Gemalto First Semester 2013 Results

Gemalto First Semester 2013 Results

• Record first semester with revenue at € 1.13 billion, up +13%

• Platforms & Services revenue up +25% to €208 million

• Profit from ongoing operations up +14%

To better assess past and future performance, the income statement is presented on an adjusted basis (see page 2 "Basis of preparation of financial information"). 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 the consolidated financial statements. The reconciliation with the IFRS income statement is presented in Appendix 2. The statement of financial position is prepared in accordance with IFRS, and the cash position variation schedule is derived from the IFRS cash flow statement. All figures in this press release are unaudited.

AMSTERDAM--(BUSINESS WIRE)-- Regulatory News:

Gemalto (Euronext NL0000400653 - GTO), the world leader in digital security today announces its results for the first semester 2013.

Key figures of the adjusted income statement

Olivier Piou, Chief Executive Officer, commented: "Gemalto recorded another strong semester of profitable growth, more than offsetting increased investments in operations made in the second part of last year. Over the period, our teams continued to deploy milestone programs and we are on track to meet our objectives for 2013. The announcement next week of our new development plan will provide company's stakeholders with Gemalto's blueprint to leverage the expanding opportunities we have in front of us."

¹ See basis of preparation on page 2, and Appendix 1 of this document for more information on ongoing operations.

Basis of preparation of financial information

In this press release, the information for the first semester of both 2013 and 2012 is presented for "ongoing operations" and under the 2013 format of segment reporting unless otherwise specified

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

The interim condensed consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS).

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 other 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).

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 interim condensed 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, 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 2 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 provides an adjusted income statement for "ongoing operations" for both 2013 and 2012 reporting periods.

The adjusted income statement for ongoing operations excludes, as per the IFRS income statement, the contribution from discontinued operations to the income statement, and also the contribution from assets classified as held for sale and from other items not related to ongoing operations.

For the first semester 2013, reported figures for ongoing operations only differ from figures for all operations by the contribution from assets held for sale, considered non-strategic and currently being disposed.

Appendix 1 bridges the adjusted income statement for ongoing operations to the adjusted income statement for all operations.

Historical exchange rates and constant currency figures

Revenue variations are at constant exchange rates, except where otherwise noted.

All other 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 in particular a translation impact on the reported Euro value of the Company 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 interim condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). To better assess its past and future performance, the Company also prepares an adjusted income statement. Appendix 2 provides the reconciliation between IFRS and adjusted income statements.

Gemalto's IFRS income statement for the first semester 2013 shows an operating profit (EBIT) of €104 million. This profit is up +38% on the first semester of 2012.

Restructuring and acquisition-related expenses amounted to €0.7 million (€2.4 million in the first semester of 2012). The equity-based compensation charge was €13 million (€25 million in the first semester of 2012) and amortization and depreciation of intangibles resulting from acquisitions amounted to €13 million (€10 million in the same period of 2012).

As a result, the IFRS net profit also showed a strong increase, up +38% over the first semester of 2012 to €81 million.

IFRS basic earnings per share and diluted earnings per share showed the same strong year-on-year increase. At €0.96 and €0.94 respectively for the reported period, IFRS basic earnings per share were higher by +36% and IFRS diluted earnings per share were higher by +39% when compared to the corresponding figures of the first semester of 2012.

Adjusted financial information for all operations

In this section, the financial information is presented for all operations.

In comparison to the adjusted income statement for ongoing operations, the adjusted income statement for all operations also includes the contribution from assets held for sale. For the years 2012 and 2013, assets held for sale are minor non-strategic assets currently being disposed.

Revenue for all operations for the first semester was €1,134 million, up by +13% at constant exchange rates and by +11% at historical rates, with all segments increasing their revenue. The pace of growth accelerated over the course of the semester with the second quarter revenue increase settling at +16%, following +9% in the first quarter. The Secure Transactions segment developed particularly well over the semester with revenue growth of +18% and the Security segment once again posted double digit revenue growth. Platforms & Services revenue expanded across the Company by +25%, generating 36% of total Company revenue growth, to reach €208 million for the semester².

Gross profit was up +10%, i.e. up by €40 million, to €427 million, representing essentially stable year-on-year gross margin of 38%. The gross margin increase in Mobile Communication and Machine-to-Machine segments, resulting from a better product mix, and in the Patents segment, benefiting from a partial resumption in licensing activity, offset lower gross margin in the Secure Transactions and Security segments. Both those segments incurred additional operational costs this semester in order to properly address the strong growth in their businesses, and benefited from gross margin improvements only towards the end of the second quarter when operational efficiencies began to kick in.

Operating expenses for all operations, at €297 million, were stable when compared to the previous semester and were up +8% year-on-year. The planned increase, driving profit seasonality, was essentially attributable to additional investments in research and development, up +10%, as well as in sales and marketing, up +11%, excluding the impact of assets held for sale.

As a result, first semester 2013 profit from operations for all operations came in at €130 million or 11.5% of revenue, up +16% on the comparable period of 2012. This expansion was driven by the increase in the contribution from ongoing operations from all segments other than the Security segment.

Gemalto's financial income for all operations was (€3.1) million compared to (€6.0) million for the first semester of 2012 with net interest income at (€0.5) million and foreign exchange transactions and other financial items at (€2.6) million.

Including a share of profit in associate of (€2.0) million, adjusted profit before income tax for all operations came in at €125 million, up +16% on the previous year.

Adjusted income tax expense was (€20) million, with an estimated IFRS annual income tax rate of 18% for the year 2013.

Consequently, the adjusted net profit for all the operations of the Company was €105 million, an +11% increase when compared to last year's figure of €95 million.

Adjusted basic earnings per share for all operations came in at €1.24, and adjusted diluted earnings per share for all operations at €1.21, increasing by +9% and +11% respectively when compared to the first semester 2012 adjusted basic earnings per share for all operations of €1.14 and adjusted diluted earnings per share for all operations of €1.09.

² Revenue growth of +25% compares the first semester 2013 revenue to the first semester 2012 revenue with revenue from Platforms & Services in the Security segment following the same definition as in the other segments, i.e. not only includes personalization services but also server platforms, application software and services. Revenue grew by +48% when compared to the revenue of €140 million reported on the first semester of 2012.

Statement of financial position and cash position variation schedule

In the first semester of 2013, operating activities generated a cash flow of €127 million before changes in working capital, up +17% on the €109 million generated in the first semester of 2012. Changes in working capital reduced cash flow by €83 million compared to €19 million in the same period of 2012. This impact was essentially due to the strong +16% revenue growth observed in the second quarter, to the transient effects of the longer cash collection cycle associated to specific accelerating businesses in Asia and to the differences in quarter-on-quarter seasonality patterns.

Capital expenditure and acquisition of intangibles amounted to €56 million, or 5.0% of revenue, of which €35 million were incurred for Property, Plant and Equipment assets with, in particular, specific investments in personalization centers and other facilities to support innovative products ramp-up and future growth in the financial services and government sectors. Capitalization of development expenses reduced as a percentage of revenue to 1.4% and total expenditure incurred for intangible assets was reduced to €21 million, representing 1.9% of revenue.

Acquisitions reinforcing Gemalto's offering in the Security segment, and divestiture of subsidiaries and businesses, net of cash acquired, used €25 million in cash.

Gemalto's share buy-back program used €15 million in cash in the first semester of 2013, for the purchase of 238,445 shares, net of the liquidity program. As at June 30, 2013, the Company held 2,273,085 shares, or 2.58% of its own shares in treasury. The total number of Gemalto shares issued was unchanged, at 88,015,844 shares. Net of the 2,273,085 shares held in treasury, 85,742,759 shares were outstanding as at June 30, 2013. The average acquisition price of the shares repurchased on the market by the Company as part of its buy-back program and held in treasury as at June 30, 2013 was €47.03.

On May 24, 2013, Gemalto paid a cash dividend of €0.34 per share in respect of the fiscal year 2012, up 10% on the dividend paid in 2012 (€0.31 per share). This distribution used €29 million in cash. Other financing activities generated €5 million in cash, including €16 million of proceeds received by the Company from the exercise of stock options by employees and a €10 million repayment of borrowings.

As a result of these elements, cash and bank overdrafts represented €285 million, as at June 30, 2013 Gemalto's net cash position, including €7 million of borrowings, was €277 million as at June 30, 2013, versus €300 million as at June 30, 2012.

Segment information

In this section, for a better understanding of Gemalto's business evolution, comments and comparisons refer to ongoing operations, i.e. excluding assets held for sale. Revenue variations are expressed at constant currency exchange rates unless otherwise noted.

With all segments growing vigorously, including Mobile Communication, the contribution to revenue of the other segments continued to expand compared to the first semester of the previous year, illustrating the regularly improving balance between Gemalto's businesses. Together, these businesses excluding Mobile Communication accounted for 55% of Gemalto's total revenue (53% in the first semester 2013) and for 46% of Gemalto's total profit from operations (40% in the first semester 2012).

For the first semester 2013, Gemalto's revenue growth from its ongoing operations was +13% at constant rates and +11% at historical rates, with double-digit growth in Secure Transactions and in Security. At constant perimeter and constant exchange rates, organic revenue growth was +11%. In the second quarter, revenue growth was even higher, with +16% at constant rates and +15% at historical rates, on the back of double-digit growth in all segments apart from the Security segment which recorded +5% growth on top of its particularly high revenue level of the second quarter of 2012.

The evolution of foreign currency translation in Euro resulted in an unfavorable 160 basis point impact on the revenue growth recorded in the first semester, coming notably from lower US dollar and Japanese Yen value vs. Euro.

Mobile Communication

In Mobile Communication, revenue increased by +8% over the period, with growth accelerating in the second quarter, to +12%, as deployment of next generation technologies generated strong organic expansion. Growth in both "Embedded software & Products" as well as "Platforms & Services" activities came from the continuing deployment of LTE networks and of a global trust infrastructure to secure services on mobile devices in the Americas, Europe and, to a lesser extent, Asia. Recently acqui