

Since the launch of the PTE Academic Test Centre, hundreds of local and international candidates have registered for the PTE Academic Test for study or migration abroad. This trend will continue to steadily grow in the coming months.

The Scicom Education Group brings years of training and education experience to our learning environment with an experienced faculty of lecturers and tutors, who have been engaged in delivering a variety of training and education solutions to both corporate employees and students.

This, coupled with Scicom as an Accredited Pearson Assured Centre, we offer bespoke programmes that are internationally benchmarked and relevant to the demands and needs that are unique to the many industries it serves. These services are currently also offered online via its website which is enabled with e-commerce abilities.

 

Our Strategy

The Scicom Education Group offers total learning solutions for clients and individuals from short corporate training programmes to internationally recognized certifications in a variety of disciplines. These new products, added to its current suite, will now give the Group an opportunity to penetrate new market segments which have not been tapped in the past.

These new products and services open new business opportunities for us by feeding into new demand for these educational products, coupled with our years of experience and the intellectual property we have developed in the past decade.

The current analysis of our business indicates several factors that encourage brisk and buoyant reception to our new products and services which we have recently launched.

With these new products and service offerings in play, the Education Group is now poised to play a more active role in extending its Learning and Development function to more key business areas and clients.

 

Moving Forward

Scicom Education Group focuses on both the Group’s internal training requirements and offers innovative training and education solutions to large corporates and government alike. It serves more and more as an integral part of the Group’s e-government initiatives as service is a key product offering and a comprehensive understanding of the provision of training components in enhancing efficiency and imparting knowledge provides the Group with a clear competitive advantage in implementing large e government projects. Our recent association with the Pearson Group and set up of a testing centre has enhanced our external education service proposition from a B2B to a B2C market.

 

In Conclusion

Scicom has evolved over the last two decades into a diversified business solutions company. Our focus has always remained the same with regard to the provision of a superlative customer experience across the entire customer journey. This focus has required us to provide increasingly innovative solutions encompassing both a service and a software proposition to a discerning multinational and government client base.

The ultimate challenge is to remain relevant in today's rapidly evolving world, anticipate the business of the future and focus on implementing tomorrow's business today. The Group’s strategy has been to move up the value chain in terms of the provision of products and services in the digital space. This has the effect of providing a high barrier to entry for competitors, increasing the Group’s margins, providing significant potential for profit growth while mitigating risk in terms of single country and industry vertical dependency. The Group is expected to benefit from the implementation of this strategy over the next financial year.

 

SEGMENTAL RISK