Gemplus year-end profits soar on back of EMV sales

Gemplus International S.A. (Euronext: LU0121706294 - GEM and NASDAQ: GEMP), the world's leading provider of smart card solutions, today reported results for the fourth quarter and full year ended December 31, 2005.

Full year 2005 highlights:

Revenue increased by 8.5% to 939 million euros: growth sustained in all core businesses.
Operating income at 67 million euros: a 2.5 fold increase, driven by good overall Company performance.
Very strong net income, at 90 million euros.
Robust free cash flow, at 85 million euros, excluding non-recurring items.

Fourth quarter 2005 highlights:

Operating margin at 6.0%, despite impact related to a quality issue with a specific chip.
Strong net income1, at 40 million euros, boosted by recognition of deferred tax assets of 25.6 million euros.

Commenting on the performance for the fiscal year 2005, Alex Mandl, President and Chief Executive Officer, said: "2005 was another year of substantial achievements for Gemplus: we reinforced the Group's leadership, notably in high-end wireless and financial services, and strongly improved our financial performance, especially in terms of margin and cash flow. At the same time, we undertook two very important strategic moves: the Setec acquisition, which strengthens our position in the Government ID space, and the proposed Gemalto merger which will create a world-class leader in digital security. We feel very excited about this project which will take the Company to new horizons."

Full Year 2005 financial review

Highlights:

Revenue up 8.5%: growth sustained in all core businesses.
Operating income at 67 million euros: a 2.5 fold increase, driven by good overall Company performance.
Gross margin up 1.7 percentage points.
Operating expenses flat.
Very strong net income, at 90 million euros.
Robust free cash flow, at 85 million euros, excluding non-recurring items.

On a segment and geographical basis for the full year:

Telecom revenue was driven by Wireless. Wireless revenue was up 7.5% (up 7.2% currency adjusted), to 600.4 million euros, confirming the Group's leading position in this sub-segment. Wireless card shipments rose 34% to 342 million units, due to strong growth in EMEA and the Americas. The Group's focus on value creation drove a substantial shift toward high-end cards, now considered only 3G and above, with their share increasing from 6.0% in 2004 of total shipments to 10% in 2005. The share of 64Kb, 128Kb, 3G cards and above rose from 34% in 2004 to 47% in 2005. The average selling price declined 20%, currency adjusted.

Financial Services revenue was driven by the EMV migration, with substantial rollouts in many European countries and ramp-up in Latin America and Japan. Gemplus shipped 70 million payment microprocessor cards (up 36%), with revenue up 25%.

ID and Security revenue was driven by the Setec acquisition, Government ID projects, particularly, in the Middle East, and Corporate Security projects, notably in the Americas.

On a geographical basis, revenue from the Americas was up 21.0%, currency and acquisition adjusted, driven by Wireless. The EMEA region was up 1.8%, led by Financial Services. Asia was down 12.5% reflecting Wireless price pressure.

Gross margin increased by 1.7 percentage points, mainly driven by a favourable business mix as well as improvement in Telecom and ID & Security.

Operating expenses were stable, despite the overall growth in the business and the Setec acquisition. Operating expenses represented 25.9% of sales, compared to 28.2% the previous year, reflecting good cost control and a reduction in restructuring expenses. Consequently, operating income rose substantially, to 66.8 million euros, taking the operating margin to 7.1%.

Income tax reflects the recognition of deferred tax assets of 26.9 million euros. This contributed to the Company reporting net income of 89.9 million euros, an increase of 85.2 million euros over last year, mainly due to improved operating income.

The Company generated free cash flow of 85.3 million euros, up 45% compared with last year, excluding non-recurring items. Net cash flow was 30 million euros, which included the cash outlay of 63 million euros related to the Setec acquisition.

Fourth quarter 2005 financial review

Income statement

Fourth quarter 2005 highlights:

Revenue up 7.9% year-on-year (down 1.5% adjusted).
Operating margin at 6.0%, despite impact related to a quality issue with a specific chip.
Strong net income, at 40.0 million euros, boosted by recognition of deferred tax assets of 25.6 million euros.

Revenue was up 7.9%, driven by the Setec acquisition. Price pressure in Wireless, combined with some softness in this sub-segment and the quality issue in Telecom, translated into a 1.5% decline in revenue, after restating for acquisitions and currency fluctuations. On a geographical basis, adjusted revenue was up 0.8% in the Americas and down 0.9% in EMEA4. In both regions, strong growth in ID & Security and Financial Services was offset by a decline in Telecom revenue. In Asia, revenue was down 6.6%.

Gross profit was up 10.3%, despite the Telecom quality issue. Gross margin was up 0.7 percentage point year-on-year, due to improved business mix and manufacturing efficiency in Telecom. Operating expenses increased 13.8% year-on-year, to 69.6 million euros, mainly due to the Setec acquisition and severance packages.

Consequently, operating income for the fourth quarter was down 3%, at 15.6 million euros.

Net income rose to 40.0 million euros, including the recognition of deferred tax assets of 25.6 million euros.

Balance sheet and cash flow statement

Fourth quarter 2005 highlights:

Robust free cash flow of 21.5 million euros, excluding non-recurring items.
Strong cash position, at 418.4 million euros. The Group's cash position is up 17.6 million euros compared to September 30, 2005.

Segment analysis

Telecom

Fourth quarter 2005 highlights:

Record wireless shipments, at 101 million units, mainly driven by emerging countries.
Wireless ASP down 28.4% year-on-year, currency adjusted, reflecting an unfavorable regional mix and price pressure.

Wireless revenue

Wireless products & services revenue was down 1.0% year-on-year (down 4.6%, currency adjusted), to 163.6 million euros.

Fourth quarter Wireless shipments grew 35% year-on-year, to 101 million units, mostly driven by emerging countries in all regions: Latin America, Eastern Europe, China, South-East Asia, Middle East and Africa.

The Wireless mix notably improved in EMEA and North America, driven by momentum in 3G cards. High-end card shipments (3G and above) accounted for 15% of the fourth quarter total, compared to 8% a year ago.

Wireless average selling price (ASP) was down 7.7% quarter-on-quarter and 28.4% year-on-year, both currency adjusted, reflecting ongoing price pressure and a substantial unfavorable change in the regional mix.

Wireless gross margin rose 0.5 percentage point, despite a quality issue with a specific chip. This issue should have minimal impact on financial statements of fiscal year 2006.

Financial Services

Fourth quarter 2005 highlights:

Very strong growth in payment microprocessor cards: shipments up 70%, to 18.1 million units.
EMV roll-out gained further momentum in Eastern Europe and Latin America.

Revenue reflects very strong growth in payment microprocessor cards as well as the Setec acquisition.

Payment microprocessor card revenue rose 45% year-on-year. Shipments of payment microprocessor cards grew 70% to 18.1 million units. ASP decline reflects a greater share of modules in the sales mix.

The strong performance in payment cards was mainly driven by the EMV roll-out, which gained momentum in Eastern Europe and Latin America, and sales growth in the United Kingdom and Continental Europe. In addition, this quarter saw the first shipments of EMV cards to China.

Identity and Security

Fourth quarter 2005 highlights:

Very strong growth, driven by Government ID and Corporate Security projects.
On-going roll-out of e-passports in Singapore, Sweden and Norway.

Strong growth was driven by a substantial increase in Government ID projects, notably in the Middle East, and Corporate Security projects, particularly in the United States, in addition to those from Setec.

Outlook

The Group continues to see strong momentum in its core segments and will maintain its focus on cost efficiency.

Gemplus confirms that it is firmly on track to realize its mid-term objective to achieve a 10% operating margin in 2007.

The Group remains confident in its ability to further strongly improve its operating income in 2006 taking into account the usual seasonality effect of stronger organic growth in the second half than in the first half.

Gemplus also continues to expect the Financial Services and ID & Security segments to turn profitable in 2006.

Fourth Quarter 2005 Business Highlights

Telecom

During the fourth quarter 2005, Orange included in its Orange Intense campaign a bundle of multimedia services for the youth segment with SIM+. This was the first commercial launch of Gemplus's multimedia SIMs and endorsed its strategy to bring SIM cards into the multimedia era.

Within a record time of nine months, Gemplus went from proof of concept to commercial deployment for a range of SIMs, with one of the most advanced mobile operators.

Gemplus was also selected by Optimus Portugal for its device management solution, GemConnect Device Manager, to improve customer care and boost data traffic.

Financial Services

In China, Gemplus was the first smart card manufacturer to deliver chip banking cards for ICBC's EMV migration. The cards were produced locally by Gemplus's joint venture with Goldpac and complied with MasterCard specifications, MCHIP/4.0.

Gemplus also announced the launch of a new range of products designed to help card issuers differentiate their service offerings and attract new clients. The Caisse d'Epargne was one of the first banks to deploy this marketing strategy in France, with the roll-out of mandarin-tinted transparent cards targeted at young customers.

Within the contactless segment, Gemplus moved forward with the delivery in the USA of GemInstant cards for MasterCard PayPass contactless payment to one of the top ten leading banks in North America.

Gemplus was also the first smart card manufacturer to achieve the certification for the MasterCard OneSMART Chip Authentication Program for its GemAuthenticate server, which enables financial institutions to secure customer access to online banking services and online purchases using two-factor authentication.

Identity and Security

For the enterprise security sector, Gemplus was selected by Pfizer to deploy Gemplus's SafesITe solution for network access and digital signature. Gemplus has shipped over 100,000 cards to Pfizer as part of its Global Identity Services program.

Lastly, in a recent report by Frost & Sullivan, Gemplus came out top in the smart card readers and chipsets segment, with a 34.8% share in 2004, up from 20.8% in 2003 (Source Frost & Sullivan, January 2006).

Research and Development

Gemplus R&D teams were rewarded for their innovation with the win of the Sesames 2005 award for Best Software at the Cartes 2005 Conference and Exhibition. Gemplus innovated with the most compact implementation of the .NET platform for networked secure devices, such as USB dongles, secure MMC and smart cards.

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