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Random House Sees Lower 2007 Revenues Impacted By Weak Dollar

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MAIN NEWS HEADLINES
March 20 – March 27, 2008 Edition

Random House Sees
Lower 2007 Revenues
Impacted By Weak Dollar

BERLIN/3/18/08—Random House, the leading global trade book publisher, recorded lower revenues and operating profit in 2007 than in the previous year, it was reported March 18 by parent company Bertlesmann. The return on sales improved to 9.4 percent (previous year: 9.3 percent). The weak U.S. dollar and a slowdown in consumer spending in North America adversely affected revenues, which amounted to €1.8 billion, down 5.6 percent on the previous year (€1.9 billion).

Due to the weak dollar, operating earnings before interest and taxes (EBIT) declined by 4.9 percent to €173 million (previous year: €182 million). The number of employees decreased slightly to 5,764 at year-end (December 31, 2006: 5,804).

Increasing uncertainty about the development of the global economy has led Bertlesmann to forecast only a modern upturn in sales for 2008, though net income is expected to considerably increase.

In the US, Random House published a record 230 New York Times bestsellers, including Playing for Pizza by John Grisham; On Chesil Beach by Ian McEwan; Clapton by Eric Clapton; Giving by Bill Clinton and Suze Orman’s Women & Money. Among other major bestsellers were the movie tie-in editions of No Country for Old Men by Cormac McCarthy, Robert Ludlum’s The Bourne Ultimatum; The Golden Compass by Philip Pullman and Ian McEwan’s Atonement. The Grammy-winning audio edition of Harry Potter and the Deathly Hallows by J. K. Rowling became the fastest-selling audiobook of all time.

In the U.K., Random House Group UK outperformed all other publishers in the Sunday Times bestseller lists, accounting for nearly one-third of the year’s overall rankings. Nigella Express by Nigella Lawson has sold over one million copies in its hardcover edition. The Group acquired a majority stake in Virgin Books and established several new publishing ventures, such as Transworld Ireland, which is dedicated to Irish authors. In Germany, Verlagsgruppe Random House recorded significant growth in revenues and earnings, which were driven by the success of bestsellers by authors such as Leonie Swann, Dieter Hildebrandt and Eva-Maria Zurhorst, as well as its paperback program and its self-help and religion publishing. In Spain, La Catedral del Mar by Ildefonso Falcones, published by Random House Mondadori, continued to enjoy excellent sales.

Random House expanded its online marketing capabilities in 2007, launching digital platforms with book-content search-and-browsing capabilities in the US, Canada, and Germany. Random House authors won many prestigious awards around the world in 2007: Doris Lessing, published by Random House in Germany and Spain, won the Nobel Prize for Literature, and Al Gore, who publishes with Random House in Germany, Japan, and Korea, received the Nobel Peace Prize.

Four Random House, Inc. titles won Pulitzer Prizes, a record for a single year.

Direct Group, which operates book, DVD and music clubs, bookstores and online shops, reported lower revenues and a significant reduction in its operating profit in 2007 compared with the previous year. The return on sales amounted to 0.4 percent (previous year: 4.1 percent). Revenues amounted to €2.6 billion, down 4.1 percent in the previous year (€2.7 billion). This development was due to the negative development of the US dollar and a significant fall in sales of physical media and membership figures, particularly in the US

The acquisition of the remaining 50 percent of the shares of the US book club Bookspan from the former joint venture partner Time Warner was not sufficient to offset these effects.

Operating EBIT fell by 90.9 percent to €10 million (previous year: €110 million). This, too, was primarily driven by the weak performance of the division’s US operations. Music, DVD and book club membership declined significantly, while the level of revenues per member also fell. Extensive write-downs were recognized at Bertelsmann Direct North America in the period under review. Some clubs outside the US and the bookstore chains also recorded lower profits in the year under review. The number of employees rose to 15,109 at year-end (December 31, 2006: 14,996). In Germany, Der Club again recorded a profit in 2007. The club activities of France Loisirs and Circulo de Lectores in Spain also remained profitable. Following the integration of the bookstore chain Bertrand, which was acquired in 2006, Direct Group now covers the entire value chain in Portugal, from publishing and distribution through to sales via book clubs, the Internet and stationary outlets. The establishment of a bookstore chain in Spain under the same name began in 2007. Club activities in Ukraine continued to enjoy dynamic growth. In late 2007, the Executive Board and Supervisory Board of Bertelsmann AG resolved to reorganize the direct-to-customer activities bundled within Direct Group. As the new CEO, Fernando Carro assumed operational responsibility for the activities in Europe in particular. The music and DVD clubs of BMG Columbia House and Bookspan, the book club which was fully acquired in the year under review, have since reported directly to Peter Olson, CEO of Random House and a member of the Executive Board of Bertelsmann AG, under the name Bertelsmann Direct North America. The Chinese book club and the related bookstore chain were also reassigned to Arvato.

Company-Wide

In 2007, Bertelsmann, the international media company, stabilized its operating profitability at a high level. Operating earnings before interest and taxes (EBIT) totaled €1,811 million after the record figure of €1,867 million in the previous year. Adjusted for portfolio measures and exchange rate Movements, Operating EBIT increased by 3.7 percent. Due to the disposal of the Group’s music publishing operations and the weakness of the US dollar, consolidated revenues declined by 2.8 percent to €18.8 billion (previous year: €19.3 billion). Adjusted for portfolio and exchange rate effects, revenues were at the high level of the previous year. Operating return on sales thus again reached 9.7 percent. However, Group net income was down considerably yearon-year.

In 2006, the equivalent figure contained high disposal gains. Due to negative non-recurring items, group net income in the reporting period totaled €405 million compared to €2.5 .5 billion in the previous year.

In 2007, the television business was again a growth driver for Bertlesmann. Hartmut Ostrowski, Chairman and CEO of Bertelsmann AG stated: “Bertelsmann was successful in 2007. After the record results of the previous year, we retained a stable position. We are strong in operating terms and are profitable at a high level. In 2007 we made extensive value corrections and removed risks such as the Napster legal dispute with the relevant expenses in order to prepare the ground for the new strategic alignment on organic growth. It is only on the basis of growth that the value of a company can be increased further on a long term-basis.”

In the course of its new growth strategy, Bertelsmann will focus its funds for investments in strongly growing business. Hartmut Ostrowski describes the resulting consequences for the Direct Group as follows: We are examining all strategic options, including a possible sale.†In 2007, consolidated revenues totaled €18.8 billion, a decline of 2.8 percent (previous year: €19.3 billion). Organic growth of 0.4 percent was offset by portfolio effects of -1.4 percent and exchange rate movements of -1.8 percent.

Operating EBIT totaled €1,811 million, 3.0 percent down from the 2006 figure. Adjusted for portfolio and exchange rate effects, Operating EBIT increased against the previous year by 3.7 percent. The return on sales was 9.7 percent, again reaching the record figure of the previous year. Operating free cash flow also achieved a record in 2007.

On the other hand Group net income declined considerably. Non-recurring items of €-854 million and the substantial gains from the disposal of the music publishing operations in the previous year depressed 2007 profits to €405 million, compared to €2,459 million in the previous year. The charges resulted from settlements relating to the legal dispute relating to the former music file sharing platform Napster; from impairments in the North American club activities; in Printing; and at the British TV channel Five, as well as a fine for the RTL advertising time marketing company, IP Deutschland.

In 2007, investments declined by 5.5 percent year-on-year. €1,032 million was expended in 2007 for investments in property, plant and equipment, intangible assets and financial assets including purchase price payments (2006: €1,092 million). Of this figure, €463 million (previous year: €502 million) related to property, plant and equipment, the majority of which was used at Arvato, while a total of €171 million (previous year: €154 million) was invested in intangible assets, primarily for RTL Group.

Debt was further reduced in 2007. At the end of December 2007, debt totaled €6,330 million (2006: €6,760 60 million). Beginning 2008, Bertelsmann is changing the presentation of its economic debt figures to an external view. According to this extended definition, leasing liabilities are also included in economic debt. In addition pension provisions including actuarial gains and losses are now recognized. As a result of this change, the economic debt posted at December 31, 2007 increased to €7,720 billion (previous year: €8,450 billion).

As part of this change, the target figure for the dynamic leverage factor (calculated as the ratio of economic debt to Operating EBITDA) has also been adjusted. The previous figure

of 2.3 increases to 3.0, as leasing obligations are added to the previous figure of 0.7. At the end of 2007, the new combined leverage factor is 3.1, just under the target figure. As a result of changed customer payment behavior, there were above-average inflows from the 2007 year end business in January and February 2008. At the end of February 2008, this resulted in the leverage factor declining to 2.9, within the internally defined target corridor.

Bertelsmann CFO Thomas Rabe: “Bertelsmann reached what we consider an appropriate level of debt. Economic debt is in line with our business profile and our profitability. As of now, we can again reinvest funds generated by operating businesses or as a result of portfolio measures for acquisitions.”

For fiscal year 2007, as was the case in previous years, Bertelsmann will again be making a profit-sharing distribution to all employees in its participation plan.

In June 2008, under the terms and conditions of the profit participation ertificates, 15 percent of the notional amount of the 2001 profit participation certificate will again be paid out. The distribution on the old profit participation certificates from 1992 will be 5.45 percent (previous year: 12.69 percent).

Despite general conditions which are becoming more difficult globally, the Bertelsmann AG Executive Board is confident about the way forward: In comparison to 2007, uncertainty about the development of the global economy has increased, particularly in the US For 2008, Bertelsmann expects a moderate upturn in revenues. The operating result will be at or slightly above the high level achieved in 2007. In 2008, the Group net income will move up considerably, with non-recurring effects no longer applying.

About Bertelsmann AG

Bertelsmann is an international media company encompassing television (RTL Group), book publishing (Random House), magazine publishing (Gruner + Jahr), music (BMG), media services (Arvato), and media clubs (Direct Group) in more than 50 countries. Bertelsmann’s claim is to inspire people around the world with first-class media and communications offerings – entertainment, information and services – and occupy leading positions in its respective markets. The foundation of Bertelsmann’s success is a corporate culture based on partnership, entrepreneurial spirit, creativity, and corporate responsibility. The company strives to bring creative new ideas to market and create value.

Bertelsmann is comprised of the television channels, television production companies, and radio stations of Europe’s largest entertainment group, RTL Group (RTL Television, M6, Five, Fremantle Media), and the more than 120 publishing houses of Random House, the world’s largest trade bookpublisher (Alfred A. Knopf, Bantam, Goldmann). Gruner + Jahr is Europe’s number one magazinepublisher (Stern, Geo, Neon, Capital). The Sony BMG joint venture in the BMG division is synonymous with creativity and strong international music brands (Beyonce©, Dixie Chicks, Justin Timberlake, Christina Aguilera). The Arvato media and communications services division brings together distribution, service centers and customer-relationship management, state-of-the art printing manufacturing, storage media production, mobile services, and comprehensive IT services. Bertelsmann’s direct-to-customer businesses are unified within the Direct Group: book, DVD, and music clubs (Der Club, France Loisirs), as well as book retailers in France and Portugal.