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Gemalto Reports Fall In First-Half Profits
France-based Gemalto, the largest supplier of smart cards worldwide, today reported profits fell for the first half of 2007, which the vendor blamed on losses in its banking card unit and lower sales of subscriber identity module cards for mobile phones.
Net profit dropped by 15.2% to 24.5 million euros (US$31.9 million) and operating profit margin came in at only 2%, about half the operating margin for the first half of 2006. Gemalto earlier reported sales of just under 760 million euros for the first half of 2007, down 10.2% at actual exchange rates.
But the fall in profitability was less than expected by financial analysts. And Gemalto showed growing operating income and profit margins in its flagship SIM card business, which has been hit hard by plunging prices in recent years. Executives said the company would recover sufficiently in the second half of the year to at least match last year’s full-year sales of just under 1.7 billion euros and 2006 operating income of 60 million euros.
All this buoyed investor sentiment. They sent the vendor’s shares up by more than 8% on trading today in Paris. “This first half has shown that we are on a good track to meet our objectives for the mid-term in a number of ways,” CEO Olivier Piou told financial analysts today. Among other things, he reaffirmed that the company would hit its goal of achieving more than a 10% operating margin for 2009. Based on Piou’s projections for the second half of 2007, Gemalto’s operating margin would come it at around 3.5% for the year, the same as in 2006. Operating margin is a key measure of a company’s financial health.
Among the hopeful signs for investors was higher profitability in Gemalto’s Mobile Communication unit, which accounts for more than half of the company’s sales. The vendor said its strategy to hold the line on SIM prices and pass up bid requests by mobile network operators for cards with little profit potential is paying off. Gemalto’s average SIM prices fell by 15% for the first half of 2007, compared with 34% during the same period in 2006, when a price war broke out among vendors. Moreover, the vendor has been cutting costs, in part with plant closings, which affect its SIM unit more than other segments, and is saving on chip prices.
But the tougher “pricing discipline” Gemalto said it put in place a year ago resulted in only a 4% growth in SIM card volumes for the first half of 2007 to 445 million units. This combined with the 15% price drop resulted in sales falling by more than 14% for the period to 417.8 million euros at actual exchange rates. But the higher operating income and profit margins in the unit led Piou to declare the vendor had made a “successful” turnaround of its mobile telecom business. Besides SIM cards, this unit takes in sales of SIM-related software and services.
On the other hand, Gemalto said its banking card unit, Secure Transactions, lost 9.5 million euros during the first half, compared with a 3.9-million-euro loss for the same period in 2006. The vendor blamed the deficit on falling prices for chip-based banking smart cards and shipments of more low-end cards.
Prices for the second quarter alone fell by about 10% for banking smart cards. All told, Gemalto shipped 110 million smart cards from the unit, 13% more than during the first half of 2006. It attributed the higher shipments mainly to more orders by Western European banks for credit and debit cards that comply with the international EMV standard. Gemalto said it also sold more contactless payment cards to financial institutions in Asia. And it shipped more pay-TV cards.
But because of the price decreases, sales in the Secure Transactions unit climbed by only about 1% at actual exchange rates to 192.8 million euros for the half. Piou pledged the banking unit would be profitable next year, but stopped short of saying the vendor would apply the same kind of pricing policies to banking cards as it did for SIM cards.
Gemalto’s Identity and Security unit also showed a loss, of 11.5 million euros, for the first half. Sales fell, too–down 8% to 98.1 million euros. The unit shipped 15 million ID cards and e-passports or e-passport modules. The vendor attributed the falling revenue and operating loss mainly to lower revenue from patents compared with the first half of 2006. Sales of national ID cards, health cards and e-passports were stable, the vendor reported.
–By Dan Balaban (2007-09-13)