Identiv Inc (INVE) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this SCM Microsystems fourth quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. After it, we'll conduct a question and answer session. At that time if you have a question, please press the one followed by the four on your telephone. As a reminder this conference is being recorded Friday, February 21st 2003. I would now like to turn the conference over to Darby [Dye], Director of Investor Relations, please go ahead Ma'am.

Thank you. Hello everyone and thank you for joining us today as we discuss the results of SCM's fourth quarter and fiscal year 2002. Speaking on today's call, our are Andrew Warner, Chief Financial Officer, who'll provide the financial announces of SCM's recent quarter and forward-looking financial guidance, and Robert Schneider, Chief Executive Officer who'll provide an overview of SCM's market environment and business strategy. As we begin today's call, let me remind you that during the course of this conference call, management will make certain forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements involve risks and that actual events or results may differ materially. We refer you to the company's 10-K and recent SEC filings which explains several important factors that could cause actual results to differ from those contained any projections of forward-looking statements. Any forward-looking statements made on this call or based on the information that is currently available and which is likely to change over time. Although our projections will likely change, we do not plan to update them. SCM will provide our analysts and investors with information and forward-looking guidance in our quarterly financial news releases and conference calls. We will not provide any further guidance during the quarter and less than two*unless done through a news release, conference calls or SEC filing in accordance with regulation fair disclosure. Now, I would like to introduce Andrew Warner.

Thank you Darby. While the results of that fourth quarter and fiscal year reflected challenging operation environment, we believe they also demonstrate our ability to effectively deploy core technologies across diverse markets while preserving our cash resources. Revenue for the fourth quarter came in at $48.4m, which was above the range of guidance we have given for the quarter and reflected solid sales performance from both our security and our digital media and video division. For the fiscal year as a whole [Inaudible] revenue of $177.7m, also above the range of guidance we had given. Given that the present economic environment over the last year, we are very pleased with this revenue performance. In addition to maintaining our revenue momentum, we successfully preserved our strong balance sheet ending the year with over $56m cash and equivalents. Despite outlays of cash over $5m in the year for the acquisition of Towitoko and the buyback of stocks in the last quarter.

Now, I would like to give you some more detail on the numbers. The reported revenues of $48.4m in Q4 above the range of guidance we had [Inaudible]given for the quarter which was between $40m and $45m. Total revenues were up 4% from the $46.8m recorded in the fourth quarter of 2001, and up 18% sequentially from revenues of $40.1m in Q3 2002.

Gross margin for Q4 was 21% including a $4m inventory charge related to both our security and our digital media and video products. Excluding the inventory charge, underlying*on the line gross margin was 29% just under the 30% level we had targeted at the end of Q3. Underlying operating expenses came in at [$16.1]m above the range of 13.3m to 13.8m we had previously indicated and there are also a couple of extraordinary items in the quarter. The first was an impairment of goodwill of $15.4 m and the other was a charge of approximately $7.6m of infrequent charges. Excluding these two items as well as the amortization of intangibles, we had an operating loss of $5.1m in the quarter. Including all these items, as reported operating loss was $28.7m. I'll provide a more detailed analysis of the goodwill, impairment, infrequent charges and operating expenses in a moment.

*If weFirst let’s take a look at our performance on a divisional basis, revenues from our digital media and video business were $28m exceeding the range of guidance we've set or between $25m and $27m. This represents an increase of 22% from sales of $22.9m in the fourth quarter of 2001 and an increase of 5% from the $26.6m recorded in Q3 2002. Revenues from this division come from sales of our digital media reader writers as well as sales of our video capture and editing products. Both product lines fell under the Dazzle brand retail channel as well as to OEM customers and the PC OEM and consumer electronic industries. In Q4, we benefited from continued strong consumer demand for our products that leveraged digital video, DVD, anti-still photography technologies.

We also benefited from the new hardware and software products that we had launched in the last half of the year. Gross margin for the digital media and media divisions was 18%, operating expenses were $7.6m, which resulted in an operating loss of $2.7m. This includes an inventory charge of approximately $2m resulting from a write-down of discontinued products and inventory. Excluding this charge, gross margin would have been 25% up from a 24% in Q3 and in line with guidance for the quarter. Revenues from our security business were $20.4m in the fourth quarter above the range of guidance we have indicated of between $15m to $18m. *Although this Polaris (ph) represents a decrease of 14%* to 10 from sales levels of $23.8m in a year-ago quarter. It reflects a sequential increase of 43% from Q3 2002 sales of $14.3m. Revenues in our security business consist of sales of digital TV conditional access modules as well as sales at our (ph) smart card reader products to the government, financial and enterprise markets worldwide.

The year-ago*overall economic environment is dampening consumer demand for a digital TV's services in Europe, and many television operators are experiencing financial difficulty after years of subsidizing set-top boxes for their subscribers. This situation has led to lower demand for [Inaudible] digital TV decryption products *curreovenantly. The situation we believe will result overtime, at the same economic pressure, we will force operators to adopt most cost effective delivery systems, which our modules provide. Robert will provide further commentary on the dynamics of this market in a few moments. Sales of our smart card reader products, were again strong in Q4 driven by continued rollout accretive *of readers to the US armed* forces as fast *part of as the DODs common access card program, . tThe personal identification and network access. The *Our deployments to the US government are in conjunction with contract, we have won through partners such as [Inaudible] and North of [Inaudible] .

As we have said in the past, orders under these contracts tend to be large but variable in terms of timing, resulting in revenue variability on a quarterly basis. Based upon our current forecast considering,*concerning the timing of up coming orders, we expect that sales of our smart card readers will be lower in the near term. Gross margin in our security division came in at 24% for the fourth quarter. Operating expenses were $7.5m resulting in an operating loss of $2.4m. [Inaudible] that*This includes the charge to inventory reserves of approximately $2m for discontinued products and inventory. Excluding this charge, gross margin for the division would have been 34%, below our target of 40%, reflecting higher than expected trade costs, license fees and charges along with higher proportionate sales on [Inaudible] gross margin product in the quarter. On a combined basis total revenues for fiscal 2002, were $177.7m, exceeding the guidance we had indicated it’s* between $169m and $174m. This reflects a decline of 4% from $184.9m we recorded in 2001, but is a positive demonstration of the revenue momentum we had maintained throughout a tough year. Full year revenues multimedia (ph)*from our digital media and video division were $98.7m up 5% from fiscal 2001 level effecting continued strong consumer demand for digital media and video products, as well as the continued strength of the Dazzle brand and a tough competitive environment.

Full year revenues from the security division were $79m, down 13% from the $90.6m in 2001 and reflecting the impact of financial turmoil and the European digital TV market resulting in reduced sales of our conditional access module. Looking at the revenue on a geographic basis, the US represented 50%, Europe 38%, Asia-Pacific -12% of keyhole Q4* revenues. For fiscal 2002 as a whole, the US accounted for 61%, Europe 36% and Asia-Pacific 13% of revenue.

Now let us look at operating expenses in a bit more detail. Total operating expenses in 4Q, excluding the amortization of intangibles, stock based compensation expense and other infrequent charges of $15.1m, . aAbove the range we had given between $13.3-13.8m and up 2% from the $14.8m and expenses we recorded a year ago, quarter. Underlying*ining operating expenses represents 31% of revenues. And looking at main expense line items, research and development expenses were $3.2m, sales and marketing were $7.5m and general and administrative expenses stood at $4.3m. On an ongoing basis, we will continue to evaluate ways to lower our base line expenses across both divisions, in the view (ph) of increasing efficiencies in our business. AOur amortization of intangibles were was $462,000 in 4Q and we expect quarterly amortization expenses will remain at this level going forward.

And turning to the impairment of goodwill and intangibles under Financial Accounting Standard 142, all US public companies are required on an annual basis to evaluate the goodwill and other intangible assets on there *their balance sheet, vis-a-visvis-à-vis their* fair market value. During the fourth quarter, SFCM reviewed, goodwill and intangible assets and based on our market capitalization, we took normal [a non] cash impairment charge to goodwill and other intangible cost $15.4m. This means, we no longer carry any good will on our balance sheet. Incurring And turning now tooften (ph) the infrequent charges; during Q4, we incurred infrequent charges of $1.6m for penalty, legal settlements, and other costs, which relates to separation of activities on media and vVideo division. We recorded charges of $3.3m related to tax receivables that were no longer considered collectable and the charge of $2.7m related to facility restructuring and several *severance costs. This gave us a total of $7.6m in infrequent charges for the fourth quarter. Q4 incurred [interest and other]*stood at a loss of $741,000 resulting from interest income, which is more than offset by a loss from on* foreign exchange and we recorded tax provision of $290,000 in the fourth quarter.

SCM's reported net loss for the fourth quarter 2002 was $29.7m or $1.90 per share. This compares with the reported loss of $42.7m or $2.78 per share in a year-ago quarter. On a pro forma basis, net loss for the fourth quarter was $6.2m or $0.39 per share excluding amortization of intangibles and payment as goodwill and intangible and other infrequent charges. This compares to pro forma net income of $645,000 or $0.04 a share for the fourth quarter of 2001. For the full year 2002, SCM reported a net loss of $49.1m or $3.15 per share and this was compared to reported net loss of $68.3m or $4.46 per share in fiscal 2001. On a pro forma basis, net loss was $5.3m or $0.34 per share excluding amortization of intangibles impairment of goodwill and intangibles and other infrequent charges.

Turning to guidance for the first quarter of 2003, we expect our revenues from our security business to be in a range of $15m to $17m. This reflects continued near-term pressure on several air*sales of our conditional access modules into the digital TV market, as well as expected lower sales for our Smartcard readers due to the variability of [Inaudible] activities related to the US Government Common Access Card Program. We expect gross margin for the security division to be around 40%. We expect revenues from the Digital Media and video business will be in the range of $16m to $19m for the first quarter reflecting seasonally lower demand and a challenging economic conflicts [unaudible] with increased competition. We expect gross margin for the Digital Media and Video division to be around 25%. Therefore, on a combined basis we expect total company revenue will be in a range of $31m to $36m for the first quarter and blended gross margins to be around 30%. We also expect an operating loss for the first quarter to be in a range of $4m to $6m. And to wrap up, let’s* take a look at the balance sheet. Cash and investments were $56.2m at the end of 2002 compared with $59.4m at the end of 2001. The decrease in our cash position was actually less than our total cash outlays for the year, which included $4.5m for the acquisition of Towitoko and may be*nearly $700,000 for the repurchase of stock in the fourth quarter. Preserving our cash position continues to be a key area of focus. Accounts receivable with $31.4m at the end of Q4 compared to $33.5m at the end of Q3. And inventory levels were at $39.1m compared with $44.1m at the end of previous quarter. Day sales outstanding at the end of Q4 was 58 days compared with 75 days at the end of Q3, 85 days at the end of Q4, 2001. With that I would now like to turn the call Robert.

Thank you Andrew. 2002 was indeed a challenging year for many companies especially in the technology sector. And in spite of difficult economic environment SCM maintained revenue momentum and pushed up all [preserved our] cash. We made progress in several keys for each of areas including new customer relationships, partnerships and market share gains, which reinforce some [Inaudible] SCM's leadership positioning in each of all the target markets. We enhanced both our management team and our board with the addition of new members to who* bring deep industry expertise as well as solid business experience. And we saw positive developments within each of target markets *that improve [Inaudible] the outlook for future growth and expansion as our keyIT* budgets will become available. Government [Inaudible] would expand on financial budgets in digital TV market push up, [led]t us to lower the cost structures. Today I would like to give you an update on SCM's market opportunities and share with you the reasons why we remained very positive about the future of these markets and confident of SCM's ability to capitalize on each of them over the long-term.

First the digital TV market, for nearly a decade SCM has participated in the development of the digital pay-TV industry in Europe and in the US. Most of those activities have been helping to large specifications on open platforms. As we have discussed with you in the last several quarters, that the digital TV market in Europe currently is in a state of profound transition moving from a closed* business model and the technology--—closed* technology to an open system that dramatically reduces the capital costs for operators. SCM offers digital TV operators a more cost effective to delivery* the model with our conditional excess *access modules, which slot in turn open systems set-top box, or an integrated digital TV set to get the broadcast content. We believe that we'll be in*European digital TV operators will adopt an open systems about over time, as financial pressures on them increase.

When they do, SCM intends to be the company supplying them this with* conditional access modules with supplied over 4m modules to-date the smaller operators to all Europe and in the last several months have signed one of the largest operators in Europe as a customer. We are the unchallenged market leader in this technology. We have achieved a major breakthrough* in October this year when we signed the agreement to provide the conditional access modules for digital television broadcast decryption to Premiere, the largest and actually the only pay-TV operator in Germany and the third largest pay-TV operator in Europe. We shipped the initial volumes of modules to Premiere in the fourth quarter for inventory stocking purposes. And in the last two months, major set-top box manufactures have begun to offer and promote open system set-top boxes with a common interface slot that accepts and is qualified for SCM's module technology. These manufactures include household *lines names like Phillips, Panasonic, Nokia and Gondic (ph) . The fact that these consumer electronics companies are so quickly bringing these common interface set top boxes to the market is a very positive sign for the adoption of this approach by the Digital TV industry as a whole. Realistically we do not expect the transition-taking place in this market to accelerate in the near-term. We're still at the beginning of the adoption curve of common interface technology. We of course know that the regulators standardization bodies are boarding *putting a lot of pressure on operators to adopt those. And we're confident that *SCM [Inaudible] will be part of the solution for European Digital TV operators as they increasingly* adopt an *open system set top box model with a conditional access module. That in fact allows as mentioned earlier to lower the costs for operators to stay in the business. Long-term market potential for digital pay TV in Europe remains huge.

Digital TV is expected to expand from 24m subscribers in 2001 to reach 18m European households by the end of 2007, that's data from market research from data monitor (ph) . For SCM this is extremely promising as we expect that operators *throughout Europe[Inaudible] will follow *Premiere’s [Inaudible] lead in adoption of our technology. Outside Europe, market opportunities for SCM are expanding rapidly as countries in Asia are opting for digital cable TV systems based on open platforms. For example, in Korea the Government plans to create a cost effective system for delivering and protecting digital cable television broadcasts to between 5m and 8m Korean households over the next five years. This system will be based on the US open cable specification, which is the US equivalent to the European DDT's, common interface, which, in fact SCM helps to develop two years ago. As we have reported before, SCM has been selected by the Telecommunications Technology Association in Korea, which is the Standards Organization, which will enforce the adoption of open systems. And we have provided first shipments of test tools from the * abilitycompatibility (ph) equipment and all the expertise to certify the Digital TV equipment used in such an open system.

In this context we also formed a strategic partnership with NDS, the largest global supplier of conditional access technology worldwide to combine our conditional access modules with their open video guard security software to create and to end cable TV systems for Korea's *emerging [Inaudible] digital cable television industry. And last we've signed an agreement with local Korean conditional access provider [InaudibleATRI] to provide common interface technology from their development of conditional access modules in the Korean markets. China also is rapidly setting up an open system space digital cable TV infrastructure. In 2002, we had formed an agreement with the Digital TV Industryial Alliance, a Chinese conditional access provider to provide our secure [Inaudible] technology for [high]ead-end applications, that would enable secured digital cable broadcast from several thousand operator's’ sites. So, this is not for the end-user, but it's for the distribution system of the Chinese Digital TV adoption. Over the next five to eight years, we believe the inevitable switch from analog to digital as well as the interface [open] broken (ph) business model will force a more rapid transition to open standard space delivery model which will provide significant opportunity for SCM.

Turning out *now to our second market opportunity, PC Security Systems based on smart cards and smart card readers. Over the last year, SCM has been a significant supplier of smart card readers and reader technology to the US government, working with government [Inaudible] system indicators*, it sounds like the system indicators and other strategic partners including Schlumberger, Northop Grumman, and active card, we’ve was supplied over 1m smart card readers for the Department of Defense, Common Access Card program. Under this program, the DOD intendts* to provide a personnel id card for secured network and physical access to more than 4m hectares due to military personnel. This program is well underway and the DOD may expand the deployment up to 13m (ph) non-active personnel contractors and dependence.

To date, only about 2m cops cards* have yet been deployed, even so, this is the largest deployment of any TKI program in history. Based on our strong participation in the Common Access Card program and on our involvement in the smart card reader deployment on the global basis, SCM gained market share in the last year and *unseating [Inaudible] as the number one supplier of in the world of leaders for smart card based security applications. We expect this internal assessment of our market position to be verified by the market research from [InaudibleFoss and Sullivan] in the next several weeks, when they publish their*ed annual rankings. In the near term, we expect to ship, as Andrew already indicated that fewer smart card readers for the Common Access Card program as forecast provided by our partners indicate that the next six months will have fewer *project [Inaudible] deployments, than in previous periods. It is expected when dealing with government customers that there will be fluctuations in the business and so this is not a surprise. SCM business relies not on one customer, but on diverse*d end markets to provide balance and favorable revenue streams.

Within the government sector, there are additional smart card initiatives on the horizon that could further expand our opportunities in the US. For example, the transportation work ID card or [Inaudible] initiative of the US transportation security administration to secure all transportation areas, and this is [Inaudibleprogram] already]l other decided and over the next three years, 15m workers at airports and sea ports, railways and bus lines will be issued identification cards to provide authentication and automized (ph) access to sensitive areas and data. Smart card and pilot programs for the [Inaudible] beginning and SCM is actively engaged in this pilots in *pursuit [Inaudible] of this business. Beyond the government sector smart card programs have been deployed in less dramatic numbers, but they continue to go forward. In the enterprise, there is *grlowing (ph) recognition that network access must be made secured to protect data and businesses. SCM is working closely with companies like Hewlett Packard, Sun and Microsoft not only to incorporate support for smart cards in their products, but also to implement smart card based systems for the internal security in these as well. These internal programs are expected to remain in pilot phase until budget constraints lighten on security issues increase. For SCM, the expansion of IT purchase will signal a significant opportunity to capitalize on the relationships that are all right in place.

Finally, in the financial sector, we continue to work both directly with customers and also *through partners, such as Schlumberger to supply banks with smart card readers for their emerging electronic service offerings. The costly applications in infrastructure for smart cards, they are still are lagging the volumes we have shipped to institutions such as American Express and Citibank, are still quite small. To ensure our ability to address these opportunities as they take shape, we continue to work on next generation technologies such as Compact Chlip (ph) and the Biometric *rleaders. So, whether we are talking about opportunity in the government sector, which is happening now, or in the enterprise and financial sectors which are more long-term opportunities,. SCM is extremely well positioned to capitalize on increasing demands for smart card reader technology. Our Power Action*products and technology, our experience in market share leadership and our strong partnerships engrossed to smart card industry prepare (ph) us to win smart-card reader business as these market opportunities develop.

Finally, let's take a look at the digital media and media business, the products we sell under the Dazzle brand. We experience an increasing competition in this consumer durable market over the last year, which was intensified, but difficult economic environment, in spite of this, the performance of our digital media and video division was strong *by any measure. International *Rrevenues increased by 5% for the year and by 22% in the fourth quarter. At the same time, we took significant costs out of the business, and aligned our market activities to support one brand, Dazzle. We also introduced several new next-generation hardware and software products for both digital photo and media applications during the 2002.

The Dazzle brand continued to hold and finding key categories and we ended the year as the market-share leader in video capture and digital media readers and secured the number-two spot into emerging category of DVD creation software. As you know, at the beginning of 2002, we announced our intention to separate the digital media and video division [towards] sale, [more] spin-off in order to fully focus in our security business for digital DV and PC platforms in the first half of the year, we legally separated the business and haves successfully separated it internally for management and day-to-day business perspective as well. The state of the capital markets has made it difficult. We accomplished a lot phase of this separation to actually divestiture (ph) . We will continue to monitor the receptivity of the markets, and intend to retain this business until we can divest it in such a way that maximizes shareholder value.

To summarize, and as a final note it is important not to forget that unlike many companies in today's environment get someSCM* benefits from a strong financial position. In spite of the challenging economy, we are pursuing *preserving our cash and today have a cash position of over $56m. We have noted that, *we have the the after-means to sustain our operations in support investments in opportunities that kind of,can* realize significant shareholder value in the future. We are focused on significant opportunities across all markets. Smart card based [legal] security for digital TV and PC platforms and virtual media and video added in products for the consumer markets. These are [Inaudible] accessed*opportunities exist both now and over the long-term. And we are committed to profitably capturing these opportunities with illustrative filing*industry defining technologies, strong partnerships, and market-share leadership. Given our strong market position and balance sheet, we believe the company's stock remain significantly on the*under valued. We continue to evaluate stock re-purchase efforts and we'll remain focused on improving shareholder value while balancing our desire to [preserveInaudible] cash assets. Now I would like to turn the call over to the operator for questions and answers.

Thank you. Ladies and gentlemen, if you would like to register a question please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question will come from the line of Robert Stone with SG Cowen. Please go ahead.

Good morning gentlemen. Andrew, I wonder if you would go into a little more detail on the inventory write-off? If revenues for the year essentially tracked above expectations, what caused you to end up with inventory that needed write-off?

Hi Rob. Couple of reasons behind that. First of all, looking at the DMV division, we [Inaudible] evaluating various products in that division [Inaudible] and during the fourth quarter, we again exited out of certain areas of the business that were low gross margin to us and took some charges of associated with that. We also, based upon our sales forecast moving forward, took a look at the inventory holdings that we had and because our sales forecasts moving forward particularly in Q1 are at the lower end, we decided [Inaudible] to take some increased charges to reflect the fact that inventory overhang was going to be little bit hard than we have initially anticipated. The most of the stuff relates to exiting from lower gross margin products that we no longer wish to focus on that forward-looking view of inventory holdings, vis-a-vis sales forecasts.

And with respect to the Digital TV, I guess the write-off was about half and half between each division?

Yeah, that is $2m each, correct.

Was the exercise similar in Digital TV or is there any color you can add there?

Similar exercise but with some inventory holdings we have for products, which there was no longer demand for those products in the marketplace. So, we took a write down associated with those products on the security side and then again taking a look at our total holdings, vis-a-vis, the sales forecast, we took an increase of reserves associated with that.

Okay. You know that expenses were above your plan. I think it was a couple of million dollars or something like that $1m to $2m. Can you provide some color there as to and this was regular operating expenses, not the unusual charges? So, what lead to the higher than expected expense levels?

A couple of main buckets (ph) expenses, Rob. First one is we took -- we had an underlying increase level of spend in those revenue level, which is particularly [Inaudible] side where a proposition of the expenses that are variable in nature and fluctuate directly with the revenue levels. So, the fact that we recorded higher revenues will not mean that we had higher revenues -- higher expenses for time in to support that. We also -- again across our customer base took a look at accounts receivable balances and also took some incremental charges associated with provisions for bad debt.

Okay.

That's kind of two areas, which accounted for that increased [Inaudible] expenses coming [Inaudible] over the 13.8m expectation.

Okay, in terms of the additional progress with Premiere Rob, roughly how much did that contribute in 2002?

Yeah, as of we have announced earlier, we signed an agreement on September with Premiere and we have shipped roughly around a million dollar worth of products in 2002.

Okay. Given your understanding of the -- and I recognize that you have given guidance so far only for Q1. I assume you are not prepared the guide for the full-year overall but just to get a sense of what a large operator might contribute as the Digital TV platforms go to an open system. What do you estimate is the annual market opportunity for customer like Premiere for your access modules?

Any forecasts, I mean, we are not giving any specific forecasts but even if you look in the markets itself, it is very difficult to forecast. The fact is that companies like Premiere, it's the German pay-TV operator, would like to target about roughly half a million new subscribers per year. So, that's the range, now of course we have it, -- we are still in a transaction phase, so they have, of course still some of the old, so called embedded box concepts, while they are opening up for the consumer brands like, I mentioned before Nokia, Panasonic and the consumer brands can only enter this market with our modules. So, this is a transition, so to how much of that new subscribers who will get for 2003, it's difficult to say.

So, is it, limited to new subscribers or does the fact that several well-known brands are entering the market suggest that they see some opportunity to move the units to consumer electronics channels. It is, some of that opportunity to convert existing customers or does it depend entirely on new subscriber growth?

It's clearly new subscribers, because the installed base of subscribers, which in fact have boxes as our platforms, which are more or less owned by the, which are owned by the operator, the pay-TV operator they will not be replaced. In fact the pay-TV operator could not even afford to replace them. The consumer [Inaudible] to do this, but without any charge. So, the new open Set-Top-Box (ph) business model is always for new subscribers.

Okay. Thanks very much.

Thanks.

Your next question will come from the line of Thomas Becker with HSBC Trinkaus & Burkhardt, please go ahead.

Yes, good morning guys, good morning Robert, good morning Andrew. Just to elaborate a little more on the cost side, we saw that G&A costs rose around 50% in Q4, is this due to, you just said provision for bad debt? That's first question. Second question is that, the outlook for Q1 is really muted and when we look into the full-year 2003, is it possible that we end up there with decline in sales compared to 2002? Third question is, do you expect any more charges on the separation of businesses for legal fees or something like that and overall to get back to the costs, just wondering what will be the cost run rate something like that, will it be in the range of $30m to $50m for each quarter for 2003?

Hi Thomas, it's Andrew.

Hi Andrew.

It is (ph) one by one.

Yeah.

In terms of the G&A, yeah the bulk of the increase quarter-on-quarter is down to the increases in [Inaudible] as through bad debt. In terms of 2003, the year [Inaudible] of indicated with, because of visibility, at this point we are not prepared to give guidance for the full year, we are giving guidance for the first quarter, at this point. In terms of the separation related costs, we do expect to see some small legal charges coming through on the separation costs, but we don't see it as a significant item moving forward and then in terms of the underlying expense base, yeah, we see it kind of the expense base moving forward in the kind the $13.5m to $14.5m range.

Okay. Probably just one follow-up, is it your target to breakeven on a full-year perspective for 2003 on operating income level?

Again, at this point, we are not offering guidance for full year.

Okay. Thank you guys.

Thanks.

Have a nice day.

Ladies and gentlemen, if there are any additional question, please press the one followed by the four at this time. Your next question will come from the line of Adrian Hopkinson with West LB Panmure. Please go ahead.

Hi, good morning guys. Can I return with a question on the balance sheet on the liability side, the accrued expenses and other liabilities, which increased over the year from 15 to 37. Could you give us some details on what is happening there and perhaps you could also -- you mentioned the $700,000 for the repurchase of stock, and I notice that the number of shares outstanding increased to 15.6m, I mean, generally speaking is there more scope to repurchase stock given your cash situation and the current level of the share price?

Hi Adrian, it's Andrew. In terms of the increase in accrued on the balance sheet, most of those are flat and that increases were flat. The increases and charges are taken in terms of inventory, in terms of the charges that we have taken on things like reserves of bad debt and also some of these in frequent charges. They haven't [Inaudible] cash; they had basically been accrued for expenses coming up over the next few months. So, that's why, and [Inaudible] , which is widely accrued number itself has gone up. In terms of the share buyback, we did enter the market during the fourth quarters. You have indicated, we did spend approximately $700,000 on buying back shares. This all are indicated in this comments, we are going to continue that program given the current evaluation of the company and the price of the shares.

Is there, I mean do you have any particular target amount, which you would consider spending for the buyback, I mean 700,000 is not very significant against the cash mentioned, which you have?

That's true. I think they are all pretty strict rules, [Inaudible] places to have a company in the US markets in particular to have a company can buyback shares and there are limitations to what the company can buy. Given that, we will stay aggressive in that marketplace subject to those rules and will, once the evaluation is attractive for us, we will go and we will actively repurchase shares.

Just as a general followup, could you give us a brief run through on what your appreciation is of the shareholders structure of [Inaudible] at the moment? Do you keep records of the level of share holdings by in [Inaudible] and management overall?

Yeah, we have records of that.

Is it a significant share, which is owned by employees and management?

No.

As far as Q1 is concerned, which is a question of the European conditional access modules, do you think that Q1 is a temporary low or is it some; I mean you refer to the cash problems of the cable operators and I noticed that there are mergers going through in Italy and Spain at the moment. Is that a significant factor as far as the Q1 level of business?

No. It is not, we are not directly affected by the large operators because the large operators have not deployed except the Premiere (ph) and Germany, but the other operators have not agreed to deploy open systems yet. So, we are not [Inaudible] , I think that's of cost, the overall scenario as I mentioned before in the European operator and [Inaudible] of the industry is not good. So, the financial, there is no financial strength and hence there is consolidation going on and that have of course has an impact also in our market sequence, which is the smaller businesses and subscriber business models. So, you know, we do not see, -- the major breakthrough happening of short-term. So, the changes in the industry don't affect the short-term, but it is the general economic climate, which is causing you the slow down and a temporary law in business with the US ministry of defense. Got the [Inaudible] correct.

Correct. Can I just ask, I am sorry to ask a lot of questions in a row, but perhaps I could just ask about the tax charge, which for this year was 13.8m, which seems quite a large charge given the operating performance and I know you referred to a 3m or so number, which you reckoned that you would never tax receivable which you wouldn't get. Is that included in that 13.8 or can you perhaps give us some reason why the tax charge is so high?

I can answer them. The main reason for the tax charge things are high is the impairment of the deferred tax affect (ph) that we took in the third quarter.

I see.

And consequently because we took the impairment with them, therefore booking a tax provision for Q4 as well and you are going to see that moving forward. The tax receivables that are doing well on the collectible are shown through the other infrequent charges line, not the tax line.

Okay. Thank you very much.

Thank you Adrian.

There are no additional questions at this time. Mr. Schneider I will turn the call back over to you.

Okay, thank you operator. In summary, we are confident in our ability to leverage our strong financial and strong market position to take advantage of the market opportunities on the long-term. Thank you for joining us today.

Ladies and gentlemen that does conclude you conference call for [Inaudible] . CONFERENCE CALL ENDS AT THIS POINT.