Kudelski on the rack again

Kudelskiís Zurich shares were hammered on Feb 29, falling 20% to SFr 13.81, the biggest single day fall for the Swiss-based smart card business since 2002.

The reason was a reported full-year net profit of just SFr 67.4m, down from last year at SFr 136m, and significantly below analyst expectations of about SFr 82.8m. The market was expecting a softening of profits because of ongoing losses at Kudelski Group's Open TV division, but these overall losses exceeded even those anticipated problems. Open TV's losses were $5.2m, and while not helping Kudelski's overall picture can hardly be blamed for the current melt down.

The disappointment was enhanced Kudelski missing its own overall revenue guidance targets. Revenues were up, and impressively, at SFr 925m (SFr762m last year) but below the market's anticipated SFR939m.

Kudelski has further problems in this current year's numbers, and the need to re-supply (or compensate, or both) Premiere with a new supply of Pay-TV smart cards to fix a hacking and widespread piracy problem.

This current trading year, says Kudelski, should generate total revenues of SFr 1.03-1.05bn, but with profits further squeezed to an EBIT figure of just SFr 5-10m, in other words just breaking even.

Kudelski's fall from grace is truly dramatic. This time last year its shares were trading at around SFr 30, and have subsequently lost two-thirds of their value in what has been an Alpine slide almost consistently in a downward direction.

Kudelski has for the past year or so seen its clients switch from a purchase model, buying smart cards outright, to a rental model. This strategy doesn't necessarily impress everyone at first. "The harsh disappointment is the operational outlook," Zuercher Kantonalbank analyst Mark Diethelm, who has trimmed his rating on the stock to "underperform," and added, "In the long term the rental model makes sense but it's a burden in the short term." CEO Andre Kudelski said the revenue and profitability is much more interesting than the sales mode.

Goldman Sachs has also cut its advice, from "neutral" to "sell", and predicts a "hard landing" for the business.