Business News

NDS Group plc Reports Fiscal Year 2008 Results

Tuesday 05. August 2008 - Earnings Release for the Fiscal Year Ended June 30, 2008

HIGHLIGHTS

– Revenues for fiscal 2008 up 20% to $850.1 million.

– Operating income for fiscal 2008 up 21.8% to $195.4 million.

– Diluted net income per share up 16.7% to $2.72 per share.

– 90.3 million active devices protected by NDS conditional access technology at end of period.

– 92.5 million middleware clients deployed at end of period.

– 13.1 million DVR clients deployed at end of period.

NDS Group plc (“NDS” or the “Company”) (NASDAQ:NNDS), a majority-owned subsidiary of News Corporation that supplies open end-to-end digital technology and services to digital pay-television platform operations and content providers, announced today its results for the fiscal year ended June 30, 2008.

Commenting on NDS’s performance, Dr. Abe Peled, Chairman and Chief Executive Officer of NDS, said, “NDS has completed another year with strong results on all our key metrics, subscriber growth, middleware and DVR shipments, and strong performance of our Orbis subsidiary. Our fiscal 2008 performance has benefited from continued strong execution and key new customer wins. Of particular note are our successful penetration of the German cable and satellite market, and our wins in India and Malaysia. We also extended the terms of our CA contracts with our largest customers. Our reported performance benefited overall from the continued weakness of the U.S. dollar. Unfortunately, as we look into fiscal 2009, the continuing strength of the Israeli shekel will make fiscal 2009 a very challenging year. We plan to invest in our business in order to continue to provide first rate technology and support to our customers in their current business, as well as to prepare for the challenges and opportunities presented by the rapid penetration of broadband and the changing viewing patterns it makes possible.”

KEY DEVELOPMENTS IN THE FOURTH QUARTER


— Our Board of Directors announced the receipt of a proposal from News Corporation and two newly incorporated companies formed by funds advised by Permira Advisers LLP (the Permira Newcos). The proposed transaction, if consummated, would result in NDS ceasing to be a public company and the Permira Newcos and News Corporation owning 51% and 49% NDS’s outstanding equity, respectively, subject to dilution by management equity and employee options. There can be no assurance that any extraordinary transaction involving us will be approved or completed.

— We opened sales and support offices in Munich, Germany and New Delhi, India, strengthening our ability to serve customers and to develop new business opportunities in these markets.

— Russian media giant Sistema Mass Media chose NDS’s VideoGuard Mobile(TM) to secure its mobile TV service, available to all Russian mobile subscribers irrespective of network provider, and the NDS Unified Headend(TM) to manage and secure delivery over mobile and IP networks to set-top boxes, PCs and handsets, resulting in a truly convergent service for the Russian market.

— SkyLife, Korea’s first and only digital satellite Pay TV operator, expanded its long-standing relationship with NDS by introducing NDS VideoGuard(R) conditional access and MediaHighway(R) middleware to secure and power its new live HD broadcast service.

— Cox Communications, the third largest cable operator in the USA, chose NDS to develop a next-generation video user interface (UI) to enhance its Pay TV offering.

— Australia’s leading subscription television provider, FOXTEL, selected a next generation Electronic Program Guide (EPG) and XTV(TM) technology from NDS to power its new HD DVR

— SKY Television New Zealand has selected NDS’s next generation EPG and XTV(TM) DVR technology to power its new MY SKY HDi DVR. SKY expects to deploy over 80,000 MY SKY HDi DVRs in the next financial year.

— Gateway Broadcast Services (GBS) selected NDS MediaHighway middleware and EPG to power its GTV Pay TV platform for Sub-Saharan Africa. In February 2007, GBS chose VideoGuard to secure its platform.

FINANCIAL REVIEW

Total revenue for the fiscal year ended June 30, 2008 was $850.1 million, an increase of 20% compared to the previous fiscal year.

Revenue from conditional access increased by 17% during the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007. The increase was principally due to recognition of a portion of security services revenue previously deferred as certain remaining revenue recognition criteria were satisfied during the fiscal year ended June 30, 2008. Additionally, conditional access revenue rose due to the growth of the subscriber base of our customers, offset in part by certain price reductions, as well as an increase in customers and a higher volume of smart cards delivered to customers. Integration, development and support revenues in the fiscal year ended June 30, 2008 was consistent with that recognized in the fiscal year ended June 30, 2007. The recognition of revenues from new customers and from the delivery of enhancements to several of our major customers is dependent on the timing of satisfaction of all of our revenue recognition criteria and, therefore, this component of our revenues tends to fluctuate from period to period; however, during the periods under review there was little change. License fee and royalty revenues increased by 12% during the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007, principally as a result of higher middleware royalty revenues as well as higher conditional access and EPG royalties. The increases in royalties were due to an increase in the number of platform operators and service providers that deploy our technology and by the growth in the number of new set-top boxes deployed or manufactured. Middleware royalties are driven by the number of middleware clients deployed, the number of which is disclosed in the table above. The increase in revenues from new technologies of 40% in the fiscal year ended June 30, 2008, compared to the fiscal year ended June 30, 2007, was principally due to higher revenues from our DVR technologies, advanced middleware, IPTV, gaming applications and residential gateway devices. Revenue from our DVR technologies and advanced middleware is driven by the number of DVR clients deployed (disclosed in the table above) and the level of integration and development revenue recognized.

Cost of goods and services sold increased by 19% during the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007, principally due to an increase in the number of our employees working on development, integration and support activities, as well as increased royalties paid to third parties for the use of their technologies and higher deliveries of smart cards during the periods. The increases were partially offset by lower smart card unit costs.

Our main operating expenses are employee costs (including the cost of equity-based awards), facilities costs, depreciation, travel costs and legal expenses. Our main operating expenses have increased primarily due to a higher number of employees, facilities expenses and legal costs. Employee costs were approximately 23% higher in U.S. dollar terms during the fiscal year ended June 30, 2008, as compared to the prior fiscal year.

Research and development costs increased by 14% during the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007, principally as a result of a higher number of employees working on an increased number of projects. Sales and marketing expenses increased by 18% in the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007, primarily as a result of higher employee headcount and travel costs, increased attendance at trade shows and a higher level of corporate communications activities. General and administrative expenses increased by 40% in the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007, primarily due to increased legal expenses, as well as equity compensation costs and facilities and infrastructure costs.

We estimate that the weaker U.S. dollar increased our revenue by approximately $27 million and increased our operating income by approximately $12 million during the fiscal year ended June 30, 2008, compared to what would have been achieved had foreign exchange rates been consistent with those prevailing in the prior fiscal year. This is inclusive of a gain of approximately $17 million arising on currency purchased at favorable prices.

As a result of the factors outlined above, and, in particular, the increase in conditional access and new technologies revenue and the impact of foreign currency exchange rate movements, operating income was $195.4 million, or 23.0% of revenue, for the fiscal year ended June 30, 2008, compared to $160.4 million, or 22.6% of revenue, for the fiscal year ended June 30, 2007.

During the fiscal year ended June 30, 2008, we incurred other expenses of $2.5 million in legal and professional fees associated with the proposed transaction announced by News Corporation and Permira. Further costs associated with this transaction are expected to be incurred in the fiscal year ending June 30, 2009.

As of June 30, 2008, we had cash and cash equivalents totaling $735.0 million. During the fiscal year ended June 30, 2008, cash from operating activities was $141.9 million and we paid a net $10.5 million in respect of business acquisitions. We had a net inflow of cash and cash equivalents of $124.7 million in the fiscal year ended June 30, 2008, compared to $267.9 million in the fiscal year ended June 30, 2007. During the fiscal year ended June 30, 2007, short-term investments of $184.4 million matured and we did not reinvest such funds.

FOREIGN EXCHANGE RATES

Average foreign exchange rates used in the year-to-date results are as follows:

Fiscal years ended June 30,
2008 2007

U.K. Pounds Sterling/U.S. Dollar 0.4992 0.5178
Euro/U.S. Dollar 0.6816 0.7664
Israeli Shekel/U.S. Dollar 3.7962 4.1572
Indian Rupee/U.S. Dollar 40.2190 44.0530