NDS Group plc Reports First Quarter Results

NEW YORK and LONDON, Oct. 23 /PRNewswire-FirstCall/ --

-- Revenue for first quarter down 11% to $182.2 million.

-- Operating income for first quarter down 56% to $25.9 million.

-- Other expenses (relating to the Proposed Transaction described below)
of $14.1 million.

-- Diluted net income per share down 71% to $0.23 per share.

-- 95.4 million active devices protected by NDS conditional access
technology at end of period.

-- 98.7 million middleware clients deployed at end of period.

-- 14.5 million DVR deployed with NDS technology at end of period.

NDS Group plc ("NDS" or the "Company") (Nasdaq: NNDS), a majority-owned
subsidiary of News Corporation that supplies open end-to-end digital
technology and services to digital pay-TV platform operations and content
providers, announced today its results for the quarter ended September 30,
2008.
Commenting on NDS's performance, Dr. Abe Peled, Chairman and Chief
Executive Officer of NDS, said, "NDS's results this quarter reflect lower
revenues from several large customers whose CA contracts have been renewed
with certain volume discounts and new pricing to reflect different smart card
change-over policies, as well as smart card recycling by certain customers.
This is in line with our guidance for fiscal 2009. In addition, our results
have been impacted by unusually large currency fluctuations during the period.
At this point, the worldwide economic uncertainty has not been reflected in
our operational results or outlook; however, we remain cautious and are
monitoring the field results closely. Our project pipeline remains strong, and
we remain focused on helping our customers compete effectively. We continue to
invest in the key areas that will drive our business, and have been gratified
by the reception of our leading technologies at the International Broadcasting
Convention in Amsterdam in September 2008."
KEY FINANCIAL MEASURES
Three months ended September 30,
2008 2007

Revenue (in thousands) $182,164 $204,876
Operating income (in thousands) $25,909 $58,286
Operating margin 14.2% 28.4%
Net income (in thousands) $13,384 $46,294
Diluted net income per share $0.23 $0.79

KEY NON-FINANCIAL MEASURES
Three months ended September 30,
2008 2007

Smart card deliveries (in millions)
Quantity delivered in period 8.0 7.4

Number of devices protected by NDS conditional
access (in millions)
Net additions 5.1 3.2
Devices protected, end of period 95.4 78.6

Middleware clients deployed (in millions)
Middleware clients deployed in period 6.2 8.1
Deployments, end of period 98.7 69.9

DVR clients deployed (in millions)
DVR clients deployed in period 1.4 1.5
Deployments, end of period 14.5 8.8

Employees
Full-time equivalents, end of period 4,073 3,665

KEY DEVELOPMENTS IN THE FIRST QUARTER

-- In August 2008, NDS, News Corporation and two newly incorporated
companies formed by funds advised by Permira Advisers LLP (the Permira Newcos)
announced the signing of an implementation agreement for the previously
announced transaction to take NDS private (the Proposed Transaction). The
Proposed Transaction would result in the cancellation of all of NDS's
outstanding Series A ordinary shares for per-share consideration of $63 in
cash. If the Proposed Transaction is consummated, the Permira Newcos and News
Corporation would own approximately 51% and 49% of NDS, respectively. The
Proposed Transaction is subject to certain conditions and there can be no
assurance that the Proposed Transaction will be completed.
-- During the International Broadcasting Convention (IBC), NDS Unified
Headend(TM) won "Best Content Protection Technology" Product of the Year Award
from Cable & Satellite International Magazine.
-- NDS and Astro, the only direct-to-home satellite TV operator in
Malaysia, completed the migration of over 2.7 million Astro subscribers to NDS
VideoGuard(R) conditional access.
-- NDS and Premiere, the largest pay-TV operator in Germany and Austria,
completed the first phase of the changeover of Premiere subscribers to NDS
VideoGuard conditional access.
-- NDS launched NDS Dynamic(TM) an innovative suite of solutions for
targeted and interactive advertising and audience measurement which allows TV
operators to generate new revenue streams. A key partner in NDS Dynamic is TNS
Media Research (TNS), a global leader in TV, radio and internet audience
measurement.
-- Tata Sky chose NDS technology to launch India's first Electronic
Program Guide (EPG) in the Hindi language, underscoring NDS' commitment to the
Indian pay-TV market.
-- NDS subsidiary Jungo launched a patent-pending software solution to
enable fast channel changing in Internet protocol television (IPTV) networks.
FINANCIAL REVIEW
Total revenue for the three-month period ended September 30, 2008 was
$182.2 million, a decrease of 11% compared to the corresponding period of the
previous fiscal year.
Revenue from conditional access decreased by 19% during the three-month
period ended September 30, 2008 as compared to the three-month period ended
September 30, 2007. The decrease was principally due to recognition in the
three-month period ended September 30, 2007 of a portion of security services
revenue previously deferred as certain remaining revenue recognition criteria
were satisfied during that period. These factors were partially offset by an
increased volume of smart cards delivered and the growth of the subscriber
bases of our customers during the three-month period ended September 30, 2008.
Recently, certain of our customers have begun recycling set-top boxes and
smart cards when a subscriber terminates its subscription by re-issuing the
set-top box and smart card to a new subscriber. This activity by our
customers reduces demand for new smart cards and also reduces our incremental
set-top box royalties. Integration, development and support revenue increased
by 4% in the three-month period ended September 30, 2008 as compared to the
three-month period ended September 30, 2007. The recognition of revenue from
new customers and from the delivery of enhancements to several of our existing
major customers is dependent on the timing of satisfaction of all our revenue
recognition criteria; therefore, this component of our revenue tends to
fluctuate from period to period. License fee and royalty revenue decreased by
16% in the three-month period ended September 30, 2008 as compared to the
three-month period ended September 30, 2007, principally as a result of a
decrease in the number of middleware clients deployed during the three-month
period ended September 30, 2008 as compared to the three-month period ended
September 30, 2007. The increase in revenue from new technologies of 10% in
the three-month period ended September 30, 2008, compared to the three-month
period ended September 30, 2007, was principally due to higher revenue from
our IPTV customers, and from gaming applications and residential gateway
devices. These increases were partially offset by lower revenue from
deployment of our DVR technologies and advanced middleware solutions. The fees
recognized on deployment of DVR technologies were lower due to the timing of
project acceptance.
Cost of goods and services sold increased by 10% during the three-month
period ended September 30, 2008, as compared to the three-month period ended
September 30, 2007, principally due to an increase in the number of our
employees working on development, integration and support activities during
the three-month period ended September 30, 2008. This was offset in part by
lower royalties paid to third parties for the use of their technologies during
the three-month period ended September 30, 2008.
Research and development costs decreased by 6% for the three-month period
ended September 30, 2008 as compared to the three-month period ended September
30, 2007 as a result of a small decrease in the number of employees working on
research and development projects. Additionally, in the three-month period
ended September 30, 2008, we recognized the benefit of a $7.9 million grant
from the French government as a consequence of our engagement in certain
eligible research projects. In the three-month period ended September 30,
2007, we received an equivalent grant of $6.7 million. Sales and marketing
expenses increased by 26% in the three-month period ended September 30, 2008
as compared to the three-month period ended September 30, 2007, 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 23% in the three-month period
ended September 30, 2008 as compared to the three-month period ended September
30, 2007, primarily as a result of losses due to holding cash in currencies
other than the U.S. dollar, which were partially offset by lower legal
expenses.
We estimate that currency exchange rate fluctuations increased our revenue
by approximately $1.0 million and decreased our operating income by
approximately $8.1 million during the three-month period ended September 30,
2008, compared to what would have been achieved had foreign exchange rates
been consistent with those prevailing during the prior fiscal year.
As a result of the factors outlined above, and, in particular, the
decrease in conditional access and royalty revenue and the impact of foreign
currency exchange rate movements, operating income was $25.9 million, or 14%
of revenue, for the three-month period ended September 30, 2008. Operating
income was $58.3 million, or 28% of revenue, during the three-month period
ended September 30, 2007, and included the impact of the recognition of a
portion of security services revenue previously deferred, as described above.
During the three-month period ended September 30, 2008, we incurred other
expenses of $14.1 million. Of this amount, $11.0 million relates to a
conditional forward currency derivative financial instrument (the Conditional
Hedge) entered into during the three-month period ended September 30, 2008 to
act as an economic hedge against the fact that a portion of the debt to be
drawn down upon the consummation of the Proposed Transaction will be
denominated in euros. The terms of the Conditional Hedge do not meet the
criteria of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" to qualify for hedge accounting; accordingly the changes in fair
value of the Conditional Hedge are recorded in other expenses. Should the
Proposed Transaction not be consummated, no amounts will be due under the
Conditional Hedge and the amounts recorded as of September 30, 2008 will be
reversed.
The remaining amount of other expenses relates to $3.1 million in legal
and professional fees associated with the Proposed Transaction, which are
included in other expenses. We expect to incur further costs associated with
the Proposed Transaction in future periods.
Our effective tax rate was 21.3% for the three-month period ended
September 30, 2008, compared to 29.5% for the three-month period ended
September 30, 2007. This decrease was due to a deferred income tax benefit of
$4.4 million related to the Conditional Hedge discussed above and lower U.K.
statutory tax rates.
As of September 30, 2008, we had cash and cash equivalents totaling $711.2
million. During the three-month period ended September 30, 2008, cash used by
operating activities was $4.7 million. We had a net outflow of cash and cash
equivalents of $10.2 million in the three-month period ended September 30,
2008, compared to a net inflow of $23.3 million during the three-month period
ended September 30, 2007. As a result of our holding a portion of our cash in
currencies other than the U.S. dollar, foreign exchange rate fluctuations have
reduced the value of our cash holdings by $13.7 million during the three-month
period ended September 30, 2008.
FOREIGN EXCHANGE RATES
Average foreign exchange rates used in the quarterly results are as
follows: Three months ended
September 30,
2008 2007

U.K. Pounds Sterling/U.S. Dollar 0.5281 0.4948
Euro/U.S. Dollar 0.6646 0.7276
Israeli Shekel/U.S. Dollar 3.4829 4.1871
Indian Rupee/U.S. Dollar 43.5840 40.3880

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-TV 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.
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 Thursday, October 23, 2008.
Dial-in
U.S. toll free: 1 866 832 0732
U.K. freephone: 0800 073 8968
International dial-in: +44 (0)1452 562 717

Replay (available for seven days)
U.S. toll free replay: 1 866 247 4222
U.K. freephone replay: 0800 953 1533
International replay: +44 (0)1452 550 000
Replay passcode: 67203351#

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 Thursday, October 23, 2008. Please
register for the event now by clicking on the "First Quarter Results 2009"
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 October 24, 2008.

NDS Group plc
Unaudited Consolidated Statements of Operations

For the three months ended
September 30,
(in thousands, except per-share amounts) 2008 2007

Revenue:
Conditional access $98,766 $121,583
Integration, development & support 11,368 10,909
License fees & royalties 24,205 28,944
New technologies 46,785 42,458
Other 1,040 982

Total revenue 182,164 204,876

Cost of goods and services sold (75,461) (68,456)

Gross margin 106,703 136,420

Operating expenses:
Research & development (47,893) (51,011)
Sales & marketing (12,118) (9,620)
General & administration (17,450) (14,220)
Amortization of intangibles (3,333) (3,283)

Total operating expenses (80,794) (78,134)

Operating income 25,909 58,286

Interest income, net 5,200 7,372
Other expenses (14,107) -

Income before income tax expense 17,002 65,658

Income tax expense (3,618) (19,364)

Net income $13,384 $46,294

Net income per share:
Basic net income per share $0.23 $0.80
Diluted net income per share $0.23 $0.79

NDS Group plc
Consolidated Balance Sheets

As of As of
September 30, 2008 June 30, 2008
(in thousands, except share amounts) (Unaudited) (Audited)

ASSETS
Current assets:
Cash and cash equivalents $711,162 $734,992
Accounts receivable, net 119,141 126,131
Accrued income 40,386 46,948
Inventories, net 87,246 79,659
Prepaid expenses 24,869 24,904
Other current assets 19,523 4,203
Total current assets 1,002,327 1,016,837
Property, plant & equipment, net 47,239 49,741
Goodwill 130,944 134,693
Other intangibles, net 51,962 55,806
Deferred tax assets 15,641 17,370
Other non-current assets 109,402 101,702

Total assets $1,357,515 $1,376,149

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $27,463 $33,611
Deferred income 125,584 128,318
Accrued expenses 56,286 87,115
Income tax liabilities 15,016 24,513
Other current liabilities 33,291 20,673
Total current liabilities 257,640 294,230
Deferred income 79,454 79,100
Accrued expenses 70,041 67,713
Other non-current liabilities 4,419 4,701

Total liabilities 411,554 445,744
Commitments and contingencies
Shareholders' equity:
Series A ordinary shares, par value $0.01 per
share: 16,424,907 and 16,250,058 shares
outstanding as of September 30, and June 30,
2008, respectively 164 162
Series B ordinary shares, par value $0.01 per
share: 42,001,000 shares outstanding as of
September 30, and June 30, 2008, respectively 420 420
Deferred shares, par value £1 per share:
42,000,002 shares outstanding as of
September 30, and June 30, 2008,
respectively 64,103 64,103
Additional paid-in capital 594,316 590,663
Retained earnings 229,585 216,201
Other comprehensive income 57,373 58,856
Total shareholders' equity 945,961 930,405

Total liabilities and shareholders' equity $1,357,515 $1,376,149

NDS Group plc
Unaudited Consolidated Statements of Cash Flows

For the three months ended
September 30,
(in thousands) 2008 2007

Operating activities:
Net income $13,384 $46,294

Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 5,451 5,652
Amortization of other intangibles 3,333 3,283
Equity-based compensation 4,795 4,311
Conditional hedge, net 6,620 -
Other 234 97
Change in operating assets and liabilities,
net of acquisitions:
Inventories (7,587) (4,402)
Receivables and other assets 7,292 (18,244)
Deferred income (2,380) (9,222)
Accounts payable and other liabilities (35,875) 9,016

Net cash (used in) provided by operating
activities (4,733) 36,785

Investing activities:
Capital expenditure (5,446) (3,470)
Business acquisitions, net of cash acquired (1,117) (10,374)

Net cash used in investing activities (6,563) (13,844)

Financing activities:
Issuance of shares 1,135 388

Net (decrease) increase in cash and cash
equivalents (10,161) 23,329

Cash and cash equivalents, beginning of period 734,992 592,750
Currency exchange movements (13,669) 6,088

Cash and cash equivalents, end of period $711,162 $622,167

SOURCE NDS Group plc

Yael Fainaro, Investor Relations of NDS Group plc, +44-20-8476-8287; Kelly
Fitzgerald of Breakaway Communications U.S., +1-212-616-6006