Chairman’s Interview

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

 

What are your perspectives on 2019 ?

2019 was a challenging year. The Group’s overall financial performance did not reach the targets that

we set at the beginning of the year, driven in particular by lower revenues and profitability at SKIDATA and weakness in Kudelski Security’s resale business in the US. Nevertheless, as part of the ongoing transformation of the Group, we successfully implemented some major changes in 2019 that continue the positive momentum across our business segments.

Nowhere can the effects of our transformation be seen better than with our Digital TV business, which emerged from the transformation with a streamlined organization and management structure that is better able to adapt to fast-changing market dynamics and to address new growth opportunities. In 2019, Digital TV improved its profitability, both in absolute and percentage terms compared to 2018. This increase in profitability was achieved in spite of the challenging market conditions in Asia and Latin America, where we experienced declining revenues.

2019 saw new leadership at both SKIDATA and Kudelski Security as well as other key changes among Group management. These changes are part of the overall effort to streamline the Group’s management structure, stimulate synergies between business units and support functions, increase the dynamism among the teams and improve the performance of each segment, both at the top and bottom lines.

In the fourth quarter of 2019, we made the additional decision to accelerate our transformation efforts at SKIDATA and Kudelski Security in order to drive faster change. Although this decision negatively impacted our 2019 financial results, due to restructuring charges and other impacts, we firmly believe that the decision we made is critical to securing the Group’s position in 2020 and beyond.

With this in mind, how do you foresee 2020 ?

We expect to see performance improvements in 2020 across all of our segments, reflecting the full effect of the transformation we implemented in 2018 and 2019. The key focus areas are targeted growth initiatives and increased synergies between the Group’s activities. That said, the Group must remain vigilant in the face of the highly volatile crisis involving the coronavirus (COVID-19), which is having a global economic impact of unknown proportions. The Group is monitoring the situation closely and will look to quickly adapt to market developments, on a segment-by-segment and region-by-region basis.

What types of collaboration are you expecting between Group entities to improve financial performance in 2020 ?

The Group has implemented incentives that are designed to reward collaborative product and sales efforts between business units. This effort is important not only to unlock synergies between our business units but also to unlock new market opportunities for the Group’s product portfolio. The first results are already visible today, with the closing of new deals with some of our key Digital TV customers that include managed cybersecurity services provided by Kudelski Security. We expect a similar joint offering to be launched soon between SKIDATA and Kudelski Security in order to address cyber threats in the public access market.

What are the key trends and developments in the Digital TV business ?

We expect the revenue erosion of the past few years in the Digital TV business to taper off in 2020. This is due to the resilience of many of our key pay-TV customers in advanced economies and to the success of our new product offerings. One of our most promising new solutions is Insight, our advanced analytics platform for pay-TV operators, which provides high value-added recommendations to reduce churn and optimize subscription upselling.

The Digital TV management team is also developing a medium- and long-term growth strategy for our key new market opportunities, including OTT and sports entertainment solutions.

What are the priorities for Public Access ?

The first priority for Public Access is to improve its profitability and cash flow generation. In order to drive these improvements, we are fundamentally transforming SKIDATA’s management structure and its operations with the goals of enhancing organizational agility and better realizing economies of scale. From a Group perspective, we are also looking to achieve important synergies between SKIDATA and our other business units and support functions, both to take advantage of cross-selling opportunities and to realize important cost savings.

What is your analysis of the Group’s cyber-security business ? How are its new product offerings developing ?

Kudelski Security’s development strategy remains on track, as we have seen the managed security business in EMEA gaining strong traction and the high added-value solutions performing well in the US. The performance of the technology resell business in the US has been more challenging, due to a very competitive market and the underlying trend in the industry to migrate on-premise IT to the cloud.Going forward, we expect to grow the overall business of Kudelski Security through the positive development of high added-value products and services.

Where do we stand with the IoT growth initiative ?

The IoT center of excellence continues to develop its secure IoT platform and has commenced commercial delivery of its IoT solutions to partners and clients in support of a growing number of verticals. We expect volume delivery of Kudelski IoT- enabled devices to grow and to drive revenue growth for this business.

What is the proposed distribution to shareholders for fiscal year 2019 ?

Taking into account the Group’s 2019 results and its 2020 profitability outlook, the Board of Directors is proposing a CHF 0.10 cash distribution per bearer share for approval at the 2020 Annual Shareholders’ Meeting. It is proposed that CHF 0.05 of this cash distribution be treated as a return of capital.

What is the outlook for 2020 ?

For 2020, the Group expects the revenue erosion in the Digital TV segment to taper off, as the subscriber churn at established pay-TV operators appears to be slowing down and the Group expects to continue to benefit from multiyear contracts with large pay-TV customers. The Group also expects to drive further revenue opportunities with its clients from new solutions that are to be delivered from Q1 2020.

With Kudelski Security, we continue to drive the development of higher value product lines and expect continued growth of gross margins in this business. We expect to continue adding new clients, expanding geographical coverage and increasing profitability by leveraging strategic offerings and high-value products and services.

Following three years of substantial investments, our secure IoT platform is now available for commercial deployment. In 2020, we expect to see strong growth in the IoT segment.

In the Public Access segment, SKIDATA is implementing measures that are expected to result in a material reduction of operating expenses. These measures are expected to restore an EBITDA margin level in line with prior years.

Overall, for 2020, the Group expects EBITDA to be between USD 70 and 90 million and positive net income.

 

Published in the 2019 Annual Report