First half 2008 results

First half 2008 results are in line with expectations. Total revenues and other operating income for the Group came in at CHF 424.2 million, only slightly up compared to the first half 2007. The compounded annual growth rate for the first half year results 2004 to 2008 was 11.4%.

The 15% decline of the USD exchange rate against the CHF had a negative impact on sales, operating margin and net income. At a constant first half 2007 exchange rate, total sales have increased by CHF 45.5 million. The negative CHF 43.7 million exchange rate impact reduces reported growth to CHF 1.8 million.

The first half 2008 was consequently marked by an operating loss of CHF 18.5 million and a net loss of CHF 39.8 million.

At the end of June, the Group has delivered about 7 million swap cards in service mode. However, the first half statements only include immaterial revenues for these swap cards.

Operating loss influenced by the transition to the service model

The “Margin after cost of material”, a pro forma non-IFRS item, is at CHF 305.8 million, which is 72.1% of total revenues, CHF 7.3 million lower than in the first half 2007. The unfavorable shift in the revenue mix from higher margin Digital TV to lower margin Public Access sales and the impact of the USD weakness were only partially offset by the material cost reduction achieved through purchasing optimization initiatives.

Personnel expenses grew by CHF 13.6 million in the first half 2008 to CHF 176.9 million. This includes CHF 5.0 million from the newly acquired entities EmbedICs, EDSI, TESC, SkiBadge and Parking Access Control Technologies. Other operating expenses increased by CHF 18.4 million compared to the first half 2007 to CHF 117.2 million, including a CHF 10.7 million increase in the first half 2008 compared to the second half 2007. This includes one-off costs related to smart card swap outs for an amount of CHF 16.5 million. Net of these one-off costs, other operating expenses decreased by CHF 5.8 million compared to the second half 2007.

In the first half, the Group generated an operating loss of CHF 18.5 million. The Group incurred additional depreciation and amortization charges of CHF 8.3 million, including a CHF 2.5 million increase compared to the second half of last year due among others to the accelerated depreciation of selected software assets.

Interest expenses of CHF 6.8 million mainly consist of convertible bond charges, while FOREX losses due to the declining USD exchange rate are the main driver of the CHF 9.9 million net finance expenses.

Overall, this results in a net loss of CHF 39.8 million, including a CHF 46.0 million loss for equity holders and a CHF 6.2 million gain for minority interests. Basic and diluted EPS are at negative CHF 0.8793.

Stable Digital TV sales

The Digital TV segment generated CHF 268.6 million sales, translating in a 4.2% decrease compared to the first half 2007. Sales at constant rates increased by 5.4%. The Digital TV segment generated an operating loss of CHF 12.2 million.

Sales in Europe at constant rates increased by 3.1%. New customers such as Portugal Telecom as well as established customers such as Virgin Media and UPC were among the growth contributors. While sales from digital terrestrial operators and Eastern European customers more than doubled in 2007, in the first half 2008, they went through a consolidation phase.

The impact of the USD exchange rate decline was particularly strong in the Americas and in Asia. In the Americas, growth at constant rates was at 4.5%, hence sales reported in CHF were lower than in the first half 2007. First half EchoStar volumes decreased due to the upcoming swap out, while other American customers more than compensated this revenue decline, in particular with stronger smart card sales. Asia continued to develop particularly well growing by 13.9% at constant rates, again with strong smart card sales.

In this first half 2008, sales in new business areas were roughly in line with the first half 2007. Having more than doubled in 2007, digital terrestrial maintained the revenue base achieved last year. In the PCMCIA market, first half sales were under the revenue base of the first half 2007, yet the order book is significantly stronger. Both the IPTV and the mobile TV markets continued to generate new contracts which, however, are still not translating into a material revenue base. Overall, net contribution from new business areas in the first half was still in the negative high single digit million range.

Strong Public Access segment

Public Access delivered a strong 16.6% growth. At constant rates, Public Access growth was at 24.4%, materially over the 10% target.

European markets continue to develop favorably, in spite of the already strong leadership of SkiData in the Ski sector. The Car Access sector, in particular, delivered a substantial contribution to the 10.5% local currency growth of Public Access in Europe at constant rates.

Sales in the Americas at constant rates increased substantially with a growth of 68.7% and in Asia more than doubled, continuing to shift the balance of Public Access beyond Europe. This development confirms the trend of the last four years: compared to the first half 2004, the Public Access extra-European revenue share increased from 7.8% to 24.5%.

Public Access experienced the usual seasonality patterns yet keeps improving profitability with first half Operating Income Before Depreciation and Amortization CHF 2.5 million and Operating Income CHF 1.6 million higher compared to the previous first half. This confirms a steady positive trend with segment Operating Income improved by 9.2 million compared to the first half 2004, more than 14 percent revenue points in spite of the deconsolidation of Ticketcorner.

Successful OpenTV turnaround

The turnaround initiated in the second half of last year has resulted in a strong improvement of the consolidated OpenTV profitability. Compared to the first half 2007, Middleware and Advertising segment Operating Income contribution has improved by CHF 10.0 million reaching CHF 7.3 million, corresponding to an Operating Income margin increase of 15.4%.

Balance sheet and cash flow statement

The acquisitions of EmbedICs, EDSI, and a SkiData affiliate led to an increase of goodwill of CHF 28.7 million. On the other hand, OpenTV goodwill was reduced in line with the lower USD exchange rate.

The replacement of smart cards in service mode at various customers drove both the increase of CHF 8.9 million in tangible fixed assets and the CHF 13.4 million increase in financial assets and other non-current assets. This item includes deferred long-term contract costs for cards delivered in service mode where title is transferred to the customer.

Higher inventories were driven by an increase in the Public Access segment, where SkiData inventories were CHF 8.2 million higher compared to year end and now represent over 40% of consolidated inventories. Accounts receivables were CHF 4.2 million lower, with an increase in the Digital TV segment more than compensated by a material reduction at SkiData.

With CHF 15.6 million, cash flow from operating activities was only marginally down from the CHF 19.1 million in the first half of last year.

Cash flow for investing activities was at CHF 68.2 million, with investments for the roll-out of replacement cards in service mode and the acquisitions of EmbedICs, EDSI, TESC and two small SkiData affiliates representing the bulk of the investment.

Net cash flow from financing activities includes in particular additional bank debt for CHF 58.1 million within Public Access aimed at introducing some financial leverage at SkiData and a dividend payment of CHF 15.7 million.

Outlook

A shift of close to 30 million smart cards to the service model was announced in the outlook for the full year 2008. The replacement process is progressing according to plan. As expected, this migration 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.

Public Access is expected to follow the usual seasonality patterns, with a significantly stronger second half, both in terms of revenues and profits.

In the Advertising and Middleware segment, the second half of the year is expected to be somewhat weaker than the first half. In line with original expectations, full year segment results, however, are expected to be significantly stronger than last year’s.