Brightcom Group Ltd Management Discussions.

BUSINESS ENVIRONMENT

Online Digital Advertising:

Total media ad spending worldwide will rise 7.4% to $628.63 billion in 2018, according to eMarketers latest report.

Digital media will account for 43.5% of investments, thanks to rising global ecommerce spending and shifting viewership from traditional TV to digital channels. By 2020, digitals share of total advertising will near 50%.

Asia-Pacific and North America will account for 70.5% of the $628.63 billion global ad spend this year. Global media spending will grow steadily at more than 5.0% per year through 2022. Despite political and economic concerns in several markets, increasing digital ad business will sustain overall advertising gains.

North America will remain the top advertising market in 2018 at $232.48 billion and a 37.0% share of worldwide total media. Asia-Pacific will place second in regional media spend with $210.43 billion and one-third of global ad business.

According to the report, countries in the Fast-track Asia category, including Malaysia, Indonesia, the Philippines and China, are expected to see an average ad spend growth of 7.4% annually until 2020. In 2017, ad spend grew by 6.8% for the region, despite the fact that it saw an ad spend of about 10.1% in 2016. Fast-track Asia is characterized by economies that are growing extremely rapidly as they adopt Western technology and practices and innovate new ones, while benefiting from the rapid inflow of funds from investors hoping to tap into this growth.

On the other hand, the countries in the Advanced Asia category - Singapore, Hong Kong, Australia, New Zealand and South Korea - are estimated to witness a 3.8% average annual growth to 2020, ahead of the 3.1% average growth rate since 2012. Ad spend in the region grew 5.3% in 2015, but slipped back to approximately 1.8% this year.

Over the next three years, the US will be the leading contributor of new ad dollars to the global market, followed by China, which combines large scale and rapid growth. Between 2017 and 2020 the report forecasts global advertising expenditure to increase by US$77 billion in total. The US will contribute 26% of this extra ad expenditure and China will contribute 22%, followed by Indonesia, India, the UK and Japan, which will contribute 4% each.

Seven of the 10 largest contributors will be the Rising Markets - China, Indonesia, India, Philippines, Brazil, Russia and South Korea. Between them, they will contribute 40% of new ad spend over the next three years. Overall, the report predicts Rising Markets to contribute 57% of additional ad expenditure between 2017 and 2020, and to increase their share of the global market from 37% to 39%.

Mobile advertising to grow

Mobile advertising is predicted to grow to US$180 billion by 2020, nearly doubling desktop advertisings US$94 billion total. According to the report, mobile will also account for 65.6% of internet expenditure and 29.3% of all expenditure in 2020, more than all the traditional media except television put together.

It is also expected to contribute US$73 billion in extra ad spend between 2017 and 2020, which will be counterbalanced by a US$2 billion decline in desktop advertising, as advertisers switch budgets to mobile.

This is also combined with a US$12 billion decline from print. TV and outdoor advertising will be the second and third-largest contributors, growing respectively by US$7 billion and US$3 billion, while cinema and radio grow by about US$2 billion and US$1 billion respectively.

Indias Digital Economy

While India has made significant strides in its Digital journey, embracing

Digital on almost all fronts, there are still gaps and challenges that need to be plugged and overcome before the vision of Digital India set for the country by the current government can be achieved.

The nation in fact, remains one of the fastest growing in terms of Digital adoption. According to McKinsey Global Institute (MGI), Indias Digital Index rose by 56 percent during 2016-2019, from 18 to 29 on a scale of 1-100. This placed the country second in terms of growth among 17 emerging and mature Digital economies. In the lift off phase of its Digital journey, India has already built a strong foundation of Digital infrastructure and expanded its base of Internet subscribers to 431 million.

Based on the number of Indias Digital identity holders, Internet subscribers, smartphone and social media users and Android app downloads, as well as Digital initiatives such as Aadhaar, it has become apparent that the focus of the nation has been on building a more equitable society where the underserved are addressed and empowered.

The bigger news however, is that the Digital Transformation is projected to create USD 1 trillion in value and sustain 55-60 million jobs by 2025. While Digital sectors such as IT-BPM industry, telecom, electronics manufacturing, e-commerce and Digital payments are expected to grow by 2-3x in terms of economic value by 2025, it is the Digital eco-systems in other verticals such as financial services, education, health, agriculture, manufacturing , transportation and logistics, etc., that are expected to help India reach the ambitious USD 1 trillion mark.

India has the second largest internet user base in the world. The number of internet users in India was estimated to be 481 million in December 2017, representing a growth of over 11% compared to December 2016. According to a report, Internet in India 2017, published jointly by the Internet and Mobile Association of India and Kantar IMRB, the number of internet users is expected to reach 500 million by June 2018. The report also states that, as on December 2017, overall internet penetration was estimated at 35% of total population.

According to the findings of the report, urban India witnessed a growth of 9.7% between December 2016 and December 2017, with there being around 295 million internet users as on December 2017. Rural India witnessed a growth of over 14% during the same period, and was estimated to have around 186 million internet users as on December 2017. It needs stating that while the growth rate of rural India is higher, it is mainly due to the low base effect. The number of internet users in rural India is still low: internet penetration in rural India wasjust a bit over 20% in December 2017 compared to 60.6% in urban India. Given that total urban population is much lower than that of rural, the urban-rural digital divide is more acute than what the penetration numbers portray.

Future growth policies must, therefore, focus on bridging this digital divide. In terms of numbers, urban India with an estimated population of 455 million already has 295 million using the internet. Rural India, with 918 million people according to the 2011 census, has only 186 million internet users. Thus, if rural India were to exhibit the urban internet penetration rate of 60.6%, there is a potential of bringing in an additional 370 million rural users —if only they can be reached out properly. The point is that while there have been rapid strides in internet usage in the country, there is still immense scope for further expansion as the overall internet penetration.

Business Review:

Financials:

During the year under review, your Company achieved a consolidated turnover of Rs. 2,420.28 Crores as against Rs. 2,452.00 Crores in the previous year. Your Company has earned a consolidated gross profit of Rs. 713.29 Crores before interest, depreciation and tax as against Rs. 729.99 Crores in the previous year. After deducting financial charges of Rs. 14.79 Crores, depreciation of Rs. 108.14 Crores and provision for tax of Rs. 183.34 Crores, the operations resu Ited in a net profit of Rs. 407.00 Crores as against Rs. 429.24 Crores in the previous year.

Operational:

• We actively invested in branding to maintain our market position as a trusted partner, with high quality, premium inventory with high view ability.

• We continued to improve our ad quality tools, and were leading the pack in terms of the IAB ads.txt initiative, as most of our publishers have included Brightcom in their ads.txt files. We witnessed success in our ads.txt initiative, and we have 60+ publishers who have already implemented Brightcom in their ads.txt files.

• Conducted two roadshows in the US, one with publishers focus in California and New York, and one with focus on demand partners in NYC, and one in Europe.

• Invested in traffic quality ("TQ") technology and automated tools in order to protect our demand partners and to position Brightcom as a trusted supplier in the market.

• We saw great success in preventing TQ issues and increased our share with leading demand partners.

• We implemented an ad quality system. We improved our ad quality measurements ("AQ") through internal processes and managed to maintain existing publishers as well as recruit new well-known publishers.

• Recruited new supply and demand partners to reduce our dependency on specific publishers and demand partners.

• We are in the process of strengthening our operations automated tools to support 24/7 optimization to get ready for 2018.

• In September, the team participated in Dmexco in Germany.

• In October, the team participated in Google think partners conference that took place in Ireland.

• We integrated Pixalate and Fraudlogix into Brightcoms ad quality tools to continue to position Brightcom as a trusted supplier.

• We strengthened our demand stack by adding leading demand partners to both our display and video activities.

• We continue to focus on our direct publisher strategy and it is our highest priority.

• Brightcom isjoining forces behind the ads.txt initiative, and believes it will enable us to strengthen our leading position in the market.

• We continue to atomize and optimize the daily work flow using new developments and algorithms.

• Also launched and improved post-bid.com landing page geared to potential Demand side partners https://www.post-bid.com/

• Brightcom participated at the world converges at dmexco for all things digital this fall.

• Working on a summer release of a new Web Publishing platform based on the Wordpress platform. There has been a lot of progress. This will provide more tools and functionality for our users. New equipment upgrade is in process as well in the new Equinix facility.

Technology

• Our ongoing investment in traffic quality tools helped Brightcom grow as a significant supplier for many of our leading demand partners. It also improved our brand, and allowed us to gain traction with more publishers and demand partners.

• Developed in-house pre-bid traffic quality tool to further enhance our control over our inventory across the different supply.

• Integrated Header Bidding to Compass, our Display SSP, which allows us to gather more data and take better decisions in terms of optimization, yielding better results for our publishers.

• Signed business agreements with additional mobile and desktop RTB partners to strengthen our demand.

• Converted over to a new customer Service platform " Fresh Desk" for improved customer support.

• Launched a new content platform with Tinbu www.tinbu.com to provide more interesting and engaging content to our users.

Risks

The Company has a well-structured and robust risk management mechanism, which includes a comprehensive register that lists the identified risks, its impact and the mitigation strategy. Broadly, there are some overriding risks that are listed below:

Data Security: Technical failure and breakdowns in servers could lead to interruptions of our websites and result in corruption of all data and/or security breaches. The Company has initiated a pilot project to establish a secondary site in India as a precautionary measure.

Obsolescence: Being a technology driven company, it always faces the risk of an innovation or product development that can make one or more of Brightcom Group Limiteds propositions redundant. The Company remains alert with technology developments to overcome this risk.

Financial Risks: Tax Issues: the Company has had a few income tax and service tax cases against it, which, if lost, may impact future cash flows. However, none ofthese is material.

Enhanced competition in the US market may reduce price and revenue margin.

The Company is expanding globally, and penetrating into potential markets like China. Going forward, it would focus more.

Consolidation of service providers may affect the Company

The Company has also ventured into strategic acquisitions and tie-ups to capitalize current market opportunities.

Business can be affected by privacy legislations and other regulations.

The Company discloses all its collection statements and dissemination practices in a published privacy statement in its website.

The new tie-ups may create problems of integration.

Brightcom Group enters into an agreement after extensive research, both internally and externally.

Human Resources:

The Company firmly recognizes the importance of its human resources to achieve its vision. Brightcom Group has significant policies to acquire and retain new and existing talent. It trains its people in a variety of ways to create an extensive talent pool. Apart from providing attractive remuneration to people, Brightcom Group also focuses on providing a stimulating and multicultural work environment.

Internal Control Systems:

Brightcom Group has a proper and adequate internal control system to ensure authorized business transactions.

Internal audit function is an independent function, which is carried out by internal auditors through extensive audits. Regular internal audits determine the operational and financial efficiencies of the company. Moreover, the Audit Committee of the Board of Directors conduct periodic reviews of pan organizational effectiveness and recommends improvements whenever required. The internal control system also formulates well documented policies, guidelines, authorizations and approval procedures and ensures compliance with applicable policies and statutes.