CEO's Letter

Services Added to Technological Knowhow

For Teleste, year 2009 was characterised by diverging trends. Concerning deliveries of products and systems to network operators, we fell short of 2008, primarily because of the decline in investments caused by the global economic crisis. On the other hand, our services business geared for the same client groups continued its promising growth supported by strategic acquisitions. Similarly, orders placed on our video monitoring systems developed favourably. Thanks to these positive developments and the adaptation measures brought about by the difficult market situation our operating profit was in the black, yet clearly below the previous year’s level.

Above all, Teleste’s key figures for 2009 were affected by two factors: the exceptionally wide-spread economic downturn and our strategic acquisitions in Germany. Thanks to our significant investments in the technical services companies of the largest European cable network market, Teleste’s net sales increased in comparison with the previous year. Net sales amounted to EUR 141.7 (108.7) million, a year-on-year increase of 30.3%. The clear drop in the sale of products and systems particularly in Q1 over the previous year could be seen in terms of our operating profit being shrunk to EUR 2.5 (5.6) million, a fall of 55.2%. Undiluted result per share ended at EUR 0.02 (0.32). Return on investment stood at 3.3% (10.4%). Along with the growth in our services business, orders received grew up to EUR 151.0 (118.6) million, an increase of 27.3%.

Operators are Biding Their Time

Our main business area Broadband Cable Networks provides products, systems and services related to modern communication networks. The most significant part of our clientele involves leading European cable operators – who compete, above all, with telecom operators – carrying in their broadband networks data, voice and video. Pressures are mounting towards upgrading the transfer networks. Good examples of new services requiring more transfer capacity include high-speed internet access, digital television, HDTV, IPTV, VOD and even 3DTV is entering the scene. Increasingly complex systems open up a lot of opportunities for technology companies like Teleste with special expertise in network technology and signal processing.

In spite of a number of pressures, 2009 turned out to be a year of transition for our clientele in their pursuit of upgrading the existing technology. The global economic crisis was also felt in the operators’ daily routine. Orders on products and systems already agreed were postponed or frozen for the time being. Similarly, new investments were delayed. In this respect, Q1 was particularly poor for Teleste. This caution shown by some of the operators can be partially explained by the structure of their balance sheet. In economically challenging times, funds of the operators, who are largely owned by private equity investors, are often allocated to strengthening of one’s own capital structure instead of investments. Compared with 2008, orders on products and systems received by Broadband Cable Networks fell by approximately one third.

Services Business Development by Targeted Acquisitions

In 2009 we took noticeable steps in implementing our strategy through acquisitions. What we aim at is a structural change, in other words giving a greater role for services in our business operations. Various maintenance and service operations improve our facilities in comprehensive deliveries and level off the cyclic pattern in network investments while providing, to some extent, a channel for our product and system solutions.

Right in the beginning of the year we acquired three German technical services companies – MKS, Young-Net GmbH and Antel GmbH – operating in the cable network business. In the mid-year we took another step by acquiring AVC Systemhaus GmbH, which effectively made us the leading services company in the largest cable network market in Europe. We now can provide geographically comprehensive service backed by sufficient resources in the field. In Germany, our clients include Europe’s largest cable operators such as Kabel Deutschland whose networks provide access to approximately 20 million end-users. In Germany we operate partially under the service and management company Cableway in which we currently have a 75% holding.

Investing in the services business, which is less sensitive to economic fluctuations, turned out to be a right move in 2009. Integrating the acquired companies to become part of Teleste’s processes gathered speed quickly and our net sales in Germany increased. We progressed positively also in Belgium and in the United Kingdom, where we successfully expanded our network planning and projecting services to Virgin Media. In terms of net sales we have reached our goal of having created a good balance between our product and technology solutions and services business. Our obvious intention is to grow in both of these sectors.

In 2009, net sales of Broadband Cable Networks equalled EUR 125.5 (92.6) million, an increase of 35.6% over the previous year. Operating profit equalled EUR 2.9 (6.1) million, a drop of 53% from the year of comparison.

Chicago Train Stations Safeguarded by Teleste Solutions

The smaller of our business areas, Video Networks, specialises in high-quality integrated video monitoring systems. The unit has special expertise in extensive monitoring networks pulling together cameras, recorders and monitoring stations from a number of sites. Professional CCTV applications are also making the transition from analogue solutions to IP-based recording and network technologies. This will create synergic benefits once our business areas can utilise this shared basis of knowhow. Video Network’s clientele comes mainly from the public sector. For example, the French National Railway Authority SNCF is our long-term customer for their nation-wide railway network.

Demand for our video monitoring systems proved to be almost immune to the general market situation, orders received increased, no less. The greatest and most delightful order by far was received from the United States. Teleste will deliver a VMX video monitoring and recording system for 144 railway stations with almost 4,000 cameras for Chicago Transit Authority by June 2010. This order of three million euros is designed to safeguard the passengers against threats posed by crime and terrorism even better than before. Other important deliveries by Video Networks went to France and England.

The 2009 net sales of Video Networks amounted to EUR 16.1 (16.1) million. Operating profit stood at EUR –0.3 (–0.5) million. The negative result was due to impairment losses of EUR 0.8 million.

New Principal Owner, New Plant and New Significant Partner

In the beginning of the year we received a new principal owner as the holding of the Finnish EM Group Oy in Teleste Corporation exceeded 20%. Soon also the Board of Directors was renewed. In my view, a strongly committed Finnish principal owner with industrial corporate culture provides good preconditions for Teleste’s long-term development and growth.

Significant internal events also included expansion of our main premises in Littoinen near Turku. The old factory real estate in Nousiainen was sold, and a new module plant and a logistical centre with the combined area of about 3,700m2 were built in Littoinen. The annex completed in December enabled focusing all of Teleste’s Finnish production and inventory operations in one spot. This, in turn, opens up obvious opportunities for stream-lining of production and logistical operations.

It was a tough year for many Teleste employees owing to the cost adaptation measures required by the difficult market situation. These measures were designed to provide the tools by which the company would come through these financially challenging times strong and capable of success. Our personnel have shown strong commitment and flexibility to develop the company even in times like these.

Despite the current uncertainties related to forecasting, we have actively invested in Teleste’s future by pressing on with our development efforts. Priorities in our developmental procedure continue to be productivisation process and lean manufacturing. As to product development, we have invested particularly in the advancement of the Luminato headend technology, the MyCast IPTV system, the product ranges of AC and HDO and the VMX video network management and recording system. Moreover, we signed a strategic cooperation agreement with Cybercom Plenware producing software development services. On the signing of this contract, 23 Teleste employees started work under Cybercom on their existing conditions.

Outlook 2010

We have put behind us a historic year when the entire world economy contracted for the first time since the World War II. Predictions concerning the speed of the market recovery vary, but a period marked by a slow and uneven growth is estimated to have begun. I believe the bottom of the depression for Teleste’s product and system deliveries is past and deliveries for 2010 will remain at least level with those in 2009.

Signs of emerging growth could, however, be seen in 2009 already as the demand for video processing products such as Luminato and MyCast picked up towards the end of the year. Considering the market situation, the sale of optical fibre solutions in subscriber network products remained on a satisfactory level. High-speed transfer rates required by video, better image quality and interactive services gaining ground are guaranteed to downright force the operators to upgrade their existing networks at some stage.

Our services business and video monitoring solutions are likely to be equally successful in the future. At any rate, in a modern information society any network disruptions will have to be addressed without delay. Our leading position in Europe’s largest cable network country will breed more net sales. The strong ownership basis and balance sheet of our company provide the necessary preconditions for further development of our services business. The challenging global situation concerning safety, continually increasing traffic and our good customer references are likely to create a cautiously positive response in the market for our video monitoring systems. Furthermore, we have to bear in mind that any sizeable investments in video monitoring will be financed by means of public funds less vulnerable to market fluctuations. Regardless of all these positive signs, market development in 2010 demands a cautious approach. Nevertheless, in an uncertain market situation, the strategic investments made in the services business enable our net sales to grow from the 2009 level. -Bearing in mind the increased net sales and the adaptation of costs we estimate that the operating profit will improve over 2009.

I thank all of our stakeholders and, above all, our personnel for their patience, good cooperation and genuine commitment in tough times. We are moving in the right direction and thanks to our promising business areas and high-level competence, Teleste’s future looks bright.

Teleste Corporation

Jukka Rinnevaara
CEO

Source: Teleste Annual Report 2009, pages 10 and 11