Gemplus reports third quarter 2002 financial results

• Q3 revenue down 2.0% vs Q2 2002, down 9.1% compared to Q3 2001. After adjusting for currency fluctuations, discontinued operations and acquisitions, Q3 revenue is up 0.9% sequentially, down 0.7% year-on-year.
  
• Gross profit improvement despite permanent pricing pressure.
  
• Restructuring benefits on track: operating loss limited to 6.5 million euros for the third quarter.
  
• Cash position almost unchanged at 401 million euros due to continued focus on working capital management.
  
• Forward visibility remains poor: break even at the operating income level not achievable in Q4 2002.
  

Luxembourg - October 31, 2002 - Gemplus International S.A. (Paris Euronext: Euroclear 5768 and Nasdaq: GEMP), the world's leading provider of smart card-enabled solutions, today reported results for the third quarter ended September 30, 2002.

Financial Statements for the third quarter 2002 (402K)

Commenting on the performance for the third quarter 2002, Alex Mandl, Chief Executive Officer, said: "Gemplus continues to enjoy a strong balance sheet and sees encouraging productivity gains. However, these are not yet at the required level. Although the Company is making progress in the reduction of operating expenses, the improvement in gross margin in the third quarter has been boosted by lower chip prices, which may not continue into the fourth quarter". He added: "Despite the fact that revenue seems to have stabilized, the environment remains uncertain. As a consequence, an earlier forecast of break-even at the operating income level in the fourth quarter will not be achieved. And, given that reality, a preliminary view of 2003 suggests that it will not be possible to meet market expectations". He concluded : "Furthermore, because our current visibility on 2003 is not yet clear, we are not in a position to provide specific guidance at this point".

Third quarter 2002 financial review

• Income statement
  Highlights:
  
• Revenue up 0.9% sequentially after adjusting for currency fluctuations, discontinued operations and acquisitions.
  
• Gross profit improvement despite permanent pricing pressure.
  
• Net income affected by non-recurring items.
  Group revenue was down 2.0% sequentially. However, the analysis of the third quarter revenue adjusted for currency fluctuations, discontinued operations and acquisitions, shows the following:
  
• Revenue was up 0.9% sequentially compared to the previous quarter. For the first time since Q1 2001, the 0.7% year on year decline seems to suggest a certain stabilization in revenue;
  
• Business units delivered a contrasted performance: Telecommunications revenue increased 1.9% sequentially, while Financial Services and Security and posted a decline of 1.3%;
  
• On a geographical basis, there is evidence of progress in the Americas, where revenue is stable sequentially, despite an 8.6% decrease in the average value of the US dollar against the euro. The EMEA region enjoys healthy growth (up 6.0% sequentially). Revenue generated in Asia, however, is sequentially down, affected by intense competition in China.

Gross margin was up 6.3 percentage points sequentially to 29.4%, mainly driven by Telecom. Pricing pressure remained strong, but was more than offset by lower cost of chips, better sales mix (products and geographies), and, to a lesser extent, by increased volumes and improved productivity.
Operating expenses were down 7.7% sequentially reflecting a seasonal pattern and the restructuring program initiated during the first quarter of 2002. Annualized savings from restructuring and cost cutting initiatives are on track to reach the overall target of 110 million euros. At the end of the third quarter, headcount reduction was 854 vs 615 at the end of Q2 02. This has to be put in the perspective of a targeted reduction of 1,140 in the number of employees and sub-contractors.

As a consequence, Gemplus reported an operating loss before provision for restructuring of 6.5 million euros, compared with a loss of 24.2 million euros for the previous quarter.

Net income for the quarter ended September 30, 2002 is affected by a provision for restructuring (8.3 million euros), foreign exchange losses (3 million euros) and goodwill write-down (15.7 million euros).

• Balance sheet and cash flow statement

Highlights:

• Cash marginally down to 401 million euros vs Q2 2002.
  
• Stable working capital requirement.
• Capital expenditure contained.
  

Cash and cash equivalents were marginally down by 11 million euros to 401 million euros at the end of the quarter ended 30 September, 2002. Financial debt is 51 million euros, and corresponds almost entirely to long term capital leases which are related to industrial and office buildings located in Gémenos and to the new R&D center in La Ciotat (France).

The cash outflow of 11 million euros is mainly related to restructuring expenses (7.3 million euros). This was made possible by better operating profitability, continued focus on working capital requirement and limited capital expenditure.

Working capital requirement was stable at the end of the third quarter.
Inventories were up 9.9% compared to the end of the previous quarter. Expressed in number of days of cost of sales, they represented 78 days at the end of the third quarter, compared with 71 days at the end of the previous quarter, and 94 days at the end of the first quarter of 2002.

Trade accounts receivable were up 7.4% compared to the end of the previous quarter. Days of Sales Outstanding (DSO) were 57 days, compared with 53 days at the end of the previous quarter, and 63 days at the end of the first quarter of 2002.

Capital expenditures were 10 million euros for the third quarter of 2002. For fiscal year

Segment analysis

• Telecom
  
  Highlights:

• Strong volume growth in wireless (+5.6% sequentially, +52% year on year), lower sales in other businesses
  
• Improved sales mix in wireless (products and geographies)
  
• Beginning of a progressive transition toward higher value added wireless cards

The market environment shows contrasted situations: while demand is solid in developing countries, it remains lackluster in developed countries, especially in Western Europe.
Telecom is still experiencing strong price pressure. However, the division is seeing an indication of demand progressively shifting towards higher value added products; but it is still unclear if this trend will continue in 2003.
Shipments of SIM cards in Q3 were up 5.6% sequentially. The SIM cards sales mix improved in Q3. In particular, the dynamic end-user menu display equipped SIM cards accounted for 16% of Q3 shipments vs 5% in Q2. Americas accounted for 11% of Q3 shipments vs 7% in Q2. Asia is down sequentially from 57% to 48% of shipments

• Financial Services and Security

  Highlights:

  • Challenging environment: EMV roll out delays, contraction of the US banking / retail card market
    
  • First significant ID contract signed in the beginning of Q4

In the third quarter, activity was driven by microprocessor cards. The environment is increasingly challenging, marked by delays to 2003 in the EMV roll-out in Western Europe and by a severe contraction of the US banking / retail smart card market. In Asia, Gemplus is operating in a highly competitive environment.

The GeldKarte program in Germany, after peaking in Q3, will make a lower contribution in Q4 2002.

In the end of October, Gemplus was awarded its first ID contract with the Sultanate of Oman for the National Identification Programme. This contract reinforces Gemplus' position in this important new growth market, where the Company is able to offer not only smart cards but also software and integration services.

Comments from Mr Alex Mandl, Chief Executive Officer
Following an extensive review of Gemplus which included in depth discussions with staff, customers and industry experts, Alex Mandl will present his strategic direction for the Company within weeks. He declared: "2003 will be a year of rebuilding and refocusing. Beyond that, the attractive market opportunities around the world, the Company's solid financial position, its unique technology expertise and its strong customer base, provide a platform which should deliver, in a reasonable timeframe, a successful, growing and profitable business".

Conference Call:
The company has scheduled a conference call for Thursday, 31 October 2002 starting at 2.30pm Paris time. Callers may participate in the live conference call by dialling:

France: +33 (0) 1 7070 8198
UK: +44 (0) 20 7984 7576

The live conference call will also be available on the IR section of www.gemplus.com.

Replays of the conference call will be available approximately two hours after the conclusion of the live conference call until November 7:+33 (0) 1 7070 8210 or +44 (0) 20 7984 7578. Access Code: 500777

Contacts:

Press

Gemplus:
Martin Crocker
Mob : 33 (0) 6 85 07 66 41
Email: martin.crocker@gemplus.com

Euro RSCG Corporate
Estelle Griffe
Tel: 33 (0) 1 41 34 48 65
Mob: 33 (0) 6 23 75 09 23
Email: estelle.griffe@eurorscg.fr

Investor Relations

Gemplus:
Yves Guillaumot
Tel : 33 (0) 6 88 38 76 24
Email: yves.guillaumot@gemplus.com

Fineo
Anne Guimard
Tel: 33 (0) 1 45 72 20 96
Mob: 33 (0) 6 80 45 71 99
Email: guimard@fineo.com

Some of the statements contained in this release constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance, or achievements expressed or implied by such forward-looking statements. Actual events or results may differ materially. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this release include, but are not limited to: trends in wireless communication and mobile commerce markets; our ability to develop new technology, and the effects of competing technologies developed and expected intense competition generally in our main markets; profitability of our expansion strategy; challenges to or loss of our intellectual property rights; our ability to establish and maintain strategic relationships in our major businesses; our ability to develop and take advantage of new software and services; and the effect of future acquisitions and investments on our share price. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements. The forward-looking statements contained in this release speak only as of this release. We are under no duty to update any of the forward-looking statements after this date to conform such statements to actual results or to reflect the occurrence of anticipated results.

Gemplus is the only completely dedicated, truly global player in the Smart Card industry, with the largest R&D team, unrivalled experience, and an outstanding track record of technological innovation.

In 2001, Gemplus was the worldwide smart card leader in both revenue and total smart card shipments (source: Gartner-Dataquest, Frost and Sullivan). Gemplus was also awarded Frost and Sullivan's 2002 Market Value Award for its exceptional performance.

Gemplus trades its shares on Euronext Paris S.A. First Market and on the Nasdaq Stock Market as GEMP in the form of ADSs. Its revenue in 2001 was 1.023 Billion Euros. It employs 6721 people in 37 countries throughout the world.

Gemplus: Beyond Smart
www.gemplus.com

©2002 Gemplus International S.A. All rights reserved. Gemplus, the Gemplus logo, GemXpresso, and Your Passport to the Digital Age are trademarks and service marks of Gemplus S.A. and are registered in certain countries. All other trademarks and service marks, whether registered or not in specific countries, are the property of their respective owners.