Financial review

The Group’s financial results show a robust top line development, confirming the positive revenue trend of the last five years, with a compounded annual growth rate at 25%.

2007 results show a robust top line development. The Group confirms the positive revenue trend of the last five years. Growth momentum continues to be strong with total revenues and other operating income reaching CHF 942.5 million, including CHF 128.6 million from the first time consolidation of OpenTV. Over the last five years, the compounded annual growth rate was at 25%.

Profitability is short of original expectations mainly due to continuous substantial investments in R&D and in new business areas, as well as customer shifts to the service model and lower-than-expected results of OpenTV. The Group consolidated EBIT in 2007 is at CHF 87.7 million, down by 3.8% compared to the 2006 EBIT adjusted for the gain on sale of Ticketcorner. The adjusted Group EBIT margin declines from 13% in 2006 to 9.5% in 2007, due to a 3 percentage point contraction of the Digital TV margin to 15.3%. Public Access EBIT on the other hand confirms the improvement trend and crosses the 10% threshold coming in at 11.5%. The consolidation of OpenTV has a dilutive effect on 2007 EBIT contributing a loss of CHF 7.6 million.

2007 Group profitability and improvement initiatives

The Group “Margin after cost of material sold” (a pro forma non-IFRS item) for the year is at CHF 678.5 million. As a percentage of revenues, adjusting for both other operating income and gain and loss on sale of subsidiaries, the margin after cost of material is up 3 percentage points to 72%. However, a further 2007 adjustment reversing the OpenTV margin contribution shows a 5% decline, reflecting in particular a material improvement potential in the Digital TV supply chain management.

The consolidation of OpenTV adds CHF 77.7 million personnel expenses, while the further CHF 43.1 million increase of personnel expenses is mainly due to a growing headcount in new business areas and in the core conditional access business R&D and service areas. Other operating expenses increases by CHF 66.5 million due to the consolidation of OpenTV and a further increase of outsourced engineering and development activities in core Digital TV.

End of 2007, the Digital TV division launched a profitability improvement program targeting the division’s cost base. The program includes a review of the business portfolio, the business priorities and the investment schedules.

Secondly, it aims at adjusting the company’s technology and platform roadmap to accelerate the deployment of highly secure, segmented new generation security solutions and to complete the offering. In this respect, the Digital TV division is redesigning key components of its solutions architecture to reduce the cost of deploying and operating the solutions.

Thirdly, the company is reviewing its location mix to better exploit global opportunities and cost structures. In addition, it is implementing cost reduction measures in areas such as procurement, with the goal of reducing smart card chipset costs.

Finally, the Group will stop the headcount increases in the established businesses.

Digital TV sales up, particularly in new business areas

Digital TV net revenues increase by 14.5% to CHF 573.4 million, while the operating margin declines to CHF 88.0 million, due to a negative gross margin development and a continued expansion of operating expenses.

European sales increase by 12.5%, with a well-balanced distribution. Among the highlights, digital terrestrial operators as well as Eastern European satellite operators experienced a particularly strong growth, with sales doubling compared to the previous year.

In the Americas, revenues are relatively stable, with the strong growth of South American sales compensating for the volume decline in North America and the USD weakness. In 2007, South American operators generated more than half the total American revenue base.

Sales in Asia/Pacific and Africa increase by 56.5% to CHF 111.5 million, with a material increase of smart card sales in the Indian, South Korean and particularly the Chinese markets.

Digital TV’s new business areas exceed the CHF 100 million revenue target, reaching CHF 118.4 million for the full year. Conditional Access Modules are gaining traction beyond the traditional footprint, and are starting to secure a significant presence in new promising markets, such as Italy. In the advanced smart card business, the Group is extending its presence in financial services and in the government segments. Further, it is continuously expanding in the PVR/push VOD/EPG space, with, in particular, the NagraGuide solution.

In 2007, the Group further consolidated its leadership in the mobile TV market with several new wins, including the recent wins at T-Mobile in the Czech Republic, Dominanta in Russia and Telefonica in Latin America.

It also extended its IPTV customer footprint beyond the French market, winning T-Com Innovations GmbH in Germany and Etisalat in the Middle East, and more than doubled its revenue base in the digital terrestrial market.

New business areas, however, had a negative impact on Digital TV operating profits, reducing division EBIT by a high single digit million number. In particular, the mobile chipset business required material expenditures in 2007 without yet generating any revenue and will continue to generate losses in 2008; mobile TV still represents an investment, with volumes today still too low to put at break-even, mainly because of the delayed availability of frequencies for mobile TV operators. IPTV is also still in an early phase in terms of deployed units.

Public Access beats targets

In 2007, Public Access revenues are 15.8% higher than in the previous year, while EBIT is up by 46.3% at CHF 25.8 million, reaching historical high marks.

Over the last four years, Public Access operating profitability substantially improved, from a negative 2% in 2004 to a positive 11% last year, translating into an absolute EBIT improvement of CHF 29.4 million.

Public Access sales are growing across all regions, with Europe up by 14.5%, in a market where SkiData already has a very strong positioning in particular in the ski market, the Americas growing by 14.6% to CHF 18.4 million and the Asia-Pacific and Africa region up 30.4% to CHF 19.5 million.

Within three years, extra-European Public Access share of sales has increased from 8.2% to 16.9%.

Balance sheet and cash flow

The consolidation of OpenTV adds CHF 132.9 million of goodwill and further CHF 21 million intangible assets as well as CHF 8 million tangible fixed assets.

Working capital at the end of the year materially increases compared to 2006 due to the consolidation of OpenTV but also a high working capital in the Digital TV division. Inventory increases by CHF 34 million with Days Inventory Outstanding up 106 days, mainly due to two customer projects delayed into 2008. Day Sales Outstanding are down from 119 to 101 days, yet are still subject to improvement in spite of the seasonality effects in the Public Access business leading to high year end receivables. Other current assets increase to CHF 78 million, including a.o. CHF 16.1 million related to the OpenTV acquisition and cashed in from Liberty Media in January 2008.

Cash flow from operating activities in 2007 is at CHF 64.4 million, as a result of a strong CHF 146.7 million cash flow before working capital and high additional working capital needs (incl. cash taxes) of CHF 82.3 million.

Following a CHF 19.1 million first half cash flow from operating activities, the second half’s was at CHF 45.3 million. Cash from investing activities mainly reflects the acquisition of OpenTV, but also high investments for security technologies and for technical equipment and machinery mainly related to the deployment of cards and equipments in service model.

Outlook

Over the last months, the Group has been actively promoting the migration of large Digital TV customers to the service model to better align with customers’ incentives and to reduce the volatility of the Group’s revenue base. In 2008, the majority of the Group’s active devices are expected to be in the service model, due to the envisaged shift of close to 30 million smart cards to this model.

With a resilient, secure solution, this model is expected to generate materially higher revenues per card, thus providing a favorable return on the company’s ongoing investments in new security solutions.

The migration, however, will negatively impact the 2008 profit and loss account as the full revenues generated by the cards to be delivered this year will not be recognized.

In the Public Access division, the Group reached its growth and profitability targets. The division expects a continuing growth in 2008.

The corrective measures implemented over the last few months at OpenTV have delivered initial tangible results in the fourth quarter of 2007. In 2008, the Group expects further progress along the same lines, with the organizational changes, the ongoing operational improvement program and in particular the synergies with the Digital TV division translating into a material profitability improvement.