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As filed with the Securities and Exchange Commission on December 19, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

NDS GROUP HOLDINGS LIMITED

(Exact Name of Registrant as Specified in Its Charter)

Not Applicable

(Translation of Registrant’s name into English)

 

Bermuda   7373   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

One London Road

Staines, Middlesex, United Kingdom TW18 4EX +44 (0) 208 476 8000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

Ismat Levin

Secretary

One London Road

Staines, Middlesex, United Kingdom TW18 4EX +44 (0) 208 476 8000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

 

Copies to:

Jennifer A. Bensch

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, NY 10036

Telephone: (212) 735-3000

Facsimile: (212) 735-2000

  

Richard D. Truesdell, Jr.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

Telephone: (212) 450-4000

Facsimile: (212) 701-5800

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class Of
Securities To Be Registered
  Proposed
Maximum
Aggregate
  Offering Price(2)  
  Amount Of
Registration Fee

Common shares, $0.00001 par value per share(1)

  $100,000,000   $11,460

 

 

  (1)   Includes shares that the underwriters have the right to purchase to cover over-allotments.
  (2)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                     , 2011

 

             SHARES

NDS GROUP HOLDINGS LIMITED

COMMON SHARES

 

 

 

This is an initial public offering of common shares of NDS Group Holdings Limited. We are offering              common shares and the selling shareholders named in this prospectus are offering              common shares. We will not receive any proceeds from the sale of shares held by the selling shareholders.

 

This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $         and $         per share.

 

Prior to the completion of this offering, we will effect a reorganization pursuant to which we will acquire all of the outstanding equity interests of NDS Group Limited as more fully described herein. Currently, NDS Group Limited is owned principally by two entities controlled by funds advised by Permira Advisers LLP and associated entities and an entity controlled by News Corporation. Following the completion of this offering and the reorganization, and assuming an initial public offering price equal to the mid-point of the price range set forth above, the entities controlled by the Permira funds and associated entities will own approximately     % of our outstanding common shares and the entity controlled by News Corporation will own approximately     %, or     % and     %, respectively, if the underwriters exercise their over-allotment option in full. We intend to elect to be a “controlled company” within the meaning of the New York Stock Exchange’s corporate governance standards.

 

 

 

We have applied to list the common shares on the New York Stock Exchange under the symbol “NDSG.”

 

 

 

Investing in the common shares involves risks. See “Risk Factors” beginning on page 15.

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to

Public

    

Underwriting
Discounts

and
Commissions

    

Proceeds

to Us

    

Proceeds to
the Selling
Shareholders

Per Share

     $               $               $               $         

Total

     $                          $                          $                          $                    

 

The selling shareholders have granted the underwriters the right to purchase up to an additional              common shares to cover over-allotments at the initial public offering price less the underwriting discount.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the common shares to purchasers on or about                     , 2011.

 

 

 

MORGAN STANLEY   GOLDMAN, SACHS & CO.    J.P. MORGAN
CITIGROUP   CREDIT SUISSE    UBS INVESTMENT BANK

 

                    , 2011


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

The Offering

     9   

Summary Consolidated Financial Data

     11   

Risk Factors

     15   

Cautionary Note Regarding Forward-Looking Statements

     35   

Corporate Formation and Reorganization

     37   

Market and Industry Data

     42   

Certain Trademarks

     42   

Enforceability of Civil Liabilities

     43   

Use of Proceeds

     44   

Dividend Policy

     45   

Capitalization

     46   

Dilution

     47   

Pricing Sensitivity Analysis

     49   

Selected Consolidated Financial Data

     50   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54   
     Page  

Business

     98   

Management

     111   

Certain Relationships and Related Party Transactions

     120   

Principal and Selling Shareholders

     124   

Description of Capital Stock

     127   

Comparison of Shareholder Rights

     132   

Taxation

     140   

Shares Eligible for Future Sale

     143   

Underwriters

     146   

Expenses Related to This Offering

     152   

Legal Matters

     153   

Experts

     153   

Where You Can Find More Information

     153   

Index to Consolidated Financial Statements

     F-1   
 

 

 

 

We intend to apply for and expect to receive consent under the Exchange Control Act 1972 (and its related regulations) from the Bermuda Monetary Authority for the issue and transfer of the common shares to and between non-residents of Bermuda for exchange control purposes provided our shares remain listed on an appointed stock exchange, which includes both the New York Stock Exchange and The Nasdaq Stock Market Inc. This prospectus will be filed with the Registrar of Companies in Bermuda in accordance with Bermuda law. In granting such consent and in accepting this prospectus for filing, neither the Bermuda Monetary Authority nor the Registrar of Companies in Bermuda accepts any responsibility for our financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

 

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the selling shareholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling shareholders are offering to sell, and seeking offers to buy, common shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common shares.

 

Until                     , 2011 (25 days after commencement of this offering), all dealers that effect transactions in our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our common shares. You should read this entire prospectus carefully, including the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and our consolidated financial statements and the related notes, before investing. Unless we tell you otherwise, the information in this prospectus assumes that the common shares offered hereunder are sold at the midpoint of the estimated price range set forth on the cover page of this prospectus and that the underwriters will not exercise their option to purchase additional common shares to cover over-allotments, if any. As described under “Corporate Formation and Reorganization,” we will acquire NDS Group Limited through an exchange of all of the outstanding NDS Group Limited ordinary shares for our common shares prior to completion of this offering, which we refer to herein as the Reorganization. Unless otherwise stated in this prospectus, references to “NDS” or the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to NDS Group Limited and its subsidiaries prior to the Reorganization, and to NDS Group Holdings Limited and its subsidiaries when we give effect to and as of the completion of the Reorganization and thereafter.

 

NDS GROUP HOLDINGS LIMITED

 

Our Company

 

We are a leading global provider of end-to-end software solutions to the pay-television industry. We supply pay-TV operators with core software systems that enable them to deliver a differentiated viewing experience to their subscribers anytime, anywhere and on any device while ensuring that only paying viewers receive content. Based on market share information derived from 2011 Screen Digest data, over one-third of the world’s digital pay-TV households rely on our technologies to discover, navigate or interact with content. Our clients include many of the largest cable, satellite and broadband pay-TV operators, including Astro, Bharti, BSkyB, Canal Plus, China Central Television (“CCTV”), Cox, DIRECTV, Kabel Deutschland, Sky Deutschland, SKY Italia, TataSky, UPC (a unit of Liberty Global) and Vodafone.

 

We believe our business is benefiting from the rapid technological and consumer shifts in the video content ecosystem. The increased availability and variety of digital content, together with the enhanced mobility and proliferation of internet-connectable devices such as connected-TVs, tablets and smart phones and progressively lower consumer electronic equipment costs, are transforming consumer demand for digital content. Consumers are increasingly demanding:

 

   

Choice of Content. Consumers want the broadest choice and diversity of content, regardless of whether the content is delivered through traditional broadcast networks, internet protocol-based broadband networks or over-the-top (“OTT,” i.e. video delivery over the internet).

 

   

Quality of Experience. Consumers expect to utilize the latest viewing technology, such as high definition (HD)-TV and three-dimensional (3D)-TV as well as highly functional, intuitive and robust user interfaces for content discovery and navigation.

 

   

Convenience of Viewing. Consumers demand the flexibility to view content anytime, anywhere and on any device.

 

In the evolving digitally-connected world, the fundamental requirements of content security, as well as improved functionality and convenience, are critical to the growth of the pay-TV industry. We believe these factors present significant opportunities for us in both developed and emerging markets. We further believe we are well positioned to benefit from these trends given our sophisticated software solutions, our end-to-end capabilities, our proven security track record and our ability to deliver complex system integration services.

 

 

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In developed markets, digital media trends and increased competition from new entrants are compelling pay-TV operators to invest in technology at an ever increasing pace in order to differentiate their product offerings. We believe we are well positioned to capitalize on this attractive growth opportunity given our industry leading innovation capacity and expertise in delivering complex end-to-end solutions. Our growth in developed markets is driven in part by the prevalence of broadband connectivity and the proliferation of connected devices leading to new revenue generating opportunities for our clients utilizing OTT technologies. We cooperate closely with pay-TV operators to develop and deliver hybrid set-top boxes that integrate OTT. We believe that our hybrid technologies and digital rights management solutions will substantially enrich the current TV-viewing experience and assist our clients in attracting new subscribers.

 

In many emerging markets, the growing middle class is driving a dramatic rise in digital pay-TV penetration, which is expected to have a 16.4% compound annual growth rate from 220 million households in 2010 to 405 million households in 2014 according to 2011 data published by Screen Digest. We believe our strong relationships with leading pay-TV providers in China, India and Latin America, including Bharti, CCTV, DIRECTV Latin America, Hathway and Tata Sky, combined with the more rapid adoption of digital pay-TV and new services, such as DVRs, in many emerging markets as the cost of the devices used in such services declines, provide further growth opportunities. Emerging markets represent a growing part of our revenue, increasing from 27% for the fiscal year ended June 30, 2008 to 40% for the fiscal year ended June 30, 2011. For a description of how we define developed and emerging markets, see “Market and Industry Data.”

 

Since our inception in 1988, we have emphasized continuous investment in research as an integral part of our technology and development (“T&D”) efforts to drive innovation in our industry and the development of new and improved offerings for our clients. We have invested over $1 billion in T&D since June 2008. Our approach has led to a number of industry accolades and a strong intellectual property portfolio featuring over 475 patents issued and over 500 patents pending worldwide as of June 30, 2011. Our primary revenue sources include:

 

   

Software Solutions. Our software solutions seek to enhance the viewing experience by providing more compelling functionality to the subscriber for discovering, navigating and interacting with content (27% of revenue for the fiscal year ended June 30, 2011).

 

   

Content and Service Protection. Our content and service protection solutions seek to protect the integrity of pay-TV operators’ business models by ensuring only paying viewers can receive content (55% of revenue for the fiscal year ended June 30, 2011).

 

   

Integration and Services. Our integration capabilities allow us to offer tailored end-to-end solutions to our clients (18% of revenue for the fiscal year ended June 30, 2011).

 

We derive our revenue primarily from the licensing of our technologies and software components and fees for the delivery of services. Key revenue drivers include the number of subscribers of pay-TV operators using our solutions and the number of devices deployed utilizing some or all of our software components. We act as a trusted partner for our clients, entering into long-term contracts, typically with a duration of approximately five years, which provide visibility into our long-term performance. In the three months ended September 30, 2011 and the fiscal year ended June 30, 2011, we generated $214 million and $957 million in revenue, operating income of $46 million and $245 million at a margin of 21% and 26%, and net income of $4 million and $252 million, respectively.

 

Our Industry

 

The TV market is the largest segment of the global media industry, according to a 2011 report by Datamonitor. The market for pay-TV software solutions is growing due to a number of trends, including growth in the availability of digital content, growth in sales of high-end televisions and mobile devices, decreasing costs of consumer equipment, increased availability of broadband connectivity, rising content costs and the rapid growth of digital pay-TV penetration in many emerging markets. In addition, we believe the need to fund the

 

 

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increasing cost of premium content is driving the broader adoption of subscription-based business models that rely on technologies like ours. According to Screen Digest data published in 2011, digital pay-TV households worldwide will grow at an estimated 11.7% compound annual growth rate from 384 million in 2010 to 598 million in 2014. According to 2011 data published by Screen Digest, of the world’s almost 1.3 billion TV households, only 43% had converted to digital as of December 31, 2010.

 

Pay-TV operators are increasingly turning to technology providers like us in order to adapt to the new digital paradigm and meet consumers’ expectations for increased choice, quality and convenience of digital content. In addition, pay-TV operators are focused on securing and protecting their content. Finally, given the complexity inherent in implementing such changes to their content distribution infrastructure, we believe pay-TV operators increasingly seek to work with technology providers that offer comprehensive, end-to-end solutions and have a successful track record of delivering complex integration services.

 

Increased penetration of digital TV, broadband and mobile is driving demand for innovative and comprehensive video solutions in developed markets. However, certain emerging markets such as China, India and Latin America offer additional opportunities through continued economic expansion and a growing middle class that can afford pay-TV services. Increasing disposable income among consumers is driving the adoption of pay-TV in households that previously relied solely on traditional free-to-air television. According to data from Screen Digest published in 2011, digital pay-TV penetration totaled 23% of television households as of December 31, 2010 in what we classify as emerging markets (compared to 54% in what we classify as developed markets) and is forecasted to reach 38% by 2014.

 

Our Technologies and Solutions

 

We connect pay-TV operators and consumers through innovative technology. Our solutions protect and deliver content through rich, intuitive interfaces and enable access to all types of content anytime, anywhere and on any device. We offer comprehensive, secure, end-to-end solutions that deliver a compelling viewer experience by enabling all types of content to seamlessly co-exist across multiple devices. Our solutions can be built from our own technologies or by combining our software technologies with third-party components and integrating the entire solution into our clients’ systems. We offer technologies and solutions across two broad categories, software solutions and content and service protection, augmenting them with a number of integration services. The key software technologies in our end-to-end solutions include:

 

   

Middleware. Our middleware software, similar to an operating system, enables operation of set-top boxes and delivery of content over both broadcast and broadband networks as well as over-the-top to broadband connected set-top boxes.

 

   

Digital Video Recorder (“DVR”) Software. Our DVR software enables pay-TV subscribers to record content as well as pause and rewind “live” TV.

 

   

Electronic Program Guide (“EPG”). Our EPG software families allow subscribers to easily and intuitively discover, navigate and interact with content and features provided by the platform operator.

 

   

Conditional Access (“CA”) and Digital Rights Management (“DRM”). These technologies ensure that only paying subscribers can access content.

 

   

Unified Headend Systems. These software systems ensure that the right content, accompanied by the appropriate data describing the content (“metadata”), is delivered to the subscriber anytime, anywhere and on any device.

 

We believe we are a market leader in middleware (approximately 195 million total units deployed and approximately 21% global market share of active units), DVR software (approximately 41 million total units deployed and approximately 38% global market share of active units) and conditional access (approximately 110 million households representing approximately 27% global market share based on households served), based on market information derived from 2011 Screen Digest data.

 

 

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Our Competitive Strengths

 

We believe the following competitive strengths position us to be the partner of choice for leading pay-TV operators:

 

Leading Global Provider of Pay-TV Software Solutions. We believe our leading position makes us the partner of choice to the world’s pay-TV operators as they seek to grow their business and look to us to help them deploy additional features and functionality.

 

Sophisticated End-to-End Solutions. We believe our end-to-end solutions portfolio provides a rich user-centric experience and enhances the value proposition to our clients’ subscribers. Our pay-TV software solutions include middleware, EPG, DVR software, CA and DRM. We believe our individual software technologies are competitive on a standalone basis and are even more compelling as part of our end-to-end solutions, given the complex and integrated nature of pay-TV operators’ systems.

 

Ability to Perform Complex Integrations. We have a proven track record of delivering complex multi-vendor integration projects. Our clients seek customized solutions incorporating some or all of our technologies that are adapted to their specific needs and choices of set-top box hardware and infrastructure. We seamlessly integrate any combination of our software components with third-party software components. We believe our extensive relationships with key industry participants provide us a unique ability to promote the adoption of our solutions across the infrastructure chosen by our clients. Given our long-standing relationships with many of our clients, we believe we are well positioned to integrate new solutions into their existing infrastructure. Furthermore, we believe our integration expertise and capabilities help us to penetrate new markets and to win new clients.

 

Technological Leadership and Proven Ability to Innovate. Our commitment to continuous investment in technology and development drives innovation and new technology development. Over 75% of our workforce is involved in technology and development, where we have invested in excess of $1 billion since June 2008. We cooperate closely with some of our key clients that consistently strive to be at the forefront of the technology adoption curve. These clients adopt our latest technologies at an early development stage and help us refine the specifications of our new solutions to accelerate the innovation cycle. Our approach has led to a number of industry accolades, including the Red Dot Product Design Award for one of our remote control designs, awarded by Design Zentrum Nordrhein Westfalen in July 2011, the Janus Award for our Snowflake® EPG, awarded by L’Institut Francais du Design in November 2010, and the Enterprise and Innovation Award, awarded by the Institute for Education Business Excellence in October 2010, and a strong intellectual property portfolio including over 475 patents issued and over 500 patents pending worldwide as of June 30, 2011.

 

Global Blue Chip Client Base. We serve many of the leading pay-TV operators, which provides us with a platform for further growth as they drive industry innovation, adopt and market new services and expand their subscriber base. Across both developed and emerging markets, we have long-term relationships with many of the largest cable, satellite and broadband pay-TV operators, including Astro, Bharti, BSkyB, CCTV, Cox, DIRECTV, Kabel Deutschland, Sky Deutschland, SKY Italia, TataSky, UPC (a unit of Liberty Global) and Vodafone. Our clients include four of the top five digital pay-TV operators in North America, three of the top five in Western Europe and two of the top five in emerging markets based on number of subscribers according to 2011 data published by Screen Digest. We have never suffered a loss of a significant client to a competitor.

 

Proven Security Track Record. We believe the NDS brand is synonymous with advanced technology, proven security and high-quality service. Our solutions protect over $50 billion in pay-TV revenues. Our security track record is a direct result of our long-term investment in developing and maintaining key proprietary security technologies, such as our proprietary encryption techniques and our custom designed smart card chips. Content has become more expensive and is increasingly becoming a key differentiator for pay-TV operators to attract and retain consumers. Our clients are increasingly looking to deploy the most sophisticated security technologies to protect and monetize their content. We believe our reputation for security positions us well to work with new and existing clients to capitalize on this trend.

 

 

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Experienced Management Team with Demonstrated Ability to Execute. We are led by an experienced and entrepreneurial management team with a strong track record of developing NDS into a global technological pioneer and a leading pay-TV industry solutions provider. Our management team has a deep understanding and appreciation of technology and a proven ability to consistently innovate and expand our technological leadership while at the same time deliver growth.

 

Our Strategy

 

Our goal is to provide pay-TV operators with innovative solutions that enable the delivery, discovery and navigation of digital content while protecting their content distribution revenue streams. Our strategy to maintain our leadership position in both developed and emerging markets and grow our business has six key components:

 

   

Create Solutions to Enhance our Clients’ Offering and Ability to Add Subscribers. Our clients’ challenge is to increase their subscriber base by providing the widest choice of quality digital content, both using linear and on-demand models, with powerful content discovery and navigation capabilities. Our interests are closely aligned with those of our clients as our revenue depends in part on the growth of their pay-TV subscriber base and their ability to sell new services. By continuing to innovate and expand the scope and reach of our solutions, we help our clients deliver the best possible user experience to their subscribers.

 

   

Pursue New Clients and Global Growth Opportunities. We are committed to continuing our global expansion, particularly in emerging markets. We intend to leverage our end-to-end suite of software technologies and components, our existing client base of leading global pay-TV operators, our strong brand and reputation and our historical track record of success to drive new client wins. By targeting the leading pay-TV providers within emerging markets, we intend to benefit from the growth trends in these markets.

 

   

Capitalize on the Emerging Internet TV and OTT Ecosystem. Our solutions and technologies, such as our hybrid middleware, DRM and unified headend software systems, facilitate the secure delivery and consumption of all types of content by seamlessly integrating OTT content with broadcast and pay-TV content through multiple connected devices. We are developing solutions to support innovative web-centric business models for our clients that can deliver both mainstream and long-tail content anytime, anywhere and on any device.

 

   

Increase Share of Client Technology Spending. Our leading positions in middleware, DVR software and CA provide us with an attractive platform from which to cross-sell additional solutions to our clients. We also seek to leverage the competitive advantage of our end-to-end offering and our proven systems integration capability. As clients’ system environments become more complex and pay-TV operators continue to reduce the number of suppliers they use and seek to rely more heavily on software-based solutions, we intend to capitalize on our leading position and solutions to increase our share of client technology spending.

 

   

Build upon our Technology Innovation Leadership. We believe that our continuous investment in technology and development and collaboration with our clients and other technology suppliers are central to our innovation leadership. We have worked together with successful early adopters to drive product demand to the mass market with innovative solutions such as dynamic advertising, high definition DVR software and a hybrid TV solution, and more recently, a number of solutions allowing pay-TV operators to embrace OTT content delivery and content from social networks. We intend to build upon our existing technology base and develop the next generation of innovative video content services for consumers. We seek to provide solutions that allow our clients to provide a wider choice of content and increased quality and convenience of the viewing experience by making the consumption of content anytime, anywhere and on any device a reality.

 

 

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Pursue Selective Strategic Alliances and Acquisitions to Augment Growth. We have a successful track record of making and integrating strategic acquisitions and intend to continue to pursue selective strategic alliances and acquisitions to complement our business. We have relationships with several set-top box vendors, chip manufacturers, system integrators and video on demand server systems.

 

Risks Associated with Our Company

 

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

Our operating results could decline if our clients experience a decline in subscribers or if our solutions do not enable them to grow their revenues per subscriber;

 

   

Our business may suffer if we and our clients do not respond to technological changes affecting the delivery of digital content;

 

   

Our quarterly results may fluctuate significantly and may be unpredictable, which could have a material adverse effect on our business and our share price;

 

   

Our business could be harmed if a defect in our software technologies or solutions interfere with, or causes any failure in, our clients’ systems;

 

   

We derive a significant portion of our revenue from a limited number of large clients. Our revenue could decline significantly if any of these clients significantly reduces its purchases of our technology or services or terminates its relationship with us;

 

   

Our success is heavily dependent upon our proprietary technologies and legal uncertainties with respect to intellectual property protection could harm our business;

 

   

Our indebtedness could adversely affect our financial health and could harm our ability to react to changes to our business; and

 

   

Political, regulatory and economic risks associated with our international operations could harm our business.

 

Corporate History and Structure

 

We were established through our original predecessor in 1988 as a joint venture of News Corporation, one of the world’s largest global media companies, and became a wholly owned subsidiary of News Corporation in 1992. In 1999, we listed on the NASDAQ Stock Exchange, and News Corporation remained our largest shareholder until February 2009 at which time we became a privately held company incorporated in England and Wales through our immediate predecessor, NDS Group Limited. In this prospectus, we refer to this transaction as the “take-private transaction.” Since that time, the Series B ordinary shares of NDS Group Limited (the “Series B Shares”) have been owned approximately 51% by Nuclobel Lux 1 S.àr.l. and Nuclobel Lux 2 S.àr.l. (the “Nuclobel Entities”), two companies controlled by funds (collectively, the “Permira Funds”) advised by Permira Advisers LLP and associated entities (“Permira”), and approximately 49% by News Corporation through its wholly owned subsidiary, NDS Holdco, Inc. (“NDS Holdco”), with a director and members of management owning less than 1% of the Series B Shares. Pursuant to agreements made at the time of the take-private transaction, the Nuclobel Entities and NDS Holdco have equal voting power in respect of their Series B Shares, and all other ordinary shares, including Series B Shares held by directors and members of management, are non-voting. In addition, primarily as a result of subscriptions made at the time of the take-private transaction, members of management of NDS Group Limited also hold Series C ordinary shares (the “Series C Shares”). The following members of management currently hold Series B Shares and Series C Shares: Michael Dick, Yorai Feldman, Alexander Gersh, Dave Habiger, Jonathan Hashkes, Raffi Kesten, Pyrros Koussios, Ismat Levin, David Nabozny, Derek Nottingham, Gorm Nielsen, Abraham Peled, Nigel Smith, Susan Taylor, Nicholas Thexton and Andrew Woodward.

 

 

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NDS Group Limited’s Articles of Association adopted at the time of the take-private transaction include a mechanism to attribute value to the various classes of its share capital based upon the valuation of NDS at an “exit event,” which will include this offering (“the waterfall calculation”). The waterfall calculation is a methodology whereby the implied equity value of NDS as of the date of an exit event is shared among the various classes of share capital. The Series C Shares held by members of management have nominal value until the Series B Shares, including the shares held by the Nuclobel Entities, NDS Holdco and management, achieve a specified return. As a result, the value resulting from the waterfall calculation of the Series C Shares held by management is more significantly impacted by changes in the enterprise value of NDS than are other series of ordinary shares. In the context of an initial public offering, the implied equity value of NDS would be calculated as the total number of common shares in NDS Group Holdings Limited, after giving effect to the offering and the Reorganization, multiplied by the initial public offering price.

 

On August 1, 2011, NDS Group Holdings Limited was incorporated under the laws of Bermuda as an exempted company to become the holding company for NDS Group Limited in connection with this offering and the Reorganization that will be completed prior to the closing of this offering. The Nuclobel Entities currently own approximately 51% of the common shares of NDS Group Holdings Limited, and NDS Holdco currently owns approximately 49%. As described below under “—Corporate Reorganization,” pursuant to the terms of the Reorganization, all of the capital stock of NDS Group Limited will be exchanged for newly issued common shares of NDS Group Holdings Limited and, as a result, NDS Group Limited will become our wholly owned subsidiary. We will be a holding company, and our business will be conducted through NDS Group Limited and its subsidiaries.

 

Following the completion of this offering and the Reorganization, and assuming that the underwriters do not exercise their over-allotment option to purchase additional common shares, the Nuclobel Entities and NDS Holdco will own approximately     % and     % of our outstanding common shares, respectively, and approximately     % of our outstanding common shares will be owned by certain members of our management. For an analysis of how the foregoing information would change if the initial public offering price is not equal to the midpoint of the estimated price range, see “Pricing Sensitivity Analysis.”

 

During the three months ended September 30, 2011 and the fiscal years ended June 30, 2011 and 2010, approximately 32%, 33% and 37% of our total revenue, respectively, was derived from businesses in which News Corporation has a continuing interest, including BSkyB and SKY Italia, two of our three largest clients in each such period. News Corporation owned 39% of BSkyB and 100% of SKY Italia as of September 30, 2011. These two entities together comprised 26%, 23% and 28% of our revenue in the three months ended September 30, 2011 and the fiscal years ended June 30, 2011 and 2010, respectively.

 

Upon completion of this offering, we intend to elect to be a “controlled company” within the meaning of the New York Stock Exchange’s (“NYSE”) corporate governance standards. Under NYSE rules, a “controlled company” may elect not to comply with certain NYSE corporate governance requirements. Accordingly, shareholders may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE’s corporate governance requirements. As a result of this election, we will not be required to, nor do we intend to, have a majority of independent directors. In addition, the compensation committee and the nominating and corporate governance committee of our board of directors will not be required to, and will not, consist of all independent directors. However, the audit committee must consist of all independent directors within an applicable phase-in period, and we intend to have a fully independent audit committee within one year following the effective date of the registration statement of which this prospectus forms a part.

 

Corporate Reorganization

 

Pursuant to the equity implementation deed, or the implementation deed, dated August 10, 2011, by and among us, NDS Group Limited, and the shareholders of NDS Group Limited, prior to the effective time of the registration statement of which this prospectus forms a part, each of the Nuclobel Entities and NDS Holdco will

 

 

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contribute all of the Series B Shares of NDS Group Limited then owned by it to us in exchange for an equal number of our common shares. At such time, the Nuclobel Entities and NDS Holdco will no longer hold any shares of NDS Group Limited. Immediately following this exchange, each              of our common shares will be consolidated into              of our common shares.

 

Immediately following the determination of the initial public offering price in this offering, NDS Group Limited will make the waterfall calculation set forth in its Articles of Association. Thereafter, the Series C Shares held by management will be redesignated into a number of Series B Shares determined pursuant to the waterfall calculation. Depending upon the results of the waterfall calculation, certain of the Series C Shares held by management may be redesignated as an additional series of ordinary shares of NDS Group Limited (the “Series E Shares”) that will be repurchased by NDS Group Limited for nominal value and cancelled, and will not be exchanged for ordinary shares of NDS Group Holdings Limited in the Reorganization. In addition, the Series D ordinary shares of NDS Group Limited (the “Series D Shares”) underlying outstanding options will be notionally redesignated into a number of Series B Shares determined pursuant to the waterfall calculation, and thereafter such options will be exchanged for options over a number of common shares based upon the conversion ratio applicable to the Series B Shares.

 

Immediately after the redesignation, each remaining holder of Series B Shares will contribute to us each Series B Share then held by it (including shares held as a result of the redesignation) in exchange for              of our common shares in the aggregate, assuming the initial public offering price is equal to the midpoint of the estimated price range set forth on the cover page of this prospectus. In addition, we will assume the existing 2009 Share Option Plan of NDS Group Limited, and each outstanding option to purchase Series D Shares will be exchanged for options to purchase our common shares. Assuming the initial public offering price is equal to the midpoint of the estimated price range set forth on the cover page of this prospectus,              of our common shares will be subject to options issued in the Reorganization.

 

We refer to the transactions described above pursuant to which we will acquire all of the equity interests of NDS Group Limited in exchange for our common shares, including the              for              share consolidation, as the “Reorganization.” For additional information regarding the Reorganization, see “Corporate Formation and Reorganization.”

 

Because the number of ordinary shares of NDS Group Limited to be exchanged by certain members of management in the Reorganization, as well as the number of ordinary shares subject to options of NDS Group Limited to be exchanged for options over our common shares, will be based on the actual per-share initial public offering price in this offering, the number of our common shares issued in exchange and the number of our common shares subject to options upon completion of the exchange will vary depending on the offering price. Where information in this prospectus gives effect to our Reorganization, such information is presented assuming an initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. For an analysis of how the foregoing information would change if the initial public offering price is not equal to the midpoint of the estimated price range, see “Pricing Sensitivity Analysis.”

 

Corporate Information

 

Our principal executive offices are located at One London Road, Staines, Middlesex, United Kingdom TW18 4EX. The telephone number at this address is +44 (0)208 476 8000. We maintain a registered office in Bermuda at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The telephone number of our registered office is +1 (441) 295-5950. Our corporate website address is www.nds.com. The information on our website does not constitute part of this prospectus.

 

 

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THE OFFERING

 

Common shares offered by NDS Group Holdings Limited

             shares.

 

Common shares offered by the selling shareholders

             shares.

 

Common shares outstanding immediately after this offering

             shares.

 

Use of proceeds

We intend to contribute the net proceeds to us from this offering to NDS Group Limited, which will be our direct wholly owned subsidiary upon completion of the Reorganization. We expect NDS Group Limited to use a portion of the net proceeds to repay indebtedness outstanding under its revolving credit facility, with any remaining proceeds to be used for general corporate purposes. Affiliates of the underwriters that are lenders under the revolving credit facility will receive a portion of the net proceeds used to repay such indebtedness. We will not receive any net proceeds from the sale of shares by the selling shareholders. See “Use of Proceeds.”

 

Risk Factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our common shares.

 

Proposed symbol

“NDSG”

 

The number of our common shares to be outstanding immediately after this offering is based on the number of shares outstanding as of             ,             , after giving effect to the Reorganization described in this prospectus (see “Corporate Formation and Reorganization”), assuming an initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and does not take into account:

 

   

             common shares issuable upon the exercise of outstanding options, at a weighted average exercise price of $             per share;

 

   

             common shares reserved for future issuance under our 2011 NDS Share Incentive Plan; and

 

   

5,500,000 common shares reserved for purchase under our NDS Employee Share Purchase Plan.

 

The aggregate number of ordinary shares of NDS Group Limited to be exchanged by certain members of our management in the Reorganization, as well as the number of ordinary shares subject to options of NDS Group Limited to be exchanged in the Reorganization for options over our common shares, will be based on the actual per-share initial public offering price in this offering. Accordingly, the number of our common shares issued in exchange therefore and the number of our common shares subject to options upon completion of the exchange will vary depending on the offering price. For an analysis of how the foregoing information would change if the initial public offering price is not equal to the midpoint of the estimated price range, see “Pricing Sensitivity Analysis.”

 

 

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Except as otherwise indicated, all information in this prospectus assumes:

 

   

an initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this prospectus;

 

   

no exercise of the underwriters’ option to purchase up to an additional              shares from the selling shareholders to cover over-allotments; and

 

   

the Reorganization, including the      -for-     consolidation of our common shares, has been completed.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The consolidated financial data as of and for the years ended June 30, 2011, 2010 and 2009 have been derived from the audited consolidated financial statements of NDS Group Limited, our predecessor for accounting purposes. The consolidated financial data for the three months ended September 30, 2011 and 2010 and the consolidated balance sheet data as of September 30, 2011 have been derived from NDS Group Limited’s unaudited consolidated financial statements. The unaudited interim consolidated financial data have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of our financial condition as of such dates and our results of operations for such periods. NDS Group Limited’s historical results are not necessarily indicative of the results that may be expected in the future, and its interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

The unaudited pro forma as adjusted net income per share data for the three months ended September 30, 2011 and the year ended June 30, 2011, give effect to the Reorganization described under “Corporate Formation and Reorganization” and the sale of              common shares in this offering by us at an assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and the application of the net proceeds to us therefrom as described under “Use of Proceeds,” as if each such transaction had occurred as of the beginning of the applicable period presented. The unaudited pro forma consolidated balance sheet data as of September 30, 2011 give effect to the Reorganization as if it had occurred on September 30, 2011, and the unaudited pro forma as adjusted consolidated balance sheet data as of September 30, 2011 give effect to the Reorganization and the sale of the common shares by us in this offering and the use of proceeds therefrom as described above, as if each such transaction had occurred on September 30, 2011. The pro forma and pro forma as adjusted information is presented for informational purposes only and is not necessarily indicative of what our results would have been had the transactions actually occurred on such dates nor is it indicative of our future performance.

 

 

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You should read the summary consolidated financial data set forth below in conjunction with the sections “Corporate Formation and Reorganization,” “Use of Proceeds,” “Pricing Sensitivity Analysis,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

Statements of Operations Data    For the three months
ended September 30,
    For the year ended June 30,  
     2011     2010     2011     2010     2009  
(in thousands)    (unaudited)                    

Revenue:

          

Software solutions

   $ 66,959      $ 58,966      $ 256,596      $ 239,307      $ 225,556   

Content and service protection

     109,334        109,740        523,759        523,137        421,083   

Integration services

     37,593        41,600        176,506        126,116        120,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 213,886      $ 210,306      $ 956,861      $ 888,560      $ 767,280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of Sales:

          

Direct cost of sales

     (23,261     (23,845     (132,682     (183,197     (123,420

Professional services

     (11,236     (12,024     (44,561     (34,772     (34,147

Technology and development

     (95,388     (84,348     (396,109     (345,775     (333,880

Sales and marketing

     (13,602     (10,332     (48,266     (43,277     (41,125

General and administrative

     (17,957     (9,868     (62,048     (44,075     (54,242

Depreciation

     (4,964     (4,759     (19,910     (18,140     (19,830

Impairment and amortization of intangible assets

     (1,115     (3,168     (8,286     (12,838     (23,790
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (167,523     (148,344     (711,862     (682,074     (630,434
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,363        61,962        244,999        206,486        136,846   

Interest and other expense, net

     (40,030     (72,999     (205,583     (66,269     (76,602

Costs of take-private transaction

                                 (124,536
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax expense

   $ 6,333      $ (11,037   $ 39,416      $ 140,217      $ (64,292

Income tax (expense) benefit

     (1,880     4,069        (25,497     (32,642     (12,008
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

   $ 4,453      $ (6,968   $ 13,919      $ 107,575      $ (76,300

Net income of discontinued operations(1)

            3,405        8,586        9,207        13,258   

Gain on disposal of discontinued operations

                   229,681                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,453      $ (3,563   $ 252,186      $ 116,782      $ (63,042
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per Series A ordinary share

          

Net loss per share from continuing operations

           $ (1.64

Net income per share from discontinued operations(1)

             0.29   
          

 

 

 

Net loss per share

           $ (1.35
          

 

 

 

Net income (loss) per Series B ordinary share

          

Net income (loss) per share from continuing operations

   $ 0.16      $ (0.24   $ 0.48      $ 3.75      $ (1.64

Net income per share from discontinued operations(1)

            0.12        8.30        0.32        0.29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share

   $ 0.16      $ (0.12   $ 8.78      $ 4.07      $ (1.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma, as adjusted, net income per common share (unaudited)

   $          $         
  

 

 

     

 

 

     

 

 

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Non-Financial Metrics               
(in millions, unaudited)                                   

Households(2)(4)

     114.6         95.0         109.7         91.1         68.7   

Unique new deployments(3)(4)

     15.1         13.6         58.0         41.6         42.8   

 

Balance Sheet Data    As of
September 30,
    As of June 30,  
     2011     2011     2010     2009  
(in thousands)                         

Cash and cash equivalents

   $ 37,268      $ 44,502      $ 119,145      $ 115,740   

Other current assets

     318,968        350,816        288,164        289,729   

Non-current assets

     293,070        299,149        356,331        356,106   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 649,306      $ 694,467      $ 763,640      $ 761,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

Current portion of long-term debt

     24,252        21,294        39,039        48,384   

Other current liabilities

     206,269        244,395        221,235        284,174   

Non-current portion of long-term debt

     1,014,667        1,039,255        1,357,734        1,418,290   

Other non-current liabilities

     125,100        117,919        131,299        99,312   

Shareholders’ equity

     (720,982     (728,396     (985,667     (1,088,585
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 649,306      $ 694,467      $ 763,640      $ 761,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Pro Forma Balance Sheet Data    As of September 30, 2011
       Pro Forma      Pro Forma as Adjusted
     (unaudited)
(in thousands)          

Cash and cash equivalents

   $                $            

Other current assets

     

Non-current assets

     
  

 

  

 

Total assets

   $    $
  

 

  

 

Current portion of long-term debt

   $    $

Other current liabilities

     

Non-current portion of long-term debt

     

Other non-current liabilities

     

Shareholders’ equity

     
  

 

  

 

Total liabilities and shareholders’ equity

   $    $
  

 

  

 

 

  (1)   In January 2011, we sold the OpenBet business, which operated as a separate segment involved in the development and sale of software systems and applications in the betting and gaming market, for net cash consideration of $292 million, as we no longer considered the OpenBet business to be core to our strategy. We have classified the OpenBet business under discontinued operations for all periods covered herein and in the accompanying consolidated financial statements.
  (2)   Households refers to total households using our conditional access solutions.
  (3)   Unique new deployments means an instance of middleware, DVR software or EPG newly deployed.
  (4)  

We track a number of non-financial measures to help monitor and evaluate our performance. Because our software solutions revenues are derived largely from the number of our software technologies deployed to our clients’ subscribers, we track total unique new deployments as a measure of the penetration and use of our technologies in consumer markets. One unique new deployment may consist of any combination of our software solutions. Therefore, we also individually track the mix of new deployments of middleware, DVR software and EPG. To help us

 

 

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  evaluate our performance in content and service protection, we track total households using our content and service protection technologies. For each of our three largest clients, we use publicly available data on households served by such clients. For all other clients, we generally calculate the number of households based on our internal data on active set-top boxes and other devices using our content and service protection solutions deployed per region and regional Screen Digest data on the average number of active digital pay-TV set-top boxes per pay-TV household in such region. The Screen Digest regional data on average number of active digital pay-TV set-top boxes per pay-TV household does not take into account the demographic mix or pay-TV operator concentrations in a particular region and therefore will not reflect patterns of higher-than-average or lower-than-average set-top boxes per household for NDS clients’ subscriber bases in that region. Although we believe that the number of set-top boxes per household of our clients’ subscribers generally approximates the average in a given region, in certain markets our clients’ subscriber bases may be above the average in terms of pay-TV set-top boxes per household, and average data may not be representative of all instances. However, we believe such data is helpful for evaluating growth trends in content and service protection.

 

 

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RISK FACTORS

 

An investment in our common shares involves a high degree of risk. You should consider carefully all of the risks and uncertainties described below, together with all the other information contained in this prospectus, before deciding to invest in our common shares. If any of the following risks actually occurs, our business, business prospects, financial condition, results of operations or cash flows could be materially adversely affected. In any such case, the trading price of our common shares could decline, and you could lose all or part of your investment.

 

Risks Related to Our Business

 

Our operating results could decline if our clients experience a decline in subscribers or if our solutions do not enable them to grow their revenues per subscriber.

 

A significant portion of our revenue is derived from the ongoing fees paid by our clients on a monthly basis based on the number of active subscribers utilizing our solutions. We receive license revenues based on each set-top box manufactured or deployed that incorporates our technologies. Therefore, a significant portion of our revenue is dependent upon our clients’ subscriber numbers, growth in set-top box numbers and the frequency with which set-top boxes are replaced with enhanced models. If our clients’ subscriber numbers or set-top box deployments do not continue to increase, we may be unable to generate substantial revenue growth or sustain our current revenue levels and, as a consequence, our business, operating results and financial condition could be materially and adversely affected.

 

Certain of our clients are recycling set-top boxes and smart cards by re-issuing them to a new subscriber when an existing subscriber terminates service. Such activity by our clients reduces our potential incremental set-top box software licensing revenue and demand for new smart cards. Should this type of activity become more widespread, it could materially and adversely affect our revenue. In addition, because the security of our smart cards has not been compromised in recent years, certain clients have delayed or limited plans to complete card changeovers. In the past, this has resulted in us agreeing to amend contract terms with certain of our clients, with the effect of reducing our content and service protection revenues from such contracts. If we are required to make similar amendments to our agreements with clients in the future, this could result in lower content and service protection revenue and our business, operating results and financial condition could be materially and adversely affected.

 

Widespread availability of OTT content may reduce the number of our clients’ subscribers, reducing their demand for our solutions and services.

 

OTT delivery increasingly allows viewers access to content that is similar to content offered by pay-TV operators. The widespread availability of OTT content may therefore result in a reduction in the number of pay-TV subscribers or reduce revenue per subscriber. If either occurs, our clients could purchase fewer solutions from us and they could also reduce their technology development initiatives, which could diminish our competitive position and could also cause our revenue to decline significantly. As a result our business, operating results and financial condition could be materially and adversely affected.

 

Our business may suffer if our clients decide not to use our technologies or do not adopt our technologies early in their development cycles.

 

We are dependent upon our clients choosing to use our technologies in the products and services they offer to consumers. We collaborate with our clients to build upon our existing technological base and develop the next generation of innovative video content services for consumers. If our clients decide not to use our existing technologies or decide not to adopt our technologies early in their development cycles, our ability to innovate would be diminished and revenue could decline significantly and our business, operating results and financial condition could be materially and adversely affected.

 

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Pay-TV operators may not adopt our advanced solutions.

 

We expect over the next several years to sell advanced technology solutions for the pay-TV market, including dynamic advertising, hybrid middleware and unified residential gateways. The market for advanced pay-TV technology solutions is still new and evolving. Historically, we have derived only a relatively small percentage of our total revenue from these advanced technology solutions. We cannot be certain that the demand for or the market acceptance of these technologies will develop as we anticipate, and even if they do, we cannot be certain that we will be able to market these advanced solutions effectively and successfully respond to changes in consumer preferences. In addition, our ability to market these advanced solutions will be affected to a large degree by pay-TV operators. If pay-TV operators determine that our advanced solutions do not meet their business or operational expectations, they may choose not to offer our advanced solutions to their subscribers. Should our advanced technology solutions fail to meet operators’ expectations, causing them not to enter into new or expanded contracts or renew their contracts with us, we will be unable to maintain or increase the associated revenue from our advanced technology solutions. Moreover, due to global economic conditions, pay-TV operators may slow the pace of their deployment of these advanced services and such action would negatively impact our revenue. Accordingly, our ability to generate substantial revenue from our advanced technology solutions offerings is uncertain.

 

Our business may suffer if we and our clients do not respond to technological changes affecting the delivery of digital content.

 

Our business and the industry in which we operate are characterized by rapid technological change, evolving industry standards and frequent product enhancement. Our continued success will depend, in part, upon our ability to develop and successfully market solutions and services that respond to technological changes and evolving industry standards in a timely and cost-effective manner and that gain market acceptance over the solutions of our competitors.

 

We have in the past incurred, and will continue to incur, significant technology and development expenses as we strive to remain competitive. New technology developments and introductions involve a significant commitment of time and resources and are subject to a number of risks and challenges, including:

 

   

managing the length of the development cycle for new technologies;

 

   

adapting to emerging and evolving industry standards and to technological developments by our competitors and clients;

 

   

extending the operation of our solutions and services to new and evolving platforms, operating systems and hardware platforms; and

 

   

managing new technology and service strategies.

 

Although the market expects rapid development and commercial introduction of new technologies to respond to changing infrastructure and evolving threats, the development of these technologies is difficult and the timeline for their release and availability can be uncertain. If we do not quickly respond to the rapidly changing and exacting needs of our clients by timely developing and releasing new or updated technologies and services, we could lose some or all of our investment in new technologies and services, and such loss of investment of capital and resources could have a material adverse effect on our results of operations. If others develop technologies or services that gain broader market acceptance than, or replace market demand for, our technologies and services, our competitive position and business prospects will be materially and adversely affected.

 

Our business could be harmed if the security provided by our content and service protection systems and solutions is compromised or is not adaptable to changing technology.

 

We face risks relating to the failure of our content and service protection systems to protect pay-TV operators and content providers from signal theft. In order for our content and service protection business to remain competitive, we need to accurately anticipate changes in technology that our clients will deploy, the security vulnerabilities of such technology as well as likely attack techniques, and we need to continue to develop

 

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and introduce solutions that successfully address the evolving opportunities and threats while maximizing technology performance. The software solutions and smart cards we provide for our clients’ individual subscribers are critical components of our conditional access systems. Unauthorized viewing and use of content may be accomplished by pirating software, counterfeiting the smart card or otherwise thwarting the security features of the content and service protection system. Any significant increase in the incidence of signal theft could require us to replace a population of a pay-TV operator’s smart cards or software or take other remedial action. In those cases where we have accepted specific responsibility for maintaining the security of a pay-TV operator’s content and service protection system, significant costs could be imposed on us if a security breach requires us to replace a population of smart cards or take other action to rectify the problem. To the extent that signal theft may result in the cessation of all, or some portion of, the payments of per-subscriber fees to us by a pay-TV operator while the security breach is being remedied or, in the event of termination by the pay-TV operator of our agreement if the breach is not satisfactorily remedied, the resultant loss of revenue could have a material adverse effect on our business, operating results and financial condition. A significant increase in the level of signal theft, whether or not resulting from a failure of our content and service protection systems, could also harm the reputation of our content and service protection systems among our clients and potential clients and, as a consequence, our business, operating results and financial condition could be materially and adversely affected.

 

We face significant competition and may be unsuccessful against current and future competitors.

 

We compete with numerous companies both to attract new clients and to retain our existing clients. We also compete with the internal development teams of our clients. Such competition may cause us to lose market share and may result in reduced profit margins. It may also hinder our ability to economically develop new software technologies. In addition, some of the companies that currently operate in the software business, but that historically have not been active competitors of ours may in the future, through acquisitions or the development of their own resources, seek to enter and obtain significant market share in our current or planned business areas. Some of these existing and potential competitors may enjoy competitive advantages, such as broader distribution and established relationships, lower labor and development costs, increased economies of scale and substantially greater financial, technical and other resources. Increased competition from existing or new competitors could result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition.

 

Our quarterly results may fluctuate significantly and may be unpredictable, which could have a material adverse effect on our business and our share price.

 

We have experienced, and may in the future experience, significant quarterly fluctuations in our results of operations. Our quarterly results tend to be stronger in the fourth fiscal quarter and lower in the first fiscal quarter of each year and may fluctuate because of a variety of factors, including those discussed elsewhere in this “Risk Factors” section and in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In future periods, our operating results may not meet the expectations of public market analysts or investors. In addition, it may be difficult for us to achieve steady growth in revenue, net income and cash flow on a quarterly basis, which could in turn lead to large adverse movements in the price of our common shares or increased volatility in our share price generally.

 

Our business could be harmed if a defect in our software technologies or solutions interfere with, or causes any failure in, our clients’ systems.

 

Our software technologies and solutions are integrated into the infrastructure of our clients. As a result, any defect, error or performance problem with our software or technology could interfere with a critical component of one or more of our clients’ systems, potentially cause a critical component of one or more of our clients’ systems to fail for a period of time or even result in damages or harm to our clients’ subscribers. Our software technologies and solutions are complex and sometimes contain undetected errors, particularly when first introduced or when new

 

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versions are released. To the extent that we engage contract manufacturers, we do not have as much control over manufacturing, which could result in quality problems. Furthermore, our software technologies and solutions are sometimes combined with or incorporated into products from other vendors, potentially making it difficult to identify the source of a problem. We rely on our clients and their subscribers to properly use our solutions to protect the software and applications to which our technology may be applied. Any improper use or application of the software by our clients or their subscribers may reduce the operational performance of our technologies, render our technologies useless or result in damages to our clients or their subscribers.

 

Defects, errors or persistent technology failures, whether or not as a result of client misuse, could result in loss of revenue or market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs, increased service costs, and claims for substantial damages against us, including product liability claims by our clients and their subscribers, regardless of whether we are responsible for such failure. Any claim brought against us could be expensive to defend and require the expenditure of a significant amount of resources, regardless of whether we prevail. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and limitation of liability clauses in our agreements, these contractual provisions may not be enforceable in every instance. Furthermore, although we maintain errors and omissions insurance, this insurance may not adequately cover these claims. If a court refuses to enforce the liability-limiting provisions of our contracts for any reason, or if liabilities arise that are not contractually limited or adequately covered by insurance, our business could be materially harmed.

 

If we fail to complete our projects in a timely fashion to meet our clients’ requirements, our business results and reputation could suffer.

 

We have in the past experienced, and may in the future experience, unanticipated delays in the availability of new software technologies and services and fail to meet previously announced timetables for such availability. Our clients often plan the timing of the introduction of new solutions around specific marketing campaigns and events, and any failure or significant delay in completing our projects and delivering software and services to our clients on time and within the applicable budget could result in a material loss of revenue and reduced operating margins and harm our relationships with clients. We may in the future experience difficulties or delays in the design, development, testing, delivery and integration with our clients’ systems of our solutions and services, which could have a material adverse effect on our business, operating results and financial condition.

 

If we are unable to sell a significant number of smart cards we have purchased in advance, or if there are substantial delays in realizing revenue from smart cards we have purchased, our funds available to operate our business may be adversely affected.

 

We hold inventory of smart cards and their components in anticipation of demand from our clients. Because smart cards supplied to different pay-TV operators are unique or contain unique features, particular types of smart cards held in inventory may not be useable for any client other than the one for which they were purchased. The lead times for smart card procurement are frequently much longer than the period covered by firm order commitments from our clients. Accordingly, we may make inventory purchases in anticipation of client orders that may never be received and we may purchase inventory some months in advance of smart cards being supplied to our clients. If we are unable to sell a significant number of smart cards we have purchased in advance, or if there are substantial delays in realizing revenue from smart cards we have purchased, our funds available to operate our business may be adversely affected which could materially and adversely affect our business, operating results and financial condition.

 

Failure to properly manage our potential growth would be detrimental to our business.

 

We may fail to adequately manage our anticipated future growth, either as a result of organic expansion or through acquisitions. Growth in our operations could place a significant strain on our administrative, financial and operational resources and could increase demands on our management and on our operational and administrative systems, controls and other resources. We cannot provide any assurance that our existing

 

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personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures to effectively achieve our growth strategy. In order to benefit from growth in our business, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base and maintain close coordination among our technical, accounting, finance, marketing and sales staff. We cannot provide any assurance that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing operations. If we are unable to manage growth effectively to achieve acceptable performance levels, our business, operating results and financial condition could be materially and adversely affected.

 

We derive a significant portion of our revenue from a limited number of large clients. Our revenue could decline significantly if any of these clients significantly reduces its purchases of our technology or services or terminates its relationship with us.

 

We currently derive, and we expect to continue to derive, a significant portion of our revenue from a limited number of large clients. Our two largest clients are DIRECTV and BSkyB. During the three months ended September 30, 2011 and the fiscal years ended June 30, 2011 and 2010, these two clients accounted for approximately 39%, 32% and 40%, respectively, of our total revenue. News Corporation, one of our largest shareholders, owned approximately 39% of BSkyB as of September 30, 2011, June 30, 2011 and June 30, 2010. During the three months ended September 30, 2011 and the fiscal years ended June 30, 2011 and 2010, our top ten clients accounted for approximately 76%, 65% and 72%, respectively, of our total revenue. We expect to continue to be dependent upon a limited number of clients for a significant portion of our revenue, although the particular clients may vary from period to period. If a large client purchases significantly less of our software or services, defers or cancels orders, or fails to renew or terminates its relationship with us or renews with us on less favorable terms, our revenue could decline significantly and as a result, our business, operating results and financial condition could be materially and adversely affected.

 

Businesses in which News Corporation has an interest, including BSkyB and SKY Italia, represent a material portion of our revenue. Revenues from BSkyB and SKY Italia together comprised approximately 26% and 23% of our total revenue for the three months ended September 30, 2011 and the fiscal year ended June 30, 2011, respectively.

 

Following completion of this offering, NDS Holdco, an affiliate of News Corporation, will own approximately     % of our issued and outstanding share capital and will have the right to nominate three members of our board of directors. Businesses with which News Corporation is affiliated, or in which News Corporation has an interest, currently account for, and are expected to continue to account for, a significant portion of our revenue. During the three months ended September 30, 2011 and the fiscal years ended June 30, 2011 and 2010, approximately 32%, 33% and 37%, respectively, of our total revenue was derived from businesses in which News Corporation has a continuing interest. Those businesses include BSkyB and SKY Italia, two of our three largest clients. As of September 30, 2011, News Corporation owned approximately 39% of BSkyB and 100% of SKY Italia. To the extent that News Corporation exerts influence or control over our clients, there can be no assurance that our existing or future agreements with such clients will be on terms no less favorable to us than those that we could obtain from unrelated third parties. Furthermore, we cannot provide any assurance that our relationships with these clients will continue on comparable terms, or at all, if News Corporation were to dispose of its interests in one or more of them or if its relationship with any of them deteriorates. There can be no assurance that the reduction in the ownership by News Corporation of our common shares as a result of this offering, or the further reduction by News Corporation of its ownership in the future, will not negatively impact our relationship with News Corporation or businesses in which News Corporation has an interest or with which News Corporation is affiliated. A reduction of involvement of News Corporation in our business, whether or not it continues to be a shareholder, may also negatively impact these relationships. Furthermore, because a number of major pay-TV operators around the world are owned or controlled by entities that compete with News Corporation or entities in which News Corporation has an interest or with which News Corporation is affiliated, our ability to attract clients in which News Corporation does not have an interest or with which News Corporation is not affiliated may be affected by their perception of, or our relationship with, News Corporation.

 

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We rely on News Corporation for certain services. If News Corporation were to discontinue such services, we may incur substantial additional costs to obtain these services from alternative providers.

 

News Corporation currently provides certain payroll, global purchasing, internal audit and legal services to us and certain of our subsidiaries. This agreement is terminable by News Corporation on 90 days’ notice at any time when News Corporation owns less than 30% of us. We reimburse News Corporation’s costs of providing these services. If News Corporation were to discontinue such services, we may incur substantial additional costs to find alternative providers for such services and may no longer be able to benefit from the greater ability of News Corporation to obtain lower prices from vendors, which may have a negative impact on our business, results of operations and financial condition.

 

Our ability to sell our solutions is also dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services could have a material adverse effect on our sales and results of operations.

 

Once our solutions are integrated within our clients’ systems, our clients may depend on our support organization to resolve any issues relating to our solutions. A high level of support is critical for the successful marketing and sale of our solutions. If we do not effectively assist our clients in deploying our solutions, succeed in helping our clients quickly resolve post-deployment issues, and provide effective ongoing support, our ability to sell our solutions to existing clients would be adversely affected and our reputation with potential clients could be harmed. In addition, if we continue to expand our international operations, our support organization will face additional challenges. Any failure to maintain high-quality support and services could result in clients choosing to use our competitors’ products instead of ours in the future and, as a consequence, our business, operating results and financial condition could be materially and adversely affected.

 

Any significant disruption in our processing of smart cards could adversely affect our business.

 

We currently obtain the computer chips used in our smart cards from a limited number of suppliers. In the event of a disruption of supply, including a shortage of manufacturing capacity, we may be unable to develop an alternative source in a timely manner or at favorable prices. Such failure could harm our ability to deliver smart cards to our clients or could negatively affect our operating margins.

 

In addition, we process all of our smart cards at two facilities, one located in the United Kingdom and the other in the United States. A significant disruption in the processing of smart cards at either facility could result in delays in the delivery of smart cards to our clients. The sale of smart cards that we have processed is a material portion of our business. Significant disruption to our smart card processing facilities could result in the loss of revenue, clients and future sales.

 

Acquisitions could result in operating difficulties, dilution and other risks.

 

Our long-term business strategy may include growth through acquisitions. Future acquisitions may not be completed on acceptable terms, and acquired assets, technology or businesses may not be successfully integrated into our operations. Any acquisitions or investments will be accompanied by the risks commonly encountered in acquisitions of businesses. Such risks include, among other things:

 

   

paying more than fair market value for an acquired company or assets;

 

   

failing to integrate the operations and personnel of the acquired businesses in an efficient, timely manner;

 

   

assuming potential liabilities of an acquired company;

 

   

managing the potential disruption to our ongoing business;

 

   

distracting management focus from our core businesses;

 

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impairing relationships with employees, clients, and strategic partners;

 

   

failing to implement or remediate controls, procedures and policies appropriate for a public company at acquired companies that prior to the acquisition lacked such controls, procedures and policies; and

 

   

diluting the share value and voting power of existing shareholders.

 

The anticipated benefits of many of our acquisitions may not materialize. Future acquisitions or dispositions could also result in the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill and other intangible assets, any of which could harm our financial condition.

 

Our success is heavily dependent upon our proprietary technologies and legal uncertainties with respect to intellectual property protection could harm our business.

 

We believe that our future success will depend on our ability to continue to develop proprietary solutions for our clients. We rely on a combination of patent, trademark, copyright and trade secret laws, nondisclosure and other contractual provisions, and technical measures to protect our intellectual property rights. Our patents, trademarks or copyrights may be challenged and invalidated or circumvented. Our patents may not be of sufficient scope or strength or may not be issued in all countries where products incorporating our technologies can be sold. We have filed applications to expand our patent claims and for improvement patents to extend the current expiration dates. However, expiration of some of our patents may harm our business. If we are not successful in protecting our intellectual property, our business would be harmed.

 

Effective intellectual property protection may be unavailable or limited in some foreign countries. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise use aspects of processes and devices that we regard as proprietary. Policing unauthorized use of our proprietary information is difficult, and the steps we have taken may not prevent misappropriation of our technologies. Such competitive threats could harm our business.

 

Consumer rights advocates and other constituencies continuously challenge copyright law, notably the U.S. Digital Millennium Copyright Act of 1998, or DMCA, through both legislative and judicial actions. Legal uncertainties surrounding the application of the DMCA may adversely affect our business. If copyright law is compromised, or devices that can circumvent our technology are permitted by law and become prevalent, this could result in reduced demand for our technologies, and our business would be harmed.

 

We may license technology from third parties. If we are unable to maintain these licenses, our operations and financial condition may be negatively impacted.

 

We may license technology, including software, hardware, and other technologies, from third parties. The loss of, or our inability to maintain or replace, these licenses could result in increased costs or delay sales of our software, smart cards and services. We anticipate that we will continue to license technology from third parties in the future. Technology licenses may not continue to be, and new technology we seek to license may not be, available on commercially reasonable terms, if at all. Some of the component technologies that we license from third parties could be difficult for us to replace. Although we do not believe any single third-party license is material to our operations, any impairment of the relationships with licensors could result in delays in the delivery of our solutions and services until equivalent technology is identified, licensed and integrated. Such a delay could adversely affect our operating results and financial condition. In addition, our clients may also license from third parties technologies necessary for the optimal functioning of, or to be used together with, our solutions and services. We have no control over our clients’ access to or use of any such licenses. If our clients were to experience any risks similar to those described above relating to our licenses, our business could be similarly negatively affected.

 

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Defending against intellectual property infringement claims could harm our business.

 

We may be subject to an increased risk of infringement claims as the number of products and competitors grows and the functionality of technology in different industry segments overlaps. A third party may allege that solutions that we have developed or technology that we have licensed from third parties infringe the rights of others. Intellectual property claims, regardless of their merit, could be time consuming to defend, result in costly litigation, divert management’s attention and resources and cause deployment delays. Such claims could also require us to seek to enter into royalty or license agreements, pay damages awards, redesign our software or potentially cease using aspects of technology, which could have a material adverse effect on our business, operating results and financial condition.

 

Many of our agreements with clients contain indemnification obligations, which could be triggered in the event that a client is named in an infringement suit involving their software products or involving an aspect of client’s solutions or services which incorporate or use our solutions. If it is determined that our software infringes or misappropriates any third parties’ intellectual property rights as alleged in any of the asserted claims in such a suit, we may be prevented from distributing certain of our software, and we may incur significant indemnification liabilities, which could materially and adversely affect our business, operating results and financial condition.

 

In addition, while damage claims in respect of an alleged infringement may, in many cases, be based upon a presumed royalty rate to which the patent or other intellectual property rights holder would have otherwise been entitled, it is possible that our liability may increase as a result of the incorporation of our technologies within our client’s products. In some cases, potential damages payable by us could be based on the profits derived by our clients from a product incorporating our software, hardware, or other technology which is determined to infringe or misappropriate a third party’s rights, even though we only received a relatively moderate economic benefit from the licensing arrangement with such client.

 

Some of our solutions contain open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

 

Certain of our solutions are distributed with software licensed by its authors or other third parties under open source licenses. Some open source software licenses contain requirements that we make available our proprietary source code for modifications or derivative works we create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software.

 

In addition, many of the risks associated with usage of open source cannot be eliminated. Use of open source in our software could inadvertently occur, as open source license terms are often ambiguous because we integrate our technology with other third-party vendors whose own screening processes may not be as rigorous. It is possible that our proprietary technology may be deemed to be combined with that of a third-party vendor. Companies that incorporate open source software into their products have, in the past, faced claims seeking enforcement of open source license provisions and claims asserting ownership of open source software incorporated into their products. Defending such claims or being required to disclose or make available our proprietary source code pursuant to an open source license could adversely affect our business.

 

Fluctuations in foreign exchange rates could harm our financial condition.

 

A risk inherent in our international operations is the exposure to fluctuations in currency exchange rates. In the three months ended September 30, 2011 and the fiscal year ended June 30, 2011, approximately 39% and 36% of our revenue, respectively, and approximately 73% and 70% of our operating expenses, respectively, were

 

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denominated in currencies other than the U.S. dollar. Additionally, as of September 30, 2011, approximately 23% of our long-term debt was denominated in euros. As a result, we are exposed to fluctuations in foreign exchange rates that may have a material adverse effect on our business, operating results and financial condition.

 

Additionally, although most of our contracts with clients in Latin America, India and the Asia-Pacific region are denominated in U.S. dollars, those clients are affected by fluctuations in their local currencies and by exchange control regulations that may restrict their ability to remit payments to us.

 

Raising additional capital may cause dilution to existing shareholders or restrict our operations.

 

We may need to raise additional capital to fund the growth of our business, new technologies development or geographical expansion. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. Any of these events could have a material adverse effect on our business, operating results and financial condition.

 

Our indebtedness could adversely affect our financial health and could harm our ability to react to changes to our business.

 

As of September 30, 2011, our total indebtedness under our secured credit facilities was approximately $1.04 billion, and we had $71 million of additional borrowing capacity available under our revolving credit facility. In addition, we may incur substantial indebtedness in the future. Although the secured credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these qualifications could be substantial. If we incur additional debt, the risks associated with our leverage would increase.

 

Our indebtedness could have important consequences to investors. For example, it could:

 

   

increase our vulnerability to general economic downturns and industry conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements or require us to seek alternative sources of funds to service our debt;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

place us at a competitive disadvantage compared to competitors that have less debt; and

 

   

limit, along with the financial and other restrictive covenants contained in the documents governing our indebtedness, among other things, our ability to borrow additional funds, make investments and incur liens.

 

In addition, debt under our secured credit facilities bears interest at floating rates. Accordingly, in the event that interest rates increase, our debt service expense will also increase. Borrowings under our revolving credit facility and our term loan A bear interest at a rate per annum between LIBOR plus 2.75% and LIBOR plus 3.50%, based upon the total leverage ratio in effect at the end of the most recent fiscal quarter for which specified financial statements have been delivered. Borrowings under our term loan B bear interest at a rate per annum, at our option, between LIBOR plus 2.75% and LIBOR plus 3.00%, if we choose to make LIBOR borrowings, or between the agent bank’s base rate plus 1.75% and the agent bank’s base rate plus 2.00%, if we choose to make base rate borrowings, in each case based upon the total leverage ratio in effect at the end of the most recent fiscal

 

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quarter for which specified financial statements have been delivered. In addition, we must pay a commitment fee on the daily unused portion of our revolving credit facility of 0.50% to 0.75%, based upon the total leverage ratio in effect at the end of the most recent fiscal quarter for which specified financial statements have been delivered. Interest is payable in cash on a quarterly basis, and the interest rate as of September 30, 2011 was (i) 5.03% for term loan A and (ii) 4.00% for term loan B. $4.0 million was outstanding under the revolving credit facility as of September 30, 2011. We made aggregate interest payments of $12.2 million and $87.8 million during the three months ended September 30, 2011 and the fiscal year ended June 30, 2011, respectively, including interest paid under our previous loan facilities. In addition, each term loan is payable in installments. We currently make quarterly principal payments of €2.3 million under term loan A and $2.0 million under term loan B. Term loan A matures in March 2017 and term loan B matures in March 2018. The final maturity date of the revolving credit facility is March 2017.

 

The terms of our secured credit facilities may restrict our current and future operations and may restrict our ability to respond to changes in our business and industry or to take certain actions.

 

Our secured credit facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests. The secured credit facilities include covenants restricting, among other things, our ability to:

 

   

incur or guarantee additional indebtedness;

 

   

pay or declare dividends with respect to us or our restricted subsidiaries;

 

   

make investments;

 

   

sell assets;

 

   

incur or allow to exist liens;

 

   

wind up, liquidate or dissolve our affairs or enter into any merger, de-merger or consolidation;

 

   

engage in transactions with affiliates;

 

   

enter into sale leaseback transactions;

 

   

change fiscal periods; and

 

   

engage in certain business activities.

 

In addition, the secured credit facilities contain financial covenants, including a maximum leverage ratio covenant and a minimum interest coverage ratio covenant. For a more detailed description of such covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and capital resources—Current financial condition.” A breach of any of the covenants under the secured credit facilities could result in a default under the secured credit facilities. If any such default occurs, the lenders under the secured credit facilities may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under our secured credit facilities also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the secured credit facilities, the lenders under those facilities will have the right to proceed against the collateral granted to them to secure the debt, which consists of substantially all of our assets including our available cash, the equity interests of our restricted subsidiaries and our intellectual property rights. If the debt under the secured credit facilities were to be accelerated, our assets may not be sufficient to repay our debt in full.

 

We depend upon key personnel, including our senior executives and technical and engineering staff, to operate our business effectively, and we may be unable to recruit or retain such personnel.

 

Our future success depends largely upon the continued service of our senior executive officers and other key management and technical personnel. If certain of our senior executives were to leave the Company, we may be placed at a competitive disadvantage. In addition, we may also need to increase the number of our technical,

 

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consulting and support employees to support new clients and the expanding needs of our existing clients. We may in the future experience difficulty in recruiting sufficient numbers of qualified personnel. If we are not successful in these recruiting efforts, our business, operating results and financial condition may be materially and adversely affected.

 

Changes to current accounting policies or in how such policies are interpreted or applied to our business could have a significant effect on our financial results.

 

New accounting pronouncements or a change in how US GAAP is interpreted or applied to our business could have a significant effect on our financial results. Our accounting policies that recently have been or may in the future be affected by changes in the accounting rules include revenue recognition, accounting for income taxes and accounting for goodwill and other intangible assets.

 

Our revenue recognition policy, in particular, is a key component of our results of operations and is based on complex rules that require us to make judgments and estimates. In applying our revenue recognition policy, we must determine what portions of our revenue are recognized currently and which portions must be deferred. Because different contracts may require different accounting treatment, it may be difficult for investors to properly assess our financial condition or operating results.

 

The effects of the global economic downturn may impact our business, operating results, financial condition or liquidity.

 

The recent global economic downturn has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, an unprecedented level of intervention from the United States federal government, European and other foreign governments, decreased consumer confidence, overall slower economic activity and extreme volatility in credit, equity and fixed income markets. Although economic conditions have been improving, there can be no assurance that they will continue to do so or that there will be a complete recovery to historical levels. If the economic downturn continues or worsens, our business, operating results, financial condition or liquidity could be negatively affected in a number of ways. For example, if the economic downturn makes it difficult for our clients and suppliers to accurately forecast and plan future business activities, they may delay or decrease purchases of our software or reduce production of their products, which may in turn decrease our licensing revenue and adversely impact our operating results, as many of our software technologies are licensed on a per-unit fee basis.

 

Furthermore, as our clients face a weak economy, they may not be able to gain sufficient credit in a timely manner, which could result in an impairment of their ability to place orders with us or to make timely payments to us for previous purchases. If this occurs, our revenue may be reduced, thereby having a negative impact on our results of operations. In addition, we may be forced to increase our allowance for doubtful accounts and our days sales outstanding may increase, which would have a negative impact on our cash position, liquidity and financial condition. We cannot predict the timing or the duration of this or any other economic downturn in the economy and we are not immune to the effects of general worldwide economic conditions.

 

Political, regulatory and economic risks associated with our international operations could harm our business.

 

Our clients are located throughout the world. Inherent risks of doing business in international markets include:

 

   

our ability to enforce our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as do the United States and European countries, which increases the risk of unauthorized, and uncompensated, use of our technologies;

 

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UK, US and foreign government trade restrictions, including those which may impose restrictions on importation of programming, technology or components to or from the United States or United Kingdom;

 

   

our ability to comply with applicable international laws and regulations governing our business and operations, including local consumer and safety laws, as well as license requirements;

 

   

foreign government taxes, regulations, and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon us in the United States or United Kingdom, and other laws limiting our ability to repatriate funds to the United States or United Kingdom;

 

   

negative economic developments in economies around the world;

 

   

political instability, including the threat of war, terrorism or civil unrest;

 

   

burdens of complying with a variety of foreign laws;

 

   

changes in diplomatic and trade relationships;

 

   

difficulty in staffing and managing foreign operations, including as a result of increasingly restrictive immigration policies;

 

   

adverse fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake;

 

   

catastrophic events and natural disasters; and

 

   

the strength of international economies.

 

We may also incur substantial expense as a result of the imposition of new restrictions or changes in the existing legal and regulatory environments in the countries where we conduct our business.

 

We are subject to certain risks relating to our operations in Israel.

 

We have research and development facilities and clients in Israel. At September 30, 2011, 27% of our employees were based in Israel. Therefore, we are directly influenced by the political, economic and security conditions affecting Israel. Any major hostilities involving Israel, or the interruption or curtailment of trade or the movement of people within Israel or between Israel and other countries, could significantly harm our business, operating results and financial condition. Additionally, certain of our employees are currently required to perform annual reserve duty in the Israeli Defense Force, and are subject to being called for active military duty at any time. We cannot predict the effect of these obligations on us in the future.

 

New and existing government regulations may adversely affect our business.

 

The telecommunications, media, broadcast, satellite and cable television industries in which our clients operate are subject to extensive regulation by governmental agencies. These governmental agencies continue to oversee and adopt legislation and regulation over these industries, particularly in the areas of user privacy, consumer protection, online content distribution and the characteristics and quality of online products and services. Our clients are also regulated by numerous antitrust and competition laws in the United States, the European Union and other jurisdictions in which they operate. To the extent that they grow their businesses in a relatively concentrated market, they may experience increased regulatory scrutiny. Governmental authorities may make legal and regulatory changes, or interpret and apply existing laws, in ways that compel our clients to modify our technologies and services, incur substantial costs, expose them to unanticipated civil or criminal liability, or cause them to change their business practices. Any such changes to our clients’ operations could impact the technologies and services they obtain from us, which could materially and adversely affect our business, operating results and financial condition.

 

In addition, many laws and regulations are pending and may be adopted in the United States, Europe and other countries with respect to the Internet. These laws may relate to many areas that impact our business, including copyright and other intellectual property rights, digital rights management, property ownership and

 

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taxation. These types of regulations are likely to differ between countries and other political and geographic divisions. Other countries that we operate in and political organizations are likely to impose or favor more and different regulation than that which has been proposed in the United States, thus furthering the complexity of compliance. In addition, state and local governments may impose regulations in addition to, inconsistent with, or stricter than federal regulations. Changes to or the interpretation of these laws could increase our costs, expose us to increased litigation risk, substantial defense costs and other liabilities or require us or our clients to change business practices. It is not possible to predict whether or when such legislation may be adopted, and the adoption of such laws or regulations, and uncertainties associated with their validity, interpretation, applicability and enforcement, could materially and adversely affect our business, operating results and financial condition.

 

We are subject to anti-corruption laws in the jurisdictions in which we operate, including the Foreign Corrupt Practices Act (“FCPA”) and the recently enacted UK Bribery Act of 2010 (the “UK Bribery Act”), and our failure to comply with these laws and regulations thereunder could result in penalties which could harm our reputation, business, and financial condition.

 

We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The FCPA also requires us to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the Company. Under the FCPA, companies operating in the United States may be held liable for actions taken by their strategic or local partners or representatives. Civil and criminal penalties may be imposed for violations of the FCPA and similar laws in other countries. We are also subject to the recently enacted UK Bribery Act. The UK Bribery Act is broader in scope than the FCPA in that it directly addresses commercial bribery in addition to bribery of government officials and it does not recognize certain exceptions, notably facilitation payments that are permitted by the FCPA. The Bribery Act also has wide jurisdiction. It covers any offense committed in the UK but proceedings can also be brought if a person who has a close connection with the UK commits the relevant acts or omissions outside the UK. The Act defines a person with a close connection as including British citizens, individuals ordinarily resident in the UK and bodies incorporated in the UK. The Act also provides that any organization that conducts part of its business in the UK, even if it is not incorporated in the UK, can be prosecuted for the corporate offense of failing to prevent bribery by an associated person, even if the bribery took place entirely outside the UK and the associated person had no connection with the UK.

 

We are in frequent contact with persons who may be considered “foreign officials” under the FCPA and UK Bribery Act, and therefore, are subject to an increased risk of potential FCPA and UK Bribery Act violations. In many foreign countries we operate in, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by the FCPA or the UK Bribery Act. Conversely, our competitors may not be bound by the FCPA, the UK Bribery Act or other similar anti-corruption laws. There can be no assurance that all of our employees, distributors, dealers, and agents will not take actions in violation of our policies designed to ensure compliance with anti-corruption laws or these regulations. Any such violation, even if prohibited by our policies, could have an adverse effect on our business. In addition, contracts obtained as a result of bribery may be deemed unenforceable. If we do not properly implement practices and controls with respect to compliance with applicable anti-corruption laws, or if we fail to enforce those practices and controls properly, we may be subject to regulatory sanctions, including administrative costs related to governmental and internal investigations, civil and criminal penalties, injunctions and restrictions on our business activities, all of which could materially and adversely affect our business, operating results and financial condition.

 

Changes in, or interpretations of, tax rules and regulations, may adversely affect our effective tax rates.

 

We conduct operations worldwide and are subject to tax in the UK and various overseas tax jurisdictions. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws or by changes in the valuation of our deferred tax assets and liabilities. Unanticipated changes in our tax rates could affect our future results of operations.

 

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In addition, UK and various overseas tax authorities may examine our tax returns. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. In making such assessments, we exercise judgment in estimating our provision for income taxes. While we believe our estimates are reasonable, we cannot provide any assurance that the final determination from these examinations will not be materially different from that reflected in our historical income tax provisions and accruals. Any adverse outcome from these examinations may have a material adverse effect on our business and operating results, which could cause the market for our share price to decline.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, and current and potential investors could lose confidence in our financial reporting.

 

We have a complex business that is international in scope. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We are continually in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures. If we or our independent registered public accountants identify areas for attention or improvement, implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems and take a significant period of time to complete.

 

Risks Related to this Offering and Ownership of Our Common Shares

 

An active and liquid trading market for our common shares may not develop.

 

Prior to this offering, our common shares have not been traded on any market. An active and liquid trading market for our common shares may not develop or be maintained after this offering. Liquid and active trading markets typically result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our common shares could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common shares, you could lose a substantial part or all of your investment in our common shares. The initial public offering price will be negotiated between us, the selling shareholders and representatives of the underwriters and may not be indicative of the market price of our common shares after this offering. Consequently, you may not be able to sell our common shares at prices equal to or greater than the price paid by you in the offering.

 

Our share price may be volatile, and purchasers of our common shares could incur substantial losses.

 

Our share price may be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common shares at or above the initial public offering price. The market price for our common shares may be influenced by many factors, including, but not limited to:

 

   

the recruitment or departure of key personnel;

 

   

quarterly or annual variations in our financial results or those of companies that are perceived to be similar to us;

 

   

market conditions in the industries in which we compete;

 

   

analysts’ reports or recommendations;

 

   

the failure of securities analysts to cover our common shares after this offering or changes in financial estimates by analysts;

 

   

the inability to meet the financial estimates of analysts who follow our common shares;

 

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legal and regulatory developments in Bermuda, the United Kingdom, the United States and foreign countries where we operate;

 

   

and issuance of additional, new or changed securities;

 

   

investor perception of our company and of the industry in which we compete; and

 

   

general economic, political and market conditions.

 

A substantial portion of our total issued and outstanding common shares may be sold into the market at any time. This could cause the market price of our common shares to drop significantly, even if our business is doing well.

 

All of the shares being sold in this offering will be freely tradable without restriction or further registration under the federal securities laws, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. The remaining common shares issued and outstanding upon the closing of this offering are restricted securities as defined in Rule 144 under the Securities Act. Restricted securities may be sold in the U.S. public market only if registered or if they qualify for an exemption from registration, including by reason of Rules 144 or 701 under the Securities Act. All of our restricted shares will be eligible for sale in the public market beginning in                     , subject in certain circumstances to the volume, manner of sale and other limitations under Rule 144, and also the lock-up agreements described under “Underwriting” in this prospectus. The lock-up agreements entered into by our senior management contain an exception for shares pledged as collateral for personal loans. Under certain circumstances, the lenders under these loans could elect to foreclose on and sell these shares pursuant to an exemption under the Securities Act notwithstanding the lock-up agreements. Additionally, we intend to register all our common shares that we may issue under our employee benefit plans. Once we register these shares, they can be freely sold in the public market upon issuance, unless pursuant to their terms these share awards have transfer restrictions attached to them. Further, we have agreed under certain circumstances to file a registration statement to register the resale of the remaining shares held by the Nuclobel Entities, NDS Holdco and members of management, as well as to cooperate in certain public offerings of such shares. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction in the public market immediately upon the effectiveness of the registration statement, except for shares purchased by affiliates. Sales of a substantial number of our common shares, or the perception in the market that the holders of a large number of shares intend to sell, could reduce the market price of our common shares.

 

Our two largest shareholders control us and may act in a manner that advances their best interests and not necessarily those of other shareholders.

 

After this offering, we anticipate that the Nuclobel Entities and NDS Holdco, our two largest shareholders, will collectively own approximately     % of our issued and outstanding common shares, or     % if the underwriters exercise their over-allotment option in full. Prior to the completion of this offering, the Company, the Nuclobel Entities, NDS Holdco and members of management will enter into a shareholders’ agreement with respect to, among other things, their voting on certain matters requiring shareholder approval, including the election of directors. Collectively, the Nuclobel Entities and NDS Holdco will have the right to appoint a majority of our board of directors. As a result, we are and will be immediately after this offering jointly controlled by the Permira Funds and News Corporation, which will continue to control our board of directors and will be able to influence or control all matters requiring approval by our shareholders, including:

 

   

the election of directors;

 

   

mergers, amalgamations, consolidations, takeovers or other business combinations involving us;

 

   

the sale of all or substantially all of our assets and other decisions affecting our capital structure;

 

   

the amendment of our memorandum of association and our bye-laws; and

 

   

our voluntary winding up and dissolution.

 

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The contractual rights and significant ownership by the controlling shareholders may delay, deter or prevent acts that may be favored by our other shareholders, including a change of control of us. The interests of the controlling shareholders may not always coincide with our interests or the interests of our other shareholders, and the controlling shareholders may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to our other shareholders or adversely affect us or our other shareholders, including investors in this offering.

 

So long as controlling shareholders have these contractual rights or continue to indirectly own a significant amount of our outstanding common shares, even if such amount is less than 50%, the controlling shareholders will continue to be able to strongly influence or effectively control our decisions. See also “Principal and Selling Shareholders” and “Certain Relationships and Related Party Transactions.”

 

Our capital structure and certain provisions of our bye-laws may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a shareholder might consider to be in its best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders.

 

The existence of authorized but unissued common shares and preference shares could render more difficult or discourage an attempt to obtain control over us by means of a proxy contest, tender offer, amalgamation, scheme of arrangement or otherwise. Pursuant to our bye-laws, our preference shares may be issued in one or more series from time to time, and our board of directors is authorized to determine the rights, preferences, powers, qualifications, limitations and restrictions applicable to such shares. See “Description of Capital Stock—Share Capital Outstanding—Preference shares.”

 

Certain provisions of our bye-laws may make a change in control of us more difficult to effect. Our bye-laws will provide for a staggered board of directors consisting of three classes of directors. Directors of each class are chosen for three-year terms upon the expiration of their current terms and each year one class of our directors will be elected by our shareholders. This classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us, even though a tender offer or change in control might be considered by our shareholders to be in their best interest.

 

Our bye-laws will also provide that persons validly standing for election as directors are elected by our shareholders by a plurality of the votes cast on the resolution. In addition, our bye-laws will provide that directors (other than directors designated by either the Nuclobel Entities or NDS Holdco, who may be removed only by the shareholder who designated such director) may be removed with or without cause for so long as we are a “controlled company” and only for cause if we are not a “controlled company,” and only by a resolution of our shareholders evidencing the affirmative vote of at least a majority of the votes attaching to all of our issued and outstanding common shares entitling the holder to attend and vote on such resolution, provided that notice of the shareholders meeting convened to remove the director is given to the director not less than 14 days prior to the meeting. Our bye-laws will also provide that shareholders seeking to nominate candidates for election as directors other than nominations of existing directors or made by or at the direction of our board of directors or to bring business before an annual meeting of shareholders must provide advance notice in writing to our corporate secretary. Finally, our bye-laws may only be rescinded, altered or amended upon approval by a resolution of the board of directors and by a resolution of our shareholders, as described in “Comparison of Shareholder Rights—Differences in Corporate Law—Amendment of bye-laws.”

 

The inclusion of these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future.

 

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We will be a “controlled company” within the meaning of NYSE rules and, as a result, will qualify for and will rely on exemptions from certain corporate governance requirements.

 

Upon completion of this offering, the Nuclobel Entities and NDS Holdco will continue to control a majority of the voting power of our issued and outstanding common shares, and we will be a “controlled company” within the meaning of NYSE corporate governance standards. Under NYSE rules, a company of which more than 50% of the voting power is held by a person or group of persons acting together is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including the requirements that:

 

   

a majority of the board of directors consist of independent directors;

 

   

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

 

Following this offering, we intend to elect to be treated as a controlled company and utilize all of these exemptions. Accordingly, shareholders may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

 

In addition, we will rely on the phase-in rules of the United States Securities and Exchange Commission, or the SEC, available to issuers who were not subject to the reporting requirements under the Exchange Act of 1934, as amended, or the Exchange Act, immediately prior to the effective date of the registration statement for such issuer’s initial public offering and the NYSE with respect to the independence of our audit committee. These rules permit us to have an audit committee that has one member that is independent on the listing date, a majority of members that are independent within 90 days of the effectiveness of the registration statement of which this prospectus forms a part and all members that are independent within one year after such effective date.

 

If you purchase our common shares in this offering, you will suffer immediate and substantial dilution of your investment.

 

The initial public offering price of our common shares is substantially higher than the net tangible book value per common share. Therefore, if you purchase our common shares in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per common share and the net tangible book value per common share after this offering. See “Dilution.”

 

We do not intend to pay dividends on our common shares and, consequently, your only opportunity to achieve a return on your investment is if the price of our shares appreciates.

 

We do not plan to declare dividends on our common shares in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in us will be if the market price of our common shares appreciates, which may not occur, and you sell your shares at a profit. There is no guarantee that the price of our common shares that will prevail in the market after this offering will ever exceed the price that you pay.

 

We are a Bermuda company and a significant portion of our assets are located outside the United States. As a result, it may be difficult for shareholders to enforce civil liability provisions of the federal or state securities laws of the United States.

 

We are a Bermuda exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions,

 

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including the United States. See “Description of Capital Stock.”         of our directors upon consummation of this offering will not be residents of the United States, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for shareholders to effect service of process on such directors or any future non-resident directors in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. We have been advised by Conyers Dill & Pearman Limited, our special Bermuda counsel, that there is no treaty in effect between the United States and Bermuda providing for enforcement of judgments of U.S. courts and that there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts.

 

Bermuda law differs from the laws in effect in the United States and might afford less protection to shareholders.

 

Our shareholders could have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction of the United States. As a Bermuda company, we are governed by the Companies Act 1981 of Bermuda (the “Bermuda Companies Act”). The Bermuda Companies Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Set forth below is a summary of these provisions, as well as modifications adopted pursuant to our bye-laws, which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries of the material differences between Bermuda and U.S. corporate laws, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders. For additional information regarding the differences between Bermuda and U.S. corporate laws, see “Description of Capital Stock” and “Comparison of Shareholder Rights.”

 

Interested Directors. Bermuda law provides and our bye-laws will provide, that as long as a director discloses a direct or indirect interest in any contract or arrangement with us as required by law, such director is entitled to vote in respect of any such contract or arrangement in which he or she is interested, unless disqualified from doing so by the chairman of the meeting, and such a contract or arrangement will not be voidable solely as a result of the interested director’s participation in its approval. In addition, the director will not be liable to us for any profit realized from the transaction. In contrast, under Delaware law, such a contract or arrangement is voidable unless it is approved by a majority of disinterested directors or by a vote of shareholders, in each case if the material facts as to the interested director’s relationship or interests are disclosed or are known to the disinterested directors or shareholders, or such contract or arrangement is fair to the corporation as of the time it is approved or ratified. Additionally, such interested director could be held liable for a transaction in which such director derived an improper personal benefit.

 

Mergers and Similar Arrangements. The amalgamation of a Bermuda company with another company or corporation (other than certain affiliated companies) requires the amalgamation agreement to be approved by the company’s board of directors and by its shareholders. Unless the company’s bye-laws provide otherwise, the approval of 75% of the shareholders voting at such meeting is required to approve the amalgamation agreement, and the quorum for such meeting must be two persons holding or representing more than one-third of the issued shares of the company. Our bye-laws provide that an amalgamation, merger or similar transaction must be approved by a resolution of our shareholders evidencing the affirmative vote of at least a majority of the votes attaching to all of our issued and outstanding common shares entitling the holder to attend and vote on such resolution. Under Bermuda law, in the event of an amalgamation of a Bermuda company with another company or corporation, a shareholder of the Bermuda company who did not vote in favor of the amalgamation and is not satisfied that fair value has been offered for such shareholder’s shares may, within one month of notice of the shareholders meeting, apply to the Supreme Court of Bermuda to appraise the fair value of those shares. Under Delaware law, with certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a corporation must be approved by the board of directors and a majority of the issued and outstanding shares

 

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entitled to vote thereon. Under Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which such shareholder may receive cash in the amount of the fair value of the shares held by such shareholder (as determined by a court) in lieu of the consideration such shareholder would otherwise receive in the transaction.

 

Action by Written Consent. The Bermuda Companies Act provides that shareholders may take action by written consent. A resolution in writing is passed when it is signed by the members of the company who at the date of the notice of the resolution represent such majority of votes as would be required if the resolution had been voted on at a meeting or when it is signed by all the members of the company or such other majority of members as may be provided by the bye-laws of the company.

 

Shareholders’ Suit. Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders, for instance, or where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it.

 

When the affairs of a company are being conducted in a manner which is oppressive or prejudicial to the interests of some part of the shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company.

 

Our bye-laws will contain a provision by virtue of which we and our shareholders waive any claim or right of action that they have, both individually and on our behalf, against any director or officer in relation to any action or failure to take action by such director or officer, except in respect of any fraud or dishonesty of such director or officer. Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.

 

In addition, because we are not a U.S. company and many of our directors are not U.S. residents, it may be difficult for shareholders to effect service of process on such non-resident directors in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons. We have been advised by Conyers Dill & Pearman Limited, our special Bermuda counsel, that there is no treaty in effect between the United States and Bermuda providing for enforcement of judgments of U.S. courts and that there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts.

 

Shareholders Meetings. Under our bye-laws, not less than ten nor more than sixty days’ notice of an annual general meeting must be given to each shareholder entitled to attend and vote at such meeting. This notice requirement is subject to the ability to hold such meetings on shorter notice if such notice is agreed: (i) in the case of an annual general meeting, by all of the shareholders entitled to attend and vote at such meeting; or (ii) in the case of a special general meeting, by a majority in number of the shareholders entitled to attend and vote at the meeting holding not less than 95% in nominal value of the shares entitled to vote at such meeting. The quorum required for a general meeting of shareholders is one or more persons present in person at the start of the meeting and representing in person or by proxy in excess of 50% of our total issued and outstanding voting shares.

 

Indemnification of Directors and Officers. We may indemnify our directors and officers in their capacity as directors or officers for any loss arising or liability attaching to them by virtue of any rule of law in respect of any negligence, default, breach of duty or breach of trust of which a director or officer may be guilty in relation to the company other than in respect of his own fraud or dishonesty. Under Delaware law, a corporation may indemnify

 

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a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if such director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his or her conduct was unlawful. In addition, we expect to enter into customary indemnification agreements with our directors and officers.

 

As a foreign private issuer, we are subject to different U.S. securities laws and rules than a U.S. issuer, which may limit the information publicly available to our shareholders.

 

We are a “foreign private issuer” as defined under U.S. securities laws. Even though we are subject to the informational requirements of the Exchange Act, as a foreign private issuer, we are exempt from certain informational requirements of the Exchange Act that U.S. issuers are subject to. As a result, our shareholders will have more limited information about the Company with which to evaluate our performance than they would if we were a U.S. issuer. Please refer to “Where You Can Find More Information” for additional information regarding such informational requirements.

 

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could affect our operating results.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934 and the rules and regulations of the NYSE. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources. The requirements of these rules and regulations may also make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage as was previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” These factors include, but are not limited to:

 

   

any decline in our clients’ subscribers or failure of our solutions to enable our clients to grow their revenues per subscriber;

 

   

widespread availability of OTT content;

 

   

any decision by our clients not to use our technologies or adopt our technologies early in their development cycles;

 

   

any compromise of the security provided by our content and service protection systems and solutions or our failure to adapt such systems or solutions to changing technology;

 

   

any significant fluctuations and the unpredictability of our quarterly results;

 

   

our failure to complete our projects in a timely fashion to meet our clients’ requirements;

 

   

our inability to sell a significant number of smart cards we have purchased in advance or any substantial delays in realizing revenue from smart cards we have purchased;

 

   

our failure to properly manage our potential growth;

 

   

any reduction of purchase of our technology or services or termination of relationship with us by the limited number of large clients from which we derive a significant portion of our revenue;

 

   

our relationship with businesses in which News Corporation has an interest and which represent material portion of our revenue;

 

   

any legal uncertainties with respect to intellectual property protection;

 

   

fluctuations in foreign exchange rates;

 

   

our need to raise additional capital that may cause dilution to existing shareholders or restrict our operations;

 

   

our indebtedness that could adversely affect our financial health and could harm our ability to react to changes to our business;

 

   

the effects of the global economic downturn;

 

   

political, regulatory and economic risks associated with our international operations;

 

   

new and existing government regulations that may adversely affect our business; and

 

   

changes in, or interpretations of, tax rules and regulations.

 

You should specifically consider all of the numerous risks outlined under “Risk Factors.”

 

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Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

 

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CORPORATE FORMATION AND REORGANIZATION

 

Our Formation

 

We were established through our original predecessor in 1988 as a joint venture of News Corporation, one of the world’s largest global media companies, and became a wholly owned subsidiary of News Corporation in 1992. In 1999, we listed on the NASDAQ Stock Exchange, and News Corporation remained our largest shareholder until February 2009 at which time we became a privately held company incorporated in England and Wales through our immediate predecessor, NDS Group Limited. Since that time, the Series B Shares of NDS Group Limited have been owned approximately 51% by the Nuclobel Entities, and approximately 49% by NDS Holdco, with a director and members of management owning less than 1% of the Series B Shares. Pursuant to agreements made at the time of the take-private transaction, the Nuclobel Entities and NDS Holdco have equal voting power in respect of their Series B Shares, and all other ordinary shares, including Series B Shares held by directors and members of management, are non-voting. In addition, primarily as a result of subscriptions made at the time of the take-private transaction, members of management of NDS Group Limited also hold Series C Shares. The following members of management currently hold Series B Shares and Series C Shares: Michael Dick, Yorai Feldman, Alexander Gersh, Dave Habiger, Jonathan Hashkes, Raffi Kesten, Pyrros Koussios, Ismat Levin, David Nabozny, Derek Nottingham, Gorm Nielsen, Abraham Peled, Nigel Smith, Susan Taylor, Nicholas Thexton and Andrew Woodward.

 

On August 1, 2011, NDS Group Holdings Limited was incorporated under the laws of Bermuda as an exempted company to become the holding company for NDS Group Limited in connection with this offering and the Reorganization. At the time of incorporation, each of the Nuclobel Entities and NDS Holdco subscribed for 119 common shares of NDS Group Holdings Limited for each share of NDS Group Limited then held by it. As a result, the Nuclobel Entities currently own approximately 51% of the common shares of NDS Group Holdings Limited, and NDS Holdco currently owns approximately 49%. See “Principal and Selling Shareholders.”

 

NDS Group Limited’s Articles of Association adopted at the time of the take-private transaction include a mechanism to attribute value to the various classes of its share capital based upon the valuation of the company at an “exit event,” which will include this offering (“the waterfall calculation”). The waterfall calculation is a methodology whereby the implied equity value of NDS as of the date of an exit event is shared among the various classes of share capital. The Series C Shares held by members of management have nominal value until the Series B Shares, including the shares held by the Nuclobel Entities, NDS Holdco and management, achieve a specified return. As a result, the value resulting from the waterfall calculation of the Series C Shares held by management is more significantly impacted by changes in the enterprise value of NDS than are other series of ordinary shares.

 

Pursuant to the waterfall calculation, in the context of an initial public offering, the implied equity value of NDS would be calculated as the total number of common shares in NDS Group Holdings Limited, after giving effect to the offering and the Reorganization, multiplied by the initial public offering price. This amount is then attributed to the various classes of share capital as follows. First, the total implied equity value is reduced by (i) the aggregate offering price of the primary shares issued in this offering, applicable underwriting fees and all offering expenses; (ii) three percent of the total implied equity value less the amounts in clause (i) above (which is the portion attributable to the Series D Shares underlying outstanding options of NDS Group Limited, assuming all such options are vested); (iii) the aggregate initial investment amount paid by the holders of the Series B Shares, including the Nuclobel Entities, News Corporation and certain members of management, to acquire such shares; and (iv) the specified return to the holders of the Series B Shares. Of the remaining amount, eight percent is attributed to the Series C Shares and the remaining amount is attributed to the Series B Shares.

 

Once the attributions are determined, the Series C Shares held by management will be redesignated into a number of Series B Shares that will be exchanged for our common shares in the Reorganization and, if necessary as described below, a number of Series E Shares that will be repurchased by NDS Group Limited for nominal

 

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value and cancelled, and will not be exchanged for our common shares in the Reorganization. In addition, the Series D Shares underlying options of NDS Group Limited will be notionally redesignated into a number of Series B Shares, and thereafter such options will be exchanged for options over a number of common shares based upon the conversion ratio applicable to the Series B Shares. The ratio for determining the number of Series B Shares into which the Series C Shares will be redesignated is calculated by dividing the amount of the total implied equity value attributable to the Series C Shares determined as set forth above by the per share price of a Series B Share determined after calculating the amount of the total implied equity value attributable to the Series B Shares as set forth above. The resulting number is then divided by the number of issued and outstanding Series C Shares to establish the ratio. If the resulting ratio is less than one, then the difference between one and the ratio represents the additional ratio for determining the number of Series E Shares into which the Series C Shares will be redesignated. The same methodology will be used to notionally redesignate the Series D Shares underlying options, using the amount of the total implied equity value attributable to the Series D Shares and the number of such shares underlying outstanding options.

 

The following sets forth an example of the waterfall calculation. This calculation is for illustrative purposes only, and the final calculation will be made using the actual offering price to the public for common shares in this offering. For purposes of this example, we have assumed that the offering price is $20 per share; the Company receives primary gross proceeds of $100 million and pays $10 million in applicable underwriting fees and all offering expenses; the offering occurs on January 30, 2012; and 190 million common shares are issued and outstanding after giving effect to the Reorganization and this offering. As noted above, to determine amounts attributable to the various share classes, the total implied equity value is reduced by (i) the aggregate offering price of the primary shares issued in this offering, applicable underwriting fees and all offering expenses; (ii) three percent of the total implied equity value less the amounts in clause (i) above (which is the portion attributable to the Series D Shares underlying outstanding options of NDS Group Limited, assuming all such options are vested); (iii) the aggregate initial investment amount paid by the holders of the Series B Shares, including the Nuclobel Entities, News Corporation and certain members of management, to acquire such shares; and (iv) the specified return to the holders of the Series B Shares. Of the remaining amount (the “surplus exit proceeds”), eight percent is attributed to the Series C Shares and the remaining amount is attributed to the Series B Shares. The following table illustrates the example (dollars in millions):

 

Total Implied Equity Value

   $ 3,800.0   

Less:

  

Primary proceeds, fees and expenses

     110.0   

Series D Shares (3% of total implied equity value less primary proceeds, fees and expenses)

     110.7   

Initial investment by holders of Series B Shares

     1,810.0   

Series B Share return (13% per annum)

     793.1   
  

 

 

 

Surplus Exit Proceeds:

   $ 976.2   
  

 

 

 

Amount attributable to Series B Shares:

  

92% of surplus exit proceeds

   $ 898.1   

Accrued capitalized interest

     793.1   

Initial investment

     1,810.0   
  

 

 

 

Total

   $ 3,501.2   
  

 

 

 

Amount attributable to Series C Shares (8% of surplus exit proceeds)

   $ 78.1   
  

 

 

 

Amount attributable to Series D Shares (3% of total implied equity value less primary proceeds, fees and expenses)

   $ 110.7   
  

 

 

 

 

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Based on shares outstanding, the Series B Shares, Series C Shares and Series D Shares would have the following values per share:

 

Shares Outstanding

   Value per Share  

28,709,115 Series B Shares

   $ 121.94   

2,495,975 Series C Shares

   $ 31.29   

8,877,440 Series D Shares subject to outstanding options

   $ 12.47   

 

As a result, in the Reorganization, each Series B Share would be exchanged for approximately 6.10 common shares; each Series C Share would be exchanged for approximately 1.56 common shares; and each option over one Series D Share would be exchanged for an option over approximately 0.62 common share. In the Reorganization, of the total value attributable to the Series D Shares, only the value related to vested options will actually be attributed to the Series D Shares, and any remaining value will be reallocated to the Series B Shares and the Series C Shares in accordance with the economic value attributed to such shares in the above calculation. Series D Shares underlying unvested options will be deemed to have no value at the time of the Reorganization. Accordingly, to the extent there are unvested options at the time of the offering, the value of the Series B Shares and the Series C Shares will increase, resulting in an increase in the number of common shares for which such ordinary shares will be exchanged. The number of common shares exchanged for Series D Shares underlying outstanding options will not change, however.

 

Our Reorganization

 

Prior to completion of this offering, we will effect the Reorganization pursuant to which we will acquire all of the outstanding equity interests of our predecessor, NDS Group Limited. To effect the Reorganization, pursuant to the equity implementation deed, or the implementation deed, dated August 10, 2011, by and among us, NDS Group Limited, and the shareholders of NDS Group Limited, each of the following transactions will occur consecutively:

 

   

Prior to the effective time of the registration statement of which this prospectus forms a part, each of the Nuclobel Entities and NDS Holdco will subscribe for one of our common shares in exchange for each Series B Share held by it, or              of our common shares in the aggregate.

 

   

Each Nuclobel Entity and NDS Holdco will transfer its Series B Shares to us, and we will issue and deliver to each of them certificates representing the number of common shares required to be issued as provided in the prior bullet. At such time, none of the Nuclobel Entities or NDS Holdco will own any ordinary shares of NDS Group Limited.

 

   

Following such issuance, we will effect the              for              consolidation of our common shares (the “Consolidation Ratio”).

 

   

Immediately following the determination of the initial public offering price in this offering, NDS Group Limited will make the waterfall calculation pursuant to its Articles of Association to determine the number of Series B Shares and Series E Shares into which the Series C Shares will be redesignated and the number of Series B Shares into which the Series D Shares underlying options will be notionally redesignated, as described above, and will effect the redesignation of the Series C Shares.

 

   

NDS Group Limited will repurchase any Series E Shares resulting from the redesignation for a nominal value and cancel all such shares.

 

   

Each remaining holder of Series B Shares will subscribe for a number of common shares in exchange for each Series B Share held by it (including shares held as a result of the redesignation) that would have equaled a one-for-one exchange immediately prior to giving effect to the Consolidation Ratio, or              of our common shares in the aggregate, assuming the initial public offering price is equal to the mid-point of the estimated price range set forth on the cover page of this prospectus.

 

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Each such holder of Series B Shares as described in the prior bullet will then transfer its Series B Shares to us, and we will issue and deliver to each of them certificates representing the number of common shares required to be issued as provided above.

 

   

Lastly, we will assume the NDS Group Limited 2009 Share Option Plan and, together with NDS Group Limited, will cause the exchange of all options to purchase Series D Shares outstanding thereunder for an equivalent number of options over our common shares (after giving effect to the Consolidation Ratio), which options will preserve the vesting period of the exchanged options.             of our common shares will be subject to options issued in such exchange, assuming the initial public offering price is equal to the mid-point of the estimated price range set forth on the cover page of this prospectus.

 

As a result of the foregoing, NDS Group Limited will become our wholly owned subsidiary. Upon completion of the Reorganization and this offering, we will be a holding company, our business will be conducted through NDS Group Limited and its subsidiaries, and the holders of NDS Group Limited ordinary shares prior to the Reorganization will hold the following percentages of our common shares, assuming the sale of              common shares in this offering at the mid-point of the estimated price range set forth on the cover page of this prospectus:

 

Entity

   % of Common Shares
Outstanding Assuming
No Exercise of Over-
allotment Option
    % of Common Shares
Outstanding Assuming
Full Exercise of Over-
allotment Option
    % of Common Shares
(Fully Diluted)
Assuming No Exercise
of Over-allotment
Option
    % of Common Shares
(Fully Diluted)
Assuming Full Exercise
of Over-allotment
Option
 

Nuclobel Entities

                                    

NDS Holdco

                                    

Members of Management

                                    

Option Holders

                                

 

For an analysis of how the foregoing information would change if the initial public offering price is not equal to the midpoint of the estimated price range, see “Pricing Sensitivity Analysis.”

 

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Corporate Structure

 

The following diagram illustrates our corporate structure following the Reorganization and this offering:

 

LOGO

 

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MARKET AND INDUSTRY DATA

 

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates as well as from studies conducted by third parties and industry or general publications, including Screen Digest, IDC, Solon, ZenithOptimedia and Datamonitor. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets.

 

In this prospectus, we present information about our geographic markets. We define these markets by region and in accordance with the level of digital pay-TV penetration. Our developed markets consist of North America (United States and Canada) and Western Europe, which had digital pay-TV penetration of 72% and 40%, respectively, of all TV households in 2010, according to 2011 data published by Screen Digest. We define our emerging markets as those regions where digital pay-TV penetration is at an earlier stage, including Asia-Pacific, Central and Eastern Europe, Central and Latin America, and Middle East and Africa, which had digital pay-TV penetration of 24%, 22%, 20% and 9%, respectively, of all TV households in 2010, according to 2011 data published by Screen Digest. Under these definitions, certain of our developed markets include countries where digital pay-TV penetration is relatively lower, and our emerging markets include markets where digital pay-TV penetration is more mature, such as Australia, New Zealand, Japan and South Korea (which countries contributed in the aggregate less than 5% to our revenue for the fiscal year ended June 30, 2011).

 

In addition, in this prospectus, where we present information about our global market share as of June 30, 2011, such market share information is calculated by dividing our actual units deployed or households served by the global market size. The number of actual units deployed by us or our households served is based on our internal data as of June 30, 2011. Screen Digest’s overall market size data is generally reported on a calendar year basis. To determine the applicable overall market size as of June 30 of a particular fiscal year, whether based upon units deployed or households served, we used the arithmetic mean of Screen Digest’s data as to the actual market size as of December 31 of the prior completed calendar year and the actual or its estimate for market size as of December 31 of the applicable calendar year.

 

CERTAIN TRADEMARKS

 

NDS®, VideoGuard®, VideoGuard Connect, MediaHighway® Fusion, XTV, Snowflake® and NDS Unified Headend are either trademarks or registered trademarks of NDS in one or more countries worldwide. This prospectus also includes trade names and trademarks of companies other than NDS. For the convenience of the reader, our clients sometimes are referred to by their common trading names and not the names of the specific legal entities with which we contract or the legal name of the parent entity of such party.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

We are a Bermuda exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions, including the United States. See “Description of Capital Stock.”              of our directors upon consummation of this offering will not be residents of the United States, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for shareholders to effect service of process on such directors or any future non-resident director in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. We have been advised by Conyers Dill & Pearman Limited, our special Bermuda counsel, that there is no treaty in effect between the United States and Bermuda providing for enforcement of judgments of U.S. courts and that there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of our common shares in this offering will be approximately $        , assuming an initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the common shares sold by the selling shareholders. For an analysis of how the net proceeds from this offering to us change if the initial public offering price is not equal to the midpoint of the estimated price range, see “Pricing Sensitivity Analysis.”

 

We intend to contribute the net proceeds to us from this offering to NDS Group Limited, which will be our direct wholly owned subsidiary upon completion of the Reorganization. We expect NDS Group Limited to use a portion of the net proceeds to repay indebtedness outstanding under its revolving credit facility, with any remaining proceeds to be used for general corporate purposes, which may include working capital to fund our operations or for potential acquisitions, although we have no agreements with respect to any acquisitions at this time. Any such amounts repaid will be available for reborrowing pursuant to the terms of the revolving credit facility. Affiliates of the underwriters that are lenders under our revolving credit facility will receive a portion of the net proceeds used to repay such indebtedness. In light of the amount outstanding under the revolving credit facility, none of the underwriters or their respective affiliates are expected to receive 5% or more of the estimated net proceeds of this offering.

 

We entered into the revolving credit facility on March 10, 2011. Borrowings have been used to repay other indebtedness and for general corporate purposes. As of September 30, 2011, approximately $4.0 million was outstanding under the revolving credit facility, which bore interest at an annual rate of 3.7025% as of such date. The final maturity date of the revolving credit facility is March 10, 2017.

 

We believe this offering will allow us to provide greater transparency to our clients as well as provide us with publicly traded equity that may enhance our flexibility in pursuing strategic acquisitions and attracting and retaining top quality employees.

 

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DIVIDEND POLICY

 

We do not intend to pay cash dividends on our common shares for the foreseeable future. We intend to retain all of our future earnings, if any, generated by our operations for the future development of our business. Our ability to pay cash dividends or to receive distributions or other transfers from our subsidiaries to enable us to pay cash dividends on our common shares may be restricted by the terms of the agreements governing our and our subsidiaries’ existing and future indebtedness. Additionally, we are subject to Bermuda legal constraints that may affect our ability to pay dividends on our common shares and make other payments; and our subsidiary NDS Group Limited is subject to English legal constraints that may affect its ability to make distributions to us. Under the Bermuda Companies Act, we may not declare or pay a dividend if there are reasonable grounds for believing that we are, or would after the payment be, unable to pay our liabilities as they become due or that the realizable value of our assets would thereby be less than the aggregate of our liabilities, issued share capital and share premium accounts. Under English company law, NDS Group Limited’s ability to pay dividends to us is limited to its distributable reserves, which are its accumulated, realized profits not previously utilized by a distribution or capitalization, less its accumulated, realized losses not previously written off in a reduction or reorganization of capital duly made. Any decision to pay dividends in the future is at the discretion of our board of directors and depends on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to the Reorganization as described in “Corporate Formation and Reorganization”; and

 

   

on a pro forma as adjusted basis, giving effect to the pro forma adjustments and the sale of              common shares in this offering by us at an assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and the application of the net proceeds to us therefrom.

 

This table should be read in conjunction with “Use of Proceeds,” “Pricing Sensitivity Analysis” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2011
     Actual    Pro Forma    Pro Forma As
Adjusted
     (unaudited)
     (In thousands, except per share data)

Cash and cash equivalents

   $                $                $            
  

 

  

 

  

 

Short-term debt

        

Long-term debt(1)

        

Total debt

   $    $    $
  

 

  

 

  

 

Shareholders’ equity:

        

Preferred Shares, $         par value per share,              shares authorized, no shares issued and outstanding, actual;             shares authorized, no shares issued and outstanding, pro forma;              shares authorized, no shares issued and outstanding, pro forma as adjusted

        

Common Shares, $         par value per share,                  shares authorized,              shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma;              shares authorized,              shares issued and outstanding, pro forma as adjusted(2)

        

Additional paid-in capital

        

Total shareholders’ equity

        
  

 

  

 

  

 

Total capitalization

   $    $    $
  

 

  

 

  

 

 

  (1)   As of September 30, 2011, we had approximately $4.0 million of indebtedness outstanding under our revolving credit facility.
  (2)   The pro forma and pro forma as adjusted information set forth in the above table excludes              common shares issuable upon the exercise of outstanding options, at a weighted average exercise price of $         per share, giving pro forma effect to the Reorganization,              common shares reserved for future issuance under our 2011 NDS Share Incentive Plan and 5,500,000 common shares reserved for future issuance under our NDS Employee Share Purchase Plan.

 

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DILUTION

 

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share after this offering.

 

As of September 30, 2011, giving pro forma effect to the Reorganization, we had a net tangible book value of approximately $        , or $         per share. Net tangible book value per share represents total tangible assets less total liabilities divided by the number of common shares outstanding. After giving effect to the Reorganization and the sale of common shares by us in this offering and deducting estimated offering expenses payable by us in connection with this offering, our net tangible book value as of September 30, 2011 would have been approximately $        , or $         per share. This represents an immediate increase in net tangible book value of $         per share to existing shareholders and an immediate dilution of $         per share to new investors purchasing common shares in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price

   $     

Pro forma net tangible book value per share as of September 30, 2011

  

Increase in pro forma net tangible book value per share attributable to new investors

  

Pro forma net tangible book value per share after offering

  
  

 

 

 

Dilution per share to new investors

   $                
  

 

 

 

 

The following table sets forth, as of September 30, 2011, giving pro forma effect to the Reorganization and this offering, the total number of common shares owned by existing shareholders and to be owned by new investors, the total consideration paid and the average price per share paid by our existing shareholders and to be paid by new investors purchasing common shares in this offering. The calculation below is based on an assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
      Number    Percent     Amount      Percent    

Existing shareholders

                   $                                

New Investors

            

Total

        100   $           100  
  

 

  

 

 

   

 

 

    

 

 

   

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by all investors in this offering by $        , after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the selling shareholders and assuming that the number of shares offered by us and the selling shareholders, as set forth on the cover page of this prospectus, remains the same. Each increase (decrease) of 1.0 million in the number of shares offered by us and the selling shareholders would increase (decrease) total consideration paid by all investors in this offering by $         million, at the assumed initial public offering price of $         per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the selling shareholders. For a further analysis of how dilution may change if the initial public offering price is not equal to the midpoint of estimated price range, see “Pricing Sensitivity Analysis.”

 

If the underwriters’ over-allotment option to purchase              additional shares from the selling shareholders in this offering is exercised in full, the following will occur:

 

   

the number of our common shares held by existing shareholders after the completion of this offering will be             , or approximately     % of the total number of our common shares outstanding after this offering; and

 

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the number of our common shares held by new investors in this offering after the completion of this offering will be             , or approximately     % of the total number of our common shares outstanding after this offering.

 

The tables and calculations above assume no exercise of outstanding options. As of             , giving pro forma effect to the Reorganization, there were              common shares issuable upon exercise of outstanding options at a weighted average exercise price of approximately $         per share. To the extent that the              outstanding options are exercised, there will be further dilution to new investors purchasing common shares in the offering. See “Description of Capital Stock.”

 

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PRICING SENSITIVITY ANALYSIS

 

Throughout this prospectus we provide information assuming that the initial public offering price per common share in this offering is $        , which is the midpoint of the price range set forth on the cover page of this prospectus. However, some of this information will be affected if the initial public offering price per common share in this offering is different from the midpoint of the estimated price range. As further described in “Corporate Formation and Reorganization,” the number of ordinary shares of NDS Group Limited to be exchanged by certain members of management as part of the Reorganization and the number of ordinary shares subject to options outstanding under incentive plans of NDS Group Limited to be exchanged in the Reorganization for options over our common shares will vary depending upon the initial public offering price. Accordingly, the number of common shares of NDS Group Holdings Limited to be issued in exchange therefore will also vary and will impact the total number of our common shares outstanding upon completion of this offering and certain other information presented in this prospectus. To the extent the initial public offering price per common share in this offering is higher than the midpoint of the price range set forth on the cover page of this prospectus, and consequently, more shares are issued to members of management pursuant to the Reorganization, you will experience increased dilution as an investor in the offering. The following table presents how some of the information set forth in this prospectus would be affected by an initial public offering price per common share at the low-, mid- and high-points of the price range indicated on the cover page of this prospectus, assuming that the underwriters’ option to purchase additional common shares is not exercised and that the number of common shares offered remains the same as that set forth on the cover page of this prospectus.

 

    Initial Public Offering Price per
Common Share
 
    $                 $                 $              
    (unaudited)  
    (Dollars in millions, except share
and per share data)
 

Outstanding Common Shares Following the Offering

     

Common shares held by the Public

     

Common shares held by the Nuclobel Entities

     

Common shares held by NDS Holdco

     

Common shares held by Management

     

Total common shares outstanding after the offering

     

Common shares subject to outstanding options under the 2011 NDS Share Incentive Plan:

     

Vested

     

Unvested

     

Total option shares

     

Ownership Percentages Following the Offering (Fully Diluted)

     

Percentage held by Public

    %        %        %   

Percentage held by the Nuclobel Entities

    %        %        %   

Percentage held by NDS Holdco

    %        %        %   

Percentage held by Management

    %        %        %   

Percentage held by Option Holders

    %        %        %   

Use of Proceeds

     

Proceeds from offering, net of underwriting discounts, to us

  $        $        $     

Estimated offering expenses to be borne by us

     
 

 

 

   

 

 

   

 

 

 

Remaining proceeds to us

  $                   $                   $                
 

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents and Capitalization

     

Cash and cash equivalents

  $        $        $     

Total debt

     

Additional paid-in-capital

     

Total shareholders’ equity

     

Total capitalization

  $        $        $     

Dilution

     

Pro forma net tangible book value per common share after the offering

  $        $        $     

Dilution in pro forma net tangible book value per common share to investors in this offering

  $        $        $     

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The consolidated statements of operations data for the years ended June 30, 2011, 2010 and 2009 and the consolidated balance sheet data as of June 30, 2011 and 2010 have been derived from the audited consolidated financial statements of NDS Group Limited, our predecessor for accounting purposes, included elsewhere in this prospectus. The consolidated statements of operations data for the years ended June 30, 2008 and 2007 and the consolidated balance sheet data as of June 30, 2009, 2008 and 2007 have been derived from our audited consolidated financial statements that are not included in this prospectus, adjusted for discontinued operations resulting from the disposition of our OpenBet business. The consolidated statements of operations data for the three months ended September 30, 2011 and 2010 and the consolidated balance sheet data as of September 30, 2011 have been derived from NDS Group Limited’s unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial data has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of our financial condition as of such dates and our results of operations for such periods. NDS Group Limited’s historical results are not necessarily indicative of the results that may be expected in the future, and its interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

The unaudited pro forma as adjusted net income per share data for the three months ended September 30, 2011 and the year ended June 30, 2011, give effect to the Reorganization described under “Corporate Formation and Reorganization” and the sale of              common shares in this offering by us at an assumed initial public offering price of $         per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and the application of the net proceeds to us therefrom as described under “Use of Proceeds,” as if each such transaction had occurred as of the beginning of the applicable period presented. The pro forma as adjusted information is presented for informational purposes only and is not necessarily indicative of what our results would have been had the transactions actually occurred on such dates nor is it indicative of our future performance.

 

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You should read the selected consolidated financial data set forth below in conjunction with the sections “Corporate Formation and Reorganization,” “Use of Proceeds,” “Pricing Sensitivity Analysis” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

Statements of Operations Data   For the three
months
ended September 30,
    For the year ended June 30,  
    2011     2010     2011     2010     2009     2008     2007  
(in thousands)   (unaudited)                                

Revenue:

             

Software solutions

  $ 66,959      $ 58,966      $ 256,596      $ 239,307      $ 225,556      $ 212,878      $ 163,400   

Content and service protection

    109,334        109,740        523,759        523,137        421,083        480,449        400,462   

Integration services

    37,593        41,600        176,506        126,116        120,641        115,351        112,400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 213,886      $ 210,306      $ 956,861      $ 888,560      $ 767,280      $ 808,678      $ 676,262   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Cost of sales

             

Direct cost of sales

    (23,261     (23,845     (132,682     (183,197     (123,420     (297,601     (247,234

Professional services

    (11,236     (12,024     (44,561     (34,772     (34,147     (18,070     (14,553

Technology and development

    (95,388     (84,348     (396,109     (345,775     (333,880     (182,704     (147,145

Sales and marketing

    (13,602     (10,332     (48,266     (43,277     (41,125     (45,272     (37,601

General and administrative

    (17,957     (9,868     (62,048     (44,075     (54,242     (48,883     (49,148

Depreciation

    (4,964     (4,759     (19,910     (18,140     (19,830     (22,137     (19,018

Impairment and amortization of intangible assets

    (1,115     (3,168     (8,286     (12,838     (23,790     (12,628     (10,706
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ (167,523   $ (148,344   $ (711,862   $ (682,074   $ (630,434   $ (627,295   $ (525,405
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    46,363        61,962        244,999        206,486        136,846        181,383        150,857   

Interest and other expense, net

    (40,030     (72,999     (205,583     (66,269     (76,602     27,131        25,284   

Costs of take-private transaction

                                (124,536     (2,498       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax expense

  $ 6,333      $ (11,037   $ 39,416      $ 140,217      $ (64,292   $ 206,016      $ 176,141   

Income tax (expense) benefit

    (1,880     4,069        (25,497     (32,642     (12,008     (55,524     (47,011
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 4,453      $ (6,968   $ 13,919      $ 107,575      $ (76,300   $ 150,492      $ 129,130   

Net income of discontinued operations(1)

           3,405        8,586        9,207        13,258        9,603        6,597   

Gain on disposal of discontinued operations

                  229,681                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 4,453      $ (3,563   $ 252,186      $ 116,782      $ (63,042   $ 160,095      $ 135,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per Series A ordinary share

             

Basic net income (loss) per share from continuing operations

          $ (1.64   $ 2.59      $ 2.26   

Basic net income per share from discontinued operations(1)

            0.29        0.17        0.11   
         

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

          $ (1.35   $ 2.76      $ 2.37   
         

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per Series A ordinary share

             

Diluted net income (loss) per share from continuing operations

          $ (1.64   $ 2.55      $ 2.22   

Diluted net income per share from discontinued operations(1)

            0.29        0.17        0.11   
         

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

          $ (1.35   $ 2.72      $ 2.33   
         

 

 

   

 

 

   

 

 

 

Weighted average Series A ordinary shares outstanding

             

Basic

            9,889,208        16,022,358        15,226,347   

Diluted

            9,889,208        16,959,004        16,161,946   

Basic net income (loss) per Series B ordinary share

             

Basic net income (loss) per share from continuing operations

  $ 0.16      $ (0.24   $ 0.48      $ 3.75      $ (1.64   $ 2.59      $ 2.26   

Basic net income per share from discontinued operations(1)

           0.12        8.30        0.32        0.29        0.17        0.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

  $ 0.16      $ (0.12   $ 8.78      $ 4.07      $ (1.35   $ 2.76      $ 2.37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Statements of Operations Data   For the three months
ended September 30,
    For the year ended June 30,  
    2011     2010     2011     2010     2009     2008     2007  
(in thousands)   (unaudited)                                

Diluted net income (loss) per Series B ordinary share

             

Diluted net income (loss) per share from continuing operations

  $ 0.16      $ (0.24   $ 0.48      $ 3.75      $ (1.64   $ 2.55      $ 2.22   

Diluted net income per share from discontinued operations(1)

           0.12        8.30        0.32        0.29        0.17        0.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

  $ 0.16      $ (0.12   $ 8.78      $ 4.07      $ (1.35   $ 2.72      $ 2.33   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average Series B ordinary shares outstanding

             

Basic

    28,726,671        28,709,115        28,709,115        28,706,230        36,682,086        42,001,000        42,001,000   

Diluted

    28,726,671        28,709,115        28,709,115        28,706,230        36,682,086        42,001,000        42,001,000   

Pro forma, as adjusted, basic net income per common share (unaudited)

  $          $             
 

 

 

     

 

 

         

Pro forma, as adjusted, diluted net income per common share (unaudited)

  $          $             
 

 

 

     

 

 

         

Pro forma, as adjusted, weighted average shares outstanding

             

Basic (unaudited)

             
 

 

 

     

 

 

         

Diluted (unaudited)

             
 

 

 

     

 

 

         
Non-Financial Metrics                                          

(in millions, unaudited)

             

Households(2)(4)

    114.6        95.0        109.7        91.1        68.7        56.0     

Unique new deployments(3)(4)

    15.1        13.6        58.0        41.6        42.8        41.4     

 

Balance Sheet Data   As of
September 30,
    As of June 30,  
    2011     2011     2010     2009     2008     2007  
(in thousands)   (unaudited)        

Cash and cash equivalents

  $ 37,268      $ 44,502      $ 119,145      $ 115,740      $ 734,992      $ 592,750   

Other current assets

    318,968        350,816        288,164        289,729        281,845        252,703   

Non-current assets

    293,070        299,149        356,331        356,106        359,312        299,400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 649,306      $ 694,467      $ 763,640      $ 761,575      $ 1,376,149        1,144,853   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current portion of long-term debt

    24,252        21,294        39,039        48,384                 

Other current liabilities

    206,269        244,395        221,235        284,174        294,230        202,526   

Non-current portion of long-term debt

    1,014,667        1,039,255        1,357,734        1,418,290                 

Other non-current liabilities

    125,100        117,919        131,299        99,312        151,514        204,054   

Shareholders’ equity

    (720,982     (728,396     (985,667     (1,088,585     930,405        738,273   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 649,306      $ 694,467      $ 763,640      $ 761,575      $ 1,376,149      $ 1,144,853   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)   In January 2011, we sold the OpenBet business, which operated as a separate segment involved in the development and sale of software systems and applications in the betting and gaming market, for net cash consideration of $292 million, as we no longer considered the OpenBet business to be core to our strategy. We have classified the OpenBet business under discontinued operations for all periods covered herein and in the accompanying consolidated financial statements.
  (2)   Households refers to total households using conditional access solutions.
  (3)   Unique new deployments means an instance of middleware, DVR software or EPG newly deployed.
  (4)  

We track a number of non-financial measures to help monitor and evaluate our performance. Because our software solutions revenues are derived largely from the number of our software technologies deployed to our clients’ subscribers, we track total unique new deployments as a measure of the penetration and use of our technologies in consumer markets. One unique new deployment may consist of any combination of our software solutions. Therefore, we also individually track the mix of new deployments of middleware, DVR software and EPG. To help us evaluate our performance in content and service protection, we track total households using our content and service protection technologies. For each of our three largest clients, we use publicly available data on households served by such clients. For all other clients, we generally calculate the number of

 

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  households based on our internal data on active set-top boxes and other devices using our content and service protection solutions deployed per region and regional Screen Digest data on the average number of active digital pay-TV set-top boxes per pay-TV household in such region. The Screen Digest regional data on average number of active digital pay-TV set-top boxes per pay-TV household does not take into account the demographic mix or pay-TV operator concentrations in a particular region and therefore will not reflect patterns of higher-than-average or lower-than-average set-top boxes per household for NDS clients’ subscriber bases in that region. Although we believe that the number of set-top boxes per household of our clients’ subscribers generally approximates the average in a given region, in certain markets our clients’ subscriber bases may be above the average in terms of pay-TV set-top boxes per household, and average data may not be representative of all instances. However, we believe such data is helpful for evaluating growth trends in content and service protection.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

 

On August 1, 2011, NDS Group Holdings Limited was incorporated under the laws of Bermuda to become the holding company for NDS Group Limited in connection with this offering and the Reorganization. See “Corporate Formation and Reorganization” for a complete description of the Reorganization. NDS Group Holdings Limited has not, and prior to the completion of the Reorganization is not expected to, conducted any operating activities other than in connection with the preparation of this offering and the Reorganization. Accordingly, financial information for NDS Group Holdings Limited and a discussion and analysis of its results of operations and financial condition for the period of its operations prior to the Reorganization would not be meaningful and are not presented.

 

You should read the following discussion of our results of operations and financial condition together with the financial statements of NDS Group Limited, our predecessor for accounting purposes, included elsewhere in this prospectus. NDS Group Limited’s fiscal year ends on the Sunday closest to June 30. Fiscal year 2011 included 53 weeks, with the 53rd week falling in the fourth fiscal quarter, while fiscal years 2010 and 2009 included 52 weeks. All references to the three-month periods ended September 30, 2011 and September 30, 2010 relate to the 13 weeks ended October 2, 2011 and the 13 weeks ended September 26, 2010, respectively. For convenience purposes, NDS Group Limited continues to date its financial statements as of June 30 or September 30, as applicable.

 

Introduction

 

Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of our financial condition, changes in financial condition and results of operations, and is organized as follows:

 

   

Overview of our Business—This section provides a general description of our business and developments that have occurred since July 1, 2008 that we believe are important in understanding our results of operations and financial condition or to disclose known future trends. We explain our main sources of revenue, costs and expenses and how these items are presented in our results of operations. We also identify and explain certain non-financial measures that we consider to be important to an understanding of our results of operations.

 

   

Results of Operations—This section provides an analysis of our results of operations for each of the three-month periods ended September 30, 2011 and 2010 and each of the three years in the period ended June 30, 2011. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.

 

   

Liquidity and Capital Resources—This section provides an analysis of our cash flows for each of the three-month periods ended September 30, 2011 and 2010 and each of the three years in the period ended June 30, 2011. It includes a discussion of the financial capacity available to fund our future commitments and obligations, as well as a discussion of other financing arrangements.

 

   

Critical Accounting Policies and Estimates—This section discusses our revenue and other accounting policies that we consider important to an understanding of our results of operations, and that require significant judgment and estimates on the part of management in application. Note 2 to the accompanying consolidated financial statements summarizes our significant accounting policies.

 

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Overview of our Business

 

We are a leading global provider of end-to-end software solutions to the pay-television industry. We supply pay-TV operators with core software systems that enable them to deliver a differentiated viewing experience to their subscribers anytime, anywhere and on any device while ensuring that only paying viewers receive content. Based on market share information derived from 2011 Screen Digest data, over one-third of the world’s digital pay-TV households rely on our technologies to discover, navigate or interact with content.

 

The key software technologies in our end-to-end solutions include:

 

   

Middleware. Our middleware software, similar to an operating system, enables operation of set-top boxes and the delivery of content over both broadcast and broadband networks as well as over-the-top (“OTT”) to broadband connected set-top boxes.

 

   

Digital Video Recorder (“DVR”) Software. Our DVR software enables pay-TV subscribers to record content as well as pause and rewind “live” TV.

 

   

Electronic Program Guide (“EPG”). Our EPG software families allow subscribers to easily and intuitively discover, navigate and interact with content and features provided by the platform operator.

 

   

Conditional Access (“CA”) and Digital Rights Management (“DRM”). These technologies ensure that only paying subscribers can access content.

 

   

Unified Headend Systems. These software systems ensure that the right content, accompanied by the appropriate data describing the content (“metadata”), is delivered to the subscriber anytime, anywhere and on any device.

 

In addition, our integration and service capabilities enable us to be a long-term strategic partner to our clients and deliver a holistic, integrated solution rather than a set of standalone technologies. We work closely with our clients to seamlessly integrate our own software as well as to combine our software components with components from third-parties to create tailored software solutions. We also offer our clients after-sale services, including ongoing support and maintenance. We believe the growing complexity of pay-TV software systems and the need to incorporate a growing range of advanced features into cohesive software solutions will continue to drive demand for our integration services.

 

Our main clients are the digital pay-TV operators that utilize a broadcast and/or a broadband infrastructure to deliver video and data to multiple subscribers over multiple devices, including hybrid set-top boxes, connected-TVs, tablets and smart phones, in addition to traditional televisions. During the three months ended September 30, 2011 and the year ended June 30, 2011, our three largest clients were DIRECTV in the United States, BSkyB in the United Kingdom and Ireland, and SKY Italia in Italy, which contributed 22% and 17%, 17% and 15%, and 9% and 8% of our total revenue for the period, respectively. We have supplied solutions to BSkyB since its launch in 1989, to DIRECTV since its launch in 1994 and to SKY Italia and its predecessor since 2000. News Corporation, one of our controlling shareholders, owned 100% of SKY Italia and approximately 39% of BSkyB as of September 30, 2011. News Corporation is not affiliated with DIRECTV. Other clients in which News Corporation had an interest contributed an additional 6% and 10% in the aggregate to our total revenues in the three months ended September 30, 2011 and the year ended June 30, 2011, respectively. We expect that a limited number of clients, including clients in which News Corporation has an interest, will continue to contribute a significant portion of our revenue for the foreseeable future.

 

We work with suppliers of other components of broadcast and broadband platforms, such as broadcast equipment, network equipment, set-top box and residential gateway manufacturers. We integrate our software with the products manufactured by these suppliers to provide platform operators with the required end-to-end system functionality. A particular platform operator may purchase all software components from us or some components from us and some from our competitors. We often act as prime contractor or sometimes as a sub-contractor when we supply a system to a client.

 

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We operate and manage our continuing business as a single segment. There are no separate divisions or profit centers. We assess the financial performance of our business by reviewing specific revenue streams in the aggregate and by client. We assess our costs by considering individual cost centers and their aggregation into the general cost categories as described below.

 

Since July 1, 2009, our business has grown through winning additional clients and through selling additional solutions and services to existing clients. The increase in number of unique devices shipped to our clients during fiscal 2011 reflects the fact that many of our clients have increased the volumes of more sophisticated technologies purchased from us and deployed to their subscribers, such as advanced DVR software technologies, set-top boxes with high-definition and hybrid broadcast/broadband functionality. We expect demand from our clients to continue to focus on more sophisticated technologies. We have hired additional employees to undertake the work required to meet our delivery and service obligations to clients. We continue to invest in technology and development to drive innovation and the development of new and improved offerings for our clients. Our total headcount has increased from 3,740 as of June 30, 2009 to 5,204 as of September 30, 2011. We expect our headcount to continue to rise in the near term, albeit at a slower rate. We seek to earn long-term revenues from the expansion of our clients’ subscriber bases without continuous modification to our existing software elements. As such, substantially all of our technical employees work on projects expected to generate additional long-term revenues. In addition, from time to time we may increase the number of employees to work on discrete projects that we expect to generate near-term incremental revenues. For this reason, there is generally not a direct relationship between our revenues and our operating expenses. If revenues from these projects do not meet our expectations, our margins could deteriorate and we may be required to reduce the number of employees.

 

We compete both to attract new clients and to retain our existing clients. A significant portion of our revenue is dependent upon the size of our clients’ subscriber bases, the growth in their subscriber bases and the related quantities of set-top boxes and applications deployed to their subscribers. The number of households using our technologies has increased from 68.7 million as of June 30, 2009 to 114.6 million as of September 30, 2011 as our existing clients expanded their subscriber bases and we added new clients. Our ability to continue to increase this number will be dependent on a number of factors, many of which are beyond our control, such as the viability of our clients, changes in technologies and general economic conditions.

 

Our results are also impacted by general trends in the digital media industry. The global media sector has been undergoing a major transformation through the ongoing adoption of and conversion of analog media to digital content and digital delivery of content. In developed markets digital media trends and increased competition from new entrants are compelling pay-TV operators to invest in technology at an ever-increasing pace in order to differentiate their product offerings. The number of households in developed markets using our technologies has increased from 35.8 million as of June 30, 2009 to 40.6 million as of September 30, 2011. In many emerging markets, the rise of a large middle class that can afford pay-TV services is driving a dramatic rise in digital pay-TV penetration. The number of households in emerging markets using our technologies has increased from 32.9 million as of June 30, 2009 to 74.0 million as of September 30, 2011. We believe both of these trends will provide opportunities for us to grow our business in future periods, and, in particular, we expect that emerging markets will provide a more significant growth opportunity for us.

 

The prices we can charge in emerging markets are typically lower than those charged to clients in developed markets, reflecting a lower level of sophistication in the technology currently supplied.

 

Revenue can vary from period to period as some of our revenue reflects a small number of relatively large orders for our technology and services. These generally have long sales and order cycles, and delivery and acceptance of our solutions and services fluctuates over the course of these cycles. We earn revenue from the initial supply of a solution and seek to earn incremental revenues as our clients grow their subscriber bases and expand their deployment of our technologies. Such growth generates ongoing revenues from the sale of additional smart cards, the receipt of additional license fees or royalties as further unique devices are deployed, and the provision of additional support and maintenance services, which are typically charged based on the

 

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number of households using technology supplied by us. Over 70% of our revenue in the three months ended September 30, 2011 and in each of the three years in the period ended June 30, 2011 was earned subsequent to the initial supply of a customer solution and the associated software. Our accounting policies often require us to defer revenue until after our clients have deployed our solutions. We seek to enter into long-term service arrangements with clients. This may entail minimal revenue during a project’s deployment phase, but more significant revenue in later periods should the project help our clients attract and retain subscribers and sell advanced solutions and services to them.

 

Until February 5, 2009, we were a public company controlled by News Corporation, with a minority of our shares listed on the NASDAQ market. On February 5, 2009, we completed a series of transactions (“the take-private transaction”) that resulted in our becoming a private company, with approximately 49% of our shares being owned by an affiliate of News Corporation and approximately 51% being owned by Nuclobel Lux 1 S.àr.l. and Nuclobel Lux 2 S.àr.l. (the “Nuclobel Entities”), two companies controlled by funds (collectively, the “Permira Funds”) advised by Permira Advisers LLP and associated entities (“Permira”). By virtue of the rights attaching to shares and pursuant to a shareholders’ agreement, no party controls the Company and decisions over major issues require the agreement of both News Corporation and the Permira Funds. As part of the take-private transaction, we received equity capital from the Permira Funds and drew down on bank facilities totaling $1,254 million. The cash raised, together with a substantial portion of our accumulated cash balances, was used to buy back all of our shares that were owned by public shareholders and to reduce News Corporation’s shareholding to approximately 49% of our revised equity capital. Part of the consideration due to News Corporation was satisfied by issuing a Vendor Loan Note of $242 million.

 

During the two years ended June 30, 2010, our OpenBet® business, which operated as a separate segment involved in the development and sale of applications in the betting and gaming market, acquired two additional subsidiaries. In January 2011, we sold the OpenBet business, including the subsidiaries acquired in the two years ended June 30, 2010, for net cash consideration of $292 million, as we no longer considered the OpenBet business to be core to our strategy. We have classified the OpenBet business as a discontinued operation for all periods covered by this discussion and in the accompanying consolidated financial statements.

 

In March 2011, we took advantage of favorable market conditions and the cash raised from the sale of our OpenBet business to refinance our debt structure (“the refinancing”). We repaid all existing bank facilities and the Vendor Loan Note to News Corporation, together with all accrued and unpaid interest, and drew down on new bank facilities that require us to pay substantially lower interest rates. The new bank facilities are secured by substantially all of our assets and comprise a US dollar term loan of $800 million, a Euro term loan of €183 million, and a multi-currency revolving credit facility of $75 million. Prior to the refinancing, we recorded a revaluation of our borrowings due to fluctuations in exchange rates within our consolidated statement of operations, which caused significant volatility. We expect such volatility to be substantially reduced as a result of the refinancing because we will recognize currency translations within other comprehensive income. However, our international operations are exposed to fluctuations in exchange rates and we expect such fluctuations to continue to impact our operating results.

 

On August 1, 2011, NDS Group Holdings Limited was incorporated under the laws of Bermuda to become the holding company for NDS Group Limited in connection with this offering and the Reorganization that will be completed prior to the closing of this offering. See “Corporate Formation and Reorganization” for a complete description of the Reorganization. Pursuant to the terms of the Reorganization, all of the capital stock of NDS Group Limited will be exchanged for newly issued common shares of NDS Group Holdings Limited and all the outstanding options to purchase ordinary shares of NDS Group Limited will be exchanged for options to purchase common shares of NDS Group Holdings Limited. As a result, NDS Group Limited will become a wholly owned subsidiary of NDS Group Holdings Limited. In connection with the Reorganization and this offering, share options granted subsequent to the take-private transaction that have vested will become exercisable and, as a result, a compensation expense will be recorded upon completion of this offering for those awards that are vested. Unrecognized expense as of September 30, 2011 amounted to $18.3 million.

 

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Basis of presentation

 

In order for readers to gain an understanding of our results of operations, we set out below the basis of preparation of the main components of our revenue, costs and expenses and certain non-financial measures that we use to monitor our performance.

 

Revenue

 

We derive revenue from:

 

1. Fees for the supply of initial software solution and subsequent additional functionality and maintenance services. The technologies supplied under this heading include middleware, EPG, DVR software and OTT components. We earn royalties and license fees based on the number of new individual software components deployed by our clients on devices used by their subscribers. Additionally, we may charge fees for the supply of initial software components, for the supply of additional features and functions and for the maintenance of those components. We refer to such fees as “Software solutions revenues.”

 

2. Fees from the licensing of service and content protection software systems, the sale of smart cards and the provision of system and security maintenance services. Under this heading we include all our revenues from content and service protection technologies. These fees are typically based on the number of smart cards supplied and the number of households and/or smart cards or software components utilized on devices authorized on a particular platform. Additional fees may be charged for the customization and installation of the service and content protection system components. We charge fees to maintain those components and preserve the security of the system. Our fees may be reduced if the security of the system is compromised. We refer to fees from the licensing of service or content protection technologies, the sales of smart cards and the provision of security maintenance services as “Content and service protection revenues.”

 

3. Fees for the provision of systems integration and professional services. These fees are typically based on or related to the amount of manpower required to perform the services. These fees may be generated under self-contained contracts, or may form part of a larger arrangement including the supply of our technologies and other services. We refer to such fees as “Integration and services revenues.”

 

These different types of fees are presented as three separate revenue streams in “Results of Operations” because they are influenced by different external factors. An individual client may generate fees from one or more revenue streams.

 

Our clients are located throughout the world. We distinguish between revenues from clients in developed markets and clients in emerging markets because the commercial terms and level of technological sophistication may be different. For a description of how we define developed and emerging markets, see “Market and Industry Data.”

 

A summary of the accounting guidance that we follow to measure and record the revenue from the elements we supply is given below under “Critical accounting policies and estimates.”

 

Costs and expenses

 

Our costs and expenses consist of physical and processing costs of smart cards; royalties paid for the right to use and sub-license certain intellectual property rights owned by third parties; personnel, travel and facilities costs; depreciation; and the impairment and amortization of intangible assets, such as intellectual property rights that we have acquired for incorporation within our technologies.

 

A smart card is a hardware device consisting of a semiconductor chip embedded in a plastic card that provides a platform operator with a means of expanding its usage of the previously supplied conditional access system. The costs of smart cards include the costs of the integrated circuits manufactured by third-party

 

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suppliers, the micro-module that houses the computer chips, the plastic body of the smart cards, and processing costs. We do not manufacture smart cards, but our engineers design computer chips that are embedded into smart cards. We arrange for the computer chips to be manufactured and assembled into smart cards by third-party suppliers. We then process the smart cards at either of our two smart card processing plants located in the United Kingdom and the United States, prior to delivery to clients. Smart card costs are dependent upon the costs of raw materials, including the cost of computer chips, plastic and assembly, the costs of our card processing facilities (which includes the labor cost of our employees working within this activity), and the quantity of smart cards purchased and processed in any period.

 

Royalty costs paid to third parties are typically charged on a per-unit basis, depending on which of our components exploit rights owned by the relevant licensor. We may pay for such rights periodically as components are deployed, or procure limited or unlimited licenses to use, the costs of which are matched with the relevant revenues.

 

We classify as “direct cost of sales” the costs of smart cards, the costs of royalties, and the cost of other hardware and services procured from third parties as part of the deliverables under our arrangements with clients.

 

Personnel and facilities costs are allocated into four categories: professional services; technology and development; sales and marketing; and general and administrative. The allocation depends upon the function being performed or managed by the individual employees. We have employees and facilities in the United Kingdom, the United States, Israel, India, France, Sweden, Germany, Singapore, Hong Kong, South Korea, China and Australia.

 

Professional services costs consist primarily of personnel and related costs, including travel and a share of facilities costs attributable to those of our employees who are providing security, integration, maintenance and other services to our clients.

 

Technology and development costs consist mainly of personnel and related costs, including an allocation of facilities costs, attributable to our technical employees who are developing and customizing our technology. These costs also include consumables, consultancy costs and travel costs, and are stated net of the benefit of grants and other incentives received, in particular from the French Government. We seek to earn long-term revenues from the expansion of our clients’ subscriber bases without continuous modification to our software elements. As such, substantially all of our technology and development costs are incurred while working on projects that are expected to generate additional long-term revenues but prior to being able to demonstrate technological feasibility. For this reason, there is generally not a direct relationship between our revenues and our technology and development costs in any period and therefore we do not consider it meaningful to allocate any portion of technology and development costs to cost of sales.

 

Sales and marketing costs mainly consist of personnel and related costs, including an allocation of facilities costs, of our sales and marketing employees in the United Kingdom, Europe and the Middle East, the United States and the Asia-Pacific region. Marketing costs also include advertising, consultancy, exhibitions, marketing communications and demonstration activities.

 

General and administrative costs consist primarily of personnel, facilities, consultancy, and legal and administration costs. Should we become a public company, it is likely that our general and administrative costs will increase.

 

We separately report the cost of depreciation of technical equipment and leasehold improvements used in our business. We also separately report the impairment and amortization of intangible assets, most of which have been acquired through business combinations.

 

A summary of the accounting guidance that we follow to measure and record elements of costs and expenses is given below under “Critical accounting policies and estimates.”

 

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Non-financial measures

 

We track a number of non-financial measures to help monitor and evaluate our performance. Because our software solutions revenues are derived largely from the number of our software technologies deployed to our clients’ subscribers, we track total unique new deployments as a measure of the penetration and use of our technologies in consumer markets. One unique new deployment may consist of any combination of our software solutions. Therefore, we also individually track the mix of new deployments of middleware, DVR software and EPG.

 

To help us evaluate our performance in content and service protection, we track total households using our content and service protection technologies. For each of our three largest clients, we use publicly available data on households served by such clients. For all other clients, we generally calculate the number of households based on our internal data on active set-top boxes and other devices using our content and service protection solutions deployed per region and regional Screen Digest data on the average number of active digital pay-TV set-top boxes per pay-TV household in such region. The Screen Digest regional data on average number of active digital pay-TV set-top boxes per pay-TV household does not take into account the demographic mix or pay-TV operator concentrations in a particular region and therefore will not reflect patterns of higher-than-average or lower-than-average set-top boxes per household for NDS clients’ subscriber bases in that region. Although we believe that the number of set-top boxes per household of our clients’ subscribers generally approximates the average in a given region, in certain markets our clients’ subscriber bases may be above the average in terms of pay-TV set-top boxes per household and average data may not be representative of all instances. However, we believe such data is helpful for evaluating growth trends in content and service protection.

 

Results of Operations

 

The following table presents our historical results of operations for the applicable periods:

 

     For the three months
ended September 30,
    For the year ended June 30,  
(in thousands)    2011     2010     2011     2010     2009  

Revenue:

          

Software solutions

   $ 66,959      $ 58,966      $ 256,596      $ 239,307      $ 225,556   

Content and service protection

     109,334        109,740        523,759        523,137        421,083   

Integration and services

     37,593        41,600        176,506        126,116        120,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     213,886        210,306        956,861        888,560        767,280   

Cost of Sales:

          

Direct cost of sales

     (23,261     (23,845     (132,682     (183,197     (123,420

Professional services

     (11,236     (12,024     (44,561     (34,772     (34,147

Technology and development

     (95,388     (84,348     (396,109     (345,775     (333,880

Sales and marketing

     (13,602     (10,332     (48,266     (43,277     (41,125

General and administrative

     (17,957     (9,868     (62,048     (44,075     (54,242

Depreciation

     (4,964     (4,759     (19,910     (18,140     (19,830

Impairment and amortization of intangible assets

     (1,115     (3,168     (8,286     (12,838     (23,790
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,363        61,962        244,999        206,486        136,846   

Interest and other expense, net

     (40,030     (72,999     (205,583     (66,269     (76,602

Costs of take-private transaction

                                 (124,536
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax expense

     6,333        (11,037     39,416        140,217        (64,292

Income tax expense

     (1,880     4,069        (25,497     (32,642     (12,008
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     4,453        (6,968     13,919        107,575        (76,300

Net income of discontinued operations

            3,405        8,586        9,207        13,258   

Gain on disposal of discontinued operations

                   229,681                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,453      $ (3,563   $ 252,186      $ 116,782      $ (63,042
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Since July 1, 2009, our business has grown through winning additional clients and selling additional solutions and services to existing clients. We have hired additional employees to undertake the work required to meet our delivery and service obligations to clients. We continue to invest in technology and development. As a consequence, our revenues and our operating income have increased.

 

During the year ended June 30, 2010, we substantially completed a planned program of smart card replacement at BSkyB which commenced during the year ended June 30, 2009. This program, for which we had been paid in previous years, generated non-cash revenues of $45.2 million and operating income of $28.0 million for the year ended June 30, 2010, with no equivalent for the year ended June 30, 2011. Non-cash revenues from this program were $23.8 million higher and operating income was $15.9 million higher in the year ended June 30, 2010 than in the year ended June 30, 2009.

 

During the year ended June 30, 2011, we completed the refinancing, which resulted in additional interest and other expenses of approximately $46.9 million.

 

During the year ended June 30, 2011, we sold our OpenBet business, which resulted in a gain of $229.7 million which was exempt from taxation.

 

Prior to the refinancing in March 2011, part of our debt was denominated in US dollars, part in euros and part in pounds sterling. Fluctuations in exchange rates resulted in a loss of less than $0.01 million and $60.6 million on revaluation of our borrowings being recorded with our consolidated statement of operations for the three months ended September 30, 2011 and the year ended June 30, 2011, respectively, compared to a gain of $72.9 million in the year ended June 30, 2010 and net losses of $15.8 million for the year ended June 30, 2009. Following the refinancing, substantially all of our euro-denominated debt is held by a subsidiary entity whose functional currency is euros. We expect that this will substantially reduce future volatility within our consolidated statement of operations because the consequence of translating our debt balances will be recognized within other comprehensive income.

 

Our international operations are inherently exposed to fluctuations in currency exchange rates, which impacts our operating results. In the three months ended September 30, 2011 and the fiscal year ended June 30, 2011, approximately 39% and 36% of our revenue, respectively, and approximately 73% and 70% of our operating expenses, respectively, were denominated in currencies other than the U.S. dollar. Additionally, as of September 30, 2011, approximately 23% of our long-term debt was denominated in euros.

 

During the year ended June 30, 2009, we incurred costs associated with the take-private transaction of $124.5 million.

 

As a percentage of revenues, elements of our operating income were as follows:

 

     For the three  months
ended September 30,
    For the year ended June 30,  
(percentages of total revenue)        2011             2010           2011         2010         2009    

Revenue

          

Software solutions

     31.3     28.0     26.8     26.9     29.4

Content and service protection

     51.1     52.2     54.7     58.9     54.9

Integration and services

     17.6     19.8     18.5     14.2     15.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0     100.0     100.0     100.0     100.0

Cost of sales

          

Direct cost of sales

     (10.9 %)      (11.3 %)      (13.9 %)      (20.6 %)      (16.1 %) 

Professional services

     (5.3 %)      (5.7 %)      (4.7 %)      (3.9 %)      (4.5 %) 

Technology and development

     (44.5 %)      (40.1 %)      (41.3 %)      (39.0 %)      (43.4 %) 

Sales and marketing

     (6.3 %)      (4.9 %)      (5.0 %)      (4.9 %)      (5.4 %) 

General and administrative

     (8.5 %)      (4.8 %)      (6.4 %)      (5.0 %)      (7.1 %) 

Depreciation

     (2.3 %)      (2.2 %)      (2.1 %)      (2.0 %)      (2.6 %) 

Impairment and amortization of intangible assets

     (0.5 %)      (1.5 %)      (1.0 %)      (1.4 %)      (3.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     21.7     29.5     25.6     23.2     17.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Our revenue mix and direct cost of sales were affected by the planned program of smart card replacement referred to above.

 

Our key non-financial performance measures were as follows:

 

     For the three months
ended September 30,
     For the year ended June 30,  
(in millions)           2011              2010              2009      

Unique new deployments:

              

To clients in developed markets

     10.2         9.2         34.1         23.7         27.4   

To clients in emerging markets

     4.9         4.4         23.9         17.9         15.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15.1         13.6         58.0         41.6         42.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Households:

              

Developed markets

     40.6         37.5         39.8         37.0         35.8   

Emerging markets

     74.0         57.5         69.9         54.1         32.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     114.6         95.0         109.7         91.1         68.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(number)

              

Total number of employees, end of period

     5,204         4,721         5,094         4,489         3,740   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The increase in the number of unique devices shipped reflects the fact that many of our clients have increased the volumes of more sophisticated technologies purchased from us and deployed to their subscribers, such as advanced DVR software technologies, set-top boxes with high-definition and hybrid broadcast/broadband functionality. The number of households using our technology has increased as our clients have increased their subscriber levels and as we have won new clients. We have continued to invest in employees, especially those involved in technology and development, to drive innovation and the development of new and improved offerings for our clients.

 

Three months ended September 30, 2011 compared to the three months ended September 30, 2010

 

     For the three months
ended September 30,
 
(in thousands)            2011                     2010          

Revenue

   $ 213,886      $ 210,306   
  

 

 

   

 

 

 

Operating income

     46,363        61,962   

Interest and other expense, net

     (40,030     (72,999
  

 

 

   

 

 

 

Income (loss) from continuing operations before income tax expense

     6,333        (11,037

Income tax (expense) benefit

     (1,880     4,069   
  

 

 

   

 

 

 

Net income (loss) from continuing operations

     4,453        (6,968

Net income of discontinued operations

            3,405   
  

 

 

   

 

 

 

Net income (loss)

   $ 4,453      $ (3,563
  

 

 

   

 

 

 

 

Comparisons of our financial performance are impacted by fluctuations in foreign exchange rates. The principal foreign currency exchange rates that affect our results of operations and consolidated balance sheets are:

 

     Average exchange rate for the
three months ended
September 30,
     Period end exchange rate
as of September 30,
 
         2011          2010              2011              2010      

US dollar / Sterling

     1.6093         1.5468         1.5584         1.5828   

US dollar / Euro

     1.4116         1.2853         1.3390         1.3475   

Israeli shekel / US dollar

     3.5556         3.8051         3.7486         3.6671   

Indian rupee / US dollar

     45.802         46.571         48.974         45.255   

 

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We estimate that fluctuations in exchange rates decreased our revenues by approximately $0.5 million, or 0.2%, and decreased our operating income by approximately $3.6 million, or 6%, compared to what would have been recorded had the exchange rates prevailing during the three months ended September 30, 2011 remained at the levels prevailing during the three months ended September 30, 2010.

 

The effect of other operating factors on individual elements of our financial statements is discussed below. The main points of discussion relate to our continuing operations.

 

Revenue

 

Revenue for the periods under review was as follows:

 

     For the three months
ended September 30,
    Change     % change  
(in thousands)    2011      2010      

Software solutions

   $ 66,959       $ 58,966      $ 7,993        14

Content and service protection

     109,334         109,740        (406     0

Integration and services

     37,593         41,600        (4,007     (10 %) 
  

 

 

    

 

 

   

 

 

   

Total revenue

   $ 213,886       $ 210,306      $ 3,580        2
  

 

 

    

 

 

   

 

 

   

 

 

 

Revenue from clients in developed markets

   $ 142,347       $ 138,736      $ 3,611        3

Revenue from clients in emerging markets

     71,539         71,570        (31     0
  

 

 

    

 

 

   

 

 

   

Total revenue

   $ 213,886       $ 210,306      $ 3,580        2
  

 

 

    

 

 

   

 

 

   

 

 

 

 

Software solutions revenue—The 14% increase in revenue from software solutions was due to higher deployments to clients in both developed and emerging markets. The recognition of revenues from new clients and from the delivery of enhancements to several of our major clients is dependent on the timing of satisfaction of all our revenue recognition criteria and, therefore, this component of our revenues tends to fluctuate from period to period.

 

The number of unique new deployments was as follows:

 

     For the three months
ended September 30,
     Change      % change  
(in millions)        2011              2010            

Unique new deployments to clients in developed markets

     10.2         9.2         1.0         11

Unique new deployments to clients in emerging markets

     4.9         4.4         0.5         11
  

 

 

    

 

 

    

 

 

    

Total unique new deployments

     15.1         13.6         1.5         11
  

 

 

    

 

 

    

 

 

    

 

 

 

 

In particular, the number of middleware, DVR software and EPG new deployments were as follows:

 

     For the three months
ended September 30,
 
(in millions)      2011          2010    

Middleware new deployments

     11.3         10.1   

DVR software new deployments

     4.1         3.0   

EPG new deployments

     2.9         3.3   
  

 

 

    

 

 

 

 

Content and service protection revenue—Content and service protection revenue was flat overall between the three months ended September 30, 2011 and the three months ended September 30, 2010. Lower sales to India and China were offset by higher sales in Latin America and Europe.

 

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The number of households using our content and service protection solutions increased as follows:

 

     For the three months
ended September 30,
     Change      % change  
(in millions)        2011              2010            

Households in developed markets

     40.6         37.5         3.1         8

Households in emerging markets

     74.0         57.5         16.5         29
  

 

 

    

 

 

    

 

 

    

Total households

     114.6         95.0         19.6         21
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Integration and services revenue—The 10% decline in revenue from integration and services was primarily due to the timing of revenue recognition on integration projects.

 

Operating expenses

 

Operating expenses for the periods presented were as follows:

 

     For the three months
ended September 30,
              
(in thousands)        2011              2010          Change     % change  

Cost of sales:

          

Direct cost of sales

   $ 23,261       $ 23,845       $ (584     (2 %) 

Professional services

     11,236         12,024         (788     (7 %) 

Technology and development expenses

     95,338         84,348         10,990        13

Sales and marketing expenses

     13,602         10,332         3,270        32

General and administrative expenses

     17,957         9,868         8,089        82

Depreciation

     4,964         4,759         205        4

Impairment and amortization of intangible assets

     1,115         3,168         (2,053     (65 %) 
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 167,523       $ 148,344       $ 19,179        13
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Direct cost of sales decreased due to lower expenses associated with systems and services revenue consistent with the lower revenue generated. This was partially offset by higher smart card costs and royalty expenses.

 

The main elements of professional services costs, technology and development expenses, sales and marketing expenses, and general and administrative expenses are employee costs, facilities costs, travel costs and legal expenses. Our number of employees, including contractors, has changed over the period under review as follows:

 

     For the three months
ended September 30,
 
         2011              2010      

Number of employees, beginning of period

     5,094         4,489   

Net additions

     110         232   
  

 

 

    

 

 

 

Number of employees, end of period

     5,204         4,721   
  

 

 

    

 

 

 

Of which:

     

Technology and development

     4,476         4,011   

Professional services

     251         264   

Sales and marketing

     213         198   

General and administrative

     264         248   
  

 

 

    

 

 

 
     5,204         4,721   
  

 

 

    

 

 

 

 

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The increase in employees for the three months ended September 30, 2011 was due to an increase in the number of projects on which we are working in expectation of additional contracts with clients.

 

Professional services costs decreased by 7% between the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Technology and development expenses increased by 13% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The effect of increases in headcount and higher travel costs were partially offset by the recognition in the three months ended September 30, 2011 of the benefit of $14.7 million of grants from the French government, an increase of $2.3 million over the benefit recognized in the corresponding period of the prior fiscal year. In addition, during the three months ended September 30, 2011, we deferred $3.1 million of technology and development costs related to the development of specific enhancements to our Fusion middleware. Such costs satisfied the criteria for capitalization under ASC 985-20-25, Costs of software to be sold, leased, or otherwise marketed. These costs will be amortized against future revenues once the software enhancements are ready to be delivered to customers. Amounts capitalized prior to June 30, 2011 were not material. Sales and marketing expenses increased by 32%, principally as a result of higher employee headcount used in this function, higher travel costs and higher costs of attendance at trade shows. General and administrative expenses increased by 82% due to higher audit, tax compliance and legal expenses, as well as higher employee costs and the effect of currency movements.

 

Depreciation expense increased by 4% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, reflecting the increased level of technical equipment used in our business. Amortization expense decreased by 65% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, as other intangible assets acquired by way of business combinations reached the end of their originally expected useful lives.

 

No expenses were recorded in either of the three months ended September 30, 2011 or three months ended September 30, 2010 in respect of equity-based compensation. Since February 2009, we have granted options to certain employees over Series D Shares in the Company, but because the share options are not exercisable unless and until there is an exit event (subject to a vesting rate condition), and such an exit event could not be considered to be probable as of September 30, 2011 or September 30, 2010, no expense has been recorded for equity-based compensation. Unrecognized expenses as of September 30, 2011 amounted to $18.3 million.

 

Operating income

 

As a consequence of the factors outlined above, operating income for the three months ended September 30, 2011 was $46.4 million, compared to $62.0 million in the corresponding period of the previous year.

 

Interest and other expense, net

 

Interest and other expense, net was $40.0 million for the three months ended September 30, 2011, compared to $73.0 million in the three months ended September 30, 2010. Elements of interest and other expense, net were as follows:

 

     For the three months
ended September 30,
 
(in thousands)        2011             2010      

Interest on long-term debt

   $ 11,687      $ 32,957   

Amortization of debt issuance costs

     1,138        1,644   

Foreign exchange losses on long-term debt

     5        46,774   

Foreign exchange gains on cash

     (1,079     (355

Changes in fair value of foreign exchange forward purchase contracts

     26,088        (9,039

Losses on interest rate swaps

     2,319        1,326   

Other interest

     (128     (308
  

 

 

   

 

 

 

Total interest and other expense, net

   $ 40,030      $ 72,999   
  

 

 

   

 

 

 

 

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The lower expense for interest on long-term debt reflects the lower interest rates applicable to our debt following the refinancing which occurred in March 2011. Prior to the refinancing in March 2011, part of our debt was denominated in US dollars, part in euros and part in pounds sterling. Fluctuations in exchange rates resulted in a loss of $46.8 million on revaluation of our borrowings being recorded with our consolidated statement of operations for the three months ended September 30, 2010. Following the refinancing, substantially all of our euro-denominated debt is held by an entity whose functional currency is euros and the consequence of translating our debt balances are recognized within other comprehensive income. Changes in the fair value of foreign exchange forward purchase contracts reflect movements in the value of the Israeli shekel and Indian rupee.

 

Income tax expense

 

For the three months ended September 30, 2011, we recorded an income tax expense of $1.9 million on income before taxes of $6.3 million, an effective tax rate of 29.7%. This includes a charge of $0.4 million in respect of uncertain tax positions and interest. We incurred taxes on profits earned in overseas jurisdictions and were subject to withholding taxes on certain revenue receipts from clients for which full double tax relief may not be available. These effects are partially offset by continuing benefits from research and development tax credits. Hence our effective tax rate is slightly higher than the statutory UK tax rate of 25.75%.

 

Our total reserve for uncertain tax positions as of September 30, 2011, excluding interest and penalties, was $11.6 million. The accumulated amount of interest and penalties accrued as of September 30, 2011 and June 30, 2011 was $0.7 million and $0.6 million, respectively. Approximately $3.7 million of unrecognized tax benefits as of September 30, 2011 would affect our future effective tax rate if realized. In October 2011, our resolved uncertain tax positions amounted to $8.0 million. Resolution had no effect on our income tax expense and involved immaterial cash payments. We do not presently anticipate that remaining accruals for uncertain income tax positions will significantly increase or decrease in the next twelve months; however, actual developments in this area could differ from those currently expected.

 

Our income tax benefit for the three months ended September 30, 2010 was $4.1 million on loss before taxes of $11.0 million, which was an effective tax rate of 36.9%. This was higher than the UK statutory rate for the year of 27.0% due to valuation reserves being created in respect of net UK losses.

 

Discontinued operations

 

In January 2011, we sold our OpenBet business, whose results are shown as discontinued operations in the three months ended September 30, 2010.

 

Net income

 

As a consequence of the factors outlined above, net income for the three months ended September 30, 2011 was $4.5 million, compared to a net loss of $3.6 million in the three months ended September 30, 2010.

 

Year ended June 30, 2011 compared to the year ended June 30, 2010

 

     For the year ended June 30,  
(in thousands)              2011                          2010             

Revenue

   $ 956,861      $ 888,560   
  

 

 

   

 

 

 

Operating income

     244,999        206,486   

Interest and other expense, net

     (205,583     (66,269
  

 

 

   

 

 

 

Income from continuing operations before income tax expense

     39,416        140,217   

Income tax expense

     (25,497     (32,642
  

 

 

   

 

 

 

Net income from continuing operations

     13,919        107,575   

Net income of discontinued operations

     8,586        9,207   

Gain on disposal of discontinued operations

     229,681          
  

 

 

   

 

 

 

Net income

   $ 252,186      $ 116,782   
  

 

 

   

 

 

 

 

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Comparisons of our financial performance are impacted by fluctuations in foreign exchange rates. The principal foreign currency exchange rates that affect our results of operations and consolidated balance sheets are:

 

     Average exchange rate for the
year ended June 30,
     Period end exchange rate
as of June 30,
 
            2011                  2010                   2011                  2010        

US dollar / Sterling

     1.5893         1.5800         1.6072         1.4981   

US dollar / Euro

     1.3607         1.3881         1.4529         1.2333   

Israeli shekel / US dollar

     3.6144         3.7796         3.3803         3.8624   

Indian rupee / US dollar

     45.356         47.697         44.583         46.290   

 

Fluctuations in exchange rates have increased our revenues by approximately $7.2 million, or 1%, and increased our operating income by approximately $6.2 million, or 3%, compared to what would have been recorded had the exchange rates prevailing during the year ended June 30, 2011 remained at the levels prevailing during the year ended June 30, 2010.

 

The effect of other operating factors on individual elements of our financial statements is discussed below. The main points of discussion relate to our continuing operations.

 

Revenue

 

Revenue for the periods under review was as follows:

 

     For the year ended June 30,                
(in thousands)            2011                      2010              Change      % change  

Software solutions

   $ 256,596       $ 239,307       $ 17,289         7

Content and service protection

     523,759