Scott McCulloch is Editor of Families in Business magazine.
Over the past 13 years André Kudelski has transformed his father's embattled audio recorder company into a €273m smart card and encryption software leader – not bad for a 43-year old
Producing smart cards that slide into cable and satellite decoders does not sound like your average father and son operation. But then André and Stefan Kudelski are not your average Swiss billionaires.
Kudelski SA's core business is software to encrypt broadcasts and smart cards for end-users to decode digital TV signals. In other words, the family-controlled company brings the digital revolution into your living room. The Swiss group is expecting strong growth in revenue and profitability this year helped by new digital TV contracts and the takeover of MediaGuard, Canal Plus Technology's access control business which it bought from French electronics group Thomson in 2003.
The €240m acquisition was pivotal. It drove Kudelski's share price north after a lacklustre spell in the doldrums a year earlier when the company issued a profit warning. From a strategic point of view, Bank Julius Baer said at the time, the geographical and historical fit between the two groups made sense.
So far so good. In March Kudelski announced a full year net profit of Swfr33.17m (€22m) against Swfr10.3m a year earlier, well above its forecast, and announced five new contracts in Europe and Asia which the market had been expecting. Earlier this year a report from Swiss bank Bank Sarasin said the group was deservedly optimistic in terms of its 2004 growth prospects. It predicted Kudelski would post a net profit of Swfr62m (€41m) up from Swfr33.17m in 2003. "I would say that I am comfortable with these figures," says CEO André Kudelski. "We have not indicated net profit, but I think that's more on the lower range."
But it's been a slog. Last November Kudelski's share price hit a 52-week high of Swfr45.50. It has since lost some steam but many analysts still rate the stock a 'buy'. They believe the company to be neatly positioned to feast on a long-overdue recovery in embattled technology markets. Over the past two years, the one-time tech market darling was hit by a slump that pushed digital TV operators into huge losses, forcing some into bankruptcy, others to team up with rivals and eating into Kudelski's shares.
Last year was a turning point. Revenue rose by 2.5% to Swfr412.4m (€273m), reflecting increased revenue from European and Asia-Pacific markets following the recovery in the digital TV market and partially offset by adverse currency exchange rates in the US. André Kudelski believes the recovery is gaining steam. The group's most potent acquisition, MediaGuard, has made Kudelski Europe's leader in "conditional access control systems" (decoder sofware and smart cards). With that, the company predicts, will come a tidy revenue of Swfr80m (€53m) and Swfr11m in earnings before interest and taxes this year. "It's a market consolidation that has proven to be quite successful," says Kudelski. "[The acquisition] has been a key part of an effort to consolidate the digital TV market. That was has been our number one objective for the last three years."
Those three years have not been without their challenges. Following the group's return to profitability in 2003, a more robust sense of optimism is emerging. Today there's an audible tone of satisfaction in Kudelski's voice. The ghosts of 2002, it seems, have been put to rest. Kudelski had suffered at the hands of its key clients – cash-strapped European digital television operators blighted by contagion from the meltdown in the global telecoms market. While a weakened, and margin-eroding, US dollar exacerbated its problems, the failed merger between its satellite television client EchoStar and DirectTV – a development Kudelski was counting on to consolidate its position in the American satellite TV market – was particularly problematic. "To support this merger, we had intended to invest in EchoStar, and had issued a $325m convertible bond," Kudelski said in its annual report.
To combat soured trading conditions Kudelski parachuted in a new CFO and restructured the group into separate management units – one for digital TV, another for its public access control unit. The goal: slash operating costs and boost productivity. "We abandoned or sold some activities which were no longer of strategic importance," Kudelski says. Meanwhile, the group hopes that its broadcasting customers can spur subscriber growth to build demand for its smart card products.
It could be argued that André Kudelski brought his travails upon himself. When the family business went public in 1986, he returned to Switzerland from California's Silicon Valley championing software as the company's saviour. But his father Stefan was sceptical. "My father was convinced the future of the company was to be in a niche market producing products nobody else could do that combined electronics and mechanics," he recalls. "I was convinced we needed to approach mass markets with not a product but a solution that had both a system and devices, and software in boxed components. It's quite a different ballgame."
Kudelski himself secured a contract to develop a system for a Swiss pay-TV station and in 1989 Canal Plus, the French television powerhouse, bought his program and placed it into millions of set-top boxes.
In 1991 André took over the reins at Kudelski SA, and the company narrowed its focus on access systems for television. The following year Kudelski set up subsidiaries in Germany and the UK and created a joint venture with Canal Plus. The group entered North America in 1995 when EchoStar Communications ordered its Nagravision system. By 1996 pay-TV systems were taking the lion's share of group revenue.
Today, the focus of the company stands in stark contrast with its 1950s origins in portable sound recording equipment – a business that saw Kudelski both gain a strong foothold in the film and recording industries in the 1970s and come under intense pressure from Asian competitors in the 1980s. Eventually, the company took on debt to survive, before listing in 1986. "At the time, the company was migrating from analogue to digital recording [equipment] and my father was in charge of the company," Kudelski recalls. "He felt the cost of gaining capital from traditional financing was quite high and going public was a way of lowering this cost." As for loss of family control, Kudelski shrugs this off. "At that time this was not an issue because only non-voting shares were issued." Today the family retains two-thirds of the voting rights and controls 34% of the group capital. It's a firm grip worth more than $1bn.
Will this be the case long term? "I would say that is an open question," Kudelski says enigmatically. "Now it is important because we have very good feeds between the clients and ourselves, and it is part of our strategy to show that we have a long term commitment to our strategy." Family business pundits would call this 'patient capital'. For Kudelski it's sound business. "If you're a company without a main shareholder then, depending on what is happening in the marketplace, the strategy may be really volatile."
But André Kudelski and the company bearing his surname are anything but volatile. His answers to questions are direct, measured. A vestige of past battles with dissenters? The Canal Plus contract, although pivotal, was not without outcry from within. "Everyone in the company was against the contract with Canal Plus," he recalls. "They said the conditions were not acceptable, and I was convinced they were acceptable."
Given the group's bulging order books, strong cash position and widened profit margins, it proved a canny move – transforming the company from a digital recording device manufacturer with fewer than 100 employees to a full blown technology and software group who's sales have rocketed in the past decade. "That is what has allowed the company to really grow in a new direction and has built very good market share. So basically there were risks in the contract but I considered the risk worth it." On balance, it was. Between 1994 and 2001 revenues soared from Swfr28m to Swfr455m.
At the start of 1998 Kudelski's share price underwent an even more spectacular change rocketing from Swfr9 to more than Swfr250m by the end of the year. That same year, as the technology boom began to peak, Kudelski was admitted to the Swiss Market Index and was listed with Morgan Stanley Capital International. Clouds appeared on the horizon in 2001 as spooked technology markets, no longer awash with venture capital, receded at a blistering pace. NTL and Telewest, both pay-TV operators and Kudelski customers, ran up debt into the billions. By the end of August 2002, Kudelski had issued its first profit warning, downwardly revised its revenue forecast to Swfr400-450m and trimmed 10% of its staff.
No matter. Kudelski seems to be playing the long game. That hasn't stopped his detractors from criticising his one-man role as majority shareholder, CEO and chairman. His response? Who is better suited to lead the company than the person who has sunk so much money into it? Yet Kudelski has his allies. Swiss International Airlines, Nestlé, the food giant, and newspaper group Edipresse, have made space on their boards for the 43-year old visionary.
It might have something to do with Kudelski's revenue increasing 15-fold over the past decade. Unlike their private siblings, publicly traded family-controlled companies seem to live a charmed existence, at least in Europe. These days family enterprises are running rings round rivals on all six major stock indexes. Charm has nothing to do with it. Stock exchange guidelines and reporting requirements do. Enforced discipline, say family business experts, help keep family feuds from ruining a company. Publicly traded family-controlled companies have the best of both worlds, says Joachim Schwass, a family business expert at the Swiss business school IMD. Either way, numbers don't lie, which is why Kudelski is one of Europe's ten best performing companies.
Does that mean bloodlines are attributable to soaring revenue? "I think it's not family by definition, but it's a company with strong shareholders who can really look at long-term interest rather than following the short-term requirements of their investors," he says. "If you look at history, Vivendi had a much harder time than Murdoch News Corp. Basically, companies that have strong shareholders are much more resilient during difficult trading conditions."
So what of the next generation? The CEO won't tip his hand on whether his children will join the family firm. "If they're interested…" he says with a pause. "I think they need to have the liberty to do it."