NDS Group Plc: Earnings Release for the Quarter and Year Ended June 30, 2005

-- Full year revenues up 56% to $556 million; quarterly revenues up 45% to $147 million

-- Full year operating income up 90% to $92 million

-- 56.7 million active digital TV smart cards

-- New contracts signed with SuperSUN in Hong Kong and Auna in Spain for content protection for IP television and VOD service

-- SOFTBANK Group rolls out BBTV nationwide IP Video services from early July

-- New contract signed with Viasat for secure broadband TV in Sweden

NDS Group plc (NASDAQ / Euronext Brussels: NNDS) today announcedits results for the quarter and for the year ended June 30, 2005.

Commenting on NDS's performance, Dr Abe Peled, President and ChiefExecutive Officer, said: "This has been a very challenging year forNDS, one in which we had to rapidly expand our resources to meet theexpansion of new customer projects, as well as make progress on theintegration of our MediaHighway acquisition. I am pleased to reportthat we are being successful in meeting these challenges, and wereable to achieve excellent financial results. We are continuing tofocus on effective execution of our strategy and are confident that indoing so we will create value for our customers and our shareholders."

Alexander Gersh, Chief Financial Officer, added: "In fiscal 2005NDS was able to exceed consensus estimates of revenue growth andoperating income, while continuing investment in customer support andinnovation. We end the year in an extremely strong position with $340million in cash and look forward to continuing success in fiscal2006."

KEY PERFORMANCE MEASURES
Quarter Quarter % change Year Year % change
ended ended ended ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
----------------------------------------------------------------------

----------------------------------------------------------------------
Revenues
(thousands) $146,834 $101,288 +45% $556,330 $356,663 +56%
----------------------------------------------------------------------
Operating
Income (Loss)
(thousands) $20,146 $(1,032) N/A $92,191 $48,425 +90%
----------------------------------------------------------------------

----------------------------------------------------------------------
Net Income
(thousands) $21,907 $51 N/A $73,998 $37,055 +100%
----------------------------------------------------------------------

----------------------------------------------------------------------
Diluted net
income per
share $0.38 $0.00 N/A $1.29 $0.67 +93%
----------------------------------------------------------------------

----------------------------------------------------------------------
Authorized
smart cards
----------------------------------------------------------------------
Net additions 2.0 3.0 12.7 9.6
million million million million
----------------------------------------------------------------------
At end of 56.7 44.0 56.7 44.0
period million million million million
----------------------------------------------------------------------

OPERATIONAL REVIEW

At June 30, 2005 NDS had 56.7 million active digital TV smartcards, an increase of 29% compared to June 30, 2004. Our middlewaresolution, MediaHighway, has been installed in a cumulative total of20.4 million set-top boxes, an increase of 2.0 million or 11% over theyear.

Highlights this quarter include:

-- Viasat - Viasat Broadcasting further extends their relationship with NDS by selecting Synamedia (TM), allowing Viasat to securely make available its pay-TV channels to over 300,000 households in 50 Swedish cities that are connected to the Bredbandsbolaget fibre network.

-- SOFTBANK BBTV - Our Synamedia(TM) solution, will be deployed in the second phase of a commercial software roll out to SOFTBANK Group's BBTV customers. This is a large-scale commercial launch of a secure pay-TV service across 47 prefectures, or districts, in Japan and will give customers IPTV plus more than 5200 video titles on demand.

-- SuperSUN - SuperSUN, the pay-TV service of Galaxy Satellite Broadcasting Limited in Hong Kong, has selected Synamedia (TM) to provide its secure broadband architecture. The system will enable the delivery of premium content including VOD service to SuperSUN's IP Platforms.

-- Auna - Using the Synamedia(TM) solution integrated with VideoGuard(R) content protection, Auna will make its existing cable pay-TV service and Video-on-Demand available to new subscribers that are connected to the Auna broadband ADSL network across Spain's major cities.

-- VideoGuard Express - NDS continues to develop solutions for pay-TV broadcasters including smaller and mid-size operators. VideoGuard Express provides off-the-shelf, standard features to fit the needs of the smaller and mid-size platform operators at an affordable price.

FINANCIAL REVIEW

The results of the fiscal 2005 periods and the comparisons withfiscal 2004 are significantly affected by business conducted withDIRECTV. Until August 13, 2003, we provided conditional accessservices, including the supply of smart cards to DIRECTV in the UnitedStates. The contract came to an end on August 13, 2003 andsubsequently we received payments under post-termination supportarrangements. Additionally, we realized revenue in the first andsecond quarters of fiscal 2004 from DIRECTV for the use of NDStechnology contained within cards which DIRECTV had procured from athird party.

In March 2004, NDS and DIRECTV signed a new six-year contract forconditional access services. Under the new contract, we receivemonthly fees for the provision of conditional access services, whichincludes NDS taking on the obligation to provide periodic replacementsmart cards in the future as an integral part of our securitymaintenance activities. In June 2004, we also re-commenced the supplyof new smart cards.

Comparisons are also affected by the results of the MediaHighwaybusiness which we acquired on December 16, 2003.

Revenues

Revenues were $146.8 million for the quarter ended June 30, 2005compared to $101.3 million for the quarter ended June 30, 2004. Fullyear revenues in fiscal 2005 were $556.3 million compared to $356.7million in fiscal 2004.

Conditional access revenues increased by 73% for the quarter andby 90% for the year. The increase in conditional access revenues isdue to a combination of an increase in the number of smart cardssupplied and growth in the number of authorized smart cards in use.The quantity of smart cards delivered in each period is as follows:
For the three months ended For the years ended
30-Jun-05 30-Jun-04 30-Jun-05 30-Jun-04
(in millions) ------- ------- ------- -------

Number of smart cards
delivered 8.8 3.0 30.8 8.0
======= ======= ======= =======

The increase in smart card sales in the quarter compared to theprevious fiscal year is principally due to demand from DIRECTV, towhom we sold virtually no smart cards in the equivalent quarter of theprevious fiscal year. The increase over the fiscal year is due todemand from DIRECTV and also to higher purchases from Sky Italia,which completed the migration of all their subscribers to NDStechnology, and higher demand from our Latin American customers.

The number of authorized cards in use at our broadcast platformcustomers has grown as follows:
Jun-03 Jun-04 Jun-05
(in millions) ------ ------ -------

Number of authorized smart
cards 34.4 44.0 56.7
====== ====== =======

The growth in authorized cards in use reflects the demand forsmart cards noted above. The volume of cards supplied exceeds theincrease in authorized smart cards in use due to a mixture of churnand the build-up of inventory by platform operators. The prior yearperiods included only four month of conditional access service feeincome from DIRECTV as the new contract was effective from March 1,2004 and card sales to DIRECTV only resumed towards the end of June2004. The prior year nine month period includes conditional accessrevenues from a third party that used NDS technology within theirsmart cards, with no comparable amounts in the current fiscal year.

Revenues from integration, development and support have decreasedby 20% for the quarter and by 5% for the full year. The full-yearimpact of the MediaHighway acquisition and revenue from work relatedto Sky Italia's migration were offset by revenues in fiscal 2004 fromFOXTEL and from our previous contract with DIRECTV.

Revenues from license fees and royalties increased by 45% for thequarter and by 38% for the full year. In fiscal 2005, conditionalaccess royalties were higher from Sky Italia and from other customerswhich experienced subscriber growth. During fiscal 2005 we alsoreceived royalties from the download of our set-top box software aspart of the Sky Italia migration of its entire platform to ourtechnology and the results also reflect the full-year contributionfrom customers acquired with the MediaHighway middleware business. Asof June 2005, we estimate that a cumulative number of 20.4 millionset-top boxes containing NDS middleware had been shipped, an increaseof 2.0 million since June 2004. During fiscal 2005 we have beenworking on developing middleware for DIRECTV. The download of ourmiddleware to DIRECTV set-top boxes started successfully in the latterpart of the fourth quarter of fiscal 2005, however our revenuerecognition criteria were not met as of June 30, 2005. We expect torecognize revenue from this during fiscal 2006 and beyond.

Revenues from new technologies which includes our advanced PVRdeployment, interactive infrastructure, gaming applications and IPTVproduct deployments, increased by 11% in the quarter and by 32% forthe year as a whole. The increase is due to the higher number ofsubscribers using our technology, the deployment of our technology onnew platforms and initial revenues from new Synamedia contracts. Wehave recognized initial revenue from the supply of various interactiveinfrastructure components to DIRECTV, but not, as yet, any revenuefrom PVR projects for DIRECTV.

Revenue comparisons are also affected by the relative weakness ofthe U.S. Dollar over the course of fiscal 2005 compared to fiscal2004. Approximately 46% of our revenues were denominated in currenciesother than the U.S. dollar and we estimate that exchange ratemovements have favoured reported revenues in fiscal 2005 byapproximately $4 million. The exchange rates in fiscal 2006 to datehave indicated a stronger U.S. dollar and if this trend continuesthere will be an adverse affect on our reported revenues for fiscal2006.

Cost of goods and services sold and gross margin

Smart card costs have increased substantially because of thevolumes of smart cards supplied. Our unit prices are usually lower forcustomers who take very large volumes of smart cards and thereforeunit margins from smart cards have been lower in fiscal 2005 periodsthan for the corresponding periods in fiscal 2004. Operations andsupport costs have increased substantially due to the greater numberof NDS employees working on customer delivery and support and on smartcard processing. We pay royalties to certain third parties for use oftechnology we have licensed. Increases in royalty costs were due tohigher revenues and a change in the mix of those revenues. Thesefactors have resulted in a decline in gross margins as a percentage ofrevenues in fiscal 2005 compared to fiscal 2004. Additionally, fiscal2004 included conditional access revenues received from a third partythat used NDS technology contained within its smart cards and set-topbox royalties from DIRECTV, with no comparable amounts in fiscal 2005.No costs (apart from royalty expenses) were incurred in relation tothese revenue items and hence gross margin, as a percentage ofrevenues in fiscal 2004 was unusually high.

Operating expenses

Our main operating costs are employee costs, facilities costs,depreciation and travel costs. We had approximately 2,508 employees(including contractors) at June 2005 as compared to 2,004 at June2004.

Our research and development costs rose by 14% in fiscal 2005primarily due to additional personnel. We expanded our research anddevelopment facilities in Israel, the United Kingdom, India and Korea.In November 2004, we occupied new premises in Jerusalem, Israel thatincreased research and development expenses. The full year effect ofthe MediaHighway acquisition also contributed to the increase incosts. This increase has been partially offset as we have transferredsome experienced staff from research and development to groups workingon customer delivery, support and smart card processing. Thesetransfers are the primary reason for the increase in the operationsand support cost line as noted above.

Sales and marketing costs have increased by 3% in fiscal 2005 dueto attendance at an additional major trade show.

General and administration costs increased by 27% in fiscal 2005.This increase was due primarily to higher employee bonuses, stockoption charges, increased professional fees and the full year effectof the MediaHighway acquisition. In order to accommodate growth inpersonnel, during fiscal 2005 management committed to reoccupy abuilding that we had previously abandoned, and as a result of thiscommitment, we reversed a charge of approximately $5.5 million thatwas previously accrued in fiscal 2004.

We estimate that the weaker U.S. dollar has increased our totaloperating costs by approximately $1.4 million in comparison to fiscal2004. The U.S. dollar has strengthened in the first two months offiscal 2006. If this trend continues, there will be a favourableeffect on our reported operating expenses for fiscal 2006.

The increase in amortization expense for fiscal 2005 compared tofiscal 2004 is due to the amortization of the fair value ofintellectual property rights acquired as part of the MediaHighwayacquisition. During fiscal 2004, we recorded an impairment charge of$11.4 million, being the cost of goodwill acquired as part of theMediaHighway acquisition.

Operating income and other items

As a result of the factors outlined above, operating income was$20.1 million for the three months ended June 30, 2005 compared to anoperating loss of $1.0 million for the three month ended June 30,2004. Full year operating income was $92.2 million, an increase of 90%over fiscal 2004.

The increase in interest income over the corresponding periods wasdue to higher average cash balances.

As a result of a change in the mix of income arising in differentjurisdictions, our average tax rate for fiscal 2005 was 27.0%. This isless than we had anticipated and accordingly the tax charge recordedin the quarter was very small. The effective tax rate in fiscal 2004was higher as we received no relief for the goodwill impairmentcharge.

As a consequence of all these factors, net income for the threemonths ended June 30, 2005 was $21.9 million, or $0.40 per share($0.38 on a diluted basis). For the full year, net income was $74.0million, or $1.35 per share ($1.29 on a diluted basis) compared to$37.0 million, or $0.69 per share ($0.67 on a diluted basis) forfiscal 2004.

Cash flow and working capital

As of June 30, 2005 we had cash of $339.8 million. Cash of $117.7million was generated from operating activities in fiscal 2005compared to $91.7 million in fiscal 2004. The increase in net cashprovided by operating activities reflects higher receipts fromcustomers, particularly in respect of conditional access income fromDIRECTV and income from the MediaHighway business. In particular, wehave received monthly security fees, which include amounts for thefuture supply of changeover smart cards to be procured and deliveredin future years. The increases in receipts were offset in part byhigher payments to suppliers of smart cards and higher payments ofpayroll costs and travel expenses as a result of an increase in thenumber of our employees.

Cash payments for capital expenditure amounted to $20.5 millionduring fiscal 2005 compared to $17.2 million during fiscal 2004. Theincrease in expenditure relates to the purchase of technicaldevelopment and test equipment used by our software developmentengineers and customer support employees as well as our new facilityin Israel. We have commenced work in fitting out new premises inBangalore, India, Orange County, California and Heathrow, England.Other investing activities during fiscal 2004 included the acquisitionof the MediaHighway business, involving a net cash outflow of $65.0million.

During fiscal 2005 we received $13.3 million from the exercise byemployees of stock options compared to $2.2 million in fiscal 2004.

About NDS

NDS Group plc (NASDAQ/ Euronext Brussels: NNDS), a majority-ownedsubsidiary of News Corporation is a leading supplier of openend-to-end digital pay TV solutions for the secure delivery ofentertainment and information to television set-top boxes and IPdevices. See www.nds.com for more information about NDS.

Cautionary Statement Concerning Forward-looking Statements

This document contains certain "forward-looking statements" withinthe meaning of the Private Securities Litigation Reform Act of 1995.These statements are based on management's views and assumptionsregarding future events and business performance as of the time thestatements are made. Actual results may differ materially from theseexpectations due to changes in global economic, business, competitivemarket and regulatory factors. More detailed information about theseand other factors that could affect future results is contained in ourfilings with the Securities and Exchange Commission. The"forward-looking statements" included in this document are made onlyas of the date of this document and we do not have any obligation topublicly update any "forward-looking statements" to reflect subsequentevents or circumstances, except as required by law.

CONFERENCE CALL

Dr. Abe Peled, President and Chief Executive Officer and AlexGersh, Chief Financial Officer, will host a conference call to discussthis announcement and answer questions at 2:00 pm UK time (9:00 am NewYork time) on Tuesday August 9, 2005.
Dial-in

UK Free Dial-in: 0500 551 099
US Free Dial-in: 1-888-222-0364
International Dial-in: +44 207 162 0180

Replay

Replay passcode: 669293 }
UK Toll Free Replay: 0800 538 1860 } Available for seven days
US Toll Free Replay: 1-888-365-0240 }
International Replay: +44 207 031 4064 }

An audio replay will also be available on the NDS websitewww.nds.com from midday UK time on August 10, 2005 onwards.

NDS Group plc

Condensed Consolidated Statements of Operations

(in thousands, except per-share amounts)
For the three months For the years ended
ended
30-Jun-05 30-Jun-04 30-Jun-05 30-Jun-04
--------- --------- --------- ---------
Revenue:
Conditional access $95,659 $55,351 $339,414 $178,286
Integration,
development &
support 9,956 12,369 52,636 55,601
License fees &
royalties 18,286 12,639 71,443 51,673
New technologies 21,304 19,208 85,945 64,942
Other 1,629 1,721 6,892 6,161
------- ------- ------- -------
Total revenue 146,834 101,288 556,330 356,663
-------- ------- ------- -------
Cost of goods and services
sold:
Smart card costs (37,128) (10,767) (131,466) (26,708)
Operations & support (19,894) (13,835) (72,254) (47,708)
Royalties (2,625) (1,552) (13,198) (7,160)
Other 623 (333) (2,020) (2,811)
------- ------- ------- -------
Total cost of goods and
services sold (59,024) (26,487) (218,938) (84,387)
------- ------- ------- -------
Gross margin 87,810 74,801 337,392 272,276
------- ------- ------- -------
Operating expenses:
Sales & marketing (6,666) (6,247) (25,820) (25,145)
Research &
development (47,003) (43,982) (166,504) (146,190)
General &
administration (11,072) (8,786) (43,352) (34,140)
Amortization of
other intangibles (2,773) (3,257) (12,349) (8,177)
Goodwill impairment - -
charge (11,391) (11,391)
Foreign exchange
gains (losses) (150) (2,170) 2,824 1,192
------- ------- ------- -------
Total operating expenses (67,664) (75,833) (245,201) (223,851)
------- ------- ------- -------
Operating income (loss) 20,146 (1,032) 92,191 48,425
------- ------- ------- -------
Other income:
Interest 2,619 1,790 9,719 7,294
Losses on
investments (605) (446) (559) (446)
------- ------- ------- -------
Total other income 2,014 1,344 9,160 6,848
------- ------- ------- -------
Income before income tax
expense and minority interests
in subsidiaries, net of tax 22,160 312 101,351 55,273

Income tax expense (253) (1,011) (27,353) (19,061)
Minority interests in - -
subsidiaries, net of tax 750 843
------- ------- ------- -------
Net Income $21,907 $51 $73,998 $37,055
======= ======= ======= =======
Net income per share:
Basic net income per share $0.40 $0.00 $1.35 $0.69
Diluted net income per share $0.38 $0.00 $1.29 $0.67
======= ======= ======= =======

NDS Group plc

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)
As of As of
30-Jun-05 30-Jun-04
------ ------
ASSETS
Current assets:
Cash and cash equivalents $339,791 $228,620
Accounts receivable 73,588 84,295
Accrued income 25,391 21,845
Inventories 41,508 35,972
Prepaid expenses 15,795 15,843
Other current assets 3,595 6,836
------- -------
Total current assets 499,668 393,411

Property, plant & equipment, net 33,962 29,472
Goodwill 64,236 66,296
Other intangibles, net 48,537 61,681
Deferred tax assets 5,121 9,153
Other non-current assets 20,374 17,146
------- -------
Total assets $671,898 $577,159
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $18,336 $51,552
Customer deposits, advance receipts &
deferred income 47,175 62,579
Accrued payroll costs 25,069 21,554
Accrued expenses 21,097 18,248
Income tax liabilities 4,070 6,812
Other current liabilities 13,498 15,393
------ -------
Total current liabilities 129,245 176,138

Accrued expenses 28,547 32,392
Deferred income 87,353 35,285
------- -------
Total liabilities 245,145 243,815
------- -------
Stockholders' equity:
Series A ordinary shares, par value $0.01 per
share:
13,318,546 and 12,186,598 shares outstanding
as of June 30, 2005 and 2004, respectively 133 122
Series B ordinary shares, par value $0.01 per
share:
42,001,000 shares outstanding as of June 30,
2005 and 2004 420 420
Deferred shares, par value GBP 1 per
share:
42,000,002 shares outstanding as of June 30,
2005 and 2004 64,103 64,103
Additional paid-in capital 498,363 478,599
Accumulated deficit and other comprehensive
income (136,266) (209,900)
------ ------
Total stockholders' equity 426,753 333,344
------ ------
Total liabilities and stockholders'
equity $671,898 $577,159
====== ======

NDS Group plc

Condensed Consolidated Statements of Cash Flows

(in thousands)
For the years ended June 30,
2005 2004
------ ------
Operating activities:
Net income $73,998 $37,055

Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 15,405 13,526
Amortization of other
intangibles 12,349 8,177
Impairment charge - 11,391
Stock-based compensation 4,327 4,743
Losses on investments 559 446
Minority interest in subsidiaries, -
net of tax (843)

Change in operating assets and
liabilities, net of acquisitions 11,054 17,164
------ ------
Net cash provided by operating
activities 117,692 91,659
------ ------
Investing activities:
Capital expenditure (20,545) (17,206)
Proceeds from sale of investments 264 -
Business acquisitions, net of cash
acquired (17) (65,644)
Other - (870)
------ ------
Net cash used in investing activities (20,298) (83,720)
------ ------
Financing activities:
Issuance of shares 13,294 2,212
Other - 40
------ ------
Net cash provided by financing
activities 13,294 2,252
------ ------

Net increase in cash and cash
equivalents 110,688 10,191

Cash and cash equivalents, beginning of
period 228,620 202,185
Exchange movements 483 16,244
------ ------
Cash and cash equivalents, end of
period $339,791 $228,620
====== ======