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Gemalto First Semester 2018 Results

  • Revenue at €1,387 million and profit from operations at €92 million in line with our expectations
  • 2018 full year outlook confirmed
  • Identity, IoT & Cybersecurity: double-digit revenue growth and strong investment to capture market opportunities
  • Smartcards & Issuance: operational performance and transition plan on track

Regulatory News:

Gemalto (Euronext NL0000400653 – GTO), the world leader in digital security today announces its results for the first semester 2018.

                                             Key figures of the adjusted income statement

            Year-on-year variations
(€ in millions)   First semester 2018   First semester 2017  

at historical
exchange rates

 

at constant
exchange rates

Revenue   1,387   1,393   =   +6%
Gross profit   497   502   (1%)    
Operating expenses   (406)   (409)   (1%)    
Profit from operations   92   93   (1%)    
Profit margin   6.6%   6.7%   (0.1 pp)    
                 

Philippe Vallée, Chief Executive Officer, commented: “Gemalto first semester results reflect the teams’ strong focus on implementing the Company’s strategic priorities.

The Company’s revenue grew organically +2%, driven by its three growing businesses in the Identity, IoT & Cybersecurity segment and as the US EMV market demand normalizes. The IoT business continued to leverage strong demand for Gemalto solutions in industrial sectors. We see good momentum in Cybersecurity, emphasizing the growing role of Gemalto’s technology in securing cloud services. In addition, the Governments business won its largest ever passport contract in the UK with Her Majesty’s Passport Office, highlighting Gemalto’s strong offering in helping governments better protect their citizens. In Smartcards & Issuance, we continue to drive the segment’s digital transformation as strong pricing discipline in removable SIM and payment cards led to a stabilizing of profit margin. We also delivered on significant milestones of our transition plan and will see their benefits in the coming quarters.

With similar trends expected in our markets in the second part of the year, our strategic priorities remain unchanged. We will continue to focus on growth opportunities in the Identity, IoT & Cybersecurity segment, leading the digital transformation and rightsizing our operations in the Smartcards & Issuance segment toward achieving our 2018 outlook.”

Basis of preparation of financial information

Segment information

The Identity, IoT & Cybersecurity segment comprises businesses associated with homeland security for governments (“Governments”), IoT connectivity for industrial applications (“IoT”) and cybersecurity for enterprises (“Cybersecurity”).

The Smartcards & Issuance segment comprises businesses mainly associated with removable SIM cards (“SIM”), payment cards (“Payment”) and their issuance services. The segment includes as well businesses associated to the digital transformation of smart cards (“Digital”) such as digital payment, digital banking, remote subscription management, embedded SIM/MIM and embedded secure elements. Patents business is also included in this segment.

Historical exchange rates and constant currency figures

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. Revenue variations are at constant exchange rates and include the impact of currencies variation hedging program, except where otherwise noted. All other figures in this press release are at historical exchange rates, except where otherwise noted.

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

The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) and with section 2:362(9) of the Netherlands Civil Code.

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 make operating decisions over the period 2010 to 2018 is the profit from operations (PFO).

PFO is a non-GAAP measure defined as IFRS operating profit adjusted for (i) the amortization and impairment of intangibles resulting from acquisitions, (ii) restructuring and acquisition-related expenses, (iii) all equity-based compensation charges and associated costs; and (iv) fair value adjustments upon business acquisitions. These items are further explained as follows:

  • Amortization, and impairment of intangibles resulting from acquisitions are defined as the amortization, and impairment expenses related to intangibles assets and goodwill recognized as part of the allocation of the excess purchase consideration over the share of net assets acquired.
  • 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 an acquisition process).
  • Equity-based compensation charges are defined as (i) the discount granted to employees acquiring Gemalto shares under Gemalto Employee Stock Purchase plans; (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.
  • Fair value adjustments over net assets acquired are defined as the reversal, in the income statement, of the fair value adjustments recognized as a result of a business combination, as prescribed by IFRS3R. Those adjustments are mainly associated with (i) the amortization expense related to the step-up of the acquired work-in-progress and finished goods assumed at their realizable value and (ii) the amortization of the cancelled commercial margin related to deferred revenue balance acquired.

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 expenses, Sales and Marketing expenses, General and Administrative expenses, and Other income (expense) net.

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

Net debt and net cash

Net debt is a non IFRS measure defined as total borrowings net of cash and cash equivalents. Net cash is a non IFRS measure defined as cash and cash equivalents net of total borrowings.

All figures presented in this press release are unaudited.

Adjusted financial information

The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. To better assess its past and future performance, the Company also prepares an adjusted income statement and uses it for daily management purposes.

    First semester 2018   First semester 2017        
Extract of the
adjusted income statement
 

€ in
millions

 

As a % of
revenue

  € in millions  

As a % of
revenue

  Year-on-year variations
         

at historical
exchange rates

 

at constant
exchange rates

Revenue   1,386.7       1,392.8       =   +6%
Gross profit   497.4   35.9%   501.9   36.0%   (0.1 pp)    
Operating expenses   (405.6)   (29.3%)   (409.1)   (29.4%)   +0.1 pp    
EBITDA   164.6   11.9%   163.3   11.7%   +0.2 pp    
Profit from operations   91.8   6.6%   92.8   6.7%   (0.1 pp)    
Financial income   (16.8)       (11.4)            
Share of profit/(loss) from associates   (0.8)       1.8            
Non-recurring profit relating to associates           10.1            
Income taxes   (7.7)       (54.3)            
Net profit (excl. non-controlling interests)   66.8   4.8%   39.4   2.8%   +2.0 pp    
Basic Earnings per share (€)   0.74       0.44       +68%    
Diluted Earnings per share (€)   0.73       0.44       +66%    
                         

Gemalto posted revenue of €1,387 million for the first semester, increasing by +6% at constant exchange rates, flat at historical exchange rates on the same period of last year. Excluding the contribution from the Identity Management Business, Gemalto’s revenue grew organically +2% at constant exchange rates.

Gross profit came in at €497 million and gross profit margin was at 35.9%, at the same level when compared with the first semester of last year. This evolution essentially reflected the Smartcards & Issuance segment revenue decrease with margin erosion not being fully offset by the revenue growth in the Identity, IoT & Cybersecurity segment.

Operating expenses were down (€4) million, at (€406) million through tighter control of expenses in the Smartcards & issuance segment while the Company continued to invest in the Identity, IoT & Cybersecurity segment in line with its strategic priorities.

As a result, profit from operations was €92 million.

Gemalto’s financial income was (€17) million compared to (€11) million in the first semester of 2017. The financial loss variation from last year is mainly due to the interest expenses on the debt drawn in May 2017 to finance the Identity Management Business acquisition.

Share of loss in associates was (€1) million for the first semester 2018.

Adjusted profit before income tax came in at €74 million.

Adjusted income tax expense was (€8) million in the first semester of 2018. The adjusted income tax rate was 10%, in line with the same period of last year excluding the non-cash deferred tax asset reduction.

Overall, the adjusted net profit of the Company was €67 million. Consequently, adjusted basic earnings per share and adjusted diluted earnings per share came in respectively at €0.74 and €0.73.

Reconciliation from Adjusted financial information to IFRS

                         

Six-month period
ended June 30 2018
(€ in thousands)

 

Adjusted
financial
information

 

Amortization
and
impairment of
intangibles
resulting from
acquisitions

 

Restructuring
and
acquisition-
related
expenses

 

Equity-based
compensation
charge and
associated costs

 

Fair value
adjustment
upon business
acquisitions

 

IFRS
financial
information

                         
Revenue   1,386,732           1,386,732
Cost of sales   (889,325)   (42,119)   (1,362)   (4,481)     (937,287)
Gross profit   497,407   (42,119)   (1,362)   (4,481)     449,445
Operating expenses   (405,644)       (10,130)   (12,206)       (427,980)
Profit from operations   91,763                    
Operating profit       (42,119)   (11,492)   (16,687)     21,465
                         

Amortization and impairment of intangibles resulting from acquisitions decreased by €426 million to (€42) million. Most of the improvement resulted from a favorable basis of comparison, as Gemalto had booked a (€425) million one-off non-cash impairment in the first semester of 2017 due to the deteriorated prospects of the removable SIM market. The €42 million charge was essentially related to the Identity Management Business and Safenet acquisitions.

Restructuring and acquisition-related expenses decreased by €25 million to (€11) million as the main actions of the transition plan were accrued in 2017. The (€11) million expenses include the costs related to the Thales project.

As a result, Gemalto recorded an operating profit of €21 million for the first semester of 2018 compared to an operating loss of (€433) million a year ago.

The income tax charge came in at (€1) million compared to (€41) million the previous year which mainly resulted from a non-cash deferred tax asset reduction following Gemalto’s 2017 revised profit from operations outlook.

Net profit excluding non-controlling interests came in at €3 million for the first semester of 2018 versus a net loss of (€473) million last year. The basic earnings per share and diluted earnings per share for the first semester 2018 are €0.04 and €0.03 respectively.

Statement of financial position and cash position variation schedule

In the first semester of 2018, operating activities generated a cash flow of €126 million before changes in working capital, a similar level to that of last year.

Changes in working capital reduced cash flow by (€14) million compared to (€1) million in 2017 as inventories level increased notably in the Governments business as a result of its fast growing backlog.

Cash used in restructuring actions and acquisition related expenses came in at (€27) million and include costs in relation with the Thales project.

Net cash generated by operating activities came in at €99 million.

Capital expenditure and acquisition of intangibles represented a net cash outflow of (€67) million. Purchase of Property, Plant, and Equipment was reduced by €7 million to (€18) million and acquisition & capitalization of intangibles came in at (€48) million.

As a result, in the first semester of 2018, the Company generated free cash flow of €32 million compared to €50 million for the same period of 2017. Combined with the cash used in other investing activities, total cash generated by operating and investing activities amounted to €28 million.

Financing activities consumed (€83) million of cash mainly through a reduction in debt.

Cash in hand, net of bank overdrafts amounted to €248 million as at June 30, 2018.

Considering the €881 million total amount of borrowings as at June 30, 2018, Gemalto’s net debt position decreased to €633 million compared to a net debt position of €684 million as at December 31, 2017. The €51 million reduction in net debt is due the combination of the Company’s free cash flow generation over the last six months and the positive contribution of derivative financial instruments.

Segment information

Outlined below is the segment information for the second quarter and the first semester 2018. Revenue variations are expressed at constant currency exchange rates unless otherwise noted.

Gemalto posted revenue of €1,387 million for the first semester, increasing by +6% at constant exchange rates, flat at historical exchange rates on the same period of last year. Excluding the contribution from the Identity Management Business, Gemalto’s revenue grew organically +2% at constant exchange rates. The Company’s top line growth was supported by a strong revenue increase in the Identity, IoT & Cybersecurity segment and the US EMV market demand normalization.

Second quarter 2018
(€ in millions)

  Total   Identity, IoT & Cybersecurity  

Smartcards & issuance

Revenue   737   351   386
At constant rates   5%   +16%   (4%)
At historical rates   (1%)   +11%   (9%)
             

During the second quarter, revenue was €737 million, up +5% at constant exchange rates.

The Identity, IoT & Cybersecurity segment’s revenue came in at €351 million, increasing +16% at constant exchange rates compared to the previous year.

The Smartcards & Issuance segment posted revenue of €386 million, (4%) lower at constant exchange rates.

First semester 2018
(€ in millions)

  Total   Identity, IoT & Cybersecurity  

Smartcards & issuance

Revenue   1,387   644   743
At constant rates   +6%   +20%   (3%)
At historical rates   =   +12%   (9%)
             

In the first semester, revenue grew +6% year-on-year at constant exchange rate. This evolution resulted from strong revenue growth in Enterprise, IoT and Governments including the acquired Identity Management Business coupled to a slowing down in the rate of revenue decrease in the removable SIM businesses and stabilizing Payment business.

The Identity, IoT & Cybersecurity segment’s revenue came in at €644 million, increasing +20% compared to the previous year. The backlog in this segment continued to increase driven by solid wins, notably in the Governments business.

The Smartcards & Issuance segment posted revenue of €743 million, (3%) lower at constant exchange rates.

Profit from operations
(€ in millions)

  Total   Identity, IoT &Cybersecurity   Smartcards & issuance
First semester   92   49   43
As a percentage of the total profit from operations   100%   54%   46%
             

First semester profit from operations came in at €92 million at around the same level as last year, as the favorable business mix evolution towards Identity, IoT & Cybersecurity was offset by weaker performance in the Smartcards & Issuance segment’s digital business.

The contribution of the Identity, IoT & Cybersecurity segment to the Company’s total profit from operations was 54% for this semester compared to 44% at the same period of last year.

Identity, IoT & Cybersecurity

    First semester 2018   First semester 2017   Year-on-year variations
    € in millions  

As a % of
revenue

  € in millions  

As a % of
revenue

 

at historical
exchange rates

 

at constant
exchange rates

Revenue   643.6       572.4       +12%   +20%
Gross profit   265.2   41.2%   237.9   41.6%   (0.4 pp)    
Operating expenses   (215.9)   (33.5%)   (197.1)   (34.4%)   +1.1 pp    
Profit from operations   49.3   7.6%   40.7   7.1%   +0.5 pp    
                         

Identity, IoT and Cybersecurity revenue came in at €644 million, up +20% at constant exchange rates compared to 2017.

In the first semester, the Governments business posted very strong revenue growth compared with the same period of last year. The positive evolution was due to the contribution of the Identity Management Business and substantial secure document deliveries in Europe, Asia, and Africa offsetting a weaker performance in the Middle East. In the second quarter, Gemalto initiated first deliveries of its commercial biometric solutions to a large banking customer. Gemalto also won its largest ever passport contract with the United Kingdom Home Office. The contract spans 11.5 years, including 10 years of production and issuance services. In addition, Gemalto’s Live Face Identification System (LFIS) solution excelled at the 2018 biometrics rally, sponsored by the US Department of Homeland Security’s (DHS). These results highlight Gemalto’s innovation capabilities and unmatched offering, aimed at helping government better protect their citizens.

The Cybersecurity business delivered a strong performance this semester. It was driven by a growing number of encryption and key management software deployments in Europe in light of the new regulatory environment deadline and more broadly as data privacy and data security continue to be a key focus for global organizations. The software monetization sub-business also posted a solid performance supported by large projects in Europe and Asia. The authentication sub-business revenue decreased slightly this semester as the ongoing shift in its product mix from hardware to software continued to progress.

The IoT business posted an outstanding revenue performance in the first semester. The increase was driven by strong deliveries in Europe and Asia to large customers in a variety of key industrial sectors that extend Gemalto’s traditional strong foothold in the automotive market. New design wins recorded this semester reflect Gemalto’s strong position and continuous investment in its portfolio which enable the Company to further leverage the sustained market demand.

Overall, the Identity, IoT & Cybersecurity segment’s gross profit was up +11% at €265 million, gross margin came in at 41.2%, driven notably by a full semester’s positive contribution of the Identity Management Business.

The operating expenses for the segment increased by €19 million, up +10% compared with the same period of last year. This increase was mainly due to the full semester integration of the Identity Management Business’ operating expenses, continuous R&D investments in the Governments and IoT businesses as well as to the development of the Cybersecurity business’ sales channel.

As a result, profit from operations in the Identity, IoT & Cybersecurity segment came in at €49 million and profit from operations margin settled at 7.6% for the first semester of 2018.

Smartcards & Issuance

    First semester 2018   First semester 2017   Year-on-year variations
    € in millions  

As a % of
revenue

  € in millions  

As a % of
revenue

 

at historical
exchange rates

 

at constant
exchange rates

Revenue   743.1       820,4       (9%)   (3%)
Gross profit   232.2   31.2%   264.1   32.2%   (1 pp)    
Operating expenses   (189.8)   (25.5%)   (212.0)   (25.8%)   +0.3 pp    
Profit from operations   42.5   5.7%   52.1   6.3%   (0.6 pp)    
                         

Smartcards & Issuance first semester revenue came in at €743 million, (3%) lower year-on-year at constant exchange rates.

As expected, the Payment business stabilized this semester. This performance was driven by the return of the US EMV market’s demand to a normal pattern combined with strong shipments sales in the CIS, Middle East and Latin America regions. These increases offset performance in Europe, marked by lesser renewal programs, and lower sales in Asia. Removable SIM revenue continued to decrease this semester as a result of the first impact of the exit of a specific low-end SIM market and more broadly as low profit-margin opportunities were dismissed. As SIM market trends look unchanged, Gemalto continues to adjust its operational cost and selective business opportunities’ approach to achieve stable profit margin for this segment.

The Digital business revenue was down year-on-year essentially due to lower performance in Digital Banking and Digital Payment services and the first impact of the discontinuation of a payment sub-business as part of the transition plan. Connectivity solutions infrastructure deployments increased in key sectors of the IoT market while the need for On Demand Connectivity (ODC) services gradually spreads to all regions and mobile network operators. In the payment market, Gemalto announced the enabling of Hong Kong’s Octopus card through Samsung Pay via its Trusted Service Hub (TSH), another landmark program that follows the recent successes in Japan and Spain, and that confirms the competitiveness of Gemalto’s digital offer in this transforming market.

The Smartcards & Issuance segment’s gross profit was down (12%) at €232 million and gross margin came in at 31%, down (1) percentage point compared to the same period of last year.

Operating expenses decreased by (€22) million down to (€190) million in the first semester 2018, reflecting initial benefits of the transition plan.

As a result, the Smartcards & Issuance segment’s profit from operations for the first semester of 2018 was €42 million and its profit from operations margin settled at 5.7%.

Thales combination

In December 2017 Thales and Gemalto reached an agreement on a recommended all-cash offer for all issued and outstanding ordinary shares of Gemalto. This offer was launched on March 27, 2018. Gemalto is working together with Thales towards achieving the regulatory and antitrust approvals required to complete the transaction. Thales expects the transaction to close by year end 2018, after it has secured all customary regulatory approvals and clearances. More information on the Thales offer and the integration, including the offer document and related press releases, can be found on Gemalto’s website at Public Offer by Thales.

2018 full year outlook confirmed

  • Double digit revenue growth expected in the Identity, IoT & Cybersecurity segment
  • Stable PFO margin expected in the Smartcards & Issuance segment
  • Mid to High single digit growth in profit from operations expected at Gemalto level



This post first appeared on Hackers Enigma, please read the originial post: here

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Gemalto First Semester 2018 Results

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