Singtel's review of its digital units is long overdue

MAINBOARD-LISTED Singtel last week announced impairments on the back of trouble at digital businesses Amobee and Trustwave, which are now facing a strategic review.

The exercise marks the first major move by new chief executive Yuen Kuan Moon - not counting the revamp of infocomm technology business unit NCS, unveiled when he was still CEO-designate in end-2020.

Analysts have largely shrugged off the resultant exceptional losses, while hailing the strategic review as a catalyst for better days at Singtel. Indeed, a Maybank Kim Eng report referred to the exercise as "cleaning up the present, moving to the future".

But the writing had really been on the wall for a long time for Singtel's struggling digital businesses - raising the billion-dollar question of why the telco waited until now to take action.

This column recently noted that Singtel tends to shy away from U-turns on its investments, preferring instead to stress the "long-term strategic view". Yet, even with this conservative attitude at the top, it appears that urgent action was needed in relation to Amobee and Trustwave.

Digital advertising unit Amobee, the pillar of Singtel's group digital life segment, was acquired in 2012; cybersecurity player Trustwave, in 2015. In short, Singtel has had the better part of a decade to evaluate the performance of its digital holdings - which suggests that it was comfortable with their under-performance, until now.

To be fair, Singtel did not expect its new investments to turn a profit as they scaled up.

"Revenue from group digital life is expected to grow by at least 50 per cent on an organic basis, reflecting increased contribution from Amobee. Group digital life will continue to register startup losses," Singtel said in statements for the 12 months to March 31, 2013 - the first financial year with Amobee under its belt.

That year, the nascent digital life segment recorded losses before interest, taxes, depreciation and amortisation of S$104 million, on revenue of S$111 million. These losses widened to S$170 million the next financial year, with Singtel blaming "ongoing startup costs and higher investments in digital businesses".

Fast forward to the acquisition of Trustwave, which the group said would "expand Singtel's existing portfolio of cloud based solutions and further entrench its leadership position in the managed services market".

During the back half of Singtel's FY ended March 2016, Trustwave contributed S$147 million in operating revenue; S$5 million in earnings before interest, taxes, depreciation and amortisation (Ebitda); and a S$27 million net loss (including acquisition financing cost). Digital life - which at that time mainly comprised Amobee, now-liquidated video streaming platform Hooq, and geoanalytics firm DataSpark - remained loss-making.

Yet, Singtel's leadership had been adamant that the digital businesses should be valued like start-ups, not traditional telecom assets - that is, on the basis of their potential growth, not their current profits. Now, it seems that Singtel shareholders have waited in vain for these digital businesses to demonstrate their value.

Arthur Lang, Singtel chief financial officer, told the media at last Friday's briefing that the group's impairment charges "reflected the challenges in the industry... accelerated by the Covid situation".

As his comment about industry challenges partially acknowledged, the difficulties at the digital businesses actually pre-dated the pandemic, which is what Singtel's financial records show.

Samba Natarajan, chief of the strategic portfolio at Singtel, mentioned at the briefing the contraction in advertising spend by virus-stricken industries, and also brought up the issue of competition from tech giants that have muscled into advertising, and singled out Amazon by name.

But such competition is not new. Even before the first Covid-19 sniffles were heard in Wuhan, Singtel was already lamenting how Amobee had to fight with Big Tech for ad dollars. Blame for Amobee's woes thus cannot be laid entirely at the feet of the pandemic.

Meanwhile, Mr Natarajan noted that Trustwave is pivoting towards cloud and away from the legacy compliance business. Yet, compliance management accounted for just over one-tenth of its operating revenue, in the most recent financial disclosures.

The more important issue is why Trustwave has not made more headway in the businesses it wants to be in. Mr Natarajan's remarks suggest that Trustwave's cloud transformation is grinding on too slowly.

To lose money on cybersecurity during a boom in demand is uncomfortably reminiscent of how SingPost botched its foray into North American e-commerce. Jagged Peak and Trade-Global, the e-commerce businesses in which SingPost took majority stakes in 2015, went bankrupt after failing to secure buyers in 2019.

SingPost CEO Paul Coutts, who succeeded Wolfgang Baier in 2017 after a year-and-a-half of interregnum, still defended the e-commerce subsidiaries all the way to the gallows.

Still, Mr Yuen's openness to gainsaying the received wisdom at Singtel might be cause for cheer. Citi, for one, said it is "positive that the company is scrutinising past decisions".

Pivoting away from losing propositions is certainly welcome, and comes better late than never. The question now is how much damage has already been done, and how long will it take to put Singtel back on track.