AMSTERDAM , The Netherlands , September 13 --
- Revenue Up 2% at Constant Exchange Rates (-1% at Current ExchangeRates)
- Operating Margin1 at 3.7%, Reflecting Fierce Competition in MobileCommunication
- Cash and Cash Equivalents at
- Continuing Challenging Industry Environment
- Synergies and Long-Term Objectives Confirmed
Gemalto (Euronext NL0000400653 - GTO), a leader in digital security,today announced its results for the half year ended June 30, 2006 .
Highlights of the adjusted pro forma income statement1 (all figures beloware at current exchange rates):
The above mentioned adjusted measures exclude business combinationaccounting entries, and one-off expenses incurred in connection with thecombination with Gemplus (Nasdaq: GEMP). Gemalto believes these measures arehelpful in understanding its past financial performance and its futureresults. Adjusted financial measures are not meant to be considered inisolation or as a substitute for comparable IFRS measures, and should be readonly in conjunction with the condensed consolidated interim financialstatements prepared in accordance with IFRS provided in appendix.
Olivier Piou, Chief Executive Officer, commented: "I would like to thankour shareholders for the outstanding success of the public exchange offer: itdemonstrates their endorsement of our vision to create a global leader indigital security.
The integration is progressing smoothly and Gemalto is fully focused oncapturing growth opportunities and on realizing the planned synergies thatwill both materialize progressively. Our work since execution of thecombination allows us to confirm the synergies and long term financialobjectives previously outlined.
Since the beginning of this year competitive pressure has been intense.We expect that our market environment will remain challenging in the comingmonths and we are adjusting to these demanding circumstances.
Yet, the simultaneous global spread of communications systems, mobilepersonal devices, and the internet, all requiring higher levels of security,plays well for fully realizing our digital security vision."
The Company's condensed consolidated interim financial statements(unaudited) are prepared in accordance with International Financial ReportingStandard (IFRS).
The pro forma income statement for the first half 2006 has been preparedassuming that the combination with Gemplus had taken place as of January 1,2005 , allowing the Group to present it in comparison with the first half of2005. The one-off, combination related items are therefore charged to thefirst half 2005 pro forma income statement, so that the first half 2006income statement only reflects the recurring intangible asset amortizationcharges resulting from the accounting treatment of the transaction, as wellas the additional stock compensation charge arising from it.
Additional financial information on an adjusted pro forma basis ispresented that is not in conformity with IFRS, in particular the presentationof cost of sales, operating expenses and operating income, operating marginand earnings per share which exclude charges arising from the accountingtreatment of the combination and one-off combination related expenses.Charges resulting from the accounting treatment of the transaction consist ofamortization of inventory step-up, additional stock-based compensation due tothe revaluation of Gemplus' stock options as of combination date,amortization and impairment of intangible assets. One-off combination relatedexpenses consist of professional advisory services incurred in connectionwith the integration, new Gemalto brand and logo creation and worldwideregistration, as well as impairment charges related to capitalizeddevelopment costs on projects which are redundant with existing products ortechnologies available in Gemplus. The Company believes that thisinformation, which is not in conformity with IFRS, is helpful supplementalinformation in order to better understand its past and future performance. Inaddition, the Company's management uses this information in its own planning.This information provided by the Company may not be comparable to similarlytitled measures employed by other companies.
The Company provides reconciliation between pro forma and adjusted proforma income statements which is displayed in tables at the end of this pressrelease. The IFRS consolidated income statement for the first half 2006 showsoperating loss of
For a more detailed description of adjustments made to the IFRSconsolidated income statement, please refer to EXPLANATION OF ADJUSTED ANDPRO FORMA MEASURES at the end of this press release.
All comparisons in this document are at current exchange rates, unlessstated otherwise, and describe the evolution of the adjusted pro forma firsthalf 2006 information compared to that of the first half 2005.
As of the third quarter 2006, the Company will adopt the euro as itsreporting currency.
As of the first quarter 2007, the Company will report full financialresults on a quarterly basis.
At constant exchange rates, revenue was up 2%, reflecting varyingperformance between market segments. Solid revenue growth in Identity &Security and Secure Transactions was fully offset by the effect of strongprice pressure on Mobile Communication revenue. After adjusting for theacquisition of Setec and currency fluctuations, revenue was down 2 %.
On a geographic basis, revenue was up 3% in Asia, driven by Identity &Security and Secure Transactions. In EMEA, revenue was almost stable,while in the Americas revenue was down 6%.
Microprocessor card shipments grew 39% to 561 million units, sustained bystrong demand in all core segments.
Gross margin was 30.3% compared to 32.7% a year ago, due to the lowerperformance in Mobile Communication.
Overall, operating expenses were up 3.4% including Setec. Research &engineering and general & administrative expenses were stable, while sales &marketing expenses were up 5.6%, due to increased field marketing andcustomer support resources in the regions.
Consequently, operating income was
Financial income was
Balance sheet and pro forma cash flow
Pro forma free cash flow of the period was an outflow
After the distribution of reserves (
At constant exchange rates, Mobile Communication revenue was down 9%: thestrong volume growth was not sufficient to fully compensate for extreme pricepressure.
SIM cards shipments for the first half 2006 were up 38% to 430 millionunits, driven by strong demand in Asia and in EMEA. Shipments in the Americasshow limited growth compared with a strong first half 2005.
The average SIM card selling price for the first half 2006 was down 35%compared to the first half 2005, reflecting the intensified competitiveenvironment this year. In the first half 2006, the market was characterizedby very strong volume growth in emerging countries which use a higherproportion of low-end cards, and by delays in migration to high-end productsin other countries.
The average SIM card selling price for the second quarter 2006 was down1% at current exchange rates, compared with the first quarter 2006.
Compared with the strong performance of the first half 2005, gross margindecreased, reflecting the intensified competitive environment since thebeginning of the year.
At constant exchange rates, revenue was up 14%. After adjusting for theacquisition of Setec and currency fluctuations, revenue was up 9%.
Microprocessor card shipments for the first half 2006 were up 37% to 109million units, driven by on-going EMV deployment, particularly in Turkey ,Latin America, North Asia and Southern Europe .
Average selling prices decreased reflecting price pressure in certainmarkets, as well as a change in the regional mix and a greater share ofmodules in the total volume sold.
At constant exchange rates, revenue was up 73%, driven by strong sales ofmicroprocessor card solutions for e-passports, healthcare and transportationmanagement, as well as by increased IP licensing activity. After adjustingfor the acquisition of Setec and currency fluctuations, revenue was up 44%.
Microprocessor cards shipments for the first half 2006 were up 58% to 22million units, fuelled by initial deployments of large scale e-passportsprograms in France and Portugal and by strong Transportation activity.
During the first half 2006, the Group won several meaningful and highlyvisible contracts for e-passport projects in France , the Czech Republic , Portugal and Slovenia , and healthcare management in France and Mexico .
Gross margin was up 8.2 percentage points compared with a strong firsthalf 2005, reflecting high revenue derived from patent licensing contracts:these are fully offsetting lower margin in the ID business as the rollout ofe-passports in Europe is still in its early stages.
Memory cards for Public Telephony now contribute for less than 4% ofGroup revenue.
The activity in this segment reflects a transition period in advance ofthe introduction of a new range of products later this year.
Market conditions have been difficult since the beginning of this year,and the Company expects it will remain challenging, particularly in light ofthe uncertainties in the global economic environment. With synergies from thecombination materializing progressively, in line with plans, and thesignificant resources required this year to converge product roadmaps andprocesses, Gemalto expects operating performance in the second half 2006 tobe similar to that of the first half.
The deployment of the electronic passport and ID projects won in recentmonths will produce their full effect in 2007.
The Group has taken cost reduction measures beyond the initiallyidentified synergies, and continues to review the adequacy of its currentconfiguration in light of these circumstances. On August 31, 2006 , Gemaltoannounced consolidation of its two production centres in Owing Mills andMontgomeryville in the United States into the latter's facility, which bettermeets the future needs of its business strategy and customers.
Given its technology and market leadership, Gemalto is uniquelypositioned to address the increasing need for security in the digital world.The Company is confident in its ability to play a leading role in the digitalsecurity industry as it expands on a global scale and to realize itsobjective for 2009 of a low teens operating margin.
Due to the combination with Gemplus, Gemalto's financial statements haveundergone significant change, due in particular to the accounting treatmentof this transaction in accordance with IFRS 3 "Business Combination". Tosupplement the financial statements presented on an IFRS basis, the Grouppresents the pro forma and adjusted pro forma information described in thetable below.
Pro forma measures
The pro forma income statement for the first half 2006 has been preparedassuming that the combination had taken place as of January 1, 2005 , allowingthe Group to present it in comparison with the first half 2005. The one-off,combination related items are therefore charged to the first half 2005 proforma income statement, so that the first half 2006 income statement onlyreflects the recurring intangible asset amortization charge resulting fromthe Purchase Price Allocation and the additional stock-based compensationcharge.
Adjusted measures exclude certain business combination accountingentries, and expenses directly incurred in connection with the combinationwith Gemplus, that the Group believes are helpful in understanding its pastfinancial performance and its future results. Adjusted financial measures arenot meant to be considered in isolation or as a substitute for comparableIFRS measures, and should be read only in conjunction with condensedconsolidated interim financial statements prepared in accordance with IFRS.Management regularly uses these supplemental adjusted financial measuresinternally to understand, manage and evaluate the business and take operatingdecisions. These adjusted measures are among the primary factors managementuses in planning for and forecasting future periods. Compensation ofexecutives is based in part on the performance of the business based on theseadjusted measures. Adjusted financial measures reflect adjustments based onthe following items, as well as the related income tax effect:
- Amortization of inventory step-up: IFRS 3 "Business Combination"requires Gemalto to value work-in progress and finished goods assumed inconnection with the combination at net realizable value (the estimatedrevenue derived from the future sale of these goods less expected sellingcost). Therefore, the value of this inventory in the books of Gemplus oncombination date was adjusted accordingly (step-up). Thus, subsequent salesof the work-in-progress and finished products carried in Gemplus' inventoryat the time of the combination generate a lower margin than if they weremanufactured after the acquisition, all other factors being equal. Theamortization expense related to this step up is therefore disclosed in theincome statement under a separate line below Cost of Sales. The adjustment,eliminating amortization of inventory step-up, is intended to restore thenormal margin of such sales. The Group believes this adjustment is useful toinvestors as a measure of the ongoing performance of its business.
- Additional stock-based compensation charge: As prescribed by IFRS 2"Share-based payment" and IFRS 3 "Business Combination", vested and unvestedstock options or awards granted by an acquirer in exchange for stock optionsor awards held by employees of the purchased company, or any substantiallyequivalent commitment by the acquirer to assume the obligations of theacquirer with regards to stock options granted to the latter's employees, asis the case for Gemalto under the Combination Agreement, shall be consideredto be part of the purchase price for the acquirer, and the fair value (at theeffective date of the acquisition or merger) of the new (acquirer) awardsshall be included in the purchase price. It leads to increase thecompensation charge related to stock-options granted by Gemplus prior to theacquisition. The adjustment, eliminating the additional stock-basedcompensation charge, is intended to reflect the compensation charge thatGemplus would expense if the company continued to operate on a standalonebasis. The Group believes this adjustment is useful to investors as a measureof the ongoing performance of its business.
- Amortization and impairment of intangible assets: amortization andimpairment of intangible assets created as a result of the combination withGemplus have been excluded from the adjusted profit for the period. The Groupbelieves this is useful because, prior to this combination in the secondquarter of fiscal 2006, it did not incur significant charges of this nature,and the exclusion of this amount helps investors understand the evolution ofIFRS operating expenses in periods subsequent to the combination withGemplus. Investors should note that the use of intangible assets contributedto revenue earned during the period and will contribute to future revenuegeneration and that these amortization expenses will be recurring.
- Combination related charges: In the last months, Gemalto incurredmaterial expenses in connection with the combination with Gemplus, which itwould not have otherwise incurred. Combination related charges consist ofprofessional advisory services incurred in connection with the integration,new Gemalto brand and logo creation and worldwide registration, as well asimpairment charges related to capitalized development costs on projects whichare redundant with existing products or technologies available in Gemplus.The Group expects to continue to incur integration-related professionalservices in the coming months. Gemalto also determined that its investment ina listed company was impaired as a consequence of the combination withGemplus. The related impairment charge was recorded in Financial income(loss) in the period. Gemalto believes it is useful for investors tounderstand the effect of these expenses on its cost structure.
Gemalto provides three sets of income statements:
- IFRS consolidated income statement, pursuant to its regulatoryobligations
The first half 2005 and 2006 pro forma income statements established inaccordance with IFRS are included in the condensed consolidated interimfinancial statements attached to this press release.
The company has scheduled a conference call for Wednesday, September 13,2006 at 3:00 pm CET ( 2:00 pm GMT and 9:00 am New-York time). Callers mayparticipate in the live conference call by dialling:
+44(0)207-138-0816 or +1-718-354-1171 or +33-1-55-17-41-49.
The slide show will be available on the web site at 10:00 CET ( 9:00 GMT ).
Replays of the conference call will be available approximately 3 hoursafter the conclusion of the conference call until September 19, 2006 midnightby dialling:
+44(0)207-806-1970 or +1-718-354-11-12 or +33-1-71-23-02-48, access code:8442332.
Third quarter 2006 revenue is scheduled to be reported on October 26,2006 , before the opening of Euronext Paris .
Gemalto (Euronext NL 0000400653 GTO) is a leader in digital security withpro forma 2005 annual revenues of US$2.2 billion (EUR1.7 billion), operationsin 120 countries and 11,000 employees including 1,500 R&D engineers. Thecompany's solutions make personal digital interactions secure and easy in aworld where everything of value -from money to identities - is represented asinformation communicated over networks.
Gemalto thrives on creating and deploying secure platforms, portable andsecure forms of software in highly personal objects like smart cards, SIMs,e-passports, readers and tokens. More than a billion people worldwide use thecompany's products and services for telecommunications, banking,e-government, identity management, multimedia digital right management, ITsecurity and other applications. Gemalto was formed in June 2006 by thecombination of Axalto and Gemplus.
For more information please visit www.gemalto.com