André Kudelski | Chief Executive Officer

Message to shareholders

The year 2008 was marked by passing the one billion Swiss francs revenue milestone and by a fundamental transformation of the digital TV business of the Kudelski Group.

For over 15 years, the Kudelski Group has posted an average revenue growth of more than 25% per year - mainly by organic growth - and for the first time passed the one billion Swiss francs revenue milestone in 2008.

The Kudelski Group ended this year of transition with total revenues and gain on sale of subsidiaries of 1.037 billion Swiss francs, an operating profit of CHF 18.5 million and a net loss of CHF 7 million.

It should be noted that the decision to accelerate the transformation of the Digital Television division's business model from sales mode to service mode greatly affected the profitability of the last financial year. This special transitional situation led to the 2008 figures not reflecting the real operating performance of the Group. In fact, it was better than the figures suggest. In other words, without the massive change in business model, 2008 would have been one of the best years for the Kudelski Group.

The service mode has the advantage of better aligning the interests of the Kudelski Group with those of its major clients, by making its revenues depend on the installed base - i.e. the total number of subscribers - rather than on new subscribers only. Positive feedback from clients confirms that they see this model as strengthening their relationship and strategic partnership with the Kudelski Group. Financially, while the service mode is costly to implement, it is economically much more robust during periods of recession, even if the number of subscribers stagnates.

However, despite the high cost of the transition, one should not forget the objective of this migration, which is to improve the Group's medium and long term profitability by capitalizing on the extended lifetime of new generations of smartcards.

With the mass migration of active cards/modules to the service mode, the Kudelski Group has reached an important strategic objective. This represents a key step towards leveraging the new conditional access generations, fundamentally more robust, and reducing risk through a better segmentation of security among the various operators.

With the introduction of new security technologies and the move to service mode of the majority of the installed base, the Kudelski Group can now focus on its development strategy aiming to surpass the average market growth over the mid and long term. To achieve this, the Group is working simultaneously on three development axes:

  • Gain market share in its core business by capturing new territories and capitalizing on its technology and know-how.
  • Offer solutions addressing new markets derived from its core business (for example in the DTV sector: cable, DTT, IPTV, mobile TV).
  • Complete its solution offering by extending its services to sectors complementary to its core activity (for example in the DTV sector: turnkey solutions, interactivity, middleware, set-top boxes, Digital Video Recorders, advanced advertising and integrated conditional access modules).

This three-point approach is based on the evolution of markets and technologies as well as on the specific skills of the Kudelski Group. It will become a key growth driver for both the Digital Television and Public Access sectors, considering that the primary objective is to create value for operators who have chosen our solutions and for the Kudelski Group.

In recent years, significant efforts have been employed to meet and anticipate market trends. However, this has resulted in increasingly complex solutions and additional costs.

Thanks to its critical mass and after implementing structures to sustainably meet market needs, the Kudelski Group is taking a string of measures to increase profitability, maximize productivity and reduce its cost base. Specifically, the following objectives have been defined:

  • implementation of a solution architecture based on a common platform to optimize synergies between the various product lines;
  • integrated management of solution roadmaps in order to reduce time-to-market, improve efficiency, increase solutions lifecycle and give customers better visibility on future developments;
  • reduction of unit costs by gradually empowering sites located in low-cost regions close to our key markets (ex. China);
  • increased cost flexibility and cost reduction through privileged agreements with strategic partners.

In order to implement its development strategy more effectively, the Kudelski Group has reviewed the distribution of responsibilities within the management of its Digital Television division. The new organizational structure is aimed at improving the quality and speed of action and places a special focus on product management, conditional access and integrated solutions. The bottom-line is to guarantee excellence in each discipline while ensuring the overall coherence of end-to-end solutions.

After the year 2008 marked by mass migration to the service mode, the Kudelski Group expects positive business developments in 2009. However, the uncertain global economic environment will lead the Group to be particularly watchful of the evolution of its activities and of its customers, in order to be able to anticipate any potential deterioration.

The Board of Directors will propose to the Annual General Meeting to pay a dividend of 15 centimes per bearer share and 1.5 centimes per registered share. The decision to maintain a dividend payment was motivated by the positive outlook for the year 2009 and by the desire to provide continuity to the shareholders who have placed their trust in us.

We would like to express our sincere gratitude to shareholders, customers, partners and employees who have enabled the Kudelski Group to achieve its transformation and face the year 2009 in a positive way.

André Kudelski