Message to shareholders

Total revenues and other operating income for the reporting period stood at CHF 1.069 billion, with operating income at CHF 110 million and net income at CHF 66.7 million.

The changeover to the service-based business model implemented over the previous two years paid off, strengthening our overall position. Our installed based for service-mode cards and modules grew by 15% in 2010 to a total of 69.4 million units, ensuring a strong, stable and recurring revenue base for the Group going forward.

The 2010 reporting period also saw the full integration of OpenTV within the Group, as well as the strengthening of our middleware and user interface R&D teams. As expected, the development efforts currently underway to bring the next generations of interactive solutions to market are proving to be substantial. However, this area should return to profitability in 2012.

With regard to our overall strategy, we experienced the first concrete examples of the anticipated convergence between digital TV, telecoms and IT in 2010. Convergence is often seen as a risk for established operators, but it also represents an extraordinary opportunity to develop new generations of solutions and open up new horizons for consumers.

In a convergence-driven environment, quality and simplicity count. Here, we feel we are in a strong position, thanks to the experience accumulated by our various teams working in digital TV, telecoms and IT over the last decade. The awards we have won for our innovations testify to our strength in this new, interconnected environment. To cite only two examples, the Kudelski Group won awards at IBC 2010 and TV Innovation for our Persistent Rights Management and Next User Experience extended security solutions.

Keeping pace with the new “super digital ecosystem” that convergence has produced will require intense R&D efforts going forward –and these are efforts we intend to make.

However, convergence is not the only potential revenue driver for the Group in the years ahead. Other opportunities are out there, for example the accelerating growth trend in emerging markets, even as developed economies are showing weak growth.

We have been active internationally for decades. Historically, our main revenue streams have come from developed countries, but this situation is now fundamentally changing. Emerging markets are playing an increasingly important role in the global economy, as is illustrated by the fact that China has become the world’s second-largest economy.

Brazil is another example of this paradigm shift toward emerging markets. We grew our revenues in Brazil by 100% in 2010, and that country is now one of our top seven markets.

The trend observed during the second half of 2010 has continued into 2011, and this has led Management to adopt a series of initiatives designed to boost revenues and enhance profitability. The following measures have already been initiated:

• A dedicated emerging-markets team has been created in order to leverage the growth potential of these regions. We intend to offer solutions specifically designed for these markets so as to maximize medium- and long-term growth. This unit has been up and running since late 2010.
  
• The geographical footprint of our teams has been adjusted, with the creation of a new R&D unit in India, as well as growth in our China- and India-based teams. This will lower unit costs, allowing us to be more competitive in emerging markets.
  
• We have rolled out a series of cost-cutting measures designed to both compensate for unfavorable currency movements and bring our cost structures into line with revenue streams. Concretely, our more expensive service providers are being systematically replaced by our India- and China-based teams.
  
• We are undertaking a comprehensive review of our activities. In line with the Group’s medium- and long-term strategy, some current areas of operation could be merged, sold, or dropped, while other areas will be strengthened and new areas developed. The Group will increasingly resort to strategic partnerships in order to round out its offering in areas that are non-core but nonetheless complementary to our businesses.

In addition, we will take a more targeted approach to innovation. Here, the idea will be to sharpen the focus on the Group’s medium- and long-term potential, with an eye to keeping R&D cost growth below top-line growth over the medium term. This will result in a structural improvement in our profitability and enhance our competitive position in emerging markets.

There will be many challenges in 2011. We will have to gain pace in emerging markets and counter the impact of the rise in the Swiss franc. We are positioning ourselves to meet these challenges by growing revenues while reducing costs.

Finally, 2011 has a certain symbolic value at Kudelski Group, since the company was founded 60 years ago this year. For six decades, innovation has been at the heart of our corporate culture. It is this very innovation that has allowed us to reinvent the company several times over the last few decades: the Kudelski Group has proved strong and durable through changing environments, yet flexible enough to meet new challenges successfully.

Based on our 2010 financials and our medium-term outlook, the Board of Directors will propose a dividend of CHF 0.30 per bearer share and CHF 0.03 per registered share for approval by the shareholders at our upcoming annual general meeting.

On behalf of the Board, I would like to thank our clients, our teams, and you, our shareholders, for your continuing trust. It is this trust that is our strongest source of motivation.