“NDS continues to invest to insure that our customers will have the solutions they will need to take advantage of the new opportunities presented by augmenting broadcast delivery with the increasingly ubiquitous broadband IP delivery of entertainment.”
 | Announcement |
KEY NON-FINANCIAL MEASURES
| | | For the Three Months Ended December 31, | | For the Six Months Ended December 31, | |
| | | 2007 | | 2006 | | 2007 | | 2006 | |
| | | | | | | | | | |
Smart card deliveries (in millions) | | | | | | | | | | | | | |
| Quantity delivered in period | | | 8.9 | | | 6.3 | | | 16.3 | | | 13.0 | |
| | | | | | | | | | | | | | |
Authorized cards (in millions) | | | | | | | | | | | | | |
| Net additions | | | 4.1 | | | 3.3 | | | 7.3 | | | 4.9 | |
| Number of authorized cards, end of period | | | 82.7 | | | 69.9 | | | 82.7 | | | 69.9 | |
| | | | | | | | | | | | | | |
Middleware clients deployed (in millions) | | | | | | | | | | | | | |
| Net additions | | | 6.5 | | | 5.5 | | | 14.6 | | | 8.6 | |
| Cumulative deployments, end of period | | | 76.4 | | | 50.2 | | | 76.4 | | | 50.2 | |
| | | | | | | | | | | | | | |
DVR clients deployed (in millions) | | | | | | | | | | | | | |
| Net additions | | | 1.6 | | | 1.1 | | | 3.1 | | | 1.8 | |
| Cumulative deployments, end of period | | | 10.4 | | | 5.3 | | | 10.4 | | | 5.3 | |
| | | | | | | | | | | | | | |
Employees | | | | | | | | | | | | | |
| Full-time equivalents, end of period | | | | | | | | | 3,820 | | | 3,212(1 | ) |
________________
| (1) | Excludes 136 employees of Jungo Limited, which we acquired on December 31, 2006. |
KEY DEVELOPMENTS
| | · | NDS and DIRECTV, the largest satellite pay-TV operator in the world, announced that they have extended the term of their relationship. NDS has been contracted to continue to provide conditional access technology to DIRECTV U.S. and DIRECTV Latin America until June 2013. |
| | · | NDS and Measat Broadcast Network Systems, owner and operator of Malaysian pay-TV service Astro, have signed contracts for the licensing and deployment of the NDS VideoGuard® conditional access system for Astro’s direct-to-home pay-TV services. Astro plans to progressively migrate its satellite pay-TV services to the VideoGuard system. Astro has been deploying NDS’ Mediahighway® middleware as its operating system for its set top boxes since 1999. |
| | · | NDS announced that Arcor, the second largest telecommunications provider in Germany, has selected NDS VideoGuard system to secure its new IPTV service. Arcor-Digital TV will initially be available in 51 German cites and communities, offering digital TV and advanced entertainment services such as video on demand (VOD). |
| | · | NDS has been selected by ASTER, a leading provider of media and communication services in Poland, to provide the technology for ASTER’s next generation cable TV service. This new end-to-end solution from NDS replaces digital technology already deployed by ASTER. It will secure ASTER’s television platform going forward and allow ASTER to offer new services to its subscribers, including integrated digital video recorders and Poland’s first VOD service. |
FINANCIAL REVIEW
Total revenue for the three-month period ended December 31, 2007 was $214.9 million, an increase of 30% over the corresponding period of the previous fiscal year. For the six-month period ended December 31, 2007, revenue was $419.8 million, an increase of 28% over the corresponding period of the previous fiscal year.
| Announcement |
Revenue from conditional access increased by 22% and 26% during the three- and six-month periods ended December 31, 2007, respectively, as compared to the three- and six-month periods ended December 31, 2006. The increases were principally due to recognition of a portion of security services revenue previously deferred as certain revenue recognition criteria were satisfied during the three- and six-month periods ended December 31, 2007. Additionally, conditional access revenue rose due to the growth of the subscriber base of our customers, as well as an increase in customers and a higher volume of smart cards delivered to customers. Integration, development and support revenue increased by 1% in the three-month period ended December 31, 2007 and decreased by 24% in the six-month period ended December 31, 2007 as compared to the three- and six-month periods ended December 31, 2006, respectively. The recognition of revenue from new customers and from the delivery of enhancements to several of our major customers is dependent on the timing of satisfaction of all revenue recognition criteria; therefore this component of revenue may fluctuate from period to period. The net decline in integration, development and support revenue during the six-month period ended December 31, 2007 was a consequence of the recognition and delivery in the prior year six-month period of conditional access, EPG and middleware technologies to TataSky, which commenced broadcasting in India in the first quarter of fiscal 2006. License fee and royalty revenue increased by 24% and 21% in the three- and six-month periods ended December 31, 2007, respectively, as compared to the three- and six-month periods ended December 31, 2006, principally resulting from higher conditional access revenue, as noted above, and EPG royalties. In addition, middleware royalties increased due to an increase in the number of middleware clients deployed during the three- and six-month periods ended December 31, 2007 as compared to the corresponding periods of the prior fiscal year. The increase in revenue from new technologies of 78% and 66% in the three- and six-month periods ended December 31, 2007, respectively, compared to the three- and six-month periods ended December 31, 2006, was principally due to higher revenue from our DVR technologies and advanced middleware, IPTV, gaming applications and residential gateway devices.
Cost of goods and services sold increased by 33% and 22% during the three- and six-month periods ended December 31, 2007, respectively, as compared to the three- and six-month periods ended December 31, 2006, principally due to an increase in the number of our employees working on development, integration and support activities, as well as increased royalties paid to third parties for the use of their technologies and higher deliveries of smart cards during the periods.
Our main operating expenses are employee costs (including the cost of equity-based awards), facilities costs, depreciation and travel costs. Our main operating expenses have increased primarily due to a higher number of employees, facilities expenses and legal costs. Employee costs were approximately 25% and 29% higher during the three- and six-month periods ended December 31, 2007, respectively, as compared to the corresponding periods of the prior fiscal year.
Research and development costs increased by 11% and 27% for the three- and six-month periods ended December 31, 2007, respectively, as compared to the three- and six-month periods ended December 31, 2006, principally as a result of higher employee headcount due to an increased number of projects. The increase in the employee costs in the six-month period ended December 31, 2007 was partially offset by a $6.7 million grant from the French government as a consequence of our being engaged in certain eligible research projects. In the six-month period ended December 31, 2006 we received a similar grant of $5.5 million. Sales and marketing expenses increased by 51% and 37% in the three- and six-month periods ended December 31, 2007, respectively, as compared to the three- and six-month periods ended December 31, 2006, 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 38% in the six-month period ended December 31, 2007 as compared to the six-month period ended December 31, 2006, largely due to higher legal expenses, equity compensation costs, business development costs and facilities and infrastructure costs. During the three-month period ended December 31, 2007, general and administrative expenses increased by 62% as compared to the three-month period ended December 31, 2006, principally due to increased legal expenses, as well as equity compensation costs and facilities and infrastructure costs.
As a result of the factors outlined above, and, in particular, the increase in conditional access and new technologies revenue, operating income was $49.5 million, or 23.0% of revenue, for the three-month period ended December 31, 2007, compared to $37.4 million, or 22.7% of revenue, for the three-month period ended December 31, 2006. Operating income was $107.8 million, or 25.6% of revenue, for the six-month period ended December 31, 2007, compared to $82.0 million, or 24.9% of revenue, for the six-month period ended December 31, 2006.
We estimate that the weaker U.S. dollar increased our revenue by approximately $17 million and increased our operating income by approximately $11 million in the six-month period ended December 31, 2007 compared to what would have been achieved had foreign exchange rates been consistent with those prevailing in the corresponding period of the prior fiscal year. Similarly, for the three-month period ended December 31, 2007, we estimate that the weaker U.S. dollar increased our revenue by approximately $9 million and our operating income by approximately $3 million.
| Announcement |
As of December 31, 2007, we had cash and cash equivalents totaling $663.5 million. Our accumulated cash is being held with the intention of using it for the future development of the business and there are currently no plans to pay any dividends to shareholders. During the six-month period ended December 31, 2007, cash from operating activities was $75.1 million and we paid a net $10.5 million in respect of business acquisitions. We had a net inflow of cash and cash equivalents of $64.6 million in the six-month period ended December 31, 2007, compared to a net outflow of cash and cash equivalents before purchases of short-term investments of $26.1 million in the six-month period ended December 31, 2006.
FOREIGN EXCHANGE RATES
Average foreign exchange rates used in the year-to-date results are as follows:
| | | For the Six Months Ended December 31, | |
| | | 2007 | | 2006 | |
| | | | | | |
| U.K. Pounds Sterling/U.S. Dollar | | $ | 2.03 | | $ | 1.89 | |
| Euro/U.S. Dollar | | $ | 1.41 | | $ | 1.28 | |
| Israeli Shekel/U.S. Dollar | | $ | 0.25 | | $ | 0.24 | |
| Announcement |
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-television 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.
CONTACT
NDS Group plc Yael Fainaro (Investor Relations) Tel: +44 20 8476 8287 | Breakaway Communications U.S. Kelly Fitzgerald Tel: +1 212 616 6006 |
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 Tuesday, January 29, 2008.
Dial-in
| U.S. toll free: | 1 866 832 0717 |
| U.K. freephone: | 0800 073 8967 |
| International dial-in: | +44 (0)1452 562 716 |
Replay (available for seven days)
| U.S. toll free replay: | 1 866 247 4222 |
| U.K. replay: | 0845 245 5205 |
| International replay: | +44 (0)1452 550 000 |
| Replay passcode: | 28132973# |
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 Tuesday, January 29, 2008. Please register for the event now by clicking on the “Second Quarter Results 2008” 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 January 30, 2008.
| Announcement |
NDS Group plc
Unaudited Consolidated Statements of Operations
| | | For the three months ended December 31, | | For the six months ended December 31, | |
| (in thousands, except per-share amounts) | | 2007 | | 2006 | | 2007 | | 2006 | |
| | | | | | | | | | |
Revenue: | | | | | | | | | |
| Conditional access | | $ | 119,411 | | $ | 98,184 | | $ | 240,994 | | $ | 191,031 | |
| Integration, development & support | | | 12,844 | | | 12,683 | | | 23,753 | | | 31,095 | |
| License fees & royalties | | | 29,061 | | | 23,450 | | | 58,005 | | | 47,800 | |
| New technologies | | | 51,382 | | | 28,922 | | | 93,840 | | | 56,421 | |
| Other | | | 2,250 | | | 1,823 | | | 3,232 | | | 2,877 | |
| | | | | | | | | | | | | | |
| Total revenue | | | 214,948 | | | 165,062 | | | 419,824 | | | 329,224 | |
| | | | | | | | | | | | | | |
| Cost of goods and services sold | | | (81,486 | ) | | (61,118 | ) | | (149,942 | ) | | (123,353 | ) |
| | | | | | | | | | | | | | |
Gross margin | | | 133,462 | | | 103,944 | | | 269,882 | | | 205,871 | |
| | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
| Research & development | | | (48,040 | ) | | (43,309 | ) | | (99,051 | ) | | (77,975 | ) |
| Sales & marketing | | | (14,042 | ) | | (9,314 | ) | | (23,662 | ) | | (17,291 | ) |
| General & administration | | | (18,538 | ) | | (11,411 | ) | | (32,758 | ) | | (23,688 | ) |
| Amortization of other intangibles | | | (3,332 | ) | | (2,510 | ) | | (6,615 | ) | | (4,927 | ) |
| | | | | | | | | | | | | | |
| Total operating expenses | | | (83,952 | ) | | (66,544 | ) | | (162,086 | ) | | (123,881 | ) |
| | | | | | | | | | | | | | |
Operating income | | | 49,510 | | | 37,400 | | | 107,796 | | | 81,990 | |
| | | | | | | | | | | | | | |
| Interest income | | | 7,584 | | | 6,500 | | | 14,956 | | | 12,512 | |
| | | | | | | | | | | | | | |
| Income before income tax expense | | | 57,094 | | | 43,900 | | | 122,752 | | | 94,502 | |
| | | | | | | | | | | | | | |
| Income tax expense | | | (16,725 | ) | | (13,609 | ) | | (36,089 | ) | | (29,123 | ) |
| | | | | | | | | | | | | | |
Net income | | $ | 40,369 | | $ | 30,291 | | $ | 86,663 | | $ | 65,379 | |
| | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | |
| Basic net income per share | | $ | 0.70 | | $ | 0.53 | | $ | 1.50 | | $ | 1.15 | |
| Diluted net income per share | | $ | 0.68 | | $ | 0.52 | | $ | 1.48 | | $ | 1.13 | |
| Announcement |
NDS Group plc
Consolidated Balance Sheets
| (in thousands, except share amounts) | | As of December 31, 2007 (Unaudited) | | As of June 30, 2007 (Audited) | |
| | | | | | |
ASSETS Current assets: | | | | | |
| Cash and cash equivalents | | $ | 663,545 | | $ | 592,750 | |
| Accounts receivable, net | | | 139,845 | | | 134,624 | |
| Accrued income | | | 47,725 | | | 40,605 | |
| Inventories, net | | | 67,944 | | | 54,133 | |
| Prepaid expenses | | | 21,541 | | | 19,415 | |
| Other current assets | | | 4,264 | | | 3,926 | |
| | | | | | | | |
| Total current assets | | | 944,864 | | | 845,453 | |
| | | | | | | | |
| Property, plant & equipment, net | | | 50,806 | | | 54,801 | |
| Goodwill | | | 132,257 | | | 124,614 | |
| Other intangibles, net | | | 61,548 | | | 63,080 | |
| Other non-current assets | | | 72,076 | | | 56,905 | |
| | | | | | | | |
Total assets | | $ | 1,261,551 | | $ | 1,144,853 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: | | | | | | | |
| Accounts payable | | $ | 25,672 | | $ | 22,110 | |
| Deferred income | | | 83,649 | | | 75,777 | |
| Accrued payroll costs | | | 30,611 | | | 31,186 | |
| Accrued expenses | | | 37,749 | | | 37,473 | |
| Income tax liabilities | | | 29,432 | | | 17,693 | |
| Other current liabilities | | | 21,336 | | | 18,287 | |
| | | | | | | | |
| Total current liabilities | | | 228,449 | | | 202,526 | |
| | | | | | | | |
| Deferred income | | | 133,629 | | | 157,517 | |
| Other non-current liabilities | | | 56,821 | | | 46,537 | |
| | | | | | | | |
Total liabilities | | | 418,899 | | | 406,580 | |
| | | | | | | | |
| Commitments and contingencies | | | | | | | |
Shareholders’ equity: | | | | | | | |
| Series A ordinary shares, par value $0.01 per share: 16,110,056 and 15,718,904 shares outstanding as of December 31, and June 30, 2007, respectively | | | 161 | | | 157 | |
| Series B ordinary shares, par value $0.01 per share: 42,001,000 shares outstanding as of December 31, and June 30, 2007, respectively | | | 420 | | | 420 | |
| Deferred shares, par value £1 per share: 42,000,002 shares outstanding as of December 31, and June 30, 2007 | | | 64,103 | | | 64,103 | |
| Additional paid-in capital | | | 578,652 | | | 563,388 | |
| Retained earnings | | | 142,769 | | | 56,106 | |
| Other comprehensive income | | | 56,547 | | | 54,099 | |
| | | | | | | | |
Total shareholders’ equity | | | 842,652 | | | 738,273 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 1,261,551 | | $ | 1,144,853 | |
| Announcement |
NDS Group plc
Unaudited Consolidated Statements of Cash Flows
| | | For the six months ended December 31, | |
| (in thousands) | | 2007 | | 2006 | |
| | | | | | |
Operating activities: | | | | | |
| Net income | | $ | 86,663 | | $ | 65,379 | |
| | | | | | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Depreciation | | | 11,360 | | | 9,120 | |
| Amortization of other intangibles | | | 6,615 | | | 4,927 | |
| Equity-based compensation | | | 8,492 | | | 4,378 | |
| Other | | | 390 | | | 399 | |
| Change in operating assets and liabilities, net of acquisitions: | | | | | | | |
| Inventories | | | (13,811 | ) | | (11,371 | ) |
| Receivables and other assets | | | (29,020 | ) | | (38,168 | ) |
| Deferred income | | | (16,016 | ) | | 31,465 | |
| Accounts payable and other liabilities | | | 20,396 | | | (6,730 | ) |
| | | | | | | | |
| Net cash provided by operating activities | | | 75,069 | | | 59,399 | |
| | | | | | | | |
Investing activities: | | | | | | | |
| Capital expenditure | | | (6,700 | ) | | (10,120 | ) |
| Short-term investments, net | | | ─ | | | (18,986 | ) |
| Business acquisitions, net of cash acquired | | | (10,537 | ) | | (82,456 | ) |
| | | | | | | | |
| Net cash used in investing activities | | | (17,237 | ) | | (111,562 | ) |
| | | | | | | | |
Financing activities: | | | | | | | |
| Issuance of shares | | | 6,736 | | | 7,035 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 64,568 | | | (45,128 | ) |
| | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 592,750 | | | 320,636 | |
| Currency exchange movements | | | 6,227 | | | 4,550 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 663,545 | | $ | 280,058 | |
