Gemalto, the world leader in digital security announces its results for the full year 2011.
Key figures of the adjusted income statement
Year-on-year variations
€in millions Full year 2011 Full year 2010 at historical exchange rates at constant exchange rates
Ongoing operations
Revenue 2000 1862 +7% +9%
Gross profit 747 676 +11%
Operating expenses (509) (468) +10%
Profit from operations 239 207 +15%
Profit margin 11.9% 11.1% +0.8 ppt
Other operations
Revenue 15 44
Profit from operations 17 8
All operations
Total revenue 2015 1906 +6% +8%
Total profit from operations 256 216 +19%
Olivier Piou, Chief Executive Officer, commented: “In 2011, halfway through our strategic plan, we clearly outperformed our objectives. Secure Transactions and Security have become double-digit profit margin businesses, with strong growth and scale effects. Mobile Communication is back to revenue and profit expansion, benefitting from our investments in software and services. Consequently, the combined profit from operations of our four main segments1 grew by 28% in 2011. These results provide a strong base for the second part of our plan. We will continue along our strategy of transformation and expansion in the growing market of digital security, and have confidence in reaching our €300 million profit from operations target in 2013.”
1 The four main segments are the Mobile Communication, Machine-to-Machine, Secure Transactions, and Security business segments. They represented almost all the Company revenue in 2011 and in 2010.
Basis of preparation of financial information
In this press release, the information for the full year 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 (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 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).
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, 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 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 contributions from assets classified as held for sale and from other items not related to Ongoing operations.
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 completed 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 and 2011 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.
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 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 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. The Company provides in Appendix 2 the reconciliation between the IFRS and adjusted income statements.
The IFRS consolidated income statement for the full year 2011 shows an operating result of €183 million for the Company. It was €163 million for the full year 2010.
For the full year 2011, restructuring and acquisition-related expenses amounted to €15 million, versus €9 million for 2010. Equity-based compensation charges were €32 million versus €20 million for 2010, essentially due to the use of different metrics in one of the 2011 plans, compared to the 2010 plan, which led to a significantly shorter amortization period. Amortization and depreciation of intangibles resulting from acquisitions were €25 million versus €23 million for 2010.
Net profit for the full year 2011 was €161 million. It was €167 million for the full year 2010. Higher current tax and the recognition of less deferred tax assets when compared to 2010 created a €18 million increase in income tax charge.
Consequently, basic earnings per share and diluted earnings per share were €1.93 and €1.88 for the reported period. These were respectively €1.97 and €1.94 in the full year of 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 contribution for the first quarter of a joint venture held for sale and the gain recognized further to its deconsolidation after restructuring of its shareholding;
for 2010 and 2011, the contribution from the Point of Sales (POS) operation disposed of in December 2010. This contribution is classified in discontinued operations and its net contribution is reported below the profit from operations.
Extract from the adjusted income statement for all operations
Full year 2011 Full year 2010
€ in millions As a % of revenue € in millions As a % of revenue Year-on-year variation at historical exchange rates
Revenue 2015.4 1905.6 +6%
Gross profit 751.5 37.3% 689.4 36.2% +1.1 ppt
Operating expenses (515.1) (25.6%) (473.7) (24.9%) (0.7 ppt)
JV deconsolidation gain 19.2 –
EBITDA 319.8 15.9% 277.2 14.5% +1.3 ppt
Profit from operations 255.6 12.7% 215.7 11.3% +1.4 ppt
of which Ongoing operations 238.6 11.8% 207.5 10.9% +1.0 ppt
of which other operations 17.1 8.2
Net profit 227.7 11.3% 216.4 11.4% (0.1 ppt)
Earnings per share (€)
Basic 2.73 2.56 +6%
Diluted 2.65 2.52 +5%
Revenue of the Company for all its operations was up by +8% at constant rates, to €2015 million. Expansion was supported by strong growth in the Secure Transactions and Security segments. The Mobile Communication segment revenue was stable with increasing activity in the second part of the year.
Gross profit for the Company was up €62 million or +9% to €752 million. This represents a gross margin of 37.3%, higher by +1.1 percentage point than the previous year. Gross margin increased in all main segments as a result of favorable product mix evolutions, increasing contribution of Software & Services due to larger software sales and delivery optimization, and productivity gains.
Operating expenses increased to €515 million, up +0.7 percentage point to 25.6% of revenue. Lower revenue in Patents led to a higher ratio of operating expenses to revenue in this segment and Machine-to-Machine increased its expenses to prepare for anticipated growth. Other income included €19 million from the one-off gain on remeasurement to fair value of Gemalto’s investment in a Chinese JV following a shareholding restructuring transaction. Full-year 2011 profit from operations came in at €256 million or 12.7% of revenue. The year-on-year variation benefited from the positive developments in Ongoing operations and from the JV deconsolidation gain. For Ongoing operations, profit grew from €207 million to €239 million, up +15%. The Company achieved this strong increase despite a €21 million year-on-year decrease in Patents’ contribution to its profit. The increase was supported by initial deployments of fourth generation networks (LTE) and mobile contactless services (NFC) in Mobile Communication, sustained global migration to EMV and contactless payment in Secure Transactions, continuing growth in Security, materialization of synergies from acquired companies and by profitability improvements in Software and Services activities as usage has picked up and efficiency from replication has kicked-in.
Financial income was a charge of €(13) million for the year. Foreign exchange transactions and hedging instruments reevaluation at year-end accounted for a charge of €(7) million. The remaining charges were mainly linked to the reassessment at fair value of several financial liabilities. Share of profit of associates increased by €4 million, to €6 million.
Consequently, adjusted profit before income tax was €249 million. It was €218 million in 2010.
Income tax expense was €(20) million, down from an income of €0.6 million in 2010, due to higher current tax and the recognition of less deferred tax assets when compared to 2010.
In 2011, the Company also recorded a €(1.5) million charge from discontinued operations in relation to the disposal of the Point-of-Sale activity at the end of 2010.
As a result, adjusted net profit for all operations of the Company was €228 million in 2011, a +5% increase when compared to €216 million in 2010, and adjusted net profit margin increased to 11.3%.
Basic adjusted earnings per share came in at €2.73 and fully diluted adjusted earnings per share at €2.65, increasing respectively by 6% and 5%.
Balance sheet and cash position variation schedule
For the full year 2011, operating activities generated a cash flow before restructuring actions of €219 million versus €183 million in 2010. Cash used in restructuring actions was €8 million. Cash used in working capital on December 31, 2011 was up by €2 million when compared to the closing of 2010. Capital expenditure and acquisition of intangibles amounted to €93 million versus €73 million in 2010, of which €53 million was incurred for Property, Plant and Equipment versus €44 million in 2010 mainly due to renewal of personalization equipment in acquired subsidiary. Capital expenditures also included capitalized R&D for an amount of €34 million in 2011 versus €25 million in 2010 mainly due to the full year consolidation period of Cinterion versus a five-month period in 2010. Net impact from investing activities related to acquisitions and divestitures was non-material.
Gemalto’s share buy-back program used €61 million in cash for the purchase of 1,808,943 shares over the full year 2011. As at December 31, 2011, the Company owned 4,996,308 shares, i.e. 5.68% of its own shares, in treasury. The total number of Gemalto shares issued remained unchanged, at 88,015,844 shares. Net of the 4,996,308 shares held in treasury, 83,019,536 shares were outstanding as at December 31, 2011. The average acquisition price of the shares repurchased on the market and held in treasury as at December 31, 2011 was €31.33.
As at March 2, 2012, the Company owned 5,047,097 shares, i.e. 5.73% of its own shares, in treasury. Net of these shares held in treasury, 82,968,747 shares were outstanding on that date.
On May 31, 2011, Gemalto paid a cash dividend of €0.28 per share in respect of the fiscal year 2010. This distribution used €23 million in cash. Other financing activities generated €28 million in cash, including €34 million of proceeds received by the Company from the exercise of stock options by employees.
As a result of these elements, the deconsolidation of assets held for sale and variations in current and non-current borrowings, Gemalto’s net cash position as at December 31, 2011 was €309 million, an increase of €54 million when compared with December 31, 2010.
