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Letter from the CEO

Dear Readers,
Dear Friends of Bertelsmann,

Thomas Rabe
Chairman & CEO of Bertelsmann

2014 was a good year for Bertelsmann. Our business performance was positive overall, and we made good progress in implementing our strategy. Among other highlights, we implemented an important step in building our education business. In the long term, we want to establish education as the third pillar of our portfolio, alongside media content and services. We’ve also moved closer to our goal of making Bertelsmann a more digital, more international and faster-growing company through many other measures. The “new Bertelsmann” is visibly taking shape, as this Annual Report documents.

Last year, Bertelsmann grew its revenues by three percent to €16.7 billion – the highest level in seven years. The key drivers of this revenue increase were our strategic transactions, such as the merger of Penguin and Random House, the full acquisition of BMG, and the expansion of financial and e-commerce services at Arvato. At the same time, we disposed of some high-revenue but structurally declining businesses, such as Gruner + Jahr’s US printing business and Be Printers’ Italian printing operations.

Operating EBITDA also reached its highest level since 2007. Year on year it increased by nearly three percent, to €2.37 billion. Here too, Penguin Random House made a significant contribution – thanks in part to numerous bestsellers. The merger of the two book-publishing groups is paying off for our authors and their millions of readers, as well as commercially. The operational integration proceeded ahead of schedule and our publishing companies on all continents achieved outstanding creative successes. In the United States, for example, more than 500 Penguin Random House titles made the “New York Times” bestseller lists in 2014.

Other major contributors to earnings growth were our German-language television business – thanks to another record year for Mediengruppe RTL Deutschland – and our music-rights business BMG. Overall, declines in earnings at some businesses in France and from structurally declining activities, as well as startup costs for new businesses, were more than offset. As a result, our EBITDA margin remained virtually stable at 14.2 percent.

Group profit was €573 million, after €885 million in the previous year. Earnings were noticeably impacted by the downscaling of our print and direct-marketing businesses, as well as an impairment loss recognized in the television business in Hungary, where a special tax on advertising was introduced in the summer. Earnings were also affected by expenditure on profit-improvement measures. However, the combined medium-term earnings potential of such measures amounts to about €500 million.

In 2012, we set ourselves the goal of making Bertelsmann a more digital, more international and faster-growing company by pursuing four strategic priorities. Last year, again, we made progress in every one of these priorities.

One important measure for strengthening the core was our full acquisition of Gruner + Jahr. Some 45 years after Bertelsmann first invested in the Hamburg publisher, under the leadership of Reinhard Mohn, we became the sole owner of G+J on November 1, 2014, after purchasing the Jahr family’s shares. We are very happy to be working with the staff to develop the company into a leading house of content – and are pleased that the strategic realignment of G+J is already bearing fruit. Excluding the print operations that were sold, in 2014, G+J achieved an almost stable operating result despite additional investment in its transformation to digital.

We also strengthened our core in other divisions: RTL Group expanded its families of channels by launching new channels in Germany (Geo TV, in collaboration with G+J), Croatia (RTL Kockica) and Southeast Asia (RTL CBS Extreme HD). Penguin Random House strengthened its presence in Latin America, as well as Spain and Portugal, with the acquisition of the book publisher Santillana. We also made significant progress in downscaling a number of structurally declining businesses. For instance, in addition to the aforementioned printers, we sold the club businesses in the Czech Republic, Slovakia and Spain. We will also be withdrawing from the club and direct-marketing business in Germany in the months ahead.

The digital transformation of our businesses also saw positive developments in 2014. RTL Group acquired a majority stake in SpotXchange, one of the world’s five largest marketing platforms for online videos. The group also increased its shareholding in the multichannel network (MCN) StyleHaul to 97 percent. StyleHaul is the world’s most popular MCN for fashion, beauty, and lifestyle topics. Our channels’ catch-up TV offerings, Fremantle Media’s Web productions and channels, and our MCNs collectively generated over 36 billion online video views in 2014. Only Google, Facebook, and AOL had more viewers. As a result, RTL Group has established itself as Europe’s leading digital-entertainment company.

Penguin Random House further consolidated its market leadership in the digital business. In 2014, Penguin Random House sold more than 100 million e-books and now offers more than 100,000 titles in electronic form. Gruner + Jahr has expanded its portfolio of digital content and is well on the way to becoming the leading provider of digital magazines in Germany. Also in 2014, Arvato grew with services for leading companies in the IT and high-tech sector.

We took an essential step in expanding our growth platforms. The takeover of Relias Learning was Bertelsmann’s largest purchase in the United States since the acquisition of Random House in 1998. Relias is a leading US e-learning provider with more than 4,000 institutional clients, and offers considerable growth potential, as it benefits from three global megatrends: education, health and digitization. This makes Relias the ideal nucleus for developing Bertelsmann’s e-learning business.

E-learning is one of three segments in the education sector in which we will invest during the next few years. We also want to build a global network of medicine and human-sciences universities under the umbrella of our US subsidiary Arist. In February 2015, we added the first university to this network: Alliant International University, a renowned institution with 3,700 students at ten campuses. We also intend to shape the services sector for universities. In this way, we plan to develop education as a key pillar of the “new Bertelsmann.” We are aiming for revenues of €1 billion in the next few years.

As well as education, we also successfully developed our other growth platforms in 2014. Fremantle Media secured a majority stake in the TV production company 495 Productions. Arvato’s takeover of Netrada made it the European market leader in fashion e-commerce. Arvato also continued to drive forward the expansion of its financial services business, for example, by acquiring the Dutch company AfterPay. BMG grew both organically and through acquisitions; among other opportunities, we took over the music publishers Talpa and Union Square, and the Montana and Hal David rights catalogs.

There are encouraging developments to report in the expansion of our businesses in the growth regions as well. Our Bertelsmann Asia Investments (BAI) fund made more new investments than ever before, bringing the total number to more than 40 since it was established. At the same time, BAI once again recorded significant increases in value. In India, Bertelsmann’s investments included the e-commerce platform Pepperfry and the education service iNurture. And in Brazil, we joined forces with an investment company to set up a venture capital fund that focuses on technologies in the education market there.

The experiences of our divisions demonstrate that China, India and Brazil offer us a wealth of opportunities with their rapidly growing middle classes. RTL Group and Fremantle Media are already present on TV screens around the world with their nonlinear offerings and hit formats such as “Idol,” “Got Talent” and “X Factor”; Penguin Random House has a global reach unrivalled by any other trade publisher; and Arvato is one of China’s leading service providers. By expanding these and our new education and digital-media businesses, we plan to generate around €1 billion in revenues in China, India and Brazil in the medium term.

In the future these countries will be even more formative for the “new Bertelsmann” than they are today. Bertelsmann is in the process of becoming a more digital, more international and faster-growing company. We will become an education company as well as a media and services company. And we want to increase our revenues to €20 billion in the years ahead.

To date, our progress on this journey has been faster than expected. Since the beginning of 2012 we have invested more than €2 billion just in our expansion and growth businesses. As a result, last year they contributed almost 30 percent to our total revenues – compared to around 20 percent in 2011. Conversely, during the same period, we reduced the share of revenues from structurally declining businesses from 15 to under 10 percent.

The most important basis for our company’s success is and will remain the commitment and dedication of our more than 112,000 colleagues, whom I would like to thank most sincerely for their work. Together, we are building a “new Bertelsmann,” as you can see in this Annual Report – which is therefore also a progress report. I hope you enjoy reading it!

Yours sincerely,

Thomas Rabe