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NDS appears to have been a costly $5 billion pig-in-a-poke acquisition for Cisco

During Q1'FY14, NDS sales appear to have dropped -12.95% year-over-year.

Hummelstown, PA:   Thu, 11/14/13 - 11:59pm    View comments

Update 1/8/2014:

Dr. Abe Peled (who had reported to Marthin De Beer) has left Cisco according to his LinkedIn Profile. Peled was the former Chairman and CEO of NDS.

Update 11/22/2013:

The decline in NDS sales was confirmed today by Cisco's Form 10-Q filing page 52 with the SEC:

"A 9%, or $21 million, decrease in sales of our Service Provider Video Software and Solution."

NDSCiscoOn March 15, 2012 Cisco announced it was using $5 billion of its profits sheltered from U.S. taxes to acquire Bermuda tax haven incorporated NDS Group.

Cisco's Bermuda subsidiary (a shell company registered at the offices of Conyers Dill & Pearman, a law firm in Hamilton, Bermuda) receives the profits from roughly $20 billion in annual Cisco sales and according to Bloomberg:

"For U.S. tax purposes, profits from the Swiss and Dutch units flow to this shell company, one of hundreds the law firm handles on Bermuda, which has no corporate income tax."

Former NDS products with their new Cisco names

Former NDS product names New Cisco product names
NDS Unified Headend Cisco Videoscape Unity
NDS VideoGuard Smart Card Cisco VideoGuard Smart Card
NDS VideoGuard Connect Cisco VideoGuard DRM
NDS MediaHighway Cisco MediaHighway
NDS Dynamic Cisco Videoscape Advertising Suite
NDS Snowflake Cisco Videoscape Snowflake
NDS Unified Gateway Cisco Videoscape Unified Gateway Software
NDS Design Studio Cisco Videoscape Design Studio Service
VideoGuard DRM Framework Cisco VideoGuard DRM
VideoGuard Server Cisco VideoGuard Server
Jungo OpenRG Cisco Videoscape OpenRG
Jungo Rainbow Cisco Videoscape Service Application Framework
Addressable TV Advertising System Cisco Videoscape TV Addressable Advertising
Audience Measurement System Cisco Videoscape Audience Measurement

Cisco CEO John ChambersOn July 31, 2012 Cisco announced it had completed the acquisition of NDS. Then on November 13, 2012 Cisco CEO John Chambers gushed during Cisco's Q1'FY13 earnings call:

"Moving onto video, total service provider video revenue was up 30%, of which NDS contributed approximately 20%. As you would expect, NDS had and is expected to continue to have a very positive impact on SP video margins."

Meanwhile, during Cisco's Q2'FY13 earnings call, Chambers enthusiastically pontificated:

"Moving onto video, total SP Video revenue was up 20% year-over-year. The integration of NDS continues to go very well driving results on both the top and bottom line.

"The recent announcements of our next generation Videoscape platform integrating the assets acquired with NDS and market traction including major new alliances with AT&T and Cox have been very well received. We continue to drive a transition in our service provider video business driven by the integration of NDS evolving from low-margin set-top box business to more of a profitable and strategic Videoscape architecture in the cloud. NDS is helping driving our business in the cloud, moving from set-top boxes to more valuable and profitable software and service offerings."

Cisco's Q3'FY13 earnings call brought even more exuberant praise for NDS from Chambers:

"Moving onto video, total SP video grew 30% driven largely by NDS. The NDS integration continues to go well and Videoscape Unity is seeing continued traction. This quarter, we announced two new European service providers for Videoscape and received the Future of Video Award for Innovation."

Cisco's Q4'FY13 earnings call once again continued to draw heavy praise for NDS from Chambers:

"Moving on to video, total SP video revenues grew 23% driven largely by our NDS acquisition. We continue to see good performance with our video software and solution business that includes NDS driven by new innovative solutions like cloud, DVR, and compelling user interfaces."

Frank CalderoniHowever, perhaps the "most curious" statement made during the Q4'FY13 earnings call came from Cisco CFO Frank Calderoni:

"As far as the savings going forward associated with the workforce reduction. One of the things that I think it's important to know here, is that what we're talking about is a workforce rebalancing. And so, we're looking at the areas of most focused for us from an innovation standpoint as we've talked about data center cloud, security, software and services as well as video, those are the areas that we are looking to continue to invest in."

So why do I find it a most curious statement?

Well, because it was only a little more than 2-months later that on October 27, 2013 an Israeli business press headline was forebodingly warning:

Cisco to fire dozens in Israel - Most of the layoffs will be at the former NDS, which is Cisco Systems Israel's largest operation

I mean, it was only 2-months earlier that Cisco CEO John Chambers had enthusiastically gushed:

"Total SP video revenues grew 23% driven largely by our NDS acquisition. We continue to see good performance with our video software and solution business that includes NDS driven by new innovative solutions like cloud, DVR, and compelling user interfaces."

Interestingly, here are the sales figures for NDS prior to its acquisition by Cisco (page 51):

5-Year NDS Statements of Operations Data

(+) Fiscal year 2011 included 53 weeks while fiscal years 2010, 2009, 2008 and 2007 included 52 weeks.

(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.

Source: U.S. Securities and Exchange Commission

So why is it that I believe NDS has been a costly $5 billion pig-in-a-poke acquisition for Cisco?

Well, according to Cisco's annual sales (view the spreadsheet without frames):

Source: Cisco Systems

During Cisco's FY13 the sales of SP Video (which includes the first full Fiscal Year of NDS sales) Cisco's SP Video sales grew by +$994 million (+25.7%), which were inline with the annual sales of NDS prior to being acquired by Cisco.

Cisco's quarterly sales (view the spreadsheet without frames):

Source: Cisco Systems

Fastforward to this week, when during Cisco's Q1'FY14 earnings call Chambers stated:

"SP video revenues of $987 million declined 14% year-over-year. As we continue to focus on profitable growth, our set-top box business, which had an annual order rate of over $2.6 billion, declined over 20% as we evolved our business to the cloud and hold to our strategy to walk away from low profit deals. This obviously has a positive impact on margins that comes with some revenue pain.

"Let me be very clear, we know that video is one of the top priorities of all of our service provider customers and we are committed to the business. We are evolving our portfolio and have made leadership changes, which will strengthen our ability to meet strategic requirement of our customers and maintain the right business program for Cisco."

Not a peep about "we continue to see good performance with our video software and solution business that includes NDS" from prior earnings calls.

So divide $2.6 billion by 4 = $650 million, multiply $650 million by 20% = $130 million.

Compare Cisco Q1'FY14 SP Video sales to Q1'FY13 SP Video sales:

Cisco First Quarter sales (view the spreadsheet without frames):

Source: Cisco Systems

$1.148 billion - $987 million = $161 million

$161 million - $130 million = $31 million

Divide NDS FY11 sales of $956.861 million by 4 = $239.21 million

Divide $31 million by $239.21 = 12.95%

So it appears Q1'FY14 NDS sales have dropped -12.95% year-over-year.

Abe PeledNOTE:   When Cisco had announced its intent to acquire NDS, I found the following most interesting:

"Dr. Abe Peled, Executive Chairman, NDS

"Cisco and NDS are helping drive the transition that will enable service providers and media companies to offer new revenue-generating video experiences. NDS's open software video platform and services are highly complementary to Cisco technology, and together we are uniquely positioned to enable service providers to deliver fresh and exciting multi-screen video services to their customers.

"A key component of NDS's success has been our open software and services model, working with a wide range of set-top box manufacturers to enable greater choice for our customers; following this acquisition this strategy will continue and expand the choice of hardware solutions available to service providers worldwide."

So not surprisingly when Cisco announced it had completed its acquisition of NDS, it further stated:

"With the close of this transaction, Dr. Abe Peled, formerly NDS chairman and CEO, becomes senior vice president and chief strategist for Cisco's Video and Collaboration Group, of which SPVTG is a part. Dr. Peled reports to Marthin De Beer, senior vice president of Cisco's Video and Collaboration Group."

So imagine my amazement to learn that according to Cisco's own internal:

Executive direct reports list

Cisco Executive NameCisco Job TitleCisco Business Office/Group/UnitDirect Reports
Abraham Peledsvp.ww strategy & planningSPVTG - NDS Research & Development (US)0

Dr. Abe Peled, Cisco's senior vice president and chief strategist for Cisco's Video and Collaboration Group and former NDS chairman and CEO, has ABSOLUTELY NO direct reports!

As of January 8, 2014 Peled left Cisco according to his LinkedIn Profile.

Since readers already know I'm not the "sharpest tool in the toolshed," perhaps readers can help clarify what's going on with Q1'FY14 NDS sales as I would much appreciate any and all help on figuring this one out.

Related documents:

Cisco Q1'FY14 Slide Presentation

Cisco's Q1'FY14 Earnings Call Transcript

Cisco Reports Q1'FY14 Earnings Press Release

Cisco Q1'FY14 Form 8-K filing with the SEC

Cisco Investor Relations Financial Results Web Page

Cisco completes acquisition of NDS

Cisco announces intent to acquire NDS

Related stories:

Cisco acquisition NDS Pay-TV Piracy resource center

Cisco tunes into $5bn of execution and reputational risk with NDS buy

Cisco acquisition NDS accused of pay TV piracy, hacking, sabotage, fabricated legal actions and obtaining telephone records illegally

NDS appears to be another BS acquisition by Cisco

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