First half 2009 results
In the first half of 2009, the Group starts to reap the harvest of the migration of a significant share of the deployed card base to the service model. In 2008, the Group delivered over 25 million replacement smartcards to EchoStar, Bell and Sogecable. In the first months of this year, the migration was completed with the delivery of a further 6 million cards. Moreover, since June of this year, the cards deployed at EchoStar started to yield the full monthly fee.
With the completion of the transition to the service model, the Digital TV division has materially improved its operating profitability in this first half and is expected to further recover in the second half. Together with a strong resilience of our Public Access division and with substantially stable economics in Middleware and Advertising, this results in a growing revenue base and a material improvement of the Group operating profit.
Total revenues and other operating income are 7% higher than in the first half 2008, reaching CHF 454 million. With an operating income of CHF 8.5 million, the Group reversed the loss of last year's period, improving its operating margin by CHF 27 million. As the USD strengthening was compensated by a weakening EUR rate, currency effects in this first half are negligible.
RETURNING TO PROFITABILITY
Group revenues in this first half grew by 7%.
The "Margin after cost of material" (a pro forma non-IFRS item) is CHF 18.2 million higher, reaching CHF 324 million. While this translates into a percentage terms decline of 0.7% points compared to the same period of last year, this represents a solid margin, as the Group fully expenses the cost of the EchoStar swap cards delivered in the first half. Key enablers of this solid margin development were new agreements with strategic suppliers. Compared to the same period of last year, personnel expenses grew by CHF 8.3 million reaching CHF 185.2 million. In percentage terms, this represents a 4.7% increase. Most of this increase took place last year: compared to the second half 2008, the growth of personnel costs was limited to CHF 3 million. On the other hand, other operating expenses were CHF 14 million lower than in the first half 2008: in the same period of last year, the Group incurred CHF 16.5 million swap-out related one-off costs. Depreciation and amortization charges were at CHF 27.1 million, CHF 3.1 million lower than in the comparable period of last year. In this first half, the Group reached an operating income of CHF 8.5 million, representing a CHF 26.9 million increase from the first half 2008.
Net income for the first half year was marginally positive at CHF 0.5 million, consisting of a CHF 4.3 million loss of equity holders and a CHF 4.8 million gain for minority interests.
STRONG DIGITAL TV MOMENTUM
The Digital TV segment generated sales of CHF 301.3 million, delivering a strong 12.2%, growth rate. Profitability recovered with operating profit improving by CHF 33.2 million to reach CHF 20.9 million.
European net sales increased by 7.9% to CHF 168.0 million. Among the highlights of this first half, the Group Italian business did particularly well, both due to a strong growth of Mediaset Premium cards as well as increasing sales of SmarDTV Common Interface modules. Furthermore, Canal+ and TVCabo experienced high double digit growth rates compared to the same period of last year.
American net sales soared with a plus of 42.7%, as the final delivery of replacement cards at EchoStar more than compensated slower sales in Latin America. First half net sales in the Americas were discounted by the amortization of the capitalized monetary consideration related to the new EchoStar long-term contract.
Asian sales declined by 12.9% reaching CHF 43.6 million, as some large operators slowed down investments in new operations and for subscriber acquisition due to the economic downturn.
New business areas in aggregate have been growing at low two digit rates in this first half. However, the different business lines delivered a heterogeneous operating performance. On the positive side, the digital terrestrial business delivered a solid performance and mobile TV's top line doubled, yet still at a low absolute level. On the other hand, the IPTV revenue base remains limited and sales of CI modules and CAMs, while growing, suffered from the slow down in sales of TV sets. Overall, new business areas generated a single digit million loss.
RESILIENT PUBLIC ACCESS
While the economic downturn affected the Public Access business, the impact was restricted, as the decline of net sales was limited to CHF 4.2 million, Operating Income Before Depreciation and Amortization was down CHF 2.1 million and operating income was down CHF 3.2 million. The careful management of the Division's cost base was the key driver enabling the satisfying profitability development.
Public Access performed particularly well in Europe, with sales increasing by 2.1% compared to the first half 2008, while extra-European sales declined to an absolute level comparable to the first half 2007's.
In light of the customary seasonality of this business, Public Access is well in line to maintain a satisfactory profitability for the full year.
MIDDLEWARE AND ADVERTISING IN LINE WITH FIRST HALF 2008
The Middleware and Advertising top line growth for the first half was at 1.3%, with net sales reaching CHF 65.4 million. Asia/Pacific and Africa were the largest sales contributor at CHF 23.4 million, representing a strong growth of 22.6% compared to the first half 2008. On the other hand, both Europe and Americas were down by close to 8% compared to the previous half year, in line with a slow down in set-top box shipments at selected customers.
Middleware and Advertising segment contribution is regressing compared to the first half of last year, with an operating income at CHF 5.4 million, representing a decline of CHF 1.9 million compared to the first half 2008.
BALANCE SHEET AND CASH FLOW
As the delivery of replacement cards accounted for in the service model was completed last year and as the replacement cards delivered in this first half were expensed, tangible fixed assets are CHF 5.7 million lower than at the end of 2008.
In the first half, intangible assets increase by CHF 12 million. In addition to ordinary investments in technology and software, this increase is due to the acquisition of Freescale's Semiconductor CMOS Modulators and Silicon Tuner product lines.
The accounts receivables balance at CHF 345.4 million includes an EchoStar receivable to be netted out against the monetary consideration to be awarded to EchoStar upon the signature of a new multi-year agreement.
The Group cash position as of June 30 is down to CHF 197.7 million. In addition to an investment of excess cash in short-term marketable securities, the CHF 52.5 million reduction of payables due to faster payments of suppliers was the key driver leading to a lower cash position. Hence, cash flow from operating activities in the first half was slightly negative at minus CHF 2 million, while cash for investing activities amounted to CHF 40.1 million, including a net outflow of CHF 9.6 million for investments in financial assets.
OUTLOOK
With the completion of the migration of over 30 million smart cards to the service model early this year, the profitability of the Digital TV division has started to recover in this first half. In the second half-year, the division's operating performance will further improve, as it will fully benefit from the return on the installed base of cards in the service model.
The Public Access and the Middleware and Advertising divisions have shown an overall bottom line stability in this first half, with a performance substantially in line with the previous year. While we do not anticipate a short-term reversion to historical market growth rates, we expect both divisions to maintain their respective momentum in this second half.
In spite of the slower than expected top line development in some areas, the successful management of the mass transition to the service model and the tight control over the Group cost base result in an improvement of the profitability outlook for the full year.