Telefonaktiebolaget LM Ericsson (ERIC) 2005 Q4 法說會逐字稿

Welcome to the TANDBERG Television quarter four 2005 results call. Today I’m pleased to present Eric Cooney, and Fraser Park. For the first part of this call all participants on the phone will be in listen only mode, and afterward there will be a question and answer session. Please begin.

Thank you. Good afternoon again, I am Eric Cooney, the President and Chief Executive Officer with TANDBERG Television. I’m here this afternoon with Fraser Park, the Chief Financial Officer, and here to present our fourth quarter 2005 financial results.

A quick agenda here, quickly I’ll step through the financial highlights for Q4 ’05, we’ll then spend a few minutes, as this is obviously the end of 2005, hitting the business highlights for the year, some things I think you’ll all be interested in. Fraser will then go through a more detailed financial analysis, and then we’ll come back with a strategic update and a summary. So, without further ado.

I’m very pleased to stand here today and present what I think we’re suggesting are superb financial results for the fourth quarter of 2005. you’ll see revenues of 525 million NOK, total fiscal year revenues of just over 1.8 billion NOK, year-on-year that’s a 23% increase on pro forma results. Gross margins very healthy, 57.8%, attributable to improved product mix both on the software and on the advanced compression products. EBITDA, I’m not going to read all these numbers, but you can see the profitability figures very healthy, with a pre-tax profit in the quarter of 121 million NOK, and 386 million NOK for the fiscal year. That’s up a very respectable 128% year-over-year.

So I think from our perspective you can see why we suggest we’re certainly very pleased with these fourth quarter financial results. And of course the share price graph on the left hand side, our share price, to the extent we can control it, follows positive financial performance pretty nicely. So we obviously had a good year in 2005.

In terms of some business highlights throughout the year, just a few things I’d like to mention. From a sales perspective you’ll see a number of key account wins, really across representing all of our key target market segments. So satellite, direct to home, of course folks like DIRECTV, SKY in the UK, SKY New Zealand, etc., cable, the who’s who of U.S. cable with Comcast, Time Warner, Charter, Cox, etc., all being added to our customer list.

IPTV perhaps the hottest market segment, certainly in 2005, and from our perspective for the foreseeable future, with accounts really on a global basis, PCCW in Hong Kong, Swiss COM here in Europe, a “North American Telco” we still haven’t named, but a very significant account nonetheless.

Satellite C&D and mobile terrestrial perhaps TANDBERG Television’s core traditional markets still performing very strongly for the company, and I’ve listed a number of the key accounts we announced throughout the year.

And then finally as effectively a new segment, interactive sales into the content owners themselves with companies like TBS, the History Channel, etc., obviously those sales coming on the back of our GoldPocket Interactive acquisition we completed in Q4.

Perhaps not surprisingly, from a delivery standpoint you’ll see some pretty healthy shipments here at the bottom in terms of encoders, total encoder sales over 6,000 units in the fiscal year, that’s up 35% year-over-year. In particular, as I mentioned, it driving the gross margins you’ll see our shipments of next generation encoders also a very healthy over 1,800 units. To be clear, those are not shipments of encoders that are next generation capable, I’m in this case talking about actual customers who purchased next generation encoders, and they’re delivered as such. So in any case, a very significant number of the percentage of the total shipments.

High definition receivers, clearly a significant contributor to the revenue and profitability in the year, with an 85% growth rate, and of course one of the things that I think TANDBERG Television uniquely brings to the market is our system integration expertise and our ability to deliver, commission, install systems is a key contributor to our business, and system shipments this year were up also dramatically to over 200 systems in the year.

From a marketing standpoint, a number of industry awards if you will, significant from our perspective in that they essentially recognize TANDBERG Television as a best in class technology supplier across our three core technologies. You’ll see the TV Technology of the Year award for our interactive television solutions, you’ll see Best Video Processing Technology of course for the compression systems and Content on Demand Solution for our video on demand software. So again, reinforcing that we are, in fact, delivering on our commitment to be a best in class technology supplier across all three of our key technologies.

From a marketing standpoint, as you would imagine, we invest significant time and energy to get our name brand recognition out in the market and cover a number of trade shows, conferences, events around the world, and do that quite successfully. In part that translates to a significant increase in the PR. We saw our PR hits, if you will, up 37% over the year in generating an estimated value well north of $1 million worth of advertising if we had purchased that same amount of publicity. So a very successful year from a marketing standpoint.

I thought it would be useful to spend a moment to talk about our M&A strategy, and it’s really been fairly straightforward, and that is the strategy is to accelerate our profitable growth as a digital media technology supplier. I think we bore that out with both the N2 Broadband acquisition and the GoldPocket Interactive acquisition. Both of those companies clearly expanding our supply, but a bit more subtlety into broadband, clearly bringing us a successful route to market into that U.S. cable space, and GoldPocket Interactive in particular bringing us a new or improved route to market with the content owners and creators, like the History Channel that I mentioned here a moment ago.

You’ll see some common or recurring themes in our approach to M&A, and that is seeking out companies with a similar approach to, if you will, best in class technology, and likewise a similar approach to what I will call ‘culture’, and that simply boils down to a company focused on fun and profitable growth. Our acquisitions are all designed, or engineered if you will, to be accretive at the operating profit level within 12 months after the acquisition, and at least N2 we have, in fact, accomplished that.

So 2005 clearly, from our perspective, was a year of fun and profit. With that, I’d like to turn it over to Fraser Park to walk through the financial details for the quarter, and then I’ll be back to cover our strategy and summary in a moment. Thank you.

Thank you Eric. I promise not to detain you too long with the detailed matters here, but first of all of you look at the quarterly profit statement, income statement, as Eric has already mentioned, our revenues were up 26% versus the pro forma comparison for last year, and 10% sequentially.

Extremely pleasingly, our gross margin percentage continues to improve with a gross margin percentage in the current quarter of 57.8%, comparing favorably with both prior quarter of 56.3% and last year pro forma number of 55%. Taken together, these and some relatively good operating expense control delivered an EBITDA increase of 32% year-on-year, and an EBITDA increase of 9% sequentially. One factor I’d ask you to bear in mind is that we did have some relatively small integration – one off integration costs relating to the integration of GoldPocket Interactive, they were around about the 4 million to 5 million NOK level in the quarter. As I stressed, they’re a one off, but they did adversely impact our EBITDA performance and artificially inflate our Op Ex in the quarter.

Our EBIT shows very strong growth, with EBIT of 108 million NOK, up over one-third on the pro forma comparator for last year and up 11% quarter-on-quarter. Taken together as a result of some favorable exchange rate movements and an increase in our interest income, you can see that our profit before tax of 120 is over double the comparator for last year, and up 15% quarter-on-quarter, all in all a very good quarterly performance.

For the full year, as Eric has mentioned, full year revenue number of roughly 1.9 billion NOK, up over 22% on last year pro forma, and up almost 40% when compared with our reported numbers for last year. Gross profit percentage, again extremely healthy, 56.3% for the year versus a pro forma of 50.5% and the previously reported 48.5%, basically down to ongoing improvements and mix, continued strength in our compression margins, particularly and this is in contrast to maybe some experiences that some of our competitors have, our traditional compression margins remain extremely attractive and have done so this quarter as well.

All in all, EBITDA performance extremely good, up 74% for the year versus the pro forma number and up 62% versus the previously reported number. Profit before tax well over double last year’s pro forma at 385 million and up almost 90% versus the previously reported number. So hopefully all in all, you will understand why we’re fairly pleased with this year’s performance. Clearly more to do, but this year has been a good year for us.

Looking at the geographic report, the revenue trends, this is a fairly similar picture to that which we reported last quarter in that the two main drivers of the growth were EMEA and the Americas, predominantly through business wins in the IPTV sector, which as Eric had mentioned, is particularly active at the moment, and the satellite sector where we’ve made a couple of anonymous announcements in recent months. So that basically drove the bulk of the growth with EMEA contributing 47% of our reported revenues in the quarter, and the Americas reporting 43% of that revenue.

Gross margin trend, I should state that these numbers exclude any impact from GoldPocket Interactive going back through time, the gross margin in the quarter is 57.8%. That’s an improvement of approximately 1.5%, about .2% or .3% of that improvement came from the improved mix effect of consolidating GoldPocket, the rest of it came from improved mix between our wider software business and compression, and within compression we actually managed to extend our margins in both MPEG2 and in EVC field. So all in all, a very strong underlying margin performance.

Just worth highlighting, we do continue to expect potential further improvements there, but to a great extent as we’ve alluded to in previous announcements, the overall percentage margin will be driven by when our competition finally get a working EVC quarter out there, which as yet they haven’t done so. But I’m sure once the competition increases we may well face some top line pressure there from our competitors, although it should also be noted that, as I’ve mentioned before, we would expect to get further economies of scale. So I think margins in the mid 50s, maybe slightly above the gains or outlook that we’ve given previously, but margins in the mid 50s are perfectly supportable.

Op Ex did go up in the quarter by just over 20 million NOK, the bulk of that increase came from consolidating GoldPocket, and 12 million NOK came from consolidating them for the quarter. As I mentioned we took some one off integration expenses in the quarter of 4 million NOK, so the total increase of 22 million NOK, 16 of that is contributed by us consolidating GoldPocket for the first time. Currency had a slightly adverse effect on us in the quarter as well, so hopefully that gives you a good underlying feel for what’s gone on in our Op Ex.

Taking it all together, if you look at the pro forma profitability trend, again these exclude any historic numbers relating to GoldPocket, which are relatively minimal, but you can see that we’ve got a good positive trend in our quarterly sales, a very good positive trend on our EBITDA especially when you take into account the one off integration costs that should be stripped out. And our percentage profitability remains at record levels, being 21.9% of revenues.

Now on to the real fun stuff, the bit I really like talking about at length in bars, and probably why I get so much space around me in the bars. But let’s talk about tax and deferred tax. We did have a difference this year in the way that we’ve gone about approaching our calculation of tax, in that we have been trying through the year to be as accurate at possible on our estimate of what the full year tax charge was likely to be. Whereas historically what we’ve tended to do specifically last year and before, we’ve taken a full tax charge through the first three quarters, and then generated a relatively large tax credit in the final quarter coming out of the number of brought forward losses that we have.

Now for two reasons that has changed this year, as I said, I and my controller have looked to make sure that the tax charge that we reported through quarters one through three have actually been as realistic as we can make them. And the second important factor is that actually in the bulk of the geographic regions where we’re making profit, we either have or are about to run out of net operating losses that we can readily access. Let me explain that a bit, in a bit more detail.

In the UK, as you can see from the graph on the bottom half of this chart, the UK is counting forward into 2006, a deferred tax asset roughly 40 million NOK, relating to net operating losses that we have accumulated historically in the UK. We feel that that is a good reflection of our ability to utilize those losses because the UK is now profitable. But, I should point out that probably partway through ’06; we will start to pay taxes in the UK.

Similarly, and this has happened this year, you can see on the top half of this chart that actually in both TTV Inc. in the Americas and in Germany, we have actually already run out of net operating losses. So, we no longer have a shield that prevents us from paying taxes over to the local authorities. So, taking all that into account and taking into account a relatively conservative approach that we’ve adopted on what the fair tax assets we’ve actually recognized, as opposed to the blue bars here, which are the deferred tax assets that we have available, we did not have the large reversal of tax charge in the last quarter.

On a full year basis our effective tax rate has been approximately 20%. On a go forward basis, you should expect, certainly for the next year that the effective tax rate will not be dissimilar to that 20% as we unwind from further losses that are available to us.

The last thing I want to say on this, because I can see that all of your eyes are glazing over; you should try standing up here and delivering this. But, one thing I’d like to highlight is, in the US for the acquired entities there are certain restrictions on how much of the losses that one can recognize on an annual basis. What we will do is look at that situation, going forward. As those businesses get more of a track record of profitability, we are likely to be able to recognize more of the net operating losses that we’ve acquired. So, that may in turn add to a further benefit to us from a tax perspective, but for the go forward rate, I would be using 20% to 21% for ’06.

Balance sheet; we ended the year, as I’ll come on and show in a minute, and are in a very good situation as far as our working capital is concerned, with fairly significant improvements on all fronts there. It’s a very healthy balance sheet that we closed the year with. Receivables, at 566, actually highlight an advanced receivables as of the end of QC, where it’s 78 day sales outstanding. At the end of this year, excluding GoldPocket so that you can compare apples and apples, the same measure for the end of Q4 was a DSO of 55. We reduced our DSOs by 23 days in the course of the quarter.

In addition to that, we also managed to reduce our inventory somewhat and managed to extend our current liabilities. So all in all, as you’ll see in a short while, we’ve had very good operating cash generation in the last quarter.

Again, for those of you that are having to model things going forward, I wanted to disclose on this next chart the accounting for the GoldPocket acquisition, where GoldPocket cost us, in cash terms, 507 million NOK, including the transaction fees, and a further 34 million NOK in shares. That generated excess of consideration of our net assets of 465 million NOK, which we then have undertaken a very detailed and ongoing review to assess which portion of that can be apportioned to specific intellectual property and other intangible assets.

You can see that a relatively small amount is being classified as intellectual property rights, which we will amortize over the next five years. And again, a relatively small amount is being assessed as relating to customer lists, which we will amortize over the next two years. Please make sure, you analysts, that you amend your amortization charges accordingly. And again, if you have any questions on that, I’ll be more than happy to deal with them afterwards.

So, let’s go onto the fourth quarter working capital movement. You can see that across all categories of working capital we managed to generate a reduction in working capital in the quarter, taking working capital down from 273 million NOK to 247 million NOK, with at least half of that, or around about half of that reduction coming from receivables. And that flowed through into the very good day sales outstanding measure that we’re reporting for the end of the quarter.

Now, I would love to be able to maintain my DSO ratio at 55 days, going forward, but as we deal with larger and larger telcos, larger cable companies, etc., I think that’s going to be a challenge. But I think our target for DSOs is going to be in the 70 to 75 range. You can rest assured that where someone is pushing me for additional credit, then I’ll be pushing them for additional payment of the [inaudible] so that we balance things out. But it’s an ongoing set of discussions with our customers and one which I greatly enjoy.

Taking all that together, you can see that our cash flow from operations in the quarter was extremely attractive. By any stretch of the imagination, it’s probably the best quarter that we have ever had in terms of generating cash from our operations. We generated over 150 million NOK in operating cash flow in the quarter. I would love to be able to report that’s going forward, but you can see a trend in this graph that we tend to have a very good quarter and then a very bad quarter, mostly driven by the timing of billings, it has to be said.

We will continue to endeavor to make sure that there’s a close linkage between our cost-ability and the cash that we [roll off], but please don’t be modeling 150 million NOK of operating cash flow for quarter one. I’m not saying it’s not impossible, but I think, as I mentioned earlier, given the amount of pushback we’re receiving from some of our larger clients on credit terms, then I think probably it would be a wee bit optimistic to expect that on a quarterly basis.

That said, given where we were at the end of Q3, I think it’s a very good performance all around for our operating cash flow.

With that, I’d like to hand it back to Eric and I look forward to taking your questions at the end.

Thanks, Fraser. OK, TANDBERG Television today, as most of you will have seen by now, is announcing that we have signed a definitive agreement to acquire SkyStream. I’m pleased to announce, or introduce, [Jim Olsen], as the Chief Executive Officer of SkyStream. He’s here with us this afternoon and he’ll be up in a few minutes to give you his perspective on the transaction and a little bit about the rationale.

I think, you know, first of all, it’s important for you to appreciate that, for TANDBERG Television, looking at our business and our market drivers, as I’ve hopefully already made fairly clear, IPTV is one of those key drivers in the foreseeable future. There are also opportunities presented to us for industry consolidation, which clearly those of you that are long-time fans of the space will recognize SkyStream has been a key player in the global video compression space for many years.

So really, those two factors, if you will, the opportunity be a facilitator for industry consolidation and the market drive we see, or the market opportunity we see in the IPTV space, really catalyzed TANDBERG Television to do a very thorough review, if you will, of the opportunities that we could pursue. And, the conclusion obviously was SkyStream represented the best opportunity. I’ll refer back to my common themes of best in class technology and a great cultural fit. SkyStream fit both of those bills.

So, to elaborate a little further, the summary of the transaction, as you’ll see in the press release, it is a purchase price of $80 million. That will be a mix of cash and shares. We have now signed the definitive agreement and we would expect closing to be not later than mid-April of this year.

SkyStream’s financials, Jim will elaborate much more, but essentially, it’s a very successful company. They have seven consecutive years of top line growth and many of you will recall those are some pretty dark years in the middle there, so, an impressive performance.

In revenue terms for 2005, just over $30 million, and that’s up 43%, year-over-year and they are profitable, i.e., they achieved profitability in the fourth quarter of 2005.

SkyStream’s business, as I said, is very complementary to TANDBERG Television, both in terms of the product base as well as in terms of the markets that they serve. Of course, we’ll elaborate more in a moment. And, for TANDBERG Television, it does, as I said, consolidate our market leadership position in the spaces that we play in. Certainly again, in terms of the video compression technology, it extends our scope of supply, in particular, into the IPTV segment, and also, a bit lesser known in terms of SkyStream, but they have a software solution, or software product known as zBand, which we would characterize as a push video on demand technology, i.e., you sell that application primarily into one-way networks, like a satellite, direct to home network, for example, or a terrestrial network without, perhaps, the back channel capability. I contrast that with the on demand technology that we have with N2 as more of a pull, or two-way video on demand technology. So, it’s a very complementary fit.

A little bit more on the product sets, specifically the SkyStream compression solution, high density, cost effective encoding solutions. And these are being sold today, really around the world, in particular, into the IPTV space, but also into the cable and satellite operators.

From zBand software, I mentioned that as the [PushVOD] client server software product and the source in edge media router products. Again, well, in this case, IP encapsulation solutions primarily targeted at the satellite space.

In terms of market, coverage, I’m harping on IPTV a bit here, but I think it’s important that we all get the message. TANDBERG Television today is selling primarily into what I would describe as the Tier1 telco, so your larger telco operators around the world, SkyStream primarily selling to the Tier2 and Tier3 telcos, and in particular, very successful in the US IOC market. So you can see a fairly significant, or fairly obvious complement-ability in terms of the market segments. And another segment that SkyStream has been very successful in selling into is the Enterprise or VSAT market, something that, for all intents and purposes, TANDBERG Television hasn’t sold into at all, previously. And this is a great opportunity for us to take our products into that space.

When you take a look at the engineering R&D of the two companies, SkyStream brings something over 50 very talented, very focused, if you will, engineering development engineers into the fold. Of course, there, with their headquarters in Silicon Valley, there’s clearly a depth and breadth of talent in Silicon Valley that we can hopefully leverage in the long-term for further expansion and growth of our organization.

And finally, I think the rationale, clearly for both SkyStream and for TANDBERG Television, is again accelerating profitable growth for our companies. That is what it’s all about. We are continuing our themes of best in class technology and the cultural fit, and I think, as you’ll see here in a moment when Jim comes up, very similar cultures across our two organizations. I’m really excited to put these companies together and see what we can make happen in the space. So, with that, Jim, if you’d like to come up? And I’ll be back in a moment. Thanks, Jim.

Well thanks, Eric. It’s great to be here Fraser and [Yon]. I think the IPTV market place that we collectively face will see an immediate, long lasting and very, very positive change starting right now, today.

Just to tell you a little bit about SkyStream, some of you may not know as much about us, we are about a 10-year-old company, Silicon Valley based, as Eric pointed out. We formed our company in 1996 to actually build a company, very contrary to many other companies that you have come to know and love and possibly hate in Silicon Valley, that were born to make people a lot of money really quick so that they can go on to something else. We’ve actually concentrated for 10 years on building a fabulous company, brick by brick. I’ve been with that business for nine of the 10 years myself.

Part of that is, of course, building a profitable enterprise. We reached over the $30 million mark this past year, in 2005. And, from the second quarter on, we’re profitable, even though our targets called for profitability in the fourth quarter. We achieved that two quarters early. Our gross margins are as impressive as TANDBERG’s, maybe we’ll even raise the average bit. I hope that we can keep that up. In 2005, we ran at about 65% gross margin.

The markets we face are the IPTV market, Telco TV market, very similar thrust as TANDBERG, but a very complimentary thrust as well. We have funded that thrust through a very profitable business in satellite market, both our VSAT product offering that Eric mentioned, as well as our direct home offering. We share the second largest DTH provider in the U.S. as a customer, the Dish Network, Echo Star Communications, and Eric mentioned our enterprise business as well.

We are headquartered in the heart of Silicon Valley, about 100 people; we sell all over the world. We’ve been shipping products since 1998, actually 1996 a little bit of product that early. Since the day we’ve shipped product we’ve provided worldwide 24/7 support all over the world. We have had, actually if you go back in time, nine consecutive years of revenue growth, but the prior two years wouldn’t show up on the chart. We were pretty small back then, but as you can see, we’ve accelerated our growth over the past couple of years. In the 1996 through 2000 era we looked like a pretty typical Silicon Valley company. Venture capitalists literally dropped by with truckloads of money and dropped them on the sidewalk for companies like us to go out and get and build a business, and it was pretty easy to grow.

That all changed in 2000 as the world really went through the steepest decline in technology spending in history. We managed to continue to grow, albeit slowly, during that period. We tweaked our strategy, went into the enterprise market with very related technology to continue to grow our business, and we also dramatically lowered our costs, we went from 171 people down to 95 over a very short time period, and took other steps as well. I remember with a group of other SkyStream people, walking through the building and unscrewing every other light bulb to save money. So this is the kind of company that I think is very fiscally prudent, and always has been.

We came out of that period in 2003 raising $10 million from the leading European venture capital firm, 3I based in London, and another $19 million from other sources, and have never looked back, becoming profitable in 2005, growing our business at the fastest rate since the early days.

The outlook for the IPTV market is exciting indeed. There are tremendous opportunities, but no one company can address all of these opportunities by itself, whether that company is TANDBERG or SkyStream, or anybody else for that matter. So it is a perfect time period to consolidate, this is really the first headend consolidation in the industry, and I think a bellwether for things that are to come.

You can see that worldwide Telco TV subscriber growth is projected to be fairly dramatic downstream, and that’s being recognized now by companies like Cisco Systems, which recently bought Scientific Atlanta to participate in this market as well.

Specific revenue that’s available to TANDBERG and SkyStream moving forward is shown on the right here, another very exciting way to look at the market just in terms of the growth of headend video on demand and middleware revenue. Our company, as Eric talked about, has made a pretty dramatic entrée into the Telco TV and IPTV market place. We started shipping our Mediaplex video headend chassis into this market in the U.S. at the very end of 2003. In 2004 we really ramped our shipments, selling to small rural operators, but then reaching into larger companies. FairPoint Communications in the United States is the 16th largest phone company; TDS a win in the second half of 2004 is the 10th largest local exchange carrier in the United States. Fast Web a little later in 2004, is the largest IP video deployment in all of Europe, based in Milan, and you can see that’s continued to grow. By the time midnight December 31 came in 2004, SkyStream had won exactly 50% of the U.S. IOC announced deployments that year. In second place was Tut Systems and in third was OptiBase. We came from nowhere at the end of 2003 and became a dominant provider by the end of 2004.

2005 we extended that reach throughout the United States, but also began to win some global Tier I’s. NTT is a SkyStream customer of our Mediaplex and iPlex products; Deutsche Telecom, China Telecom and others as well. So we’ve continued to grow our business and reach into higher and higher global Tier I marketplaces. We’re a small company, but we have a global presence, and really have ever since we started our business. You can see our headquarters there in the United States, but selling offices, sales offices and support offices, most of them very small of course, all over the world. In Thunder Bay Canada we have our zBand software development team; we’ll talk about the zBand software and what it does, and what it brings to TANDBERG in a moment.

This is just a smattering of our customers all over the world; hopefully many of these logos are ones that you recognize. We’re very proud of what we’ve done in these accounts globally, many of them now are repeat accounts, and we continue to grow our customer base. All told we stopped counting customers, it was a very exciting thing to do back in 2001, we stopped counting when we had maybe 250 customers. I would suggest today we probably have over 400 all over the world.

Just to touch on a few of these customers, we share now with TANDBERG the Dish Network in the U.S., I mentioned earlier. Our IP encapsulators there have been the key element in broadcasting dish television to today over 12 million subscribers across the U.S. 24/7 without ever any serious problem resulting in any down time. So we know how to do mission critical operations for our customers, and Dish is one of my favorite examples.

Fast Web I mentioned, I think that actually may be an account we share. There’s a lot of headend providers that have sold technology to Fast Web, we’re one of them, and be very happy to grow our business there with Alcatel moving downstream with TANDBERG. On Alcatel, that is a key partnership of ours, and has been now for over a year. Alcatel is a worldwide reseller of our Mediaplex and iPlex technology, and the combination of partners we have now with TANDBERG having a very close relationship with Siemens and SkyStream having a very close relationship with Alcatel, we now really become the partner of choice of the large telecom equipment providers.

TDS is a very significant #10 local exchange carrier in the U.S., NTT I’ve mentioned, NTT is using our technology both on the eastern part of the island and the western part of the island, and we expect a lot of repeat business there now as we move from trial to deployment. GlobeCast is a division of France Telecom, it uses our technology for television backhaul, but also direct to home television really all over the world 24/7. Movie Beam is a service that grew out of Walt Disney Company, Movie Beam deploys our push VOD solution zBand. You’ll hear more about Movie Beam in the future, it’s a very, very exciting on demand content service that again, you will hear a lot about.

Reuters is an example over here in the European theater, they’ve been a customer of ours, we have built a satellite based network using both our source router, our edge routers, and in fact our zBand software in some unique applications for Reuters. The biggest one is delivering real time stock quotes and financial information to over 8,000 locations using our technology throughout Europe. With SkyStream technology Reuters has been able to increase the number of transactions per second that they broadcast around the globe from about 9,000 to over 55,000 individual price changes and volume information per second. They couldn’t do that without SkyStream technology.

I think I’ve mentioned many of these key partners we have, I think the key ones here are Alcatel, certainly Hughes and Scientific Atlanta, [Teleste] right up here in Scandinavia is a key partner, a new partner of ours, sold over $.5 million worth of our gear in the first six months of our relationship into mostly the European cable market, but also the European Telco market. We have a number of technology partners, as you can see down below. We partner with every single access system provider that you can imagine, a very key partner in the Telco TV world, and in middleware we’re agnostic too, we partner with Microsoft TV, Microsoft TV is also a customer of ours, and Siemens Myrio is a key partner all over the United States. Set top boxes, we’re interoperable with every set top box ever manufactured for IPTV and we’ll continue that downstream.

We’re very complimentary from a technology perspective with TANDBERG, and Eric has mentioned this, but the TANDBERG products are on the left, the SkyStream ones are on the right. TANDBERG obviously known for very high quality, high performance, high end encoding, both HD and SD; SkyStream know for high density, high quality, the Mediaplex itself is the densest real time MPEG2 or MPEG4 encoding platform on the plant, up to 48 real time encoders in a single 20 rack unit chassis. The iPlex is the densest encoding platform in the industry with eight channels in a single rack unit. iPlex shipments in the fourth quarter of 2005 were up 50% over the third quarter of 2005, and this is a very, very exciting new business for the combined company.

The combination of asset management software, and PullVOD software with interactive content enabling software from GoldPocket, combined with the SkyStream video headend technology and our push VOD solution are going to make TANDBERG an absolutely awesome competitor as we move forward. We also bring a lot of compliments from the satellite delivery perspective as well. We share some common customers in the direct to home marketplace, but SkyStream also has the push VOD software, I’ll highlight that in a moment and show you, very quickly, how it works.

But we’re also the strongest worldwide provider of IP encapsulators, in fact we’ve actually resold some of those in the past through TANDBERG, and our edge media router is a world leading IP encapsulator receiver at the other end. It’s both a receiver and a Cisco class router in the same product. TANDBERG of course has been a leader in real time delivery solutions for a very long time in the satellite space, I would say we’re both very profitable in that satellite space and can increase penetration there with the SkyStream technology plus the TANDBERG real time headend technology very dominant there today, and their broadcast receivers. So a very complimentary product set, very much extends our range into the satellite markets across VSat and direct to home television.

Many people might wonder what zBand and push VOD is all about, the VOD market, particularly in the IPTV segment, will become a hybrid of both pull, two way, I want this movie delivered in real time to my set top box over the network, and push technology, where the content is already on the hard drive. That model is what zBand brings to the TANDBERG pull model. In push VOD movie files are actually encrypted and labeled at the source, labeled with the rights for usage. Then these movies are pushed, unbeknownst to the user in the home, over the network at the right period of time when the network is not being utilized much, and since it’s IP delivery it consumes much less bandwidth anyway. The user doesn’t have to be there to receive the movie, the operator can just push down the network all the new releases, all the top hits that people are watching, all the classics that should reside on that set top box, maybe up to 100 or 200, in the Movie Beam case it’s about 100.

The consumer can now select right off his set top box, which movie he wants to see. If it’s a new release it’s already there, and the quality is HD, it’s essentially HD quality because the bits have been delivered flawlessly over the IP network. If it’s not a movie that’s there, then through the pull system it can be requested. In the push model encryption middleware requests keys from the headend, that gets delivered along with the content or separately, and then the consumer has essentially DVR capability, full trick play, pause, fast forward, rewind, and billing occurs automatically through the monthly statement.

The combination of both the pull model and the push model is really the way Telco’s in particular will need to go. They don’t have the bandwidth to do pure pull all the time, and having a push model where the content is there all the time, the hot content is the way things will evolve. So this hybrid model, TANDBERG will be the first company in the world to be able to deliver the complete hybrid model.

The impact of our combining forces on the marketplace is really substantial. In 2005 overall market share of TANDBERG was 22%, that will rise to 25%, it doesn’t sound like a huge rise, but it will increase in an area that is very significant, which is combining large headend capability, high quality, as I mentioned earlier with the edge of the network, where the SkyStream iPlex is poised to succeed. It will take that combination of technologies to get into the dominant SBCs, the large RBOCs in the United States, and the larger PTTs over here in Europe. So I believe that with this combination this market share is poised to grow even more.

As you can see in Tier I, we become a clear leader with, as I was just mentioning, the headend solutions and the edge solutions. In Tier II we both have a strong presence, we’ll clearly be a leader; and in Tier III this is an area where SkyStream has been very, very dominant and the combined companies will be clear leaders as well.

Before I turn it back to Eric let me just say again it’s a pleasure to be here. I think the combination of our companies is going to change this landscape forever. I think we’re poised for a great future together, and our companies are very similar from a cultural prospective. I’ve know Eric for five years, I have a great deal of respect for him, we’ve gone from competing in the marketplace to hopefully soon collaborating, and it will be much better to be on the same side of the table as Eric as opposed to the opposite side of the table. So thanks very much.

OK ladies and gentlemen, let’s see if we can’t wrap up here fairly efficiently. One comment just to refresh everybody’s memory, we’re all talking about millions of Norwegian krone, let’s remember as we announced in Q4 of this year, that from the first quarter of 2006 TANDBERG Television’s financial results will be in U.S. dollars. We will be in approximately two weeks coming out with historical restated financials, of course in U.S. dollars, so we’ll give you all the background information. But if you would, start thinking U.S. dollars in terms of your forecasts, projections, etc.

So with that let’s see if we can wrap up here. The big picture, what’s driving TANDBERG Television’s business now and presumably over the next several years? Hopefully this will look very familiar to all of you; we derive some comfort from the fact that the drivers for our business that we identified two and three years ago are still very much driving the business today. And of course HDTV with comments like this from the CMO at LG Phillips, “HDTV is no longer an option, if you will, it is, in fact, a market requirement.”

IPTV, the Chairman and CEO now of AT&T stating in November of ’04 he expects IPTV to change the way people are going to watch television. This is the what you want, when you want, where you want concept. Video on demand, Brian Roberts, the Chairman and CEO of the largest cable operator on the planet last November stating that “Video on demand has literally changed the way people watch television.” In support of that he stated that there were “over 1 billion views of on demand content, amongst those Comcast customers, through November.” In fact I just saw some results they finished the year with over 1.4 billion views through 2005. He’s clearly using video on demand to reduce churn and drive subscriber growth rate, it’s key to his business model.

Finally interactive television, of course Rupert Murdoch following his DIRECTV acquisition stating he was planning to use interactive TV as one of the ways in which he was going to drive subscriber growth rate for DIRECTV in much the same way he did for BSKYB in the UK. The take home message here is all four of those drivers are in fact compelling consumer propositions. These aren’t technologies that we’re creating; these opportunities are creating a pull for TANDBERG Television products and solutions.

So the first point here, strong market drivers, what I was just referring to, compelling consumer propositions creating a pull for TANDBERG products. Across our scope of supply, as I mentioned earlier, three core pillars if you will, compression, on demand, and interactive solutions. We are wholly unique in our ability to take that breadth and depth of solutions into the market, and to the next point, the Switzerland of technology if you will. What we’re referring to there is our unique ability to sell these technologies across all the platforms, be they cable, satellite, terrestrial, Telco, and more and more across all the end devices.

So the message here, if you’re looking to move video from the headend if you will, or from the point of content creation, to the consumer, irrespective of the transmission media and irrespective of the receive device, TANDBERG Television is bound to be a key technology supplier right in the middle of that value chain.

Bottom line, that’s why we feel we’re well positioned for growth today and into the foreseeable future. So with that, I will thank you again for your attention, we certainly feel good about where we are and where we’re headed, and we’ll open up for questions.

OK, at this stage we will begin the question and answer session. [OPERATOR INSTRUCTIONS] Eric, do you have any questions from your end?

Give us a moment. Yes we do, so hold on a second operator.

What I want to ask, TANDBERG Television was involved in the Athens Olympic Games, next will be the China Olympic Games. Will you win the contract there?

The question is in terms of opportunities for us delivering equipment, specifically supporting the Olympic Games, and I guess in particular the upcoming Chinese hosted Games. The short answer is absolutely. We would expect to be a technology supplier for the Olympic Games. There are literally hundreds of broadcasters attend these events and purchase contribution and distribution equipment to support the backhaul of those broadcasts. There’s not just one contract, there are in fact many. I’m not suggesting we’ll get them all, but we will certainly get more than our fair share. Other questions? Yes sir.

[Inaudible] has set the final date for closing the analog system in February 2009, does that give you more hope for your technology that it otherwise would have, if they hadn’t set the date?

Short answer is yes; that February date clearly drives a stake in the ground for the North American broadcast market. Now of course as always, difficult to quantify exactly what that will translate into, but yes, the removal of all analog services clearly means there needs to be a further investment in digital technology to support that.

But does that mean that you will have [inaudible] because my next question is, how would your running shoes now have to be put in gear when somebody like Cisco sets its eye on this market?

Well let’s put it this way, from our perspective we’re competing with Cisco tomorrow the same way we were competing with Scientific Atlanta yesterday. And my suggestion there is, quite effectively. Nothing about the Cisco Scientific Atlanta acquisition changes the competitive dynamic as it relates to our ability to compete with the core technologies, compression, on demand or interactive, that we’re going to market with today. And of course we would stand here and suggest, hopefully supported by our financial results that we’re in fact competing very, very successfully there. I think the take home message for me, with regard to Cisco and Scientific Atlanta, is really a validation, if you will, of the importance of technologies like those that TANDBERG Television brings to the market, and the importance of segments like IPTV over the next several years. It’s clearly a place big players are recognizing large opportunities.

Other questions here in the audience? Yes sir.

I have two questions for you, one with SkyStream, can you give us sort of a break down on the SkyStream product mix in regard to in quarters, and the other type of products like [inaudible] and video on demand, in terms of revenue? And also, how the encoding solution of SkyStream differs from TANDBERG’s own encoders, if there is a difference there in segment or qualities.

I’ll take the second one and then maybe Jim can answer just a top level break down on the revenues. In terms of how the encoding products are different, they’re different first of all in terms of the target market. SkyStream is selling successfully today, and I’ll use an example, in the Telco or IPTV space, whereas we at TANDBERG are typically selling into the sort of Tier I large central headends where the operators are willing and able to spend premium dollars for premium encoding solutions. That’s where we’re selling successfully today. SkyStream, as you saw really in some of the slides, comes to market with a much higher density, and to be frank, a better cost point, or better price point for the customer compression set.

And yes, there’s also a trade off in performance there in terms of absolute video quality. So we’re talking slightly different market segments and slightly different price performance barriers, or metrics that the target markets or target customers are using. Tier I Telco’s investing in the premium quality encoding and paying, if you will, premium pricing to do that versus Tier I’s for their regional headends or local headends where they can get away with or feel its appropriate to invest in higher density, effectively lower cost or lower price solutions.

So that’s the difference, from our perspective it’s an extension for both companies; it’s an extension of the target markets that we’re currently serving. And the second question was the revenue split.

At a very high level in 2005 we’re about 65% satellite based products, and about 35% the peer encoding video headend products. One statistic below that I can give you, we shipped about 800 MPEG4 EVC encoders in 2005.

Other questions here?

OK there are three questions in the queue currently. The first is from James Crawshaw of Blue Oak. James please go ahead with your question now.

Thank you very much. I’m afraid I’m touching on some of the same issues, but perhaps just in terms of the Cisco acquisition of Scientific Atlanta, I understand that Scientific Atlanta was a key partner for Alcatel, it’s one of their preferred partners for encoding. Given that Alcatel and Cisco clearly compete in networking equipment, is Alcatel likely to look for a new preferred partner for encoding, and might that provide an opportunity for TANDBERG TV? Secondly, just on the analog switch off in the U.S., you touched on that, could you just clarify in a bit more detail where exactly the opportunity is for TANDBERG TV? Is it in the content and distribution side? And then finally, you made an acquisition, or you’ve announced an acquisition today, I think you announced an acquisition at the last set of results or shortly before. Do you feel as though you’ve got the capacity to keep on consolidating and making acquisitions, or do you think you need to take a bit of a breather now and concentrate on absorbing the two most recent acquisitions before moving on to further consolidation?

I’ll try to remember those three questions. The first one, as it relates to Cisco and Scientific Atlanta and Alcatel, I’ll certainly leave it to Alcatel or Scientific Atlanta to characterize what their relationship is like. What I will suggest is as Jim inferred earlier, SkyStream has a very solid relationship providing their range of products, compression products, into Alcatel in the IPTV space around the world TANDBERG Television has worked with Alcatel in the past, and to the extent that industry consolidation or acquisitions may shift the landscape in terms of preferred partners, of course we’ll be looking to go to Alcatel and others and try and position ourselves exactly as what we are, which is a premiere supplier of, at this point, full range of compression solutions. We could be the one stop shop, if you will, of video compression supplier for any system integrator looking to deploy in an IPTV space. Hopefully that reasonably answers your question.

In terms of your second question, the analog shutoff, or switch off in the US in February of ’09, a little bit of elaboration on what that means; to be frank, it’s difficult to characterize it. Explicitly, it means that the broadcasters will, of course, no longer be transmitting in analog. They’ll be completely digital. Of course, a number of those broadcasters, in fact some might suggest the majority, are already dual broadcasting in both analog and digital. So, you could say, well maybe that doesn’t actually incrementally increase the revenue opportunity.

It actually will, in that not all broadcasters are, of course, digital yet. And, of course, many of those broadcasters, who initially purchased compression-assist systems did so six or seven years ago. So, we’re getting to the point where there’s a natural upgrade expansion cycle. So, again, it’s difficult to quantify and I’m, at this stage, just talking about the terrestrial opportunities. I’m not speaking at all about potential cable segment implications or IPTV for that matter.

So, you know, clearly significant opportunities and I think the point is, we will be there with the right products to take full advantage as the market develops.

And finally, in terms of further acquisitions, I hope you recognize TANDBERG Television’s strategy to date has been one of aggressive, albeit profitable, growth. And we absolutely expect to continue that. That being said, trust me there’s a very high priority on insuring the success of the acquisitions that we’ve made to date. So, we’re not on a hunt, if you will, for other opportunities. We’re clearly focused on delivering on those that we’ve announced and completed thus far, and we’ll take it from there. Yes?

Thanks very much.

If I could just come in, this is Fraser with an addendum to that last point. Somebody on the web is asking whether there’s any sign that Cisco is going to look to court off [inaudible] encoder division of Scientific Atlanta. I think we haven’t certainly seen any signs of that. Equally, I think, as Eric has already characterized it, that acquisition and the ensuing integration process is likely to mean that those two companies have got a wee bit more of an interest [bit] to focus, going forward.

But, I think the potential acquisition of Scientific Atlanta’s encoder division might wait until next week. We’ll leave it for this week, I think, for the moment.

That’s very reassuring, thank you.

Thank you.

OK, the next question is from Steve [Harper], from [Aphis] Capital Advisors. Steve, please go ahead with your question.

Hi, thank you. I have a couple of questions. First of all, can you comment, Fraser, on the operating expenses, looking into 2006? You know, the last two quarters you’ve been running close to 22% operating margin. You know, so including SkyStream, how do you see that developing in ’06?

I think, as a company we tend not to give detailed guidance going forward. But with that caveat, let me talk around the question, somewhat that the acquisition of SkyStream, one of the criteria we have for acquisitions is that they are accretive within a 12-month period. And, I’m happy to confirm that that is certainly the plan for SkyStream.

I think our target operating margin of 25% is something that we still maintain as a target. But, clearly with the currently superior gross margin SkyStream can deliver, then we’ll maybe look at that as time goes on. But that’s something that, within the foreseeable future, we would still hope to achieve, as a target.

I think it’s early days yet to give detailed information on an operating expense structure, going forward. Suffice it to say that, as Jim has already pointed out, he’s clearly got some Scottish blood in him if he’s taking light bulbs out. I haven’t quite gone that far yet, but I think the culture meshes quite nicely and we’re going to make sure that we don’t go out there and blow our operating expense budget, going forward.

OK. And I want to ask as well, with these acquisitions, [N2] and GoldPocket etc., I can understand how you can show up at a large telco with, you know, more bags of tricks to sell them. But, can you just describe how being one company, are you able to do anything on the integration, the product integration side, of software integration, etc., that might also add value and sort of help you, vs. point solutions that are out there, and you know, there are just so many out there, I just, I guess my concern is that if there’s ever a better point solution, then you’re always sort of, you know, weaker against any of those other point solutions?

Sure, I’ll come back again to the underlying premise for all of these acquisitions, which was that each of those companies in their own right, brought to the combined TANDBERG Television best in class technologies. So, there’s no issue with them being able to compete, as you say, as a point solution for the products and services that they sell.

That being said, there are absolutely, if you will, the-one-plus-one equals three technology development opportunities. I’ll give you one example of that, the most obvious of which being the combination between interactive software from GoldPocket and the on demand software from, or applications, from N2 Broadband in an advertising implementation. So, for example, you’re General Motors and querying the return on investment you get for your annual $3 billion advertising spend, and let’s say, you’re not happy with that. One obvious application is as consumers, most of us go to the web when we’re researching a new vehicle. Wouldn’t it be compelling if instead of going to the web to research your next sport utility vehicle purchase, you went to a dedicated on demand channel from your cable system and accessed a 10-minute long-form video on the BMW SUV, if you will? And furthermore, if that on demand advertisement was interactive such that you could request further information, or communicate your buying information to the dealership, etc., etc.

That’s one simple example of the combination of interactivity and on demand advertising that, suffice it to say, is attracting a great deal of interest in the market today, as those advertisers in particular, question the return on investment for their spend and look for better ways to improve that model. Interactive and on demand can provide a pretty compelling improvement for them. So, yes, there are clearly new technologies that the combination can bring to market.

OK, and I just wanted to be clear, you gave a pro forma - in your presentation, you have a revenue growth figure of 22.5% in ’05 over ’04, pro forma. Is that kind of a clean, underlying revenue growth number? And also, you know, is there a currency impact in there? I just want to understand how fast you grew last year, kind of on an underlying basis.

The pro forma numbers for 4Q last year includes into broadband and also include GoldPocket. They did not, obviously, include SkyStream. The underlying exchange rate, I mean, clearly some of the movement is exchange rate related, but I think the overall impact of exchange rate on those two quarters is relatively minimal. I have to go in to confirm that, but it’s certainly not one of the major things that drove change in revenues, quarter-on-quarter.

OK, OK, and then, I just wanted to ask, within the – if you look out at sort of the solutions you’re trying to take to market, where does set top boxes, and particularly sort of set top Box software fit into your interest in sort of offering a complete solution?

I think that one of the privates, Createl was recently purchased and I’m just wondering what your thoughts are in terms of needing that in-house capability?

Set top boxes, and let’s be even more explicit, let’s say consumer receive devices, is a space that TANDBERG Television is, as we sit here today, not intending to pursue. I think we can all see there are some pretty large companies, with some pretty deep pockets, heavily invested in that consumer receive space. And, our intention, and all of our technologies today, are up in the headend, with the exception of there are, of course, some software applications, i.e., client applications that may run on top of a set top box, i.e., an on demand or an interactive TV application.

But again, in terms of any sort of hardware play, TANDBERG Television group is a professional system solution provider, not a consumer products provider. And, we intend to stay that way.

OK, and just my last question; I’ll let somebody else have a shot. But, it seems to me that we’re now at a point where the set top boxes that can decode Mpeg4 HD are going to be more available, you know, as we go through the first half of ’06. I’m just wondering if you’re seeing any impact on your orders, on your customer deployment schedules, etc., because my thought was in ’05 that was something of a gaining factor, particularly in IPTV.

The short answer is, you’re correct. As we go forward, there are clearly more and more available Mpeg4 set top box solutions. At this stage, I’m not seeing that as a barrier in terms of TANDBERG Television’s revenue growth. Obviously, we have the advantage. As it relates to these new technologies, our revenues, of course, lead the significant subscriber or consumer set top box revenues.

You’d need 200 channels of headend equipment to provide one customer system, as opposed to, or similar to, you need 200 channels for 10 million subscribers. So, from our perspective, the revenues for professional headend equipment are definitely leading the consumer space.

OK, thanks very much.

I think, unfortunately, operator, this probably needs to be our last question. I know that a number of people may have other questions, or those have asked questions on the web, I’ve got a note of your questions and I will actually contact you separately. But, I think we should sort of wrap things up fairly swiftly. Maybe one more question from the person queuing on the telephone.

OK, the last question is from Jason [Mercier] of [Arret]. Jason, please go ahead with your question.

Thank you very much. Fraser, I was just wondering if you could comment at all on encoding pricing, among the different platforms, whether Mpeg2, Mpeg4 standard definition, or Mpeg4 high definition? And then, maybe – any comment, you’re moving to U.S. dollar reporting. Any chance you might start reporting in different revenue segments, whether it’s encoding or systems, or something along those lines?

As far as pricing between the different compression technologies is concerned, I guess that the key thing I would reiterate is actually our gross margins are, if not improving, certainly in the more commoditized Mpeg2 end of the market. They’re certainly holding up. In recent history, we’ve tended to make gross margins there of between 45% and 50%. And that is something I’m pleased to report. We are at the upper end, or beyond the upper end of that in the last couple of quarters.

Mpeg4 AVC pricing, you know while obviously we want to make sure that we’re pricing those particular products to continue to from long-standing relationships with our clients, on balance, the margins there are slightly better than those sectors of the market where we face more competition. As I mentioned, we’ll just have to wait and see what happens, when and if our competition will launch competing products.

On the software side, we are relatively unique and therefore, the margins there tend to be in the 70%-plus range. So, taken altogether, I think we’re in a very good position. And, for the near technology, we’ll benefit from economies of scale as more Mpeg4 hasty enabled chipsets become available and we can write the costs of sales down.

As far as segmental reporting is concerned, under IFRS yes, we do have to think about further segmental reporting. But we’re still in the throes of finalizing that with our auditors. And until we do so, I’d probably prefer just to keep my powder dry and then work with you separately, Jason, just to make sure that you’ve got a good understanding of what we’re doing there.

OK, thanks.

Last question from the audience, yes sir?

[Inaudible] to China, does TANDBERG Television have some plans? I see that all the products are towards USA and maybe Europe. What about China, this big market? Are you active there?

Absolutely, both TANDBERG Television and SkyStream are very active in China. I think I would characterize the activity in revenue in terms as, of course, very early days and relatively speaking, a much smaller or lower scale, if you will, than other parts of the world. That being said, at some point in the foreseeable future, yes, there’s a huge opportunity. Our objective now is just to insure that we’re positioned, both in terms of the products and the routes to market, to capitalize on that. Fair enough?

And with that, I will thank you, ladies and gentlemen, for your attention and we’ll see you next quarter.

This now concludes our conference call. Thank you all very much for attending.