Letter to Shareholders

What were the highlights for the Group in 2020?

2020 was a remarkable year that challenged the Group in unprecedented ways. The COVID-19 crisis significantly disrupted most of our business activities, with project delays and cancellations resulting in lower total revenues. At the same time, we were able to leverage the business transformation efforts initiated by the Group in 2017. Through proactive measures, we were actually able to improve our profitability and cash flow generation in 2020, especially during the second half of the year. Overall, 2020 was a significant stress test for the Group. I am proud to say that we were not only able to pass this test, but we emerged as a stronger organization, highlighting the agility and adaptability that our transformation efforts made possible. From that perspective, we are seizing the opportunity from this crisis to accelerate our innovation activities in order to better position the Group for the post-COVID world.

What has been the impact of the COVID-19 pandemic on the Group in 2020 and what does it mean for the future?

As a result of the COVID-19 crisis, 2020 was a uniquely unpredictable year. When the first lockdowns were imposed, our entire organization was able to transition within days to a work-from-home environment – without disruption to our business operations. More importantly, our ability to maintain business continuity meant that there was no disruption for our clients and partners. At the beginning of the crisis, we saw reduced levels of new business activity, largely due to the lockdown restrictions and the economic uncertainty that led some clients to delay projects. However, we worked hard to boost our capabilities to digitally interact with our clients and customer prospects, and by the second half of the year, we were able to seize upon some new opportunities. In parallel, we were also able to innovate for the COVID and post-COVID times, introducing some compelling solutions across our product lines to better address new customer needs. We are excited to see positive traction for these solutions in the market.

With this in mind, what do you expect for the Group in 2021?

2021 does not look to be a return to “business as usual”, even if approval of vaccines suggests that we can see the light at the end of the tunnel. Our expectation is that the highly uncertain and volatile business environment will continue for most of 2021. As a result, we are working to further enhance our flexibility in order to ensure that we are able to better address demand fluctuations, both up and down. The positive dynamics within our teams should continue to improve our ability to address market trends. We expect our Digital TV segment to remain strong in terms of revenues and profitability and that recent positive trends at our Kudelski Security and IoT businesses will continue. Due to the nature of its business, we expect our Public Access segment to remain volatile during the continued COVID crisis. Overall, for the Group, we expect to further improve our profitability, with overall revenues higher than in 2020. An additional important benefit of the ongoing transformation has been better alignment among the different business segments of the Group, with a special focus on developing and marketing solutions across the four segments. This enables each business to expand beyond its traditional client base. It also enables increased innovation, which benefits our existing clients and attracts new prospects through our partner segment. In 2020, we were able to win clients for a combined offering between our Kudelski Security and Digital TV businesses, and based on positive customer feedback, we expect continued momentum for these solutions as well as further collaborative efforts among our Digital TV, Kudelski Security, IoT and Public Access businesses.

What are the main trends for Digital TV? How has the pandemic affected this sector?

The appetite for quality content increased in 2020 due to COVID-related restrictions and lockdowns. However, the pandemic negatively impacted the availability of sports content and reduced TV advertising revenues. While the number of distribution channels for content increased due to the multiplication of OTT offerings, the business of Digital TV operators generally remained stable. During these challenging times, our Nagra Insight platform has enabled operators to manage subscribers dynamically and proactively in order to optimize retention and revenue streams. Our joint solution with Samsung, TVKey Cloud, has also offered a low-touch approach for Digital TV operators to onboard new clients. As evidence of the demand for quality content, piracy increased during the pandemic, due to the combination of a strong appetite for premium content and some extra free time for the hackers. This has kept our anti-piracy teams busy.

Are its physical access solutions able to meet new pandemic-related requirements?

Of all our business segments, Public Access has been impacted the most by the pandemic. This is not a real surprise due to the nature of its business. In 2020, the challenge was to simultaneously execute on the transformation of its business while adapting its business operations in response to the COVID crisis.
During 2020, flexibility has been a very high priority in order to ensure that our Public Access business adapts to the fast-changing environment. As testimony to the success of our efforts, while Public Access revenues were lower in 2020 compared to 2019, the segment’s profitability and cash flow generation improved. We have also taken the opportunity to innovate, launching a series of innovations that allow consumers to use our products and solutions without physical contact. We have also introduced COVID-related solutions that are integrated into access gates, such as active crowd management for events that can help enforce COVID test or vaccine requirements and automatic body temperature controls.

How are the new offerings for Cybersecurity developing?

Our Kudelski Security business has continued to shift to higher value-added solutions and services. One of the most visible success stories from 2020 has been the 23% growth of the gross margin of this business, which was fueled by the 57% growth of our European business.
The pandemic has highlighted for the world that IT infrastructure is a critical resource that must be protected. We have also seen a massive acceleration in the migration to the cloud and an associated growth of our Managed Security Services. Our Managed Security Service offering has continued to receive excellent recognition from industry analysts, such as Gartner and Forrester. At the same time, these trends have negatively impacted the demand for on-premise security hardware, especially in the US market during the first half of the year, resulting in lower revenues from our technology resale business.

How is the IoT growth initiative developing?

Under the new leadership of Hardy Schmidbauer, Kudelski IoT has seen a new dynamic with the acceleration of KeyStream, our secure IoT platform, and the launch of our new end-to-end IoT solution for asset tracking, which is initially targeted at vehicle management for car dealers. In 2020, we further developed our partnerships with key players in the industry, like Amazon for Alexa certification, in order to develop new business opportunities for future growth. As a result of these initiatives, we expect that our IoT unit will accelerate its expansion in 2021.

What will be the main growth drivers for the Group in the future?

In 2020, we demonstrated that the Group is able to adapt quickly to challenging environments and to proactively adapt our business operations and processes. We are not only better prepared to face the uncertainties of the pandemic, but we have also adapted our products and solutions to take advantage of new opportunities that have emerged due to the COVID crisis. The key driver for a sustainable improvement of the Group’s margins will be the growth of high value-added solutions, products and services in all four of our business units.

How do you expect the Group to move forward once the pandemic has been overcome?

Once the pandemic subsides, we expect there to be a recovery in the business activities that were negatively affected by the COVID crisis. By capitalizing on the investments the Group has made in new technologies and solutions designed to help impacted customers get “back to normal” faster, we expect to benefit from these trends.SKIDATA customers and Digital TV solutions for sports offerings are the most obvious targets for such a post-COVID recovery. The current crisis has also shown that the Group can work efficiently and effectively by leveraging virtual communications and other IT technologies. We will not only continue to use these after the crisis, but we will look to improve the capabilities of these technologies and make them more intuitive and secure in support of our daily operations.

What will be the distribution to shareholders for fiscal year 2020?

Taking into account the Group’s 2020 results, especially the strong free cash flow generation, and the Group’s outlook for 2021, the Board of Directors is proposing a CHF 0.10 cash distribution per bearer share for approval at the 2021 Annual General Meeting of Shareholders. It is proposed that CHF 0.05 of this cash distribution be treated as a return of capital.

Do you have any closing thoughts ?

In the name of the Board of Directors and the Group’s management, I would like to take the opportunity to thank our teams who have worked very hard during 2020 to address the unprecedented challenges that we faced as a result of the pandemic. Despite the strong headwinds, our teams have performed well to ensure business continuity, proactively manage business transformation and to invest in addressing new opportunities that have emerged from the COVID crisis. Our thoughts also go out to our customers, partners and shareholders. We thank you for the support you have provided during these challenging times.

 

André Kudelski, Chairman and Chief Executive Officer

Published in the Kudelski Group 2020 Annual Report