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Kudelski Targets European Market Growth

By | June 18, 2003

      Europe will become a more important market for conditional access vendor (CA) The Kudelski Group this year. This is the view of CEO André Kudelski, who cites the recent contract win from German pay-TV satellite operator Premiere as an example of his company’s renewed European focus. Kudelski told Interspace: “One of our important strategic objectives is to increase our market share in the European market … Traditionally, we have over 50 per cent of our revenues coming from the European market. Last year, it was in the range of 35 per cent. It was not our first market. North America is our first market. However, we think in 2003 the importance of Europe will grow for us.”

      Europe is a rapidly changing market in the satellite pay-TV arena. Mergers on the verge of completion in Italy and Spain will change the face of those markets. Kudelski believes this is a good thing for the industry. “The first impact, and I would consider the most important one, is it [increases the] chances for operators to be successful … The most important element in any business is to have successful clients, so basically successful operators. You will see some people that will be the winners in consolidation and some others that may be the losers. The most important thing is that consolidation is creating a much better landscape for the future of digital TV.”

      The contract win from Premiere is the biggest so far announced this year. It was a vital win for the Kudelski, which saw profits dramatically fall in 2002. Its net profit in 2001 had been a healthy CHF 72.1 million ($54.4 million). In 2002, this figure dropped to CHF 10.0 million ($7.6 million). This represented a staggering 86 per cent fall in net profit between the years 2001 and 2002. In terms of profits in 2003, Kudelski said that his company “has not provided any guidance regarding the net profit expectations for 2003. The only guidance is a break even EBITDA [earnings before interest, taxes, depreciation and amortisation] as target for 2003 based on an important growth in term of number of smart cards for new subscriber but with a partial transition to a new business model.”

      With digital TV markets still in a state of transition, 2003 is likely to be another tough year for the CA vendor, although Kudelski expects the company to keep a consistent level of performance. “Our track record in winning new contracts has been quite good for many years … In 2002, despite the fact it was not a good year, we added 26 new systems, which have been installed. We expect to be at the same level this year. It could be a little higher. But, the average size of the systems will be higher this year. We have some quite large systems, which have been sold this year. We expect to have in the range of 25 to 30 systems.”

      The vendor is planning to change its business model to win more contracts. Its subsidiary, Nagravision, now offers a package that includes installation of a CA platform based on payment of monthly subscriber fees. The aim here is try and reduce the risks for operators and offer them some kind of protection in case subscriber numbers fail to increase. Kudelski believes this model is likely to have a number of long-term benefits. “In terms of revenues directly, it will not be spectacular, but in terms of quantities to be shipped, we [expect] something in excess of 50 per cent growth this year in terms of numbers of smart cards for new subscribers.”

      The United States, by contrast, has been a difficult marketplace for Kudelski recently. With News Corp [NYSE: NWS] on the verge of acquiring DirecTV, Kudelski is likely to miss out on a potential contract because News Corp owns Kudelski’s CA rival NDS.

      Kudelski supplies CA systems to DirecTV’s pay-TV satellite rival EchoStar [Nasdaq: DISH] and could have been in a strong position if EchoStar’s attempts to merge with DirecTV had been successful. In terms of the U.S. market, Kudelski said: “Of course, DirecTV was a hope for us and that is no longer on the radar screen. But on the other side, there are some opportunities including U.S. cable, which are becoming more of a priority. In addition to this, EchoStar is performing very well.”

      With fewer CA contracts out there, it is becoming increasingly unlikely that the number of CA players will remain the same. The Kudelski Group looks to be one of the winners in the consolidation game. It could strengthen its position still further by acquiring one of its rivals.

      Kudelski said: “Acquisitions are part of our strategy, but we can only consider an acquisition if pricing of the potential acquisition target is in a range that is acceptable … It is difficult to predict what will happen but I think one of the key elements will be to see what will be the wins in the next few months and they will define how the market consolidation will happen.” –Mark Holmes

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