Exhibit 99
NDS Group plc
Transcript of conference call held on November 1, 2005
Presenters
----------
o Dr Abe Peled
o Mr Alex Gersh
Operator: Thank you for standing by and welcome to the NDS first quarter
results conference call. At this time all participants are in a listen-only
mode. There will be a presentation followed by a question and answer
session, at which time if you would like to ask a question, you will need
to press *1 on your telephone keypad. I must advise you that this call is
being recorded today, Tuesday 1st November, 2005. On this call we will make
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 assumption 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
economics, business, competitive market, and regulatory factors. For more
detailed information about these and other factors that could affect future
results, is contained in our filings for the Securities and Exchange
Commission. The forward looking statements included in this call are made
only as of the date of this call, and we do not make any obligation to
publicly update any forward looking statements to reflect subsequent events
or circumstances, except as required by law.
I would now like to hand the conference over to your speaker today, Dr Abe
Peled. Please go ahead sir.
Abe Peled: Good morning, good afternoon, wherever you are, thank you for
joining us on our Q1 FY06 conference call. I would hope that most of you
have had the chance to look at our press release. NDS enjoyed another very
strong quarter, particularly we are pleased with the fact that our long
term strategy of investing in new technologies and middleware is starting
to show the results that we were hoping for, of a better revenue mix,
moving increasingly towards software, which can be translated into an
expansion of margins, and while, I think where we, as Alex will talk about
later, you know we don't expect every quarter to have this operating
margin, we are well on our way to our target of 20% operating margins.
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In the quarter we have seen another two of our customers adopt the XTV(TM)
PVR technology for their systems, that brings to eleven the number of NDS
pay-TV customers that have adopted our XTV(TM) technology, and furthermore
none of our pay-TV customers that use conditional access have, in cases
where the PVR was up competitively, have selected NDS. I guess the only
exceptions are the cable Scientific Atlanta PVR, but outside the United
States that's certainly the case.
We're particularly pleased with SkyLife which as you know has been a very
strong account for us, and we expect to see them also pursuing their PVR
quite aggressively.
Again in our middleware area we're making good progress, both with the
announcement of NDS and Philips that we will have a production launch of
our MHP digital terrestrial receivers, as well as we're solidifying and
expanding our relationship with the MediaHighway customers. Currently on
DIRECTV, all new standard set-top boxes are shipping with NDS middleware,
and we have obviously continued to download to all of the boxes that are
capable of receiving our middleware, and that should have been completed in
this quarter.
As Alex will explain, we take the revenue credit, we recognise the revenue
as we get detailed reports of how many boxes have been downloaded. This
quarter we have already seen a substantial impact from the end of the last
quarter as well as the previous quarter downloads, which has reflected
itself in the licence fees and royalties, it brings the total number of
shipped middleware of NDS to $26.7 million, up $18.8 million from the last
quarter, and again we expect to start seeing that number increase rapidly,
and therefore expanding our market share in middleware.
In terms of new contracts, we have won a new pay-TV broadcast in Romania,
showing that our strategy of focusing on Eastern Europe and with our
VideoGuard Express is starting to pay off, and we see considerable
additional interest in that area, in such a system. And indeed our
partnership with Tandberg, Pace Micro Technology and MGt is being received
quite well by the smaller and mid-size cable pay-TV operators, particularly
in Eastern Europe.
I'm also pleased to say that in our new technologies area, particularly on
the gaming side we have done quite well with our first win with Victor
Chandler, one of the leading bookmakers in the UK, which will license NDS's
OpenBet for games. We`ve also made a small acquisition of NT Media,
expanded our ability to develop creative casino games that can be played
both on the internet and on interactive TV, and we expect with the
continuing deregulation of gaming laws in the UK and possibly in other
parts of the continent, this to become a growing area.
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Looking forward, we believe that for the medium term there are several key
trends that clearly will determine our performance in the mid-term, and
they have to do with multi-room penetration; as we see increasingly our
operators focus on expanding their presence in addition to the living room
into other rooms, and they expect the second box average to move in the US
from 2.5 to around 3, and in Europe from 1 to 1.5. We expect PVR
penetration to start strongly and indeed in the US DIRECTV is part of a
mass and very aggressive marketing campaign, and we expect to see that roll
out quite strongly to a large percent of the population over, we expect
over five years to see 100% penetration; in Europe, we would expect to see
50% penetration. Another factor is the high definition. High definition
clearly is well on its way in the United States, but now in Europe we see
substantial effort, crystallised around the world cup launch, and we're
working obviously with BSKyB, Sky Italia, and some of our other customers
on high definition, including by the way in Korea and in China.
Finally we believe that IP-TV, both stand alone in which we have an
increasing number of projects, as well as hybrid satellite and IP systems,
will again drive not only major development work but also future software
revenues and the replacement cycle for set-top boxes that are capable of
accepting both a broadband connection as well as a satellite tuners. We
demonstrated our first such box at IBC in Amsterdam, and the first customer
for that is a satellite operator in Israel in conjunction with the local
telecom operator, Bezeq, who also is a 51% owner, and, you know, but I
think that trend is further confirmed with the acquisition of Easynet in
the UK by BSkyB, which will allow BSkyB to deliver both a hybrid system as
well as deliver its channel package to customers that can only receive IP
and not have a satellite dish, as is doing Viasat for example in Sweden,
where we have developed a system for Viasat where the same channel package
can be also delivered over broadband to customers who don't have a view of
the satellite or don't have access because they live in large buildings.
So we think that these key trends obviously will play a major role in our
medium and long term growth. I would now like to turn it over to Alex who
will take you in some more detail through the numbers, and then we will
open it up for questions. So Alex?
Alex Gersh: Thank you Abe. Good afternoon and good morning everybody. Let
me first hit the highlights and then go through some detail behind some of
the revenue and cost occurrences during the quarter.
Obviously total revenue for the quarter is $145 million, which is an
increase of 2% over first quarter of last year. Operating income $35.7
million, an increase of 41% over the first quarter of 2004. Net income for
the quarter is $27 million, a 54% improvement on the first quarter of last
year.
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And now some detail on the revenue, conditional access revenue decreased by
8%. We have delivered fewer cards this quarter than the first quarter of
last year; 5.5 million cards have been delivered verses 8.9 million in the
first quarter of last year. The biggest reason for this is a lower demand
from DIRECTV as well as last year we were in the process of switching Sky
Italia to the NDS platform, and so there was additional cards delivered
because of that migration, so those are the two reasons for the lower
cards. However, the authorised cards, active authorised cards stand at 58.5
million, verses 47.8 million first quarter of last year. Obviously that
increase offset some of the decrease that we've seen because of the lower
card shipments, and just as important, 88% of our active cards currently
pass the monthly fee for the service, and that is an increase from the
first quarter of last year.
Integration development and support revenue decreased by 18% to $13.8
million. Really there has been no major conditional access system
deliveries in the current quarter. Last year in the first quarter we
recognised some revenue on this migration of Sky Italia to the NDS
platform.
License fees and royalties as Abe just mentioned, up 54% to $24.6 million.
We have recognised revenue on 6.4 million set-top boxes downloaded, DIRECTV
middleware boxes that we've downloaded. We have recognised some of the
boxes were downloaded last year, but we've recognised all of the revenues
this year in the first quarter, obviously as we satisfied ourselves that
the reports that we get from DIRECTV, we've received and so we understood
exactly the revenue recognition that needed to be done, so 6.4 million
set-top boxes we've recognised. Obviously there will be some additional
backlog that will be recognised in Q2 for the boxes that have already been
downloaded and are currently being downloaded.
As Abe said as of September we estimated an accumulated number of 26.7
million set-top boxes containing NDS middleware have now been shipped.
New technology has increased by 23% percent in first quarter of 2006, to
$20.9 million, and again, PVR, Synamedia, interactive infrastructure and
gaming applications all contributed to this increase.
Now onto the costs, and let me first talk about gross margin. Gross margin
stands at 58.6% verses 58% in Q1 of 2005. Now I'm going to spend a little
bit of time here, because I need to explain some different treatment of
certain costs that we've done first quarter of this year. In January of
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this year we have introduced a new time reporting system, and we have now
been able to more precisely allocate time and cost of our technical staff
between operations, which shows up in cost of sales, and R&D which of
course shows in our operating expenses. Now in terms of definition, the
time and cost incurred on customer project, integration and development
work, undertaken under specific customer contracts is reflected in the cost
of sales. R&D on the other hand represents cost of employees involved in
internal research and development, on improving functionality of our
existing products, as well as on software development focused on digital
broadcasting industry. As a consequence of this new system and as a
consequence of time spent by our engineers between those two elements of
our P&L, we have increased our cost of sales by $13 million, and reduced
our R&D obviously by $13 million. So the difference, if you wanted to look
at the Q1 of this year and Q1 of last year on an apples-to-apples basis,
the $13 million is a shift from R&D into cost of sales that occurred in Q1
of this year.
Operating expenses decreased by 16% for the quarter to $49 million.
Obviously the single biggest component here is this, again reallocation of
this $13 million of cost out of R&D and into the cost of sales. We also
received an R&D grant from the French government of $5 million, which
reduced our R&D for the quarter by $5 million, but those two decreases were
partially offset by obviously an increased headcount between first quarter
of this year verses first quarter of last year. At the end of September our
headcount stands at 2,640 people, verses 2119 at the end of first quarter
last year.
Expected income tax rate for the first quarter is 30% verses 35.4% in the
first quarter in last year, and really this is due to the change in mix of
income arising in different tax jurisdictions. Net income is $27 million,
which is 47 cents per diluted share, compared to $17.6 million or 31 cents
per diluted share for the first quarter of last year.
Cash flow, just a few words on cash flow, cash stands at $342 million as of
the end of September. Cash from operating activities increased by $11
million, reflecting obviously lower payments for smart cards, which were
offset by higher expenses. Capital expenditure for the quarter was $8.7
million. As we talked about last time we were on the call, we have
mentioned that we have moved into a number of new facilities and are
planning to move into a number of new facilities. This quarter we have
begun to receive a spend on those new facilities. $5 million out of $8.7
relates to the new facilities in India, UK and the US. The rest of it is
obviously due to our ongoing technical equipment that we have to purchase.
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In first quarter of the year we received $2.8 million from exercise of
employee stock options, and that equates to about 208,000 shares. We have
now 4.1 million stock options outstanding with 2.7 million exercisable as
of September 30th.
Again, staying with the cash flow, during this quarter as Abe mentioned we
have acquired NT Media, and we've paid $2.9 million cash consideration in
the quarter for the company.
Now just a few words in terms of the 2006 guidance. As we always do before
every quarter we continue to review our guidance and our revenue guidance.
With the key uncertainty continuing to be currency fluctuation, that I
discussed last quarter, last time I spoke on this call, that continues to
be the key uncertainty, and therefore we are maintaining our revenue
guidance the same at $600 to $625 million. However, the positive impact of
R&D credit we received from the French government and continuing good
performance of our business allows us to upgrade operating profit guidance
from earlier, $102 to $110 million, to the new operating profit guidance of
$107 to $115 million. And again, as I mentioned last time this operating
profit guidance does not take into consideration P&L effect of new options
to be granted in fiscal 2006. We've actually kicked off the process of
evaluating the grant, the 2006 grant this quarter. Next quarter when we're
updating you we will have that completed and we will be able to update you
on the actual P&L effect of the 2006 option grant.
Thank you very much.
Abe Peled: Thank you Alex, and operator, could you please open it for
questions.
Operator: Certainly. Thank you, we will now begin the question and answer
session. If you would like to ask a question, please press *1 on your
telephone keypad and wait for your name to be announced. If you would like
to cancel your request, please press *2. Once again that's *1 to ask a
question. And your first question comes from Daniel Meron of RBC. Please go
ahead.
Daniel Meron: Hi Abe and Alex, congratulations on a strong quarter. Can you
maybe provide a sense on any new businesses or opportunities you see out
there?
Abe Peled: Well, you know we don't usually comment on new business until we
have signed contracts. In terms of potential and where we see activity, we
see activity as I mentioned in Eastern Europe, on pay, what we call
traditional pay-TV platforms. We see a lot of activity in the IP-TV both
stand alone as well as the potential for hybrid IP-TV systems, and we see
considerable potential for interactive applications in the United States as
there will become a critical mass of set-top boxes out there that are
capable of accepting such interactive applications, although I expect that
the revenue impact of that will be mostly in next fiscal year and beyond.
But we're seeing a lot of interest, and we expect to see more of that at
the consumer electronics show.
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We also see quite a bit of interest in the whole mobile arena, but I think
it's too early to quantify the financial aspect of that, we are involved in
a number of pilots and trials and different projects, we also announced
from this quarter, announced, SanDisk this quarter announced the
TrustedFlash initiative in partnership with NDS, but again I think to
quantify the revenues from that is a bit premature. Having said that I
would like to come back to my main comment that in terms of the actual
financial performance in the near term it will be to a very large extent
determined by the trends we see in our existing customer base and the
deployment of the new technology.
Daniel Meron: Thank you Abe. Can you maybe elaborate on, you mentioned the
opportunity with BSkyB and Easynet, can you maybe give us a sense on the
timing of that and what kind of opportunities you have there?
Abe Peled: I think I can't comment on the timing, that would be up to
BSkyB, but in terms of the opportunity, I very much see it as both using
the broadband network to deliver the BSkyB service to customers that do not
have access to a satellite dish in the UK, of which there are some
substantial number in the inner city due to restrictions on dishes, as well
as a replacement cycle for set-top boxes and PVR, that would have both the
satellite reception for the main channel as well as the broadband
connection in the back for additional VOD services and other entertainment
from the internet, and I expect that to start rolling out over the next few
years.
Daniel Meron: Okay thank you, and then M&A, you discussed this in brief over
the industry day, any updates on that front please?
Abe Peled: Again, you know obviously we are looking at a lot of things but
we would let you know the moment we have something concrete that we are
planning to do.
Daniel Meron: Okay, and Alex a question for you. Can you maybe give us a sense
on, number one, what are the metrics to look for with DIRECTV, and then on
the OpEx, how should we look at that, can we assume that it will be pretty
much flat after the change in the classification of the R&D that you
mentioned during the quarter, how should we model it going forward?
Abe Peled: Well I just want to add on the metrics, DIRECTV publishes on a
quarterly basis their growth out, so obviously that is an important metric,
they will probably provide updates on the PVR penetration, and you know the
combination of those two as well as churn which is used to calculate the
growth out which they also provide, and therefore these are the key metrics
in so far as DIRECTV is concerned, and then in the longer term we obviously
would look at the... what success we have in signing up channels for
developing interactive applications.
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Daniel Meron: Okay thank you Abe
Alex Gersh: In terms of the operating expenses I think obviously in terms of
this reclassification of this change, clearly as we look forward, if we
continue to see the shift in time that our engineers spend in supporting
our existing contracts, clearly there could be additional movement out of
R&D into cost of sales. On the other hand, if you see things going the
other way, you can see movement the other way. I think the best way of
looking at this is an aggregate. We disclose, when we look at cost of
sales, we show you the operations line in there so in my opinion if you
look at operations line together with the R&D line and you add those two
together, the statement that we've always made that the increase in our
expenses is really driven by an increase in our head count still stands, so
if you look at those two lines in aggregate, you can, and we're telling you
in terms of our increased headcount, that's probably the easiest way of
being able to look at that.
You know, we've said that last time that we were going to hire, we've hired
over 500 people last year, we said we were going to hire less than that
number this year, that still holds true, a significant amount o four hiring
is going to be done in India. We probably could hire more, I think we've
mentioned a number of 250 people or so last time for the year, I think the
number could be higher than that as we have new projects that Abe was
talking about coming on board, however, because a significant amount of
that headcount is going to be in India the point that we've made is that
our revenue growth will clearly exceed our expense growth, we'll still
continue to be valid and will continue to improve our operating margins. In
terms of marketing, sales and marketing, you've seen some increase in this
quarter and we've said that this is with regard to our additional shows
that we decide to do to support our business but the increase so not very
significant, and G&A again, we're not adding people really in G&A, so the
G&A number should be relatively flat with some modest increases going
forward.
Daniel Meron: Okay thank you Alex and Abe and good luck going forward.
Operator: Thank you. Your next question comes from Alan Gould of Natexis,
please go ahead.
Alan Gould: Yes good morning thank you, a few questions for Alex, first can
you just clarify for us the revenue recognition of the XTV(TM) results, so
if DIRECTV is shipping in October / November, new PVRs, when will you
recognise that, will that be in March?
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Alex Gersh: Well we have, the way we work with all of our customers
obviously is we need to receive, we receive reports from them a number of
days after the download and on the basis of that report we recognise
revenue. So depending on when these reports are received and they are
verified, that's how the revenue is going to be recognised. When we started
with middleware, to be honest with you, with XTV(TM), I'm just not sure of
the frequency of these reports at this point. We generally receive reports
30 days after the shipments or the downloads have been completed, so if
that holds true, 30 days at the end of the quarter, so if that's true then
that's how the revenue recognition is going to work.
Alan Gould: 30 days after the quarter, so if something shipped in the
December quarter, you're not going to receive that report until January,
you won't recognise it until March?
Abe Peled: That is correct
Alan Gould: Okay. And just a clarification on this new allocation between
R&D and operating expense, so you're saying I could, to get an apples to
apples comparison of the September quarters, I could add $13 million to R&D
and take it out of operating expenses.
Alex Gersh: That's correct
Alan Gould: So on an apples-to-apples basis, R&D was up about 13% and gross
margin actually was 67.6 verses 59.2?
Alex Gersh: That's correct
Alan Gould: Okay, third thing is stock option expense, are you now expensing
options in your financials?
Alex Gersh: Yes, as I said we did not have the 2006 grant yet, but
everything else we are expensing currently and the impact of that is about
$1 million a quarter.
Alan Gould: It's about a million a quarter, but I mean for GAAP that's now
running through the income statement whereas it wasn't a year ago?
Alex Gersh: Well I mean a year ago if you look at our G&A the SFAS 123R was
not running but we did have some option, some option expense that had to do
with, principally with previous financial officer having an extension of
vesting of his options granted to him, and that produced a stock option
expense in the first quarter of last year. But in terms of the SFAS 123R
this is the first quarter we're running it and the expense is $1 million.
Alan Gould: So if I look at that line the cash flow statement the 2.5
million last year was due to the extension on the CFO and the $1 million
this year is the expensing under the new GAAP rules.
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Alex Gersh: Yeah the 2 million is not quite - there are some additional
expenses recognised last year for some other reasons but yes you're right,
the 1.3 million of the 2 million is CFO. There were some other reasons why
some additional expenses had to be taken in the stock options but this
quarter SFAS-120-3-R $1 million.
Alan Gould: Okay and last thing just to clarify on that G&A because it was
the lowest G&A number in over a year is 34 million plus a little bit a good
run rate now for the year?
Alex Gersh: Well the G&A - the biggest difference in G&A is the stock
options because that's when that's where stock options appear. So if you
look again if you look at last quarter we recognised $2.5 million of
expenses of G&A, of stock option expense and this quarter it's 1 million.
So as we approve our 2006 option grant, it's probably going to appear in
G&A so that line will increase based on that. Other than that, the G&A
should be relatively stable.
Alan Gould: So extra stock options, it was 9.5 million or so last year
versus about 7.5 million this year?
Alex Gersh: Right. The other thing that we've done this quarter - I should
have mentioned this - a prior year on all of the cost of our facilities for
the UK were recorded as part of G&A. Obviously what we've done is when we
actually looked at - analysed the number we've had approximately 800 people
in the UK. A vast majority of those people are either in R&D in operations
so we've actually reallocated some of the facility cost into R&D and
operations this quarter. That took G&A down by approximately $2 million.
That's a one time.
Alan Gould: Okay thank you very much.
Operator: Your next question comes from Todd Mitchell of Kaufman Brothers.
Please go ahead.
Todd Mitchell: Good morning I want to go back to the DirectTV deployment. As
I understand it now the DVR is being delayed. DirectTV has already started
marketing it but apparently they're not on the shelves and we're also
hearing word that their HD box is running late and may not be ready for the
holiday seasons. Can you address your role in this issue and give us some
colour as to exactly what the issue is and when these issues might be
resolved?
Abe Peled: I really feel uncomfortable talking for DirectTV. I believe that
the ads - at least the way reported to me in California by some of my
people is that you are encouraged to come and take up your DVR from the
shelves and that, buy etc. but you really would have to ask DirectTV in
terms of the HD and the rate of roll out of the DVR and all of those.
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Todd Mitchell: It's not a - I guess it's not a software issue?
Abe Peled: I think we believe that our software is currently stable and
ready for starting to ship it.
Todd Mitchell: And would you attribute it to a platform issue then?
Abe Peled: No I don't attribute it to anything I just told you that I
believe that it's in the shops. Go to Best Buy in Los Angeles and pick one
up.
Todd Mitchell: Alright. Sorry to press you on it. The other thing I wanted to
know is in terms of this Philips business for the broadcast box can you
give us some colour on what your expectations are in terms of units and
what the economics to NDS look on that? It's obviously lower per unit but
does it generate the same sort of revenue contribution?
Abe Peled: Well you know one has to make a call on the MHP in Europe and
you know how successful it will be, the initial launch is in Italy where
roughly I think 1.5 million boxes were sold last year depending on whether
the government will continue the subsides or not, there may be another
million or so sold this year. Philips says we'll hopefully get some market
share out of that. Also in Spain there is the intention of having MHP in
digital terrestrial and maybe additional markets but I don't think that
it's a very large number that would materially affect our results one way
or the other and in longer term you know participation in the MHP market
place.
Todd Mitchell: Okay. Also I would like to know in terms of - you mentioned -
in terms of smartcard that 80% of our customers are currently on a monthly
subscription fee. Can you tell me what that figure was a year ago at this
time?
Abe Peled: It was about 77% or so.
Todd Mitchell: So if we look at the different in the cards shipped and the
revenue numbers and I mean basically with the same amount of subscription
can we attribute a big chunk of the per unit difference this year versus
last year to perhaps DirectTV getting a lower cost per unit and that this
the rate we're seeing now is-
Abe Peled: No. No. No. You are wrong.
Todd Mitchell: Okay. Alright well maybe we can talk about that later then.
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Abe Peled: No I mean our practise with DirectTV is fixed on a six year
contract and it has nothing to do that. I think that we don't disclose the
mix between subscriber fee and smartcard sales. We could tell you what the
smartcard sales were and we also told you the result has been larger
revenues from subscriber fees, in particular Sky Italia moved as of July
1st to a full subscriber fee, 3.4 million cards, that's a substantial
number.
Todd Mitchell: Okay and then the last question is terms of your Capex,
you've mentioned that there's about 5 million in your CAPEX on new
facilities. How long does that continue going forward?
Abe Peled: We expect the entire budget for new facilities for the year to
be within the neighbourhood of 6.5 maybe maximum $7 million. So you we've
spent 5 million and we've got a couple of more million to go but we're
pretty much at the end of the facility spend, the big facility spend.
Todd Mitchell: Great. Thank you very much.
Operator: Your next question comes from Ronnie Biron of Oscar Gruss.
Please go ahead.
Ronnie Byron: Hi Abe and Alex. Most of my questions were answered, just if you
net out the middle ware download DirectTV it seems that your revenues from
royalties and over all substantially decline sequentially. Can you comment
on that whether a specific - do you see this quarter as slow in particular
and do you see a pick up in shipment in the coming quarters?
Alex Gersh: I'm sorry, when you're saying substantial declined, Q4 of last
year the revenues was 147 million, Q1 of this year is 144 million so could
you just-
Ronnie Byron: What I'm trying to say, I'm trying to net out the effect of the
middleware download and to see how your core business is growing.
Alex Gersh: Just a quick comparing of Q4 to Q1 again there is a couple of
things you need to know. Obviously in Q4 we've shipped 8.9 million cards.
We've shipped 5.5 million -oh just the license fees and royalties lines.
The license fees and royalties in Q4 of 2005 we've actually recognised a 6
million catch up of royalties, conditional access royalties for Sky Italia.
This was - what happened in Sky Italia is we've switched from getting paid
our royalties from the setup box manufacturers to Sky Italia actually
paying us themselves. In that switch process there was a time lag which we
caught up in Q4 of last year. So there's a six million kind of a one off
recognition of conditional access royalties for Sky Italia in Q4. So if you
want to take out the middle ware this quarter you have to take out that 6
million at Q4.
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Ronnie Byron: Okay that answers my question. Thank you.
Operator: Your next question comes from Merhdad Torbati of Deutsche Bank.
Please go ahead.
Merhdad Torbati: Hi Abe. Hi Alex. Congratulations. I have a question
regarding a number of smartcards you shipped in the first quarter. Is this
number in any way affected by any inventory fluctuations compared to the
previous quarter? Or you would say this 5.5 million is a true reflection of
the demand of your customers within this quarter? Is my fist question...
Abe Peled: I don't - but it is one of the reasons why we don't give
quarterly guidance because it's very hard to, both for us and for our
customers, to manage our business by end of quarters and over a year sure
if it smoothes itself out. The orders for smartcards obviously has to be
built up ahead of the demand and maybe occasional build ups that get
smoothed out subsequently. So I don't think you can read anything into this
5.5 million whether it was current demand or future demand because you know
we expect for a year while we have said that we had to save some less than
reserves last year we still are confident and the overall year number in
the number of [prices we will ship] which will compare if we factor out Sky
Italia which was a one time will compare favourably year-to-year. So I
really urge you not to make too big a deal from trying to guess because it
may be that there was order on this that went out on October 10th, so we
can't manage obviously our customer's inventories or shipments by our
convenience.
Merhdad Torbati: Sure. The second question relates to BSkyB's recent
announcement around mobile pay TV. Do you have conditional access solution
ready to accommodate any service in a joint venture business together with
Vodafone? Would you be ready in case you would be asked to offer technology
on that front?
Abe Peled: We have a DVBA solution and we have a mobile and VideoGuard
solution that we have integrated with those prototypes of DVBH devices as
well as a mobile phone so should that require the need for conditional
access etc. we have such solutions.
Merhdad Torbati: Okay. Just a quick question for Alex and I know you said
you can't disclose it now because your 10-Q is not out yet, can you give a
geographic breakdown of your sales and a breakdown between News Corp. and
non News Corp. companies at this time or shall we wait?
Alex Gersh: We actually don't even disclose that in the quarter, this is
only disclosed once a year in a 10K, so no, I cannot, we don't disclose
this information unfortunately.
Merhdad Torbati: Okay, thank you very much.
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Operator: Your next question comes from Can Elbi of Cheuvreux. Please go
ahead.
Can Elbi: Hi Abe, Hi Alex, just one question on IPTV. Just looking at US
and Europe and looking at the incumbents increasingly introducing IPTV
services, either full IPTV or a hybrid solution, it seems like most of them
have gone ahead with software solutions, be it Verimatrix or Microsoft.
What do you attribute that to and what is it going to take for them to
change their minds and maybe go with smartcard based solutions in the
future?
Abe Peled: Well first of all I attribute it to ignorance, second I want to
point out that we have a solution known as VGS which does not necessarily
require a smartcard in the box and some of the Telcos that we're working
have adopted it already that solution which simplifies and given that they
believe the logistics of handling smartcards being unfamiliar with it are
complicated we are offering an alternative of course where all the mobile
operators seem to be able to handle the smartcards quite well but I think
it has to do with the fact that they don't have experience in protecting
content and are therefore not sufficiently aware of the factors involved in
content protection. I also will contest your assertion - yes certainly on
Microsoft there has been a lot of decisions but people like, Widevine
Verimatrix and Latens I consider completely irrelevant in terms of the wins
that they have had. I know that you will say Verimatrix has BP but it's
really a watermarking thing, it's not even a conditional access or content
protection technology as far as we understand it.
Can Elbi: Okay, and maybe just in terms of PCPTI based systems and PTI
based systems that come off these software based vendors are using for IPTV
- are there any fundamental differences?
Abe Peled: PC what?
Can Elbi: In terms of Public Infrastructure based systems that these
software based vendors are using, is there any fundamental differences in
terms of what protects that side versus what they use for IPTV based
solutions?
Abe Peled: You're talking about PKI?
Canelbi: Yeah.
Abe Peled: Yeah. Well, I mean look, conditional access and content
protection is not about encryption whether you use PKI or RSA or whatever
you want. It's about protecting the overall system from holes through which
the encryption can be circumvented and that's the speciality of conditional
vendors. Indeed no encryption of any conditional access vendor was ever
broken, the only thing that was broken was the mechanism of delivering
those keys and therefore emulating the ability to show it as if you have a
key and that requires both technology as well as operational security that
produced a system that can protect the revenue of a platform and those
really only come into consideration when a platform is big enough and has
content worthwhile stealing and none of the IPTV operators are in this
situation yet I might add.
Page E-14
Can Elbi: So basically being able to change the private keys on the fly if
there is any hacking what you're saying doesn't really solve the problem
because it can be hacked again?
Abe Peled: No the thing emulates getting the new key and using it.
Can Elbi: Okay. Thanks a lot Abe.
Operator: Your next question comes from Ian Whittaker of UBS. Please go
ahead.
Ian Whittaker: Thank you very much. If I could ask really three questions
about general trends; one is just in terms of going back to BSkyB and
Ethernet. You also mention ViaSat was also delivering TV over broadband
internet. Perhaps you could talk about some of the other players in
different parts of the world that are also other satellite providers that
are moving move to delivering their content via broadband? The second
question has to do with IPTV. I wonder if you could share some of your
thoughts of what you're seeing from telecom operators in terms of the sort
of content that they are showing over IPTV, whether they tend to be
focusing very much on just video on demand or whether any of the players
that you've seen are perhaps becoming more aggressive in competing with the
established Pay TV operators? And then third question really had to do with
high definition TV. Again I'd be interested to hear your thoughts on how
you think the high definition TV market will grow over the next 18 months
given that again this could be a very good potential source of extra
revenues for you in the future?
Abe Peled: So in terms of IPTV, I mentioned Yes in Israel, Auna is another
operator, it's a cable and telephone company in Spain that instead of
laying out additional cable are going to use their IPTV broadband
infrastructures to deliver the same packages as cable, and I would expect
that...Canal Plus obviously in France has an agreement with France Telecom
as well as another local operator to deliver their package on IPTV as well
and I don't know if they reported a number but obviously I'm a little
worried being used in that...so you know, I would expect to see that as a
complimentary I might add because it's still much more efficient to deliver
it by satellite but for places where satellite cannot reach or is
inconvenient and there is enough bandwidth, you are likely to see that.
Page E-15
In terms of the package, our experience in Japan with broadband TV with
whom we have been working for the last two years clearly shows that they
started with only VOD and that was not a really sufficiently interesting
proposition and they restarted their whole marketing and technology
proposition earlier this summer with a package of both the main broadcast
channel as well as VOD and niche content and that seems to be much more
successful, and indeed they've ordered 500,000 cards from us and seem to be
rolling out aggressively to have then this for a million. So that's the
most advanced. I do believe that people still want a complete package of
entertainment and not only the niche, so most people in the UK for example
who still watch ITV and BBC and if that's not in the package then it's an
incomplete package or many of the other quite popular channels like the
fifth channel and so on.
In terms of your high definition, clearly the penetration of high
definition is primarily created by the cost of your high definition
displays; the quicker they come down the more affordable it will be to the
masses and I am pleased to say that on a dollar/pound basis, you can see
the kind of HD displays that in the United States will be $1,000 to $1,200
are now available in the UK also for a (pound)1,000 to (pound)1,200, so
it's turning into a certainly more affordable range given the experience
but until it goes down to perhaps the (pound)500-600 for a 28", 30"
television, it will probably not become a really very big number in the
amount of users, but more of a high end 10% kind of penetration.
Ian Whittaker: Okay, and so the question just in terms of satellite providers
moving into broadband internet to Ethernet, you mentioned ViaSat. I just
wondered whether there were any other players as well?
Abe Peled: I said Yes for example in Israel and I said Auna which is a
cable, but yeah we would expect that as broadband is a static market where
it's deregulated and they can have access to the broadband infrastructure
without having to build it up, if that's the case. I also would point out
that Chase Carey on the [unclear] conference policy that's on DIRECTV has
clearly outline their intention to use broadband as well a distribution
mechanism and as a complimentary mechanism in order to compete with more
effectively with the market.
Ian Whittaker: Ok, that's great. Thanks very much.
Operator: Your next question comes from Jason Mauricio of Arete Research.
Please go ahead.
Jason Mauricio: Hi there. Last year was clearly a one-off on condition access
with DIRECTV coming back and it seems like there was a big catch up
throughout the year. Despite that, do you think you can still grow
conditional access sales for the full year and FY06?
Page E-16
Alex Gersh: Well, I think again what Abe has said we need to separate the
two components of conditional access that combine that revenue line.
Obviously as we continue to active card, the monthly de-component, the
returning component will continue to grow and what we've said on the cards
that outside of that Sky Italia one-off, we expect the card numbers to be
substantially similar this year than they were last year. So those two
elements should combine for growth in conditional access although maybe
not...a moderate growth.
Jason Mauricio: Okay, and Alex can you give us maybe it'll be in the 10Q or
the 10K but in this last quarter, any chance you could give us a rough idea
of what percent of revenue your top ten customers accounted for?
Alex Gersh: What you will see in the Q is you will not see the geographical
breakdown as I said, but you will see the related party revenue in the Q.
So the Q will come out in a five or six days, you'll be able to see it and
we actually list...we list the customers that we consider a related party
and then we give one revenue number for all of them, so you'll be able to
take a look at this. But obviously if you look at our 10K from last year,
we've disclosed DirectTV, Sky Italia and BSkyB and clearly those continue
to be the very largest customers of ours.
Jason Mauricio: Okay.
Operator: There are no further questions at this time sir.
Abe Peled: Okay, well I would like to thank everyone for joining in on the
call and we will meet again next quarter.
Alex Gersh: Thank you very much.
Operator: Thank you that does conclude our conference for today. Thank you
all for participating. You may now disconnect.
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