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Message to shareholders

The Kudelski Group faced three simultaneous challenges in 2011: the transformation of the digital TV sector, the negative economic trend that prevailed particularly in Southern Europe and the sharp rise in the Swiss franc against other major currencies. The most significant of these challenges – the transformation of DTV – was something we had expected for several years and were prepared for, but the negative macroeconomic environment and the effects of the strong Swiss franc hit us harder and faster than anticipated. In response to this changed environment, we implemented a major cost-cutting program that will reduce recurring costs by CHF 90 million per year, starting in 2012.

This effort to bring down our costs impacted not only our organization and our processes, but also our workforce. The changes we made were difficult, in particular those that involved layoffs. We managed the process so as to maximally protect our capacity to innovate while simultaneously sharpening our focus on emerging markets like China and India.

Our R&D investments in 2011 amounted to CHF 214 million, which shows that even in a tough economic environment the Kudelski Group is committed to laying the foundation for future growth by investing resources in tomorrow’s technology and markets. However, we have tightened our selection criteria for determining which new projects are implemented and which existing projects are maintained. With all of this, our aim is to respond to the new economic climate and the speed of change in the digital TV sector, where opportunities arise quickly – and disappear quickly as well.

We have taken a series of measures aimed at addressing each of the challenges that had an impact on our 2011 results. This should pay off in the short, medium and long term. What we have done may be summed up in five key points:

1. Responding to the transformative changes in the digital TV sector
The digital TV sector is currently experiencing a fundamental paradigm shift:
In developed countries, convergence between digital TV and the internet is opening up new opportunities, especially with regard to multi-screen environments. We currently have several R&D projects that are geared to staying one step ahead of convergence-driven needs. However, while developing new technologies involves substantial costs, operators are responding to the current low macroeconomic visibility with a relatively prudent approach to capital investments.

Meanwhile, emerging economies are becoming fully-fledged markets in their own right. A few years ago it was possible to gain a presence in these markets with technologies and solutions similar to those deployed in developed countries. This is no longer true today; a dedicated innovation strategy is essential to succeed. That’s why we decided to develop a range of solutions tailored specifically to these markets and to strengthen our emerging-market R&D teams. This is a critical step in the process of enhancing our overall competitive position in these countries as well as our responsiveness when new opportunities arise.

Increasingly, Digital TV is about ecosystems, not specific products. As our projects that accelerate the development of the latest generations of middleware pay off, notably OpenTV 4 and 5, we once again have middleware platforms that respond perfectly to digital TV and internet convergence. These new technologies mean that it makes sense to fully integrate our middleware activities into the core Digital TV business line. This approach aligns our organization with the market, making us more responsive. It also greatly reduces organizational complexity (allowing us to streamline our Executive Board from nine to four members) and thus also to reduce operating expenses.

2. Strengthening our presence in emerging markets
The Kudelski Group has traditionally had a major presence in Southern Europe, a region which generates a large proportion of our revenue streams. However, the difficult economic climate has sharply reduced our top line in these countries. To offset the shortfall (tens of millions of francs), we are strengthening our presence in emerging markets, particularly in Latin America and Asia. However, these efforts to sharpen our focus on emerging markets did not fully offset the downtrend in Southern Europe in 2011 nor is it expected to do so in 2012. Beyond this, we have also consolidated our market-leading position in Southern Europe with new generations of solutions that place us in a favorable position. Finally, the strategic strengthening of our R&D competence centers in Asia will enhance our responsiveness to the needs of emerging markets.

3. New opportunities: CyberSecurity and Intellectual Property
Among the potential revenue-growth drivers we have identified, CyberSecurity and intellectual property are two areas where we are investing selectively:

CyberSecurity
Over the past 20 years the Kudelski Group has acquired unique experience in developing anti-piracy solutions for all types of threats in the digital TV sector. Today, with cyber-criminals targeting a growing range of activities, we can offer a wide array of strategies to fight these attacks. We have therefore created a CyberSecurity business unit to serve this high-potential market.

Monetizing our intellectual property
For almost 25 years we have been actively protecting our intellectual property. One of the ways we do this is by regularly patenting our innovations. Today, with renewed momentum in the digital TV and media sector, we see exciting revenue potential in our patent portfolio. A dedicated team is being organized to leverage our intellectual property assets.

4. Growing our Public Access business through innovation

We are committed to growing our Public Access business over the long term. This division is less volatile than digital TV and media and performs well even in a difficult macroeconomic environment, which is a major risk mitigator for the Group. Public Access has also shown its ability to innovate, applying a “cloud-based” approach to a traditionally conservative industry. The new cloud-based technologies make it possible to remotely manage ski and parking facilities, for example with reservations available via mobile applications. Public Access is also driving growth outside Europe and reducing costs through innovation and process streamlining.

Current SkiData CEO Charles Egli will step up to become Chairman of the SkiData Supervisory Board during the 2012 financial year. Hugo Rohner will take over as CEO. In his various roles within the Kudelski Group, Hugo has demonstrated leadership and business acumen in the units he has headed. I wish him well in his new role as CEO. I would like to thank Charles for all he has done on an operational level since 1989 to contribute to the Group’s success, and we wish him well in his new role as head of the SkiData Supervisory Board.

5. Reducing our exposure to currency exchange rates

The sharp downturn in the forex markets, with major currency weakness against the Swiss franc, have strongly impacted our profitability in the digital TV business. To offset the impact of this unfavorable trend, we have reduced our cost base in “expensive” countries and shifted a number of activities to subsidiaries in India and China. Our cost-cutting measures will generate aggregate savings of CHF 90 million per year as of H2 2012.

In 2012, we will press ahead with the changes announced last year: cost reduction, strengthening our presence in emerging markets, and investing in the opportunities driven by the convergence of the digital TV and internet ecosystems. In addition, we will grow our CyberSecurity business and drive monetization of our intellectual property portfolio.

In spite of the tough year we experienced in 2011, the Board has nevertheless decided to distribute a dividend of CHF 0.10 per bearer share and CHF 0.01 per registered share.

On behalf of the Board, I would like to thank our clients, our teams, and you, our shareholders, for your continuing trust in difficult times.