Management Discussion Analysis

We are Malaysia’s leading provider of technology-enabled business process and customer management services. We have a consulting-led approach to implementation and we combine our experience and expertise with our own intellectual property and enabled technology to make processes smarter, organisations and governments more efficient and ultimately the customer experiences better. From the Group’s operating centres in Malaysia and Sri Lanka, the Group is strategically located to serve its current and targeted clients in the Asia Pacific region.

 

Dear Shareholders,

Scicom (MSC) Berhad (“Scicom” or “the Company”) and its group of companies (“the Group”) has had a challenging year operating within an increasingly competitive environment. However, the Group consolidated its position over the financial year in terms of managing its cost base and set in place necessary measures to ensure sustained growth.

Notwithstanding the above, the Group achieved its highest revenue and profit after taxation of approximately RM199.5 million and RM45.1 million, respectively since incorporation 20 years ago. The Group generated free cash flows of approximately RM30.2 million and maintained a very strong balance sheet, ending the year with approximately RM37.1 million in cash and a zero-debt position.

 

GROUP FINANCIAL PERFORMANCE

 

The Group continues to register growth in revenue and profit after taxation. Revenue increased by 1.63% from RM196.3 million in FY2016 to RM199.5 million in FY2017 due to organic growth and new business secured in the Business Process Outsourcing (BPO) division. The organic growth for the Group’s existing BPO projects is fueled by additional services required by certain clients and also increase in number of contacts for other clients especially in the telecommunication sector. The new BPO business secured are for outbound telesales and inbound technical support services.

In the financial year 2017, the Group recorded profit before tax (“PBT”) and profit after tax (“PAT”) level of RM49.8 million and RM45.1 million respectively, corresponding to an increase in growth of PBT and PAT for the financial year 2017 as compared to the financial year 2016 of 10.8% and 8.4% respectively. The increase in the Group’s profitability is primarily due to lower staff related cost and also a higher foreign exchange gain recognized.

This translates to a compounded annual growth rate of 29.4% and 27.1% in the Group’s PBT and PAT, respectively over the last 5 year period. PAT margins for the financial year 2017 increased to 22.6% as compared to 21.2% for the preceding financial year 2016.

EPS for the financial year 2017 stands at 12.77 sen, an increase of 8.2% from 11.80 sen for the financial year 2016. The Group’s Return on Capital Employed (“ROCE”) is 43% for the current financial year 2017.

In recognition of the Group’s efficiency in utilizing its assets to generate income, Scicom was honoured with an award under the Best Return on Assets category for companies with market capitalization below RM1 billion by Focus Malaysia. The Group’s Return on Assets for financial year 2017 and 2016 is 39.1% and 37.7%, respectively.

 

Taxation

The Company was granted Customised Incentive of 100% income tax exemption on statutory income derived from the outsourcing income (“tax incentive”) for 5 years commencing 7 November 2012 to 6 November 2017. The recognition of the tax incentive is conditional to fulfilment of certain Key Performance Indicators (“KPIs”) that is assessed annually by the administrator of the Customised Incentive (“the administrator”). In August 2016, the administrator revised the KPIs and the tax incentive was reduced from 100% to 70% which is applicable for the incentive period from 7 November 2015 to 6 November 2017.

During the financial year, the Company recognised a tax incentive representing 70% tax exemption on its statutory income from outsourcing services. The Company’s achievement of the KPIs have been presented to the administrator, however the assessment by the administrator has not been completed as at 30 June 2017. The Directors have assessed that the Company is able to meet the requirements for the tax incentive after taking into consideration that the Company has substantially met the stipulated conditions of the KPIs, and their historical experience where confirmations from the administrator were obtained to recognise the tax incentive when conditions and KPIs were substantially met.

 

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 2017 with a total cash position of RM37.1 million and a zero debt position. Total free cash flows generated by the Group for the financial year 2017 amounted to RM30.2 million as compared to RM41.4 million for the preceding financial year 2016. The Group’s current ratio has increased from 5.02 in the preceding financial year 2016 to 10.43 in 2017 while cash over total assets ratio remained at a high of 32.2% for the financial year 2017.

 

Capital Expenditure

During the year, the Group incurred approximately RM6.3 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 RM6.3 million capital expenditure incurred for financial year 2017, RM4.3 million is procured specifically for BPO projects requirement and the balance of RM2.0 million for enterprise wide usage. Total net book value of fixed assets comprising of plant and equipment and software licenses amounted to approximately RM18.6 million as at 30 June 2017. The Group’s Fixed Assets Turnover ratio stands at 10.3 indicating a healthy utilization of the Group’s fixed assets to generate revenue.

 

Shareholder Value

Shareholders also saw an increase in their return on investment value as Scicom’s share price increased from RM2.27 per share on 1 July 2016 to RM2.30 on 30 June 2017. As a result, market capitalisation for Scicom increased by 1.3% to RM817.5 million by the end of financial year 2017. 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 71% of its profits to shareholders in declared dividends.

For the financial year 2017, the first, second and third interim dividend of 2 sen each equivalent to RM7.1 million each was paid on the 7th of December 2016, 28th of March 2017 and 20th of June 2017 respectively. A fourth interim dividend of 3 sen equivalent to RM10.6 million was paid on the 27th of September 2017. This brings the total dividend declared for the financial year to 9 sen equivalent to approximately RM32.0 million or 71% of the Group’ PAT for the financial year 2017.

 

Human Capital

An organization’s most valuable asset is its employees. The knowledge, skills and expertise garnered by the employee are the main factors that determine the success of each organization.

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) by the Malaysian Institute of Human Resource Management (MIHRM) for the past 5 consecutive years.

With 2,208 employees as of 30th June 2017, Scicom is strongly positioned as one of Malaysia’s largest and most experienced providers of integrated solutions.

 

Quality Certification

The Group received its ISO 27001 certification during the financial year 2017. 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 2016, Scicom achieved its highest score of 138.53 versus the global SCP mean score of 125.59. Scicom’s score of 138.53 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.

 

SEGMENTAL REVIEW

The Group’s business activities is segmented into 2 primary business units, Business Process Outsourcing (“BPO”) and Education Solutions. BPO’s suite of services include integrated solutions in Customer Lifecycle Management, e-Commerce Solutions and e-Government Solutions. Education Solutions focuses on internal training requirements for the Group’s BPO division and external training contracts for both government and corporate entities.

 

BUSINESS PROCESS OUTSOURCING (“BPO”)

Current Financial Year Performance

The Group’s BPO revenue marginally increased from RM195.8 million for the financial year 2016 to RM199.4 million for the financial year 2017. The increase in revenue is attributable to a higher number of contacts performed by the BPO division in the financial year 2017.

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 RM21.6 million. The loss of revenue is mitigated by revenue contribution from new projects secured and organic growth for existing projects, amounted to RM22.4 and RM2.9 million respectively. BPO’s revenue for financial year 2017 recorded a net increase of RM3.7 million or 1.9% against the preceding financial year 2016.

 

Segment Overview

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 225 million distinct transactions resolve, enhance, provide value and serves the clients’ customers in over 30 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, serves a discerning client base.

The BPO division consists of the following verticals

 

Customer Lifecycle Management

Scicom’s Customer Lifecycle Management (“CLM”) professionals turn a customer’s experience into a strategic differentiator for its clients. Scicom understands how to deliver CLM excellence and how to leverage it to drive brand loyalty and profitability. Scicom’s customer care platform provides clients with the insights, tools, and capabilities they need to exceed customers’ expectations and increase profitability.

 

e-Government Solutions

Scicom offers new and innovative service delivery models to meet the challenges of delivering improved outcomes within strict financial limits that has helped governments to manage costs more efficiently while improving the quality of service to the public. Scicom has been a trusted partner of many government departments and agencies since 2010.

Scicom’s e-Government Solutions enable governments to improve their efficiency and effectiveness via an integrated and unified digital approach for government to citizen services.

Scicom’s e-Government Solutions focuses on digital government services and solutions for federal, local and state government clients. Scicom’s e-Government solutions enable government agencies to rapidly deploy technology tools and services that are easy to use, easy to maintain, and cost efficient. Scicom’s e-Government Solutions are customised to each client’s specific needs.

Scicom helps bring more creative and effective ways of working through its extensive capabilities and infrastructure, offering flexibility, increased service efficiency, high quality and transparency about what is being delivered and at what cost. Scicom adopts the right approach for transforming and managing existing services or creating completely new service infrastructures.

Scicom delivers a variety of single functions to its clients – HR, IT, Application Development, Social Media, Digital Support back and front office support coupled with Business Intelligence – as well as tightly integrated end-to-end services, enabling key government departments to launch new policy initiatives and help their supporting agencies to transform and manage existing services. This includes introducing and deploying new digital service channels as these provide the benefits of access and convenience for service recipients, cost savings for tax payers and new data to inform policy makers.

Scicom design collaborative service arrangements to meet specific customer service and wider policy requirements. Scicom’s approach is to apply our expertise in ways that can complement the expertise of public and voluntary sector organisations so that the needs of the public are put first. Scicom always brings new and auditable ways of helping government deliver on its objective of achieving full transparency into service contract arrangements.

The Group wide range of capabilities and extensive infrastructure means Scicom can quickly scale-up to meet any requirements for throughput, service efficiency, quality and flexibility. Scicom constantly work to realise wider commercial value for tax payers from government’s unrivalled intellectual property in programme and project management methodologies. Scicom has the right balance of people, skills and technology to achieve either – and the experience to recommend the best course of action.

 

e-Commerce Solutions

Scicom’s unique approach of providing innovative end-to-end solutions means that our clients can see significant improvements in efficiency, quality and value.

Scicom’s e-commerce solution is integrated to include application development, graphic design, internet marketing and customer support. Its customized solutions provide unmatched ROI, boosted revenue generation as well as increased site engagement and traffic.

Scicom offers unique, tailor-made e-commerce solutions to meet its customer’s specific requirements with optimum use of modern IT infrastructure that will guarantee success. Customers have the choice of taking the whole suite of Scicom’s e-commerce offerings or they can pick the specific services they require. Scicom can thus ensure that the provided solution is a perfect match for the customer’s requirements.

Whether the solution entails mobile app development or custom-built e-commerce platforms, Scicom’s experienced team improve the time to market and ensure a successful implementation of the customer’s internet sales channel. With a wide array of skill sets, Scicom not only focuses on the software but the sales funnel that will generate the most conversions. Scicom does this by experimenting with different user interfaces, and tracking customer navigation and behaviour on the site.

Scicom was named the 2017 Malaysia BPO Service Provider of the Year by Frost & Sullivan. Scicom also stands at the top of the list of certified companies by a US based BPO standards organization, SCP (Service Capability & Performance Standards) which is considered the gold standard of the global Outsourcing industry.

 

EDUCATION SOLUTIONS

Current Financial Year Performance

Scicom Education Group’s (“SEG”) primary focus is in providing for the internal training requirements for the Group. The training programmes offered to staff are to enhance operational knowledge and capability, impart specific skills in data science and analytics, provide innovative customer engagement skills along with leadership and management training. A total of 1,932 staff of the Group has been trained by SEG for the financial year 2017.

 

Segment Overview

The Group is committed to developing human capital through SEG. SEG's mission is to provide differentiated vocational training programmes in services management for large corporates and governments across the region.

SEG’s world class academic and corporate programmes, supported by high quality content and personalized attention to student learning, are:

• A dynamic, flexible online educational system
Students will be drawn towards the exciting edutainment portal, which is rich in classroom type lectures, games and quizzes, to help any individual at his or her own pace and ensure that learning has taken place.

• Specific, up-to-date skills education
Students will also be encouraged to partake in business communication skills programmes as part of their education approach, thus ensuring that students are up to date with the specific skills required in services management. SEG’s programmes are updated regularly, abreast with the latest industry developments and trends.

• Job Placement
Graduates who have chosen the career path of a contact centre industry, are encouraged to undertake the courses provided by our academic institution to ensure that they will be able to enjoy job placement assistance. By choosing SEG’s academic courses, one would definitely make a lifetime investment in their education and career path.

SEG is an integrated multi-disciplinary learning institution, focused on shaping talent holistically through industry driven training and education. This process includes the acquisition of soft and hard skills as well as professional insights. In the new millennium of rapid technological change, constant shifts in both the global and domestic market place and with organizations becoming more complex, aspects of each are necessary to ensure each employee achieves their full potential.

SEG’s chief mission is to serve as a human capital development centre for the services economy.

SEG offers total learning solutions to its clients and students from short corporate programmes to nationally recognized certifications and diplomas in a variety of disciplines for the service industry. Today the Scicom Education Group stands as a global integrated learning and development pathway for the Service Management industry in Malaysia.

 

SEGMENTAL RISK

 

MOVING FORWARD

BPO

Scicom service offerings in Customer Lifecycle Management has centered around a multilingual, multichannel proposition to a discerning client base which has a customer base in Asia Pacific. Over the years, Scicom has supported multi-national clients from our centres in Malaysia and Sri Lanka who have customers situated in Africa, the Middle East and Asia Pacific. Our strategy while not precluding clients and customer support for large English-speaking markets such as the USA, UK and Australia has been focused on supporting Asia Pacific markets. Scicom chooses its people and its clients carefully. Since incorporation, Scicom targets multi-national clients and local conglomerates that view service as a differentiator, seek a centralized proposition in servicing their regional customers and view the use of technology as an enabler to superlative customer support. Scicom is increasingly regarded as providing a gold star level of service by current and prospective clients and in line with our stated strategy in not compromising service delivery, we provide a value based tangible return on investment model to our targeted client base rather than providing low end services purely determined by price.

The Group expects opportunities in Customer Lifecycle Management to increase as more clients choose a centralized option, primarily for their multilingual customer base in the Asia Pacific region and Malaysia is well placed to take advantage of these opportunities. This is mitigated however by an increasingly demanding economic environment that is adversely affecting our targeted client base. This in turn results in the creation of a highly competitive market for our services.

Scicom’s service offerings in e-Government and e-Commerce has been focused on providing a software and service proposition to governments in emerging markets. The go to market strategy is predicated on our ability to build our own products using our own IP, providing integrated services and software solutions and coupling this with a self-funding business model in the areas of enhancing and digitizing government services. While there is a significant and positive margin differentiation in the provision of these innovative new services, this is offset by long sales cycles and the complexity of client liaison required in the pursuit and acquisition of these government contracts. Scicom over the last 3 years has actively pursued and established a healthy pipeline of over 20 potential contracts with governments around the world.

 

Education

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 increasingly serves 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.

The Group’s growth strategy is to offer products and services that provide the Group with diversification in terms of market offerings as well as margin. Traditionally, the Group’s proven capability in Customer Lifecyle Management provides the Group with stable revenue streams and healthy profit margins. Importantly, it also provides the Group with the unique ability to implement large scale projects as a result of experienced project management teams, IT infrastructure and shared services structures already in place. However, maintenance of these margins in light of an increasingly demanding competitive environment is challenging.

As a result of these challenges the Group’s strategy has been to move up the value chain in terms of the provision of products and services in the e-Government and e-Commerce 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.