Gemplus reports strong Q2

Second quarter 2005 highlights:

• Operating income more than tripled, to 22.4 million euros.
• Strong revenue growth in all core businesses: up 12.2% year-on-year, even in comparison to robust sales in the quarter a year ago.
• Highest gross margin in 4 years: 33.9%, up 1.6 percentage point year-on-year.
• Large improvement in attributable net income: 21.8 million euros.
• Setec acquisition finalized.

Commenting on the performance for the second quarter 2005, Alex Mandl, President and Chief Executive Officer, said: "This was the ninth consecutive quarter of continuous strong progress for Gemplus, highlighted by a threefold increase in operating income. The top line grew at a double digit rate, even though we had strong sales for the quarter a year ago. This confirms the positive outlook we have for the remainder of the year. We are also very pleased with the strong customer endorsement of our quantum-leap technology, GemXplore Generations. Regarding ID & Security, the doubling of revenues supports our confidence and strong emphasis on this market."

Second quarter 2005 financial review

Net sales rose 11.3% year-on-year, even compared to robust sales in the second quarter 2004, which were up 25% year-on-year, after adjusting for currency fluctuations, acquisitions and disposals. Sales grew in all core businesses.

On a geographical basis, wireless drove a 50.7% year-on-year revenue growth in the Americas, after adjusting for currency fluctuations, acquisitions and disposals. In EMEA, adjusted net sales increased by 5.4%, year-on-year, and were down 15.7% in Asia.

Gross margin was up 1.6 percentage point year-on-year, to 33.9%, the highest in 4 years. This was driven by a favorable business mix and improved manufacturing efficiency.

Operating expenses decreased 5.8% year-on-year to 57.6 million euros, mainly due to the reversal of a 5.2 million euros litigation provision. Excluding this reversal and the consolidation of Setec, operating expenses were stable.

Consequently, operating margin tripled to 9.5%. Excluding the reversal of the litigation provision, operating margin was 7.3%, up 4.1 percentage points.

Attributable net income grew to 21.8 million euros.

Balance sheet and cash flow statement

The Group's cash position remains strong at 373.5 million euros. Compared to March 31, 2005, cash is down 21.6 million euros, reflecting a 58 million euros net outflow related to the acquisition of Setec, partly compensated by the release of 22.5 million euros from an escrow account in relation to the successful outcome of a litigation.


Segment analysis

Telecom

Wireless continues to grow significantly. Adjusted revenue increased 13.0% year-on-year, even compared to strong sales in the second quarter 2004, which were up 45.5% year-on-year.

Wireless shipments grew 44% year-on-year to 85.8 million units, driven by market share gains in North and Latin America, and in emerging markets in EMEA.

Wireless product mix continued to improve: the share of high-end card shipments rose significantly year-on-year, accounting for 48% of the total in the second quarter 2005, compared with 33% in the second quarter 2004 and 44% in the first quarter 2005.

Wireless average selling price (ASP) was down 20.6% year-on-year and 10.9% quarter-on-quarter, both currency adjusted. Product mix improvement did not fully compensate for strong price pressure.

Financial Services

Bank cards continued to grow very strongly, driven by broad activity in EMV deployment across all regions, particularly in the UK and Turkey. This quarter saw the first EMV shipments by Gemplus to the Netherlands, Italy and Japan.

In total, Gemplus shipped 16.8 million units of payment microprocessor cards, up 30% year-on-year. Payment microprocessor card revenue rose 31% year-on-year.

The decline in operating expenses reflects the impact of the reversal of a 5.2 million euros provision related to a litigation.

Identity and Security

Revenue almost doubled, led by shipment of ID cards to the United Arab Emirates and the acquisition of Setec, which is consolidated starting June 1st, 2005.

Even excluding Setec, this quarter is the best quarter ever for this segment, with a 66.5% revenue growth after adjusting for currency fluctuations, acquisitions and disposals. This was mainly driven by substantial high-end card deliveries: UAE and also Royal Oman Police, the US Department of Defense and Boeing.

The increase in operating expenses is mainly due to Setec.

First half 2005 financial review

Sales in the first half 2005 grew 5.3% compared to a year ago. All core businesses saw favorable revenue momentum.

On a geographical basis, wireless drove a 27.4% revenue growth in the Americas, after adjusting for currency fluctuations, acquisitions and disposals. In EMEA, adjusted revenue increased by 4.6% but was down 14.6% in Asia.

Gross margin was up 1.4 percentage points year-on-year, to 33.1%, reflecting a favorable business mix and improved manufacturing efficiency.

Operating expenses decreased 5.8% mainly driven by the reversal of a 5.2 million euros litigation provision.

Consequently, operating margin almost tripled to 7.0% and attributable net income quadrupled, to 29.0 million euros.


Outlook

The Group continues to see strong momentum in its core markets. Notwithstanding the apparent slow start in the first quarter, Gemplus expects to increase revenue, excluding acquisitions, by around 10% in 2005, despite continuous selling price pressure.

The Company continues to focus on cost efficiency and is confident to show very strong improvement on operating income in 2005.

The Group also expects the Financial Services and ID & Security business units to become profitable in 2006.

With excellent second quarter results, the Group proves it is well on track to realize its mid-term objective of a 10% operating margin in 2007.

Business Highlights

Telecom

On the strength of Gemplus' quantum leap technology, GemXplore Generations, which was launched in the first quarter 2005, the Company has been selected as the exclusive development partner by the T-Mobile group for its next generation card platform. This will be the basis for T-Mobile's future card and service deployment for its customers.

The SIM is increasingly valuable when linked to the wider network infrastructure via Over The Air (OTA) platforms. H3G Australia demonstrated this when it recently deployed a Gemplus OTA platform to link into the high end SIMs already at work on their 3G network. The first use of this platform was to update the preferred roaming lists in each subscriber's SIM, following a new national roaming agreement with another Australian operator.

In North America, Gemplus was selected by Cingular to provide SIMs for their 3G migration. Cingular is currently using Gemplus' SIMs for Enhanced Network Selection and advanced data services for its GSM subscribers.

Financial Services

Deployments of EMV made good headway, with several new contracts. In Mexico, Banco Azteca selected Gemplus to deliver biometric smart payment cards, which will store the customer's photographs and biometric data for identification purposes. In Italy, Setefi (Intesa Group) chose Gemplus for the country's first mass EMV deployment, with over one million smart payment cards for debit and credit payment applications to be supplied. During the second quarter, Gemplus started the delivery of a new EMV product for JCB, the largest credit card issuer in Japan.

In addition, MasterCard International granted full certification to Gemplus for its GemInstant PayPassTM solution. This strongly positions Gemplus to take full advantage of the increasing interest from merchants and commercial partners in the MasterCard Paypass scheme in the US and other contactless payment initiatives worldwide.

Identity and Security

In France, Gemplus will participate in the French Government's border control initiative, "Biodev", by supplying its GemBorder contactless smart card technology. The cards use ICAO-compliant contactless chip technology for electronic passports and visas and can be used for contactless authentication.

In the US, Gemplus continues to receive orders from leading systems integrators such as BearingPoint on behalf of Transportation Security Administration and EDS on behalf of several U.S. Federal Government agencies.

Research and Development

At the JavaOne conference in San Francisco, Gemplus announced a new prototype for the future generation of JavaCard products, in a joint presentation with SUN Microsystems, Inc. Designed for use in all market sectors, the card represents Gemplus' vision of a universal node within any network architecture, facilitating the deployment of complex architectures and the dialogue with internet-based services.

Wireless gross margin was stable year-on-year, due to stronger volume, lower chip purchasing prices and improved manufacturing efficiency, compensating for price pressure.

Telecom gross margin improved 1.8 percentage points year-on-year, led by a more favorable business mix.

Operating expenses were almost flat year-on-year. Therefore, operating profit rose 38.5% and the operating margin was up 3.0 percentage points, to 12.9%.

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