NDS Group plc Reports First Quarter Results

NDS Group plc Reports First Quarter Results

 NEW YORK and LONDON, Oct. 23 /PRNewswire-FirstCall/ --    -- Revenue for first quarter down 11% to $182.2 million.     -- Operating income for first quarter down 56% to $25.9 million.     -- Other expenses (relating to the Proposed Transaction described below)       of $14.1 million.     -- Diluted net income per share down 71% to $0.23 per share.     -- 95.4 million active devices protected by NDS conditional access       technology at end of period.     -- 98.7 million middleware clients deployed at end of period.     -- 14.5 million DVR deployed with NDS technology 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-TV platform operations and content providers, announced today its results for the quarter ended September 30, 2008.

Commenting on NDS's performance, Dr. Abe Peled, Chairman and Chief Executive Officer of NDS, said, "NDS's results this quarter reflect lower revenues from several large customers whose CA contracts have been renewed with certain volume discounts and new pricing to reflect different smart card change-over policies, as well as smart card recycling by certain customers. This is in line with our guidance for fiscal 2009. In addition, our results have been impacted by unusually large currency fluctuations during the period. At this point, the worldwide economic uncertainty has not been reflected in our operational results or outlook; however, we remain cautious and are monitoring the field results closely. Our project pipeline remains strong, and we remain focused on helping our customers compete effectively. We continue to invest in the key areas that will drive our business, and have been gratified by the reception of our leading technologies at the International Broadcasting Convention in Amsterdam in September 2008."

   KEY FINANCIAL MEASURES                                             Three months ended September 30,                                                      2008           2007    Revenue (in thousands)                          $182,164       $204,876   Operating income (in thousands)                  $25,909        $58,286   Operating margin                                   14.2%          28.4%   Net income (in thousands)                        $13,384        $46,294   Diluted net income per share                       $0.23          $0.79    KEY NON-FINANCIAL MEASURES                                             Three months ended September 30,                                                       2008           2007    Smart card deliveries (in millions)   Quantity delivered in period                         8.0            7.4    Number of devices protected by NDS conditional    access (in millions)   Net additions                                        5.1            3.2   Devices protected, end of period                    95.4           78.6    Middleware clients deployed (in millions)   Middleware clients deployed in period                6.2            8.1   Deployments, end of period                          98.7           69.9    DVR clients deployed (in millions)   DVR clients deployed in period                       1.4            1.5   Deployments, end of period                          14.5            8.8    Employees   Full-time equivalents, end of period               4,073          3,665     KEY DEVELOPMENTS IN THE FIRST QUARTER   

-- In August 2008, NDS, News Corporation and two newly incorporated companies formed by funds advised by Permira Advisers LLP (the Permira Newcos) announced the signing of an implementation agreement for the previously announced transaction to take NDS private (the Proposed Transaction). The Proposed Transaction would result in the cancellation of all of NDS's outstanding Series A ordinary shares for per-share consideration of $63 in cash. If the Proposed Transaction is consummated, the Permira Newcos and News Corporation would own approximately 51% and 49% of NDS, respectively. The Proposed Transaction is subject to certain conditions and there can be no assurance that the Proposed Transaction will be completed.

-- During the International Broadcasting Convention (IBC), NDS Unified Headend(TM) won "Best Content Protection Technology" Product of the Year Award from Cable & Satellite International Magazine.

-- NDS and Astro, the only direct-to-home satellite TV operator in Malaysia, completed the migration of over 2.7 million Astro subscribers to NDS VideoGuard(R) conditional access.

-- NDS and Premiere, the largest pay-TV operator in Germany and Austria, completed the first phase of the changeover of Premiere subscribers to NDS VideoGuard conditional access.

-- NDS launched NDS Dynamic(TM) an innovative suite of solutions for targeted and interactive advertising and audience measurement which allows TV operators to generate new revenue streams. A key partner in NDS Dynamic is TNS Media Research (TNS), a global leader in TV, radio and internet audience measurement.

-- Tata Sky chose NDS technology to launch India's first Electronic Program Guide (EPG) in the Hindi language, underscoring NDS' commitment to the Indian pay-TV market.

-- NDS subsidiary Jungo launched a patent-pending software solution to enable fast channel changing in Internet protocol television (IPTV) networks.

FINANCIAL REVIEW

Total revenue for the three-month period ended September 30, 2008 was $182.2 million, a decrease of 11% compared to the corresponding period of the previous fiscal year.

Revenue from conditional access decreased by 19% during the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007. The decrease was principally due to recognition in the three-month period ended September 30, 2007 of a portion of security services revenue previously deferred as certain remaining revenue recognition criteria were satisfied during that period. These factors were partially offset by an increased volume of smart cards delivered and the growth of the subscriber bases of our customers during the three-month period ended September 30, 2008. Recently, certain of our customers have begun recycling set-top boxes and smart cards when a subscriber terminates its subscription by re-issuing the set-top box and smart card to a new subscriber. This activity by our customers reduces demand for new smart cards and also reduces our incremental set-top box royalties. Integration, development and support revenue increased by 4% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007. The recognition of revenue from new customers and from the delivery of enhancements to several of our existing major customers is dependent on the timing of satisfaction of all our revenue recognition criteria; therefore, this component of our revenue tends to fluctuate from period to period. License fee and royalty revenue decreased by 16% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, principally as a result of a decrease in the number of middleware clients deployed during the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007. The increase in revenue from new technologies of 10% in the three-month period ended September 30, 2008, compared to the three-month period ended September 30, 2007, was principally due to higher revenue from our IPTV customers, and from gaming applications and residential gateway devices. These increases were partially offset by lower revenue from deployment of our DVR technologies and advanced middleware solutions. The fees recognized on deployment of DVR technologies were lower due to the timing of project acceptance.

Cost of goods and services sold increased by 10% during the three-month period ended September 30, 2008, as compared to the three-month period ended September 30, 2007, principally due to an increase in the number of our employees working on development, integration and support activities during the three-month period ended September 30, 2008. This was offset in part by lower royalties paid to third parties for the use of their technologies during the three-month period ended September 30, 2008.

Research and development costs decreased by 6% for the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007 as a result of a small decrease in the number of employees working on research and development projects. Additionally, in the three-month period ended September 30, 2008, we recognized the benefit of a $7.9 million grant from the French government as a consequence of our engagement in certain eligible research projects. In the three-month period ended September 30, 2007, we received an equivalent grant of $6.7 million. Sales and marketing expenses increased by 26% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, principally 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 23% in the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, primarily as a result of losses due to holding cash in currencies other than the U.S. dollar, which were partially offset by lower legal expenses.

We estimate that currency exchange rate fluctuations increased our revenue by approximately $1.0 million and decreased our operating income by approximately $8.1 million during the three-month period ended September 30, 2008, compared to what would have been achieved had foreign exchange rates been consistent with those prevailing during the prior fiscal year.

As a result of the factors outlined above, and, in particular, the decrease in conditional access and royalty revenue and the impact of foreign currency exchange rate movements, operating income was $25.9 million, or 14% of revenue, for the three-month period ended September 30, 2008. Operating income was $58.3 million, or 28% of revenue, during the three-month period ended September 30, 2007, and included the impact of the recognition of a portion of security services revenue previously deferred, as described above.

During the three-month period ended September 30, 2008, we incurred other expenses of $14.1 million. Of this amount, $11.0 million relates to a conditional forward currency derivative financial instrument (the Conditional Hedge) entered into during the three-month period ended September 30, 2008 to act as an economic hedge against the fact that a portion of the debt to be drawn down upon the consummation of the Proposed Transaction will be denominated in euros. The terms of the Conditional Hedge do not meet the criteria of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to qualify for hedge accounting; accordingly the changes in fair value of the Conditional Hedge are recorded in other expenses. Should the Proposed Transaction not be consummated, no amounts will be due under the Conditional Hedge and the amounts recorded as of September 30, 2008 will be reversed.

The remaining amount of other expenses relates to $3.1 million in legal and professional fees associated with the Proposed Transaction, which are included in other expenses. We expect to incur further costs associated with the Proposed Transaction in future periods.

Our effective tax rate was 21.3% for the three-month period ended September 30, 2008, compared to 29.5% for the three-month period ended September 30, 2007. This decrease was due to a deferred income tax benefit of $4.4 million related to the Conditional Hedge discussed above and lower U.K. statutory tax rates.

As of September 30, 2008, we had cash and cash equivalents totaling $711.2 million. During the three-month period ended September 30, 2008, cash used by operating activities was $4.7 million. We had a net outflow of cash and cash equivalents of $10.2 million in the three-month period ended September 30, 2008, compared to a net inflow of $23.3 million during the three-month period ended September 30, 2007. As a result of our holding a portion of our cash in currencies other than the U.S. dollar, foreign exchange rate fluctuations have reduced the value of our cash holdings by $13.7 million during the three-month period ended September 30, 2008.

FOREIGN EXCHANGE RATES

Average foreign exchange rates used in the quarterly results are as follows:

                                             Three months ended September 30,                                                       2008           2007    U.K. Pounds Sterling/U.S. Dollar                  0.5281         0.4948   Euro/U.S. Dollar                                  0.6646         0.7276   Israeli Shekel/U.S. Dollar                        3.4829         4.1871   Indian Rupee/U.S. Dollar                         43.5840        40.3880     ABOUT NDS  

NDS Group plc (NASDAQ:NNDS) , a majority-owned subsidiary of News Corporation, supplies open end-to-end digital technology and services to digital pay-TV operators and content providers. See www.nds.com for more information about NDS.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This document may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's views and assumptions regarding future events and business performance as of the time the statements are made. Actual results may differ materially from these expectations due to changes in global economic, business, competitive market, regulatory and other factors. More detailed information about these and other factors that could affect future results is contained in our filings with the U.S. Securities and Exchange Commission. Any "forward-looking statements" included in this document are made only as of the date of this document and we do not have any obligation, nor do we undertake, to publicly update any "forward-looking statements" to reflect subsequent events or circumstances, except as required by law.

CONFERENCE CALL

Dr. Abe Peled, Chairman and Chief Executive Officer, and Mr. Alex Gersh, Chief Financial Officer, will host a conference call to discuss this announcement and answer questions at 9.00 a.m. New York time (2.00 p.m. London time) on Thursday, October 23, 2008.

   Dial-in   U.S. toll free:  1 866 832 0732   U.K. freephone:  0800 073 8968   International dial-in:  +44 (0)1452 562 717    Replay (available for seven days)   U.S. toll free replay:  1 866 247 4222   U.K. freephone replay:  0800 953 1533   International replay:  +44 (0)1452 550 000   Replay passcode:  67203351#   

The live webcast and conference call will be available at: http://investor.shareholder.com/nds/webcasts.cfm starting at 9.00 a.m. New York time (2.00 p.m. London time) on Thursday, October 23, 2008. Please register for the event now by clicking on the "First Quarter Results 2009" link on that page. For those of you who are not able to attend this live broadcast online, the presentation will be recorded and available on the same page three hours following the original broadcast.

An audio replay will also be available on the NDS website (www.nds.com) from approximately 12.00 noon (London time) on October 24, 2008.

                               NDS Group plc              Unaudited Consolidated Statements of Operations                                                    For the three months ended                                                          September 30,   (in thousands, except per-share amounts)            2008           2007    Revenue:   Conditional access                               $98,766       $121,583   Integration, development & support                11,368         10,909   License fees & royalties                          24,205         28,944   New technologies                                  46,785         42,458   Other                                              1,040            982    Total revenue                                    182,164        204,876    Cost of goods and services sold                  (75,461)       (68,456)    Gross margin                                     106,703        136,420    Operating expenses:   Research & development                           (47,893)       (51,011)   Sales & marketing                                (12,118)        (9,620)   General & administration                         (17,450)       (14,220)   Amortization of intangibles                       (3,333)        (3,283)    Total operating expenses                         (80,794)       (78,134)    Operating income                                  25,909         58,286    Interest income, net                               5,200          7,372   Other expenses                                   (14,107)             -    Income before income tax expense                  17,002         65,658    Income tax expense                                (3,618)       (19,364)    Net income                                       $13,384        $46,294    Net income per share:     Basic net income per share                       $0.23          $0.80     Diluted net income per share                     $0.23          $0.79                                  NDS Group plc                        Consolidated Balance Sheets                                                    As of           As of                                            September 30, 2008  June 30, 2008   (in thousands, except share amounts)         (Unaudited)       (Audited)    ASSETS   Current assets:     Cash and cash equivalents                     $711,162       $734,992     Accounts receivable, net                       119,141        126,131     Accrued income                                  40,386         46,948     Inventories, net                                87,246         79,659     Prepaid expenses                                24,869         24,904     Other current assets                            19,523          4,203   Total current assets                           1,002,327      1,016,837   Property, plant & equipment, net                  47,239         49,741   Goodwill                                         130,944        134,693   Other intangibles, net                            51,962         55,806   Deferred tax assets                               15,641         17,370   Other non-current assets                         109,402        101,702    Total assets                                  $1,357,515     $1,376,149    LIABILITIES AND SHAREHOLDERS' EQUITY   Current liabilities:     Accounts payable                               $27,463        $33,611     Deferred income                                125,584        128,318     Accrued expenses                                56,286         87,115     Income tax liabilities                          15,016         24,513     Other current liabilities                       33,291         20,673   Total current liabilities                        257,640        294,230   Deferred income                                   79,454         79,100   Accrued expenses                                  70,041         67,713   Other non-current liabilities                      4,419          4,701    Total liabilities                                411,554        445,744   Commitments and contingencies   Shareholders' equity:     Series A ordinary shares, par value $0.01 per      share: 16,424,907 and 16,250,058 shares      outstanding as of September 30, and June 30,      2008, respectively                                164            162     Series B ordinary shares, par value $0.01 per      share: 42,001,000 shares outstanding as of      September 30, and June 30, 2008, respectively     420            420     Deferred shares, par value £1 per share:      42,000,002 shares outstanding as of      September 30, and June 30, 2008,      respectively                                   64,103         64,103     Additional paid-in capital                     594,316        590,663     Retained earnings                              229,585        216,201     Other comprehensive income                      57,373         58,856   Total shareholders' equity                       945,961        930,405    Total liabilities and shareholders' equity    $1,357,515     $1,376,149                                  NDS Group plc              Unaudited Consolidated Statements of Cash Flows                                                    For the three months ended                                                          September 30,   (in thousands)                                      2008           2007    Operating activities:   Net income                                       $13,384        $46,294    Adjustments to reconcile net income to net    cash provided by operating activities:     Depreciation                                     5,451          5,652     Amortization of other intangibles                3,333          3,283     Equity-based compensation                        4,795          4,311     Conditional hedge, net                           6,620              -     Other                                              234             97     Change in operating assets and liabilities,      net of acquisitions:       Inventories                                   (7,587)        (4,402)       Receivables and other assets                   7,292        (18,244)       Deferred income                               (2,380)        (9,222)       Accounts payable and other liabilities       (35,875)         9,016    Net cash (used in) provided by operating    activities                                       (4,733)        36,785    Investing activities:   Capital expenditure                               (5,446)        (3,470)   Business acquisitions, net of cash acquired       (1,117)       (10,374)    Net cash used in investing activities             (6,563)       (13,844)    Financing activities:   Issuance of shares                                 1,135            388    Net (decrease) increase in cash and cash   equivalents                                      (10,161)        23,329    Cash and cash equivalents, beginning of period   734,992        592,750   Currency exchange movements                      (13,669)         6,088    Cash and cash equivalents, end of period        $711,162       $622,167  

First Call Analyst:
FCMN Contact:

Source: NDS Group plc

CONTACT: Yael Fainaro, Investor Relations of NDS Group plc,
+44-20-8476-8287; Kelly Fitzgerald of Breakaway Communications U.S.,
+1-212-616-6006

Web site: http://www.nds.com/

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