Economic Environment: Overall Economy
Although the economic recovery in Europe continued through 2007, forecasts for the year 2008 are becoming more cautious. This must be seen in the light of the subprime crisis in the USA which, in conjunction with the high price of oil and the weak dollar, has dampened expectations. Although these developments did not rattle the economy initially, the financial markets in particular were obviously becoming increasingly nervous towards the end of the past calendar year. This resulted from the fact that, contrary to expectations, various banks had experienced solvency problems in the course of the developments. Fears have now arisen that other unpleasant surprises may follow.
The US economy is the focal point of this crisis. Investments in residential construction have fallen by 20% since 2005 as a consequence of the lower prices of real estate and a lower volume of mortgage financing. Consumption by private households might likewise be lower over the next quarters due to the reduction in the value of assets and a slowing in the growth of employment. This could potentially be accompanied by a clear downturn in economic growth in 2008 to below 2%. The danger of recession in the USA is becoming more and more apparent.
In contrast to this, significant levels of growth can continue to be expected in Asia, Latin America and even in Africa.
In this light, the autumn report drafted by the leading economic research institutes assumes that the German economy will grow by 2.2% in 2008. An increase of 2.6% is expected for 2007. As a consequence of the developments described above, the European Commission has reduced its expectations for GNP growth in the euro area from 2.5% to 2.2%.
Economic Environment: Industry
Various factors play a role in how the markets for multimedia products develop. For example, it is important to observe growth rates in the markets for PCs and products relating to entertainment electronics. At the same time, increasing propagation of broadband Internet connections has an influence on the use of digital content in personal communication. Finally, it should be noted that multimedia solutions only cover a small part of the overall software market. Consequently, forecasts for this market cannot be simply transposed onto multimedia products.
The European Information Technology Observatory (EITO) sees growth totaling 2.9% on the market for information and communication technology in Europe in 2008, having already seen this amount of growth in 2007. As for the USA, growth will, on the other hand, slow down in 2007 from 4.7% to 4.3% but will continue at a high level.
According to a study by the BITKOM [“Bundesverband Informationswirtschaft, Telekommunikation und neue Medien”: German Association for Information Technology, Telecommunications and New Media], growth of 4.2% is expected in the field of digital entertainment electronics in Germany in the coming year. Furthermore, software was quoted as being the growth driver with an increase of 5.8%. The study further stated that the number of PCs would continue to increase – from 9.8 million in this year to 10.4 million in 2008. Furthermore, stable growth is forecast in the broadband sector – from EUR 12.4 billion to EUR 13.2 billion in the coming year.
The prerequisites for a positive development in the industry are therefore still in place.
The MAGIX Group’s Strategy
The Company intends to exploit these positive prerequisites in various ways. The following gives details of the Group’s strategy in various business fields and the opportunities and risks arising from the same.
Portal
With regard to MAGIX' Internet services, the current fiscal year puts an emphasis on expanding the mufin and myGoya online portals. These portals offer the Group an opportunity to generate new sales sources, for example through online advertising. At the same time this is a very lively market, however. Consequently, there is a risk that it may take longer to place the services on the market than currently planned by the Group. Special divisions are being formed for these services in order to render investments and results in this segment more transparent. These divisions can promote the products in a more targeted way and give them their own character. In the case of mufin, the focus is put on building up a social network and entering into partnerships with various online music shops. myGoya initially addresses groups which will profit most of all from the possibilities of collaboration provided by the Online Desktop. In the further course of this process, myGoya will be established as a service for small businesses which can use the Online Desktop as a digital assistant for day-to-day collaborative work processes. The Group has budgeted EUR 1 million for the market launch of each of the two services. The use of these funds is, however, linked to the success of the respective product. Alongside this, EUR 0.8 million in additional personnel costs have been earmarked for the expansion of the divisions. Over and beyond this, alongside mufin and myGoya the intention is to standardize the individual Internet services of the MAGIX Group in order to win over more users directly from the Internet in addition to MAGIX’s customers.
With regard to further acquisitions, the Management Board continues to observe the market for social networks pertaining to multimedia content. However, the prices for online portals are currently extremely high as a consequence of the spectacular purchases of the shares in FaceBook, YouTube and StudiVZ. Consequently, there will only be a corporate acquisition in the current fiscal year if the price is reasonable in relation to the number of users gained.
Direct marketing will be increasingly diversified. In doing so, knowledge gained from the Customer Relation Management System will be exploited in order to make tailored offers to users.
Expanding partnerships in the B2B business was unsatisfactory in the past fiscal year. One of the reasons for this is that the MAGIX Group’s partners are large corporate groups. These may take a long time to make decisions. Very frequently the required approval of the costs arising from implementation and customization causes considerable delays in the decision-making process. For this reason, there are plans to present business partners with a new model in future, in which MAGIX provides the service directly in the form of an affiliate program. This means that the partner will not have to bear the investments at the beginning of the project, making its possible to get started more quickly. At the same time, the users won in this way become direct customers of MAGIX’s range of services, and the Group can turn them into repeat buyers. This increases the chances of concluding additional partnerships.
Professional & Consumer
In the Professional & Consumer division it is important to align activities in the Research & Development division to developments in the technological environment. At the same time, the marketing concept must be adapted to the changing situation in the retail trade.
One focal point of development will be placed on networking current products with the MAGIX multimedia community. The user will then be able to make direct contact with other users via the software, present his results or ask questions. This will give the Group an opportunity to gain more information on user habits which leads to enhanced customer ties and can at the same time improve customer support. Networking customers is a truly unique selling proposition in comparison to the competition thus providing a possibility to gain new customers. The first products with a networking function were already delivered in autumn 2007 and further functions are in planning.
Sales through online dealers such as Amazon are rigorously being expanded in order to take into account the increasing sales volume via the Internet. The aim over the next year is to build up an enhanced presence on well-known online portals. In addition to this, the intention is to continue to expand the VAR channel. In this respect, the plans are to expand internationally in addition to continuing sales in Germany. New channels of distribution are likewise being sought for the US market. There is great potential in the field of education there.
OEM
Generally speaking, license payments are lower in connection with OEM sales than in the retail trade. Nevertheless, hardware manufacturers are increasingly unwilling to license products due to the great pressure on margins. As a consequence, the Group will increasingly dispense with unit licenses in specific areas. Instead, a license will only be required when the program enclosed with the hardware is actually activated by the user. In this way, OEM sales will be used more intensively in future as a tool to propagate the MAGIX brand and the respective products being distributed. There is the risk that this might have a negative influence on sales in the OEM division.
The following activities are planned with regard to the marketing of music recognition and music recommendation software technology for use on hardware devices. The Management Board will present its functions at various conferences, in particular in the US and Europe. Alongside CEO Jürgen Jaron, one of the guest speakers will be Prof. Brandenburg, who invented the MP3 format and music recognition and music recommendation technology. At present, all of the major hardware manufacturers are looking into music recommendation. In order to facilitate their decisions in favor of implementation, the Group is further working towards partnerships with manufacturers of components for MP3 players. Consequently, music recognition and music recommendation technology offers the Group the chance to boost sales in the OEM division.
Expected Results of Operations
The Management Board sees growth potental in the current financial year in the Professional & Consumer segment to which new products and the additionally tapped retail channels will contribute. The situation in the US market will continue to be strained in this market, however, and it remains to be seen whether recovery in the German retail market will continue during the current financial year. Continuous growth can be expected in the Portal business due to an increasing reorientation towards online retail. Increases will be mainly outside of the GAS region. Due to the different challenges in the retail market the Management is expecting revenues of the previous year for 2007/2008. In the coming financial year the new online services are expected to further increase returns of the portal business and thus result in growth of group revenue.´
The market launch of mufin and myGoya demands additional investment by the Group. On the one hand, marketing expenditure is budgeted for and, on the other, there are plans to hire additional staff for both these divisions. As a consequence of these investments, which will total EUR 2.8 million at most, the management expects an EBIT of approx. EUR 2 million for the current year. The EBIT is expected to then increase again in the following fiscal year.
It is intended to increase the number of registered users, which is an important indicator for portal business, from the current 7.03 million. In this, the launch of the mufin and myGoya Internet services will be an additional driving force for the increase in the number of registered users.
Forecast Financial Position
With regard to the financial position, no material changes are expected in comparison to the past fiscal year. The high equity ratio of around 80% and the high level of cash and cash equivalents would only be reduced within the framework of an acquisition. The operating cash flow will continue to develop in a positive way. No financing measures are planned. There are no immediate plans to distribute dividends.
In addition to expanding the technical infrastructure, there are plans to make modest investments in software development orders. These investments are intended to further promote organic growth by putting the MAGIX Group into a position to be able to continually extend its knowledge base.