KUDELSKI GROUP 2011 ANNUAL REPORT KEY FiguRes MACROECONOMICS IMPACTING PROFITABILITY TURNAROUND PROGRAM ON TRACK The significant fall of USD and EUR rates affected the Group’s 2011 financial results with a negative impact of CHF 121.7 million on full-year revenues and CHF 46.5 million on operating income. Operating income for the year amounts to CHF 25.4 million compared to a CHF 110 million in 2010. Net of restructuring costs, the Group’s 2011 operating income was CHF 35.3 million. 2011 cash flow generation was strong, with an operating cash flow for the year at CHF 86.7 million. 2011 KEY FiguRES In million CHF 2011 2010 2009 2008 2007 Total revenues and other operating income 896.6 1 069.3 1 060.8 1 037.0 942.5 OIBDA 1) 91.0* 173.0 137.8 92.2 137.2 Operating income 35.3* 110.0 73.3 18.5 87.6 Net income/loss -17.7* 66.7 51.1 -7.0 67.5 * Ex-restructuring costs 1) OIBDA: Operating income before interest, taxes, depreciation and amortization REVENue BREAKDOWN BY SECTOR In CHF '000 2011 4% 2 555 543 Digital TV Middleware & Advertising 107 018 Public Access 211 302 873 863 Total 873 863 % 2 % 1 4 6 EMPLOYEE BREAKDOWN BY ACTIVITY % 61% 1 Digital TV* 2 Middleware & Advertising 18% Public Access 21% Total 100% 2 999 % % 8 1 * Includes Nagra Audio employees (22) 1 6 Total employees at 31.12.2011: 2999 EMPLOYEE BREAKDOWN B Y REGION % 16 Europe 70% Americas 14% % 4 Asia & Oceania 16% 1 2 999 Total 100% % 0 7 TOTAL REVENues AND OTHER OPERATING INCOme In million CHF 2007 2008 2009 2010 2011 1200 800 400 0 942.5 1037.0 1060.8 1069.3 896.6 OIBDA 2007 2008 2009 2010 2011 200 150 100 50 0 137.2 92.2 137.8 173.0 91.0 OPERATING INCOme 2007 2008 2009 2010 2011 120 80 40 0 87.6 18.5 73.3 110.0 35.3 NET INCOme 2007 2008 2009 2010 2011 80 60 40 20 0 -20 67.5 -7.0 51.1 66.7 -17.7 HIGHLIGHTS STRONG COMMITMENT TO DEVELOP NEW TECHNOLOGIES WITH CHF 214 MILLION INVESTED IN 2011 STRONG SWISS FRANC AND ECONOMIC SLOWDOWN IN TRADITIONAL MARKETS AffECT THE GROUP’S RESULTS CHF 90 MILLION SAVINGS PROGRAM ON TRACK SOLID AND SUSTAINABLE DTV MARKET: – STRATEGIC CLIENT WINS – GROWTH PROSPECTS IN EMERGING MARKETS – PROMISING NEW SOLUTIONS 150 MILLION ACTIVE SMART CARDS AND MODULES TURNAROUND OF MIDDLEWARE & ADVERTISING PUBLIC ACCESS: CONTINUED GROWTH AND IMPROVED PROFITABILITY CONTENTS 01 CHAIRMAN'S LETTER P. 02 02 FINANCIAL REVIEW P. 04 03 STRATEGIC ORIENTATIONS P. 10 04 DIGITAL TELEVISION P. 14 05 PUBLIC ACCESS P. 24 06 CORPORATE GOVERNANCE P. 26 07 FINANCIAL statements P. 49 KUDELSKI group consolidated financial statement P. 52 KUDELSKI SA financial statements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he Kudelski Group faced three simulta- 1. Responding to the transformative king us more responsive. It also greatly neous challenges in 2011: the transforma- changes in the digital TV sector reduces organizational complexity tion of the digital TV sector, the negative The digital TV sector is currently expe- (allowing us to streamline our Execu- economic trend that prevailed particularly riencing a fundamental paradigm shift: tive Board from nine to four members) in Southern Europe and the sharp rise in and thus also to reduce operating the Swiss franc against other major cur- - In developed countries, convergence expenses. rencies. The most significant of these between digital TV and the internet is challenges – the transformation of DTV opening up new opportunities, espe- 2. Strengthening our presence in – was something we had expected for cially with regard to multi-screen envi- emerging markets several years and were prepared for, but ronments. We currently have several The Kudelski Group has traditionally had the negative macroeconomic environment R&D projects that are geared to staying a major presence in Southern Europe, a and the effects of the strong Swiss franc one step ahead of convergence-driven region which generates a large propor- hit us harder and faster than anticipated. In needs. However, while developing tion of our revenue streams. However, response to this changed environment, we new technologies involves substantial the difficult economic climate has sharply implemented a major cost-cutting program costs, operators are responding to the reduced our top line in these countries. that will reduce recurring costs by CHF 90 current low macroeconomic visibility To offset the shortfall (tens of millions of million per year, starting in 2012. with a relatively prudent approach to francs), we are strengthening our pre- capital investments. sence in emerging markets, particularly 2 This effort to bring down our costs im- in Latin America and Asia. However, pacted not only our organization and our - Meanwhile, emerging economies are these efforts to sharpen our focus on processes, but also our workforce. The becoming fully-fledged markets in emerging markets did not fully offset the changes we made were difficult, in particu- their own right. A few years ago it was downtrend in Southern Europe in 2011 lar those that involved layoffs. We managed possible to gain a presence in these nor are they expected to do so in 2012. the process so as to maximally protect our markets with technologies and solu- Beyond this, we have also consolidated capacity to innovate while simultaneously tions similar to those deployed in deve- our market-leading position in Southern sharpening our focus on emerging mar- loped countries. This is no longer true Europe with new generations of solu- kets like China and India. today; a dedicated innovation strategy tions that place us in a favorable posi- is essential to succeed. That’s why we tion. Finally, the strategic strengthening Our R&D investments in 2011 amounted decided to develop a range of solutions of our R&D competence centers in Asia to CHF 214 million, which shows that even tailored specifically to these markets will enhance our responsiveness to the in a tough economic environment the and to strengthen our emerging-market needs of emerging markets. Kudelski Group is committed to laying the R&D teams. This is a critical step in the foundation for future growth by investing process of enhancing our overall com- 3. New opportunities: CyberSecurity and resources in tomorrow’s technology and petitive position in these countries as Intellectual Property markets. However, we have tightened our well as our responsiveness when new Among the potential revenue-growth dri- selection criteria for determining which opportunities arise. vers we have identified, CyberSecurity new projects are implemented and which and intellectual property are two areas existing projects are maintained. With all of - Increasingly, Digital TV is about eco- where we are investing selectively: this, our aim is to respond to the new eco- systems, not specific products. As nomic climate and the speed of change in our projects that accelerate the deve- - CyberSecurity the digital TV sector, where opportunities lopment of the latest generations of Over the past 20 years the Kudelski arise quickly – and disappear quickly as middleware pay off, notably OpenTV 4 Group has acquired unique experience well. and 5, we once again have middleware in developing anti-piracy solutions for platforms that respond perfectly to all types of threats in the digital TV sec- We have taken a series of measures aimed digital TV and internet convergence. tor. Today, with cyber-criminals targe- at addressing each of the challenges that These new technologies mean that it ting a growing range of activities, we had an impact on our 2011 results. This makes sense to fully integrate our mid- can offer a wide array of strategies to should pay off in the short, medium and dleware activities into the core Digital fight these attacks. We have therefore long term. What we have done may be sum- TV business line. This approach aligns created a CyberSecurity business unit med up in five key points: our organization with the market, ma- to serve this high-potential market. AndrÉ KUDELSKI K UDELSKI group CHAIRMAN AND CHIEF EXECUTIVE OFFICER 2011 ANNUAL REPORT 3 - Monetizing our intellectual property - Current SkiData CEO Charles Egli In 2012, we will press ahead with the For almost 25 years we have been acti- will become Chairman of the changes announced last year: cost re- vely protecting our intellectual property. SkiData Supervisory Board during duction, strengthening our presence in One of the ways we do this is by regu- the 2012 financial year. Hugo Rohner emerging markets, and investing in the larly patenting our innovations. Today, will take over as CEO. In his various opportunities driven by the convergence with renewed momentum in the digital roles within the Kudelski Group, Hugo of the digital TV and internet ecosystems. TV and media sector, we see exciting has demonstrated his ability to take In addition, we will grow our CyberSecu- revenue potential in our patent portfo- up challenges and to manage costs rity business and drive monetization of our lio. A dedicated team is being organi- efficiently in the units he has headed. intellectual property portfolio. zed to leverage our intellectual property I wish him well in his new role as CEO. assets. I would like to thank Charles for all he On behalf of the Board, I would like to has done on an operational level since thank our clients, our teams, and you, our 4. Growing our Public Access business 1989 to contribute to the Group’s shareholders, for your continuing trust in through innovation success, and we wish him well in his difficult times.