Chairman’s Interview

2016 ANNUAL RESULTS

INTERVIEW WITH ANDRÉ KUDELSKI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF THE KUDELSKI GROUP

How would you describe 2016 for the Kudelski Group?

The Kudelski Group’s performance in 2016 was solid, with revenues and other operating income reaching CHF 1 067 433 000, operating income of CHF 97 805 000 and net income from continuing operations of CHF 74 804 000. The Group improved its topline by 12.3% and its operating income by 20.4%, while at the same time investing CHF 196.8 million in R&D to develop the innovation and technology that will power our future.

In 2016, new generation connected Digital TV solutions, cybersecurity, intellectual property licensing and SKIDATA contributed to the Group’s overall revenue growth. But more importantly, 2016 was a year in which the Group took important steps to better address the future opportunities and challenges facing the Group, specifically within the fields of Internet TV, cybersecurity and the Internet of Things.

In 2016, the global political landscape was quite active, with unexpected events in the UK and the US. What impacts do you see for the Group and its main activities?

The world experienced significant volatility in 2016 and witnessed a few political surprises as well. The mood of the middle and working classes in Western countries demonstrates their aspiration for disruptive change, while the world’s increasing connectivity has helped some seemingly unlikely scenarios become reality.

The amplitude of change remains almost invisible on the radars of traditional media before disruptive change happens, while the fast digitalization of the world with borderless connectivity has become a key driver of social transformation. This transformation showcases some paradoxes, with the demand for global interconnectivity increasing at the same time as a growing part of Western society is challenging some fundamental notions of globalization and demanding better protection through national borders.

For the Kudelski Group, the current trends have important consequences. On one side, the fast digitalization of our world requires new technologies to facilitate easy access to digital media content, including social networks, on multiple devices and without geographic boundaries. On the other side, the need for content owners to protect their content and ensure its traceability is paramount to protecting their assets, especially when we consider the nature and scale of the piracy that is being fueled by global interconnectivity.

Cyber risks are a growing concern due to the asymmetric risk posed by new hacking techniques and the hyper connectivity. Recent examples have demonstrated that cyber attacks may have much broader implications on our lives than previously anticipated. The digitalization of our society increases our exposure to attacks that can be originated in countries where the legal framework may not be appropriately adapted. The new generations of cyber attacks are also not limited to cyber space; their impacts on the real world and its mass quantity of everyday objects have dramatically increased by virtue of the Internet of Things.

The Kudelski Group sees opportunities with these new paradoxes. In Digital TV, it is about enabling access to cross border content, taking into account the desires of consumers while preserving the interest of content owners. In cybersecurity, it is also about avoiding cross border threats as well as domestic threats that impact business and personal lives. Efficient cyber protection may avoid disasters that the legal system, which is slow to adapt, can at best only hope to mitigate over the long term.

In this new landscape, the Kudelski Group has decided to continue to invest in Digital TV, with a special focus on Internet TV and new security technologies, like watermarking and analytics, while also ramping up its investment in cybersecurity through Kudelski Security, with a special focus on securing IT, digital infrastructures and the Internet of Things.

For the Group, innovation remains a key element in an environment in which fundamentals change quite rapidly. We focus on developing technologies that will be relevant with these transformations.

With this in mind, how do you foresee 2017?

2017 will be more challenging than 2016, as most sectors in which the Group is active are in a state of transformation, with new risks and opportunities. The Digital TV industry is evolving fast, with new opportunities such as extended content protection, enhanced user experience and analytics.

In 2017, we will continue to invest heavily in R&D to ensure that the Group is well-positioned to face the challenges that await us in the future. Our primary areas of focus will be Internet TV, cybersecurity and the Internet of Things.

In cybersecurity, we have successfully expanded our distribution network in the United States. In 2017, we will continue to grow our Kudelski Security business with a focus on broadening our product portfolio through innovation and R&D.

Analytics, thanks to our global installed base in digital TV and our long experience in this industry, is also a key investment topic, as most third party solutions currently available in the market are too generic to enable pay-TV operators to differentiate themselves from new competitors. In the DTV business, the needs of content viewers and the demands of content owners remain disconnected, with a real impact on the entire digital content distribution ecosystem. We will look to introduce solutions that help address this disconnect.

In June 2016, the Group announced the opening of a second headquarters in Phoenix, Arizona. Now that nine months have passed, how do you see this decision?

For many years, the Group has striven to be close to its primary markets. The rationale of this approach is to better understand and appreciate the specificities of each region, with the recognition that even though a company can be global, there is no real global consumer. This approach applies not only to sales, marketing and operations; it can apply to most of the functions of the Group.

Over the last decade, the Group has established R&D centers in Europe, America and Asia as part of our strategy to be closer to our markets and to optimize our cost structure. When a business segment is R&D intensive, it is critical to ensure that every Swiss franc or US dollar is spent as efficiently as possible.

Our decision to establish a second headquarters in Phoenix was motivated by our strategy to ramp up our cybersecurity activity in the United States, the largest cybersecurity market in the world. The build-up of our Phoenix presence also benefits from the transfer of support functions from Switzerland.

The strong increase of revenues generated in the US in 2016 demonstrates the importance of an increased local presence there. Furthermore, the growing protectionist mood in many Western countries further validates this strategy, as our exposure to currency exchange rate fluctuations and potential barriers to international trade can be better mitigated through local operations.

Furthermore, in order to better reflect the reality of the sectors in which we operate, as well as our international focus, we have decided to report our financial results in US$ beginning as of January 1, 2017.

From a business perspective, what were the Group’s major achievements of 2016?

For iDTV, we had a particularly good year in Asia and Africa. South America continues to suffer from deteriorating economic conditions. Nevertheless, the Group was able to extend its presence in all of these markets, primarily by introducing new technologies such as solutions for Internet TV.

We launched new products, especially our content distribution platform, providing content protection services on the most popular devices. We also introduced, in partnership with Samsung, a new concept called TVkey to secure distribution of content on connected TVs, which will enable smart TVs to become a premium content receiver, whatever the means of transmission.

We also strengthened our market position in the field of watermarking, with the acquisition of NexGuard (formerly Civolution), to provide unique traceability solutions for premium content distribution. This reinforces our end-to-end content protection offering, by allowing active detection of pirated content in all watermarked content.

In the area of user experience, we developed new ways of discovering content that are more intuitive and stickier in order to increase viewer satisfaction.

For SKIDATA, 2016 was a good year mainly focused on global expansion and with the launch of new products helping infrastructure operators to increase their revenues.

For Kudelski Security, we are executing on our strategy to expand aggressively in the US market, with two recent acquisitions closed, but we also continue to develop unique proprietary solutions that will reinforce our positioning in the US and Europe.

In respect of the Internet of Things, we brought together our significant capabilities in a “Center of Excellence,” in order to leverage our 25 years of expertise in connected devices. We have already gained important traction from prospects operating in industries in which the need for security was not perceived as critical until recently.

Our Intellectual Property team continued to deliver patent license agreements in 2016, including some important cross-license arrangements with industryleading technology players. Once more, these agreements validate the quality of our R&D investments and enable us to better protect our own customer base.

What will be the distribution to shareholders for fiscal year 2016?

We are focused on striking the right long-term balance as we distribute the value the Kudelski Group creates among various stakeholders. We manage the Group with a long-term vision. Regarding the distribution to shareholders, considering the solid performance of the Group in 2016 and the prospects for 2017, the Board of Directors is proposing at the next Annual General Meeting a distribution of CHF 0,35 per bearer share.

What is the outlook for 2017?

For 2017, we expect to further grow Group revenues by approximately 10%. We expect to see growth momentum in Kudelski Security and Public Access and further consolidation of revenues in the iDTV sector, as this market continues to experience major transformation. We will continue to invest aggressively in our growth initiatives, including cybersecurity and the Internet of Things, in order to strengthen the Group’s position in these respective markets.

On behalf of the Board of Directors of the Kudelski Group, I would like to thank our clients, employees and shareholders for their support and continued trust.

 

Published in the 2016 Annual Report