AMSTERDAM--(BUSINESS WIRE)--Aug 30, 2018--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

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.

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

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.

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.

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.

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

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