Chairman’s Interview

Interview with André Kudelski Chairman and Chief Executive Officer of the Kudelski Group

 

How would you characterize 2018 for the Kudelski Group?

As expected, 2018 was a challenging year, underscoring the importance of the transformation efforts previously initiated by the Group in 2017. The Group realized the first tangible results from these efforts last year.

The Group continued to shift its investment efforts from its traditional Digital TV activities to new growth initiatives, including Internet TV, Cybersecurity and Internet of Things (IoT), as well as to its Public Access business.

For Digital TV, important milestones were achieved during the year, including the integration of CONAX with NAGRA, implementation of a cost reduction program and the simplification of the product portfolio, most notably through the divestment of SmarDTV. The combination of these measures has allowed the Digital TV segment to improve its structural profitability in spite of the forecasted revenue decline, while at the same time maintaining strong investment in the Group’s innovation efforts.

In order to allow shareholders to better understand our market dynamics, the Board of Directors has decided to improve the transparency of the Group’s financial reporting. For the year ended December 31, 2018, we are now reporting four separate segments: Digital TV, Cybersecurity, IoT and Public Access.

Kudelski Security (Cybersecurity) has continued to shift its revenue mix from technology resale to higher value-added activities, such as executive level advisory services, managed security services and sales of proprietary solutions. As a result, Kudelski Security’s gross margin and operational profitability improved in 2018, even if revenues declined for the year other than in Switzerland, where revenues increased by 57% compared to 2017.

Still in an early development phase, the Group’s IoT business continued to invest in further developing its comprehensive secure IoT platform and also added a growing number of partners in order to market this platform effectively in new industry verticals.

In Public Access, SKIDATA continued its impressive track record of development, evolving from an electro-mechanical equipment provider focusing on the European market when the Group acquired the company in 2001 to now being the worldwide leader in revenue and access management for parking, ski and events infrastructure operators. After more than a decade of 10% CAGR, SKIDATA’s growth rate in 2018 was disappointing at 3%, and its operating profit for the year decreased as compared to 2017 due to lower than expected revenues in November and December.


With that in mind, how do you foresee 2019?

Our goal has always been to manage the Group with a long-term perspective, pioneering new technologies and delivering solutions of excellent quality that are impressive technically, from an end-user standpoint. We have always been keenly focused on areas in which we are critical to the business of our customers.

While we will continue to transform the Group to better position it for the future, we do not expect a material improvement in our financial outlook for 2019. As part of the transformation, we will continue to improve our Digital TV segment’s performance by focusing our innovation efforts on new promising initiatives and by further optimizing our structural profitability.

For Kudelski Security, we will further develop our high value-added activities, including managed security services, our innovative product portfolio and our Blockchain Center of Excellence.

Kudelski IoT will continue to develop its multi-industry secure IoT platform and will expand its collaboration with existing and future partners to address effectively high potential IoT market segments.

The Group has recently launched an initiative to improve the efficiency of SKIDATA and to restore both profitability and growth, setting a strong foundation for positive developments for Public Access in the future.

In 2017, the Group initiated an important transformation effort that spanned across all its businesses. What is the status today?

Our transformation efforts have been focused on four key goals: (1) reduce our cost to serve, (2) get closer to our key customers, (3) maintain our pace of innovation and (4) improve our delivery excellence.

Our significant efforts have already helped the Group to better focus on new promising initiatives, while improving the structural profitability of its existing core business. The real challenge with transformation is to be able to maintain momentum in innovation while simultaneously downsizing declining activities.

This task is very challenging, but with the help and the support of our teams around the world, we have been able to make it happen while continuing to serve our clients with the highest standards of service and quality. I would like to take this opportunity to thank our employees for their high level of commitment and professionalism in the face of an increasingly challenging market environment.

Will your transformation efforts continue in 2019?
Our transformation is not over, but our focus has evolved. In 2017 and 2018, our priorities largely involved reducing our cost base. For 2019, we will increasingly focus on positioning our offering to serve new market opportunities more effectively.

We will also focus on better leveraging the synergies between entities of the Group. Technology developments, location mix, talent and capabilities management are aspects that share common needs and attributes across our Group companies. We intend to go further in reinforcing the entrepreneurial spirit within the Kudelski Group.

What are the main trends in Digital T? And how does the Group plan to address them?
Classical pay-TV remains under pressure from new OTT players, including the digital Internet giants. However, most pay-TV network operators have been able to find solutions to stay competitive in this market. We must not forget that this market includes the largest catalogue of premium content in the world and the largest subscriber footprint.

In such an environment, we see a growing number of collaborations between traditional pay-TV operators and new Internet platforms, offering the Kudelski Group opportunities to link the two worlds. The experience of the Group and its reputation of sustainability in the premium content creation and distribution industry for more than 65 years are core assets.

In such a competitive landscape, we see continued investments being made by pay-TV network operators to better compete and adopt new technologies developed by the Group, such as our end-to-end security solution or our Insight business performance platform.

The pure OTT market is also an opportunity for the Kudelski Group, since several of our new solutions have been specially optimized to serve this market, including our end-to-end security solution, watermarking solutions, advanced user experience platform and Insight.

What are the priorities for Public Access?
Over the last decade, SKIDATA has proven its capability to deliver continued revenue growth with sustainable profitability. From that perspective, 2018 was an exception, which has triggered the need to transform SKIDATA to better address future opportunities. The main priority for 2019 and beyond is to restore SKIDATA’s profitability, cash flow generation and growth in a sustainable way.

Innovation is also key for building the future of SKIDATA. We will continue to release high-value solutions that will allow our customers to increase their revenues in a significant way.

How is the Cybersecurity business developing, especially with regards to new product launches?
We see, from an industry standpoint, that major breaches still happened in 2018 and that large enterprises and governments are not well-equipped to detect, diagnose and respond.

When the Group decided to enter the US cybersecurity market with the acquisition of two companies that were active primarily in the business of technology consulting and resale, the goal was to get access to the largest security market in the world. This strategy allowed us to quickly gain a significant distribution channel to sell our high value-added proprietary solutions and services. Our focus for Kudelski Security is to develop new proprietary solutions that will deliver significant margins for the future. New products launched in 2018 include the Secure Blueprint and Managed Secure Enclaves, in addition to the advanced cyber fusion centers in Cheseaux (Switzerland) and Phoenix (USA), which gained significant traction in the market.

In IoT, could you elaborate on the strategy and the success to date?
IoT security is a natural move for the Kudelski Group, since IoT security can fully benefit from the experience of the Group in Digital TV and cybersecurity. We combine the embedded IoT client’s security and real time secure backend management with our cyber security expertise for a smooth integration of IoT devices within a securely managed IT environment.

In 2018, the priority for Kudelski IoT was to develop its secure proprietary IoT platform and to build partnerships with leaders in high potential IoT industry verticals. In 2019, we will continue in the same direction and add new strategic partners in industries where security is critical.

Our key differentiation in this sector is to provide a secure IoT management platform, combined with the diagnosis, certification and response capabilities made possible by our advanced labs, with the ability to manage the entire security life cycle of a given device.

What will be the distribution to shareholders for fiscal year 2018?
After having carefully reviewed the 2018 performance and the future outlook, the Board of Directors has decided to propose a distribution, as a return of capital, of CHF 0.10 per bearer share (CHF 0.01 per registered share).

What is the outlook for 2019?
For 2019, the Group expects a stable to slightly higher revenue base and an EBITDA ex restructuring costs in the range of USD 80 to 95 million.

The traditional pay-TV business is expected to stabilize in 2019. Cybersecurity is expected to continue adding new clients, expanding geographical coverage and, as a result, increasing profitability by leveraging strategic offerings and high value-added services. The Group will also continue to invest in the IoT domain. For Public Access, our focus will be on improving cash flows and restoring a higher level of profitability.

On behalf of the Board of Directors, I would like to take the opportunity to thank our shareholders, employees, clients and partners for contributing to the long-term success of the Group and for supporting us especially during these challenging times.

 

Published in the 2018 Annual Report