Gemplus reports first quarter 2003 results

• Revenue reflecting currency fluctuations and seasonality.
• Signs of recovery in the Telecom business unit.
• Further evidence of a shift to higher end wireless products.
• Operating loss contained by significant productivity gains and further cut in operating expenses.
• Further reduction in breakeven point.
• Positive free cash flow before restructuring of 11.5 million euros.
• Progress backed by strong balance sheet: cash stable at 416.5 million euros.
  

Luxembourg - April 30, 2003 - 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 first quarter ended March 31, 2003.

First quarter 2003 financial review

• Income statement

Highlights:

• Sequential revenue decline due to currency fluctuations, seasonality in the wireless segment and soft demand in Financial Services and Security.
• Significant productivity gains help mitigate impact of lower revenue base on gross profit.
• Operating loss contained by further reduction in operating expenses.
• Net loss substantially reduced due to lower non-recurring items.

The analysis of the Company's first quarter revenue shows the following: 

• As expected by Gemplus and indicated during the fourth quarter 2002 earnings release conference call, sales were dragged down by currency fluctuations and the seasonality historically observed at the beginning of each year.
• Business Units continued to deliver contrasted performances: while Telecom shows signs of a recovery as highlighted by the 4.8% year on year revenue growth in the wireless segment, Financial Security and Services attests the slow start of both EMV migration and Government ID & Corporate Security business segments.
• On a geographical basis, the best underlying performance was achieved in Asia driven by the wireless segment. However, this is not reflected in the top line, given the 13% year on year decline in revenue attributable to the sharp depreciation of local currencies (the Chinese renmibi was down 18.2% against the euro during this period). The EMEA region was down 6% year on year reflecting lackluster demand in Financial Security and Services markets while in the Americas more than two thirds of the 28% decline in year on year revenue was caused by adverse currency fluctuations (US$ down 18.5% against the euro).

Group gross margin decreased by 3.6 percentage points compared with the fourth quarter of last year, primarily due to lower revenue base and disadvantageous regional mix. However, this has been partly offset by savings attributable to the Company's continued cost structure optimization plan. In particular, manufacturing productivity improved substantially, following the implementation of the restructuring plan announced in February 2002. Gross margin increased by 3.9 percentage points compared with the first quarter of last year.

 Operating expenses decreased 8.7% quarter on quarter to 65.0 million euros due to restructuring actions and lower non-recurring items. The restructuring plan and cost cutting measures helped reduce the operating expense run rate from 67 million euros per quarter in the fourth quarter 2002 to 63.5 millions euros in the first quarter 2003, contributing to further lowering the break even point. 

At the end of the first quarter 2003, the restructuring plan announced in February 2002 was nearly completed with headcount reduction of 1,156 vs. 1,010 at the end of the fourth quarter. In addition, 201 employees left the Company during the first quarter in relation with the restructuring plan announced in December 2002.

As a result of currency fluctuations and seasonality, the operating loss before restructuring for the first quarter increased by 10.7 million euros compared with the fourth quarter of last year. However, it was some 42.3% below its level in the first quarter 2002.

Net loss for the first quarter was substantially reduced compared with the fourth quarter of last year due to lower non-recurring items. Savings mainly drove the year on year improvement and are attributable to the Company's continued cost structure optimization plan.

Highlights:

• Positive free cash flow before restructuring of 11.5 million euros.
• Cash stable at 416.5 million euros.

Free cash flow before restructuring generated 11.5 million euros during the first quarter. Gross cash outflow before restructuring was 15.3 million euros reflecting the operating loss. Capital expenditures were contained at 2.7 million euros. However, these cash outflows were fully compensated by a 30.7 million euros reduction of working capital requirement.

Net cash flow was nearly neutral (-0.8 million euros) during the first quarter as free cash flow before restructuring financed most of all restructuring expenses (16.2 million euros).

During the first quarter, the Company maintained a strong balance sheet. Cash and cash equivalents were stable at 416.5 million euros at the end of the first quarter.

Working capital requirement was cut by 13.8% to 82.0 million euros. Days of Sales Outstanding (DSO) were 58 days, in line with the target of 60 days.

Segment analysis

Highlights:

• Shift toward higher value-added wireless cards is materializing.
• Improving product mix offset by adverse regional mix reflecting wireless seasonality.
• Wireless revenue up 4.8% year on year after adjusting for currency fluctuations.
• Weaker software and services revenue but encouraging backlog

The review of the Telecom business unit first quarter revenue shows the following:

• Wireless shipments were up 38.7% year on year, but down 3.6% quarter on quarter. The analysis of the regional mix shows that Asia benefited from the traditionally favorable impact of the Chinese New Year and posted a 19.3% increase in shipments compared to the fourth quarter.
• Telecom revenue was nearly stable year on year, despite persistent pricing pressure. More importantly, after adjusting for currency fluctuations, wireless revenue was up 4.8% year on year. At constant currency, wireless revenue was down 15.8% compared to the fourth quarter 2002, driven by pricing pressure and adverse regional mix, the latter reflecting seasonality.
• The pricing environment continued to be challenging but appeared not to have worsened compared with the previous quarter. As had been expected, the sequential decline in average selling prices (ASP) reflected not only this pricing pressure, but more specifically the unfavorable seasonal variations generated by larger shipments to Asia at much lower prices.
• The weighting of high-end cards (32 Kb cards and above) as a percentage of total shipments increased by 3.5 percentage points in the first quarter 2003 compared with the previous quarter and 15 percentage points compared with the first quarter 2002. Looking at the product mix by region gives more insight to the underlying trend. In EMEA, the weighting of these high-end cards increased by 6 percentage points in the first quarter 2003 compared with the previous quarter. In Asia, their weighting rose by 13 percentage points over the same period.
• Software & Services had a weaker first quarter compared with a very strong fourth quarter 2002. However, Gemplus closed a number of deals that should generate revenue in the coming quarters. At the GSM Congress held in Cannes, in February 2003, mobile operator Hutchison announced that it selected Gemplus Over The Air (OTA) platform for its third generation wireless network in the UK. This contract started during the first quarter and revenues will be realized in the coming quarters.

Business Highlights:
Our high-end offering is clearly making an impact on the market. As an important partner of NTT DoCoMo, Gemplus products and services are getting strong customer acceptance. We are leveraging our early experience of rolling out 3G networks towards the European market place. To date, we are a key supplier of Over The Air platforms to H3G. Together with the global supply of USIM cards, this has enabled us to offer mobile operator "3" a complete 3G solution. Further OTA solutions are being rolled out across the Group and this augurs well for further momentum in 3G business. 

Elsewhere in 3G, Gemplus was selected as one of the first two suppliers to deliver USIM cards to the Vodafone Group, which will enable them to roll out a global platform for 3G. 

Beyond the realm of 3G, we have made significant headway with our key customers. Following a tender submitted in 2002, the T-Mobile group selected us as a key supplier for their SIM requirements. In addition, we managed to increase our market share with several key operators.

New Products & Services:
Gemplus continues to demonstrate a commitment to innovation. 

During the course of 2003, Gemplus will launch various new products and solutions designed to support operators in providing quality services to their subscribers and generate revenue. Launched in Q1, GemConnect MySIMcopier, is already available in "3"'s flagships stores across the UK. This is an innovative piece of kit that enables subscribers to copy across their phonebook and SMS data from one SIM to another, thus removing a significant barrier to SIM migration. This can also be offered as part of an outsourced solution from Gemplus, mailed directly to the end-user. 

Beyond the SIM, new solutions have been developed to help operators maximize their potential; GemConnect Device Manager automatically configures advanced data handset and service parameters via SMS for 2.5G and 3G devices, easing service access and reducing the burden on Operators' customer service departments.

 Lastly, Gemplus launched the world's first contactless combi card designed for mobile payment. GemCombiXplore works in mobile handsets with an embedded RFID antenna and drives combined applications, meaning that users can top-up their e-purse, purchase tickets over-the-air and pay tolls using their cell phone and a contactless interface. Korean CDMA operator KT Freetel is first to adopt GemCombiXplore for e-purse, debit/credit, loyalty and contactless mobile payment applications.

Financial Services and Security

Highlights:

• Revenue shows evidence of soft markets in the banking segment due to renewal cycle of GeldKarte.
• Significant progress in the UK EMV market.
• Increasing interest in Government ID & Corporate Security demonstrated by contract awarded by the United Arab Emirates.

Revenue of the banking segment was impacted by slow start of EMV migration in Southern Europe and the renewal cycle of GeldKarte. However, in the EMV market, Gemplus achieved significant progress in the UK which is expected to be the hottest regional market in 2003. Excluding GeldKarte, shipments of micro cards in the banking segment increased 33% and revenue grew by 8% year on year despite adverse currency fluctuations.

Business Highlights: 
In the banking sector, Gemplus was able to secure two key wins for delivery in 2003 and beyond. These contracts, with major UK banks, represent a total of 15 million EMV smart cards.

In the ID sector, the government of the United Arab Emirates has announced a comprehensive smart card based ID security solution. Gemplus will partner with Sagem to in a significant contract to deliver over two million smart cards

The UAE nationwide ID program marks the second successive contract win in the Middle East for the Gemplus-Sagem partnership, the first of which was in the Sultanate of Oman, scheduled to roll-out end of 2003.

Outlook 
Our main markets remain challenging, but the drivers of revenue are clear. In the global wireless market, while the pricing pressure is set to remain, volume should grow by 10%. Gemplus should benefit from its improving product mix. In the banking segment, EMV migration will not be rapid, but should gain momentum as we approach full European roll out in 2004. 

For the rest of this year, the theme for Gemplus will be continuous progress: 

• lower break even point; 
• strengthened regional capabilities and customer focus; 
• launch of new software and services; 
• improving execution skills.

All these advances are consistent with the plan we articulated in December 2002 and are on target with the goals the Company has outlined.

Additional information 
As mentioned above, the worldwide restructuring plan announced in December 2002 continues to be implemented, involving consultation with workers' representatives in various countries including France. 

On March 7, 2003, the Workers' Committee of the Group's French subsidiary Gemplus S.A. requested the commercial court of Marseille to appoint an expert to prepare a report on certain alleged management decisions of Gemplus S.A., relating to alleged recapitalization of US subsidiaries, alleged intra Group transfers of intellectual property and workforce reduction. 

On April 2, 2003, the court appointed two experts instructed to prepare such a report. The purpose of this proceeding under French Law is to permit the Workers' Committee to obtain information regarding the alleged management decision. 

The Company believes that the Workers' Committee already had sufficient information regarding these alleged management decisions and intends to cooperate fully with the experts' mission. 
Ends

Conference Call:
The company has scheduled a conference call for Wednesday, 30 April 2003 at 3:00pm CET.

Callers may participate in the live conference call by dialing: +44 (0) 207 784 1017, access code 134736

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

Replays of the conference call will be available from 6:00pm CET until 5 May 2003 by dialing:
+44 (0) 207 784 1024. Access Code: 134736.

Contacts:

Press

Gemplus:
Martin Crocker
Tel: +33 (0) 4 42 36 3046
Mob : 33 (0) 6 85 07 66 41
Email: martin.crocker@gemplus.com

Edelman
Stephen Benzikie
Tel: +44 (0) 207 344 1325
Mob: +44 (0) 774 003 8929
Email: stephen.benzikie@edelman.com

Charlotte O'Brien
Tel: + 44 (0) 207 3444 688
Mob: +44 (0) 770 325 8488
Email: charlotte.obrien@edelman.com

Investor Relations

Gemplus:
Yves Guillaumot
Tel : +41 22 544 5065
Email: yves.guillaumot@gemplus.com

Fineo
Anne Guimard
Tel: +33 (0) 1 56 33 32 31
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 helps its clients offer an exceptional range of portable, personalized solutions that bring security and convenience to people's lives. These include mobile data services, inter-operable banking, identity, WLAN, m-commerce and a wealth of other applications. 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 & Sullivan). Gemplus was also awarded Frost & Sullivan's 2002 Market Value Leadership Award for its exceptional performance.

Gemplus' revenue in 2002 was 787 million Euros. It employs 5700 people in 37 countries throughout the world.

Gemplus: Beyond Smart
www.gemplus.com

©2003 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.