Gemalto First Half 2011 Results

Regulatory News:

Gemalto (PARIS:GTO)

All figures in this press release are unaudited. The income statement is presented on an adjusted basis (see page 2 "Basis of preparation of financial information"). These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable IFRS measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with IFRS. The reconciliation with the IFRS income statement is presented in Appendix3. The balance sheet is prepared in accordance with IFRS, and the cash position variation schedule is derived from the IFRS cash flow statement.

Gemalto (Euronext NL0000400653 - GTO), the world leader in digital security today announces its results for the first half of 2011.

Key figures of the adjusted income statement

n.c.

Olivier Piou, Chief Executive Officer, commented: "Our four main segments generated 16% revenue growth and 35% profit expansion. These results evidence Gemalto´s strong progress along its strategic plan, which combines organic growth with bolt-on acquisitions. Secure Transactions stood out, with 21% revenue growth and double-digit profit margin. Security also recorded double-digit revenue growth and increased profit margin. We continued to invest in our new mobile offerings and as a result, we expect Mobile Communication to return to year-on-year profit expansion for the second semester. The sustainable and wider adoption of the EMV standard and dual interface contactless cards further adds to our confidence in delivering on the € 300 million profit from operations target we have set for ourselves in 2013."

1 The main segments include the Mobile Communication, Machine-to-Machine, Secure Transactions, and Security business segments representing close to 100% of the semester´s Company revenue; i.e. they exclude the Patents segment which accounted for € 2.6 million revenue in H1 2011 and €16 million revenue in H1 2010.

Basis of preparation of financial information

In this press release, the information for the first semester of both 2011 and 2010 is presented for ongoing operations and under the 2011 format of segment reporting unless otherwise specified.

Adjusted income statement and profit from operation (PFO) non-GAAP measure

The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards. To better assess its past and future performance, the Company also prepares an adjusted income statement where the key metric used to evaluate the business and take operating decisions over the period 2010 to 2013 is the profit from operations.

Profit from operations (PFO) is a non-GAAP measure defined as the IFRS operating result adjusted for the amortization and depreciation of intangibles resulting from acquisitions, for share-based compensation charges, and for restructuring and acquisition-related expenses. These items are further explained as follows:

• Amortization and depreciation of intangibles resulting from acquisitions are defined as the amortization and depreciation expenses related to the intangibles recognized as part of the allocation of the excess purchase consideration over the share of net assets acquired.
• Share-based compensation charges are defined as (i) the discount granted to employees acquiring Gemalto shares under Gemalto Employee Stock Purchase plans; and (ii) the amortization of the fair value of stock options and restricted share units granted by the Board of Directors to employees, and the related costs.
• Restructuring and acquisitions-related expenses are defined as (i) restructuring expenses which are the costs incurred in connection with a restructuring as defined in accordance with the provisions of IAS 37 (e.g. sale or termination of a business, closure of a plant,"¦), and consequent costs; (ii) reorganization expenses defined as the costs incurred in connection with headcount reductions, consolidation of manufacturing and offices sites, as well as the rationalization and harmonization of the product and service portfolio, and the integration of IT systems, consequent to a business combination; and (iii) transaction costs (such as fees paid as part of the acquisition process) which were previously capitalized as part of the cost of an acquisition under previous IFRS versions.

These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable IFRS measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with IFRS.

In the adjusted income statement, Operating Expenses are defined as the sum of Research and Engineering, Sales and Marketing and General and Administrative expenses, and Other income (expense) net.

EBITDA is defined as PFO plus depreciation and amortization expenses, excluding the above amortization and depreciation of intangibles resulting from acquisitions.

The Appendix 3 bridges the Adjusted income statement to the IFRS income statement.

Ongoing operations

For a better understanding of the current and future year-on-year evolution of the business, the Company also provides an adjusted income statement for "Ongoing operations" for both 2011 and 2010 reporting periods.

• Ongoing operations: The adjusted income statement for "Ongoing operations" not only excludes, as per the IFRS income statement, the contribution from discontinued operation to the income statement, but also the contribution from assets classified as held for sale.
• Assets held for sale: The assets of one of the Company joint ventures (the "JV") active in China in Secure Transactions and Security, and for which shareholding restructuring agreement has been signed with the partner.
• Discontinued operation: The disposal of the Company business in point of sale ("POS") terminals to Verifone was effective on December 31, 2010. As per IFRS, the contribution of this activity to the IFRS income statement is reclassified for 2010 reporting periods and its net contribution is presented on the line item "Profit (loss) from discontinued operation (net of income tax)". Consequently, in the adjusted income statement, the contribution of POS and the impact of the transaction are not included in the profit from operations.

The Appendix 1 bridges the adjusted income statement, with the discontinued operation, assets held for sales and adjusted income statement for ongoing operations.

Basis of presentation of the segment information starting 2011

Starting January 1, 2011, the segment information accounts for the following changes:

• the patent licensing activity, previously reported as part of the segment Security, is reported separately, in a new segment "Patents".
• the public telephony activity, which is reaching end of life as it is now almost fully substituted by mobile telephony, previously reported in the segment Others, is included in the segment Mobile Communication.

In this press release the financial information for 2010 is presented pro-forma on the above basis of presentation.

The Appendix 8 bridges the adjusted income statement for ongoing operations under the 2011 and 2010 basis of segment information.

Historical exchange rates and constant currency figures

Figures in this press release are at historical exchange rates, except where otherwise noted. The Company sells its products and services in a very large number of countries and is commonly remunerated in other currencies than the Euro. Fluctuations in these other currencies exchange rates against the Euro have a translation impact on the reported Euro value of Group revenues. Comparisons at constant exchange rates aim at eliminating the effect of currencies translation movements on the analysis of the Group revenue by translating prior year revenues at the same average exchange rate as applied in the current year.

IFRS results

The IFRS consolidated income statement for the first semester 2011 shows an operating result of € 63 million for the Company and a net profit for the period of € 44 million. These were respectively € 46 million and € 45 million for the first semester 2010, and respectively € 46 million and € 45 million when represented to take into account the operation discontinued in 2010.

Basic earnings per share and Diluted earnings per share were essentially stable year on year at € 0.54 and € 0.52 for the reported period. These were respectively € 0.54 and € 0.53 in the first semester of 2010.

The Company provides in Appendix 3 the reconciliation between the IFRS and adjusted income statements. In the first semester 2011, restructuring and acquisition-related expenses amounted to € 4 million (€ 2 million in the first half 2010), equity-based compensation charges were € 16 million (€ 9 million in H1 2010); and amortization and depreciation of intangibles resulting from acquisitions were € 10 million (€ 10 million in H1 2010).

Balance sheet and cash position variation schedule

In the first half 2011, operating activities generated a cash flow before restructuring actions of € 43 million versus € 27 million in the first half 2010 including cash used in working capital, up by € 2 million on June 30th 2011 when compared to the beginning of the semester. Cash used in restructuring actions was stable at € 3 million.

Capital expenditure and acquisition of intangibles amounted to € 37 million, or 4.0 % of revenue, of which € 20 million were incurred for Property, Plant and Equipment purchases.

Acquisition and divestiture of subsidiaries and businesses, net of cash acquired, provided €5 million in cash.

Gemalto´s share buy-back program used € 31 million in cash for the purchase of 903,000 shares in the first half of 2011. As at June 30, 2011, the Company owned 4,908,387 shares, i.e. 5.58% of its own shares in treasury. The total number of Gemalto shares issued remains unchanged, at 88,015,844 shares. Net of the 4,908,387 shares held in treasury, 83,107,457 shares were outstanding as at June 30, 2011. The average acquisition price of the shares repurchased on the market and held in treasury as of June 30, 2011 was €29.10.

As at August 22, 2011, the Company owned 5 328 178 shares i.e. 6.05% of its own shares, in treasury. Net of these shares held in treasury, 82 687 666 shares were outstanding.

On May 31, 2011, Gemalto paid a cash dividend of € 0.28 per share in respect of the fiscal year 2010, up 12% on the dividend paid in 2010 (€ 0.25 per share). This distribution used € 23 million in cash. Other financing activities generated € 13 million in cash, including € 17 million of proceeds received by the Company from the exercise of stock options by employees.

As a result of these elements, of the deconsolidation of assets held for sales and of variations in current, and non-current borrowings, Gemalto´s net cash position as of June 30, 2011 was € 186 million, a reduction of € 69 million when compared with December 31, 2010.

Adjusted financial information

In this section, the financial information is presented for all operations. In comparison to adjusted income statement for ongoing operations, the adjusted income statement for all operations also includes:

• For 2011, the gain recognized during the semester further to the deconsolidation of a joint venture.
• For 2010, the contribution from the Point of Sales (POS) operation disposed in December 2010.
  As per the full year 2010 publication, this contribution is reclassified in discontinued operations and its net contribution is reported below the profit from operations.

As a % of
revenue

As a %
of revenue

Year-on-year
variation at historical
exchange rates

JV deconsolidation gain2

2 Gain on re-measurement to fair value of an investment in associate

Revenue for the first semester was up by +14% at historical rates, to € 928.5 million. Expansion was supported by strong growth in the Secure Transactions, Security and Machine-to-Machine segments partially offset by lower activity in the Mobile Communication segment. Software & Services revenue expanded across the company by +12% to € 123 million, and accounted for 13% of the total semester revenue. These results evidence Gemalto´s strong progress towards the implementation of its 2009-13 strategic plan through a combination of organic growth and the successful integration of acquired businesses.

Gross profit for the Company was up € 29.1 million or +10% at € 321.2 million. This represents a gross margin of 34.6%, lower by 1.2 percentage point from previous year, essentially due to the temporarily lower level of patent licensing activity. Productivity gains and service delivery optimization techniques implemented with select customers helped offset the combined adverse effects of higher prices in raw materials, plastic and gold in particular, and unfavorable purchasing conditions of silicon chips during the period.

Operating expenses decreased by 3.1 percentage points when expressed as percentage of revenue at € 228.2 million. This evolution includes a reduction of 1.3 percentage points on R&D and SG&A expenses for on-going operations, as synergies from acquisitions progressively materialize and additional expenses required by organic development in new growth areas were kept under tight control. It also includes a € 21.1 million gain in the re-measurement at fair value of Gemalto´s participation in a Chinese JV deconsolidated during the first semester, further to a transaction planned to be completed in the second semester.

First semester 2011 profit from operations came in at € 93.0 million, i.e. 10.0% of revenue. The year-on-year variation benefited from both the one-off €21.1 million JV deconsolidation gain and the positive developments in the business. Indeed, for ongoing operations, profit grew from € 66.6 million to € 71.9 million despite the year-on-year € 13.8 million shortfall effect of the Patents´ contribution to profit. The increase was driven by the accelerated global migration to EMV and contactless payment in Secure Transactions, double digit growth in Security, notable progress made in delivering synergies from acquired companies and profitability improvements in the Software and Services activities as usage picks up and efficiency from replication begins to kick-in.

As with the first half of 2010, net interest income was not material this semester. Foreign exchange transactions resulted in a loss of € 4.3 million, compared with a gain of € 0.9 million in the first half of 2010, partially offset by € 1.5 million of other financial income. As a result, Gemalto´s financial income of (€ 2.8) million for the first half of 2011 was lower by € 3.6 million year-on-year. Share of profit in associates increased by € 0.9 million, at € 1.3 million.

Profit before income tax was € 91.5 million.

Net income tax expenses were € 16.1 million; and a € 1.5 million charge from discontinued operations was recorded in relation to the Point of Sales disposal transaction.

Consequently the adjusted net profit for the Company was € 73.8 million, a 17% increase when compared to last year´s figure of € 63.2 million.

Basic adjusted earnings per share came at € 0.89 and fully diluted adjusted earnings per share at € 0.86, increasing respectively by 18% and 16% when compared to first semester 2010 basic adjusted earnings per share of € 0.76 and fully diluted adjusted earnings per share of € 0.74.

Segment information

For a better understanding of Gemalto´s business evolution, comments and comparisons address ongoing operations. The basis of presentation of this document describes the changes that occurred in the segments´ presentation for the year 2011, as announced in 2010. The segment financial information for 2010 is presented pro-forma on the above basis of presentation.

Mobile
Communication

Machine-to-
Machine

Secure
Transactions

This semester, it is worth noting that the contribution of the Secure Transactions, Security and Machine-to-Machine segments progressed rapidly and represents 52% of Gemalto revenue and 61% of profit from operations (PFO). In consequence, Mobile Communication had lower contribution, accounting for 48% of the Company revenue and 42% of total profit from operations.

Mobile
Communication

Machine-to-
Machine

Secure
Transactions

Total four
main
segments

Total
Gemalto

Currency exchanges rates had significant individual variations over the first and second quarters but their overall impact was limited, with no significant difference between historical and constant rate year-on-year variations of segment revenues.

The four main segments of activities comprising Mobile Communication, Machine-to-Machine, Secure Transactions and Security represented close to 100% of Gemalto´s revenue this semester and had combined revenue growth of 16%, at both historical and constant rates. Their contribution to the Company´s profit from operations increased by 35%, to € 74 million.

Mobile Communication

As a % of
revenue

As a % of
revenue

Year-on-year
variation at historical
exchange rates

Mobile communication posted revenue of € 444.1 million, lower by 3% year on year at constant exchange rates.

Software and Services grew to € 72 million in revenue this semester as developments in new service offerings were realized. The organic developments made notably in mobile contactless

(Near Field Communication - NFC) and mobile financial services (MFS) led to significant "pay-per-use" contracts wins that will produce effects gradually as consumer adoption ramps up. In parallel, the Company continued to trim revenue of the least profitable activities in the recently acquired businesses.

Product revenue was lower by 4% year-on-year at constant exchange rates in line with the more marked seasonal sales pattern anticipated for 2011. Volume growth was once again strong in rapidly developing countries. The product mix improvement was still limited in developed countries, as major operators finalize their upgrade plans towards fourth generation networks (LTE) and NFC services, which they expect to launch near the end of the year.

Gross margin for the segment was lower by 2.1 percentage points, mainly due to these mix variations. The combined adverse effect of significantly higher prices for raw materials - gold and plastic in particular, and of this semester´s adverse silicon chips purchasing conditions was neutralized by new productivity gains and pricing discipline

Operating expenses settled at € 129.2 million, lower by € 5.3 million compared to last year. The decrease essentially reflects acquired businesses synergies that more than offset the additional resources the company chose to deploy to support strong demand from its customers for more field trials of its new NFC and MFS services.

Profit from operations came in at € 30.5 million for the segment, lower by € 9.8 million. This represents a profit margin of 6.9% during the period, a sound basis for performance considering the seasonality that has historically characterized this segment.

After three semesters of unfavorable evolution, the segment is expected to return to expansion of year-on-year profits in the second half of 2011. It will start to benefit from the software and services investments that have been made, and from the improved profitability of acquired businesses progressing toward Gemalto´s broader level of performance. The segment should also benefit from an improved product mix as the first deployments of NFC and MFS services trigger a faster product upgrade rate in the developed countries´ traditionally slow-rotating installed base of consumer SIM and UICC cards.

Machine-to-Machine

As a % of
revenue

As a % of
revenue

Year-on-year
variation at historical
exchange rates

The Machine-to-Machine segment posted revenue of € 84.2 million driven by the continuing growth of this activity in the industrial sector. The Machine-to-Machine segment includes mainly the activity of Cinterion, which was acquired in July 2010 and consolidated as of August 1st 2010.

The events that occurred in Japan in the first quarter led several customers to delay certain deliveries, especially in the automobile sector. This resulted in a small shift in quarterly revenues, which is however expected to have minimal impact, if any, on the full year revenue of the segment.

Due to productivity gains, the segment´s gross margin improved this semester to 34.3%, up by 1.7 percentage points when compared to last year´s initial consolidation period of August-December 2010.

Operating expenses were € 23.1 million, as R&D expenses in new products and services were sustained and supplemental marketing efforts were deployed to support the newly integrated offerings.

As a result, profit from operations for the segment came in at € 5.8 million, or 6.9% when expressed as a percentage of this semester´s segment revenue.

Secure Transactions

As a % of
revenue

As a % of
revenue

Year-on-year
variation at historical
exchange rates

Secure Transactions posted a record performance this semester, growing by an impressive 21% at constant exchange rates to € 251.1 million. In line with the trend that began in the second half of 2010, growth this semester was driven by countries migrating to EMV in the Americas, as well as European financial institutions upgrading to contactless dual interface payment cards. In this rapidly expanding market, Gemalto continued to leverage its geographical presence and its recently renewed product and services portfolio to capture the market growth worldwide.

The improvement in volume and product mix, the better absorption of fixed costs in high growth areas and higher personalization activity led to a significant gross margin increase of 4.6 percentage points on the previous year, to 30.8%. Gross profit settled at a record € 77.3 million for the semester, up 42%. This performance is all the more impressive as the segment was also confronted this semester with increases in raw material costs, and with various issues with suppliers that had difficulty meeting Gemalto´s large increase in demand.

Revenue growth significantly outpaced the operating expenses increase, which came in lower by 3.3 percentage points when expressed as percentage of revenue.

Excellent fall through from revenue growth to profit from operations was thus generated, and the segment´s profit from operations for the period settled at € 26.4 million, a close to five-fold increase on last year´s figure. This corresponds to a double-digit profit margin of 10.5%, up almost 8 percentage points on 2010, and a new record for a first semester.

Coming after the excellent second semester of 2010, the performance of Secure Transactions confirms the sustained improvement in the development of this part of Gemalto business. This segment is now expected to outperform the objective set out as part of the company´s long-range development plan in 2009, and record double digit profit margin from operations for the full year 2011.

Security

As a % of
revenue

As a % of
revenue

Year-on-year
variation at historical
exchange rates