Financial review

Gemalto delivered a strong performance in 2010 with Secure Transactions and Security reaching their profit margin objective one year ahead of schedule.

Income statement

Extract of the adjusted income statement:

€m 2009   2010  
Revenue 1,602.0     1,905.6   + 19%
Gross profit 587.8 36.7%   689.4 36.2% (0.5 ppt)
Operating expenses(1) 407.1 25.4%   473.7 24.9% (0.5 ppt)
EBITDA(2) 233.9 14.6%   277.2 14.5% (0.1 ppt)
Profit from operations 180.7 11.3%   215.7 11.3% +0.0 ppt
Net profit 160.9 10.0%   216.4 11.4% +1.3 ppt
Earnings per share(€ per share)(3)
– basic 1.91     2.56   +34%
– diluted 1.88     2.52   +34%

The financial review is based on adjusted financial information: non-GAAP measures where the key metric to evaluate the business and to take operating decisions is the profit from operations (PFO). PFO is defined as the IFRS operating result adjusted for all equity-based compensation charges and associated costs, amortization and depreciation of intangibles resulting from acquisitions, and restructuring and acquisition-related expenses. For a better understanding of Gemalto’s year-on-year business evolution, financial information and comments in the ‘Segment information’ paragraph address the ongoing operations i.e. exclude the contribution from discontinued operations and from assets classified as held for sale to the income statement.

Figures in the financial review are at historical exchange rates, except where otherwise noted. Fluctuations in currencies exchange rates against the Euro have a translation impact on the Euro value of Group revenues: comparisons at constant exchange rates aim at eliminating the effect of currencies translation movements on the analysis of the Group results by translating prior year revenues at the same average exchange rate as applied in the current year.

For more information on adjusted measures see Adjusted measures.

Revenue for the full year 2010 was up by 19% at historical rates to €1,906 million, fuelled by double-digit growth in all four main segments, and by a strong second semester which, for the first time, saw Company revenue clearly surpassing the one billion euro revenue mark for a semester.

Revenue from software and services grew by 54% to €252 million, contributing significantly to the Company’s overall growth, and representing 13% of 2010 revenue.

Business conditions in the fourth quarter were generally comparable to those observed during the rest of the year. The seasonality of revenue throughout 2010 was, as expected, more pronounced than in 2009, leading to much stronger seasonality in profit generation.

Gross profit for the Company was up €102 million or 17% at €689 million. This represents a gross margin of 36.2%, lower by 50 basis points on the previous year. Profitability expanded in the Secure Transactions and Security segments offset by lower gross margin in Mobile Communication.

The increase in operating expenses was much less than revenue growth, and was essentially attributable to the consolidation of acquired businesses and to some specific organic operating expense investments made in software and services and strategic growth areas. As a consequence, operating expenses were down 60 basis points when expressed as a percentage of revenue.

The operational leverage combining strong revenue growth and controlled operating expenses generated a 19% increase in profit from operations to €216 million.

The profit margin from operations of the Company was kept at its record level of 11.3% of revenue.

Financial income for 2010 came in as a €0.8 million profit, versus a €2.2 million charge the year before; and share of profit of associates was essentially stable at €1.7 million. Hence, the profit before tax was up year-on-year by 21% to €218 million.

Income tax amounted this year to a credit of €0.6 million, reflecting the effect of the recognition of some previously unrecognized deferred tax assets. In 2009, income tax expense amounted to €21.6 million.

The divestiture of the Point-of-sale (POS) activity, previously reported in the segment ‘Others’, became effective on December 31, 2010. As per IFRS, the contribution of this activity to the income statement is reclassified, and its net contribution is presented as a single amount on the line item “Profit (loss) from discontinued operation (net of income tax)” for both the 2010 and 2009 accounts. In 2010, this net contribution from discontinued operation was a loss of €2.4 million, essentially reflecting the net loss recorded on the disposal of the associated assets and liabilities. In 2009, the net contribution of the POS operations was a profit of €2.6 million.

For the full year 2010 Gemalto generated an adjusted net profit of €216 million, higher by €55.5 million than the adjusted net profit for full year 2009. Basic adjusted earnings per share rose to €2.56 for 2010, and diluted adjusted earnings per share settled at €2.52, representing an earnings growth of 34% compared to 2009.

Discontinued operation and Assets held for sale

Within the framework of a strategic partnership between VeriFone and Gemalto announced in October 2010, the two companies entered into exclusive discussion for the transfer of Gemalto’s electronic point of sale (POS) terminals business to VeriFone. The disposal of the POS business became effective on December 31, 2010, and therefore this activity, formerly reported within the segment “Others”, is now classified as a “discontinued operation”. As per IFRS, its net contribution is presented as a single amount on the line item “Profit (loss) from discontinued operation (net of income tax)”, together with the €3 million net loss on the disposal of the related assets and corresponding liabilities. Without this reclassification, the POS activity would have contributed €51 million in revenue and €1 million in profit from operations in 2010, respectively €52 million and €3 million in 2009.

The assets of one of the Company joint ventures (the JV) active in China in Secure Transactions and Security have been classified as “held for sale” due to the shareholding restructuring in process with the partner. In 2010 this JV revenue was €44 million and its profit from operations was €8 million, in 2009 its revenue was €42 million and its profit from operations was €10 million.

Ongoing operations analysis

For a better understanding of the current and future year-on-year evolution of the business, the Company also provides the adjusted income statement for the “ongoing operations”; i.e. excluding discontinued operation and assets held for sale. See Adjusted measures for the reconciliation between the ongoing operations figures and the adjusted and IFRS income statements.

Extract of the adjusted income statement for ongoing operations:

€m, ongoing operations 2009   2010  
Revenue 1,560.0     1,861.8   + 19%
Gross profit 573.8 36.8%   676.0 36.3% (0.5 ppt)
Operating expenses 403.4 25.9%   468.6 25.2% (0.7 ppt)
EBITDA 222.3 14.3%   267.2 14.4% +0.1 ppt
Profit from operations 170.4 10.9%   207.5 11.1% +0.2 ppt
Net profit 150.0 9.6%   212.5 11.4% +1.8 ppt
Earnings per share (€ per share)
– basic 1.81     2.54   +41%
– diluted 1.78     2.50   +41%

The 22% increase in profit from operations to €207 million in 2010 leads to 11.1% profit margin from operations, both new records for the Company. The vast majority of this €37 million positive variation comes from the higher performance of the underlying business. This was complemented by the net effect of one-off items and acquired businesses.

In Security the strong fall through from the double-digit growth was augmented by a greater contribution from the patent licensing activity. In Secure Transactions, the high operational leverage was driven by worldwide migration to EMV standards and strong demand for dual interface cards, and was partially offset by the triennial renewal trough in the UK. In the Telecom sector, the Mobile Communication segment reported lower profit due to limited large scale deployment of innovative projects and operating expense investments in software and service growth areas, while in the Machine-to-Machine segment customers reacted positively to the fast integration of Cinterion. The contribution to profit from operations from acquired businesses was slightly positive for the year.

Constant perimeter analysis

Businesses acquired in 2010 contributed €158 million to revenue. Taking as a reference the group’s perimeter as at December 31, 2010, the ongoing operations year-on-year revenue growth(4) at constant perimeter was +7% at historical rates.

Segment information

For a better understanding of Gemalto’s year-on-year business evolution, in this section ‘Segment information’ comments and comparison address the ongoing operations as defined in the ‘Adjusted Measures‘ section.

Mobile communication

€m, ongoing operations 2009   2010  
Revenue 888.1     980.9   + 10%
Gross profit 383.5 43.2%   375.9 38.3% ( 4.9 ppt)
Operating expenses 232.8 26.2%   258.2 26.3% + 0.1 ppt
Profit from operations 150.7 17.0%   117.7 12.0% ( 5.0 ppt)

Mobile Communication posted revenue of €981 million, higher by 5% at constant exchange rates from the previous year.

Growth was driven by success in software and services whose revenue doubled year on year to €152 million as investment towards new offerings was sustained both through bolt-on acquisitions and organic developments.

On the product side, promising developments in new form factors(5) products used in new wireless usage such as mobile TV and mobile contactless services partly offset the slightly lower revenue from a traditional SIM card business whose product mix improvement was slowed by a less favorable regional sales breakdown and by the year’s limited return to large-scale commercial deployment of innovative projects.

Gross profit remained relatively stable at €376 million. Operating expenses grew by €25 million to €258 million with the consolidation of acquired technology companies and continued organic investment in strategic fast-growing areas such as Trusted Service Management (TSM), Mobile Money and Digital Life Management services.

Hence, profit from operations was lower by €33 million year on year, at €118 million, representing a profit margin of 12.0%. The margin profile of the traditional SIM card business remained unchanged and the segment’s year-on-year profit variation was essentially attributable to the pro-active investments in operating expenses to grow the software and service offerings, to the consolidation effects of the acquired businesses and to a series of non-recurring items.


The Machine-to-Machine (M2M) segment formed at the beginning of August 2010 essentially corresponds to the acquired Cinterion activity. It also includes Gemalto’s existing M2M activity previously reported in the Mobile Communication segment. As a result, the Machine-to-Machine segment encompasses wireless modules from Cinterion, Gemalto’s Machine Identification Modules (MIM) products and emerging M2M management platforms and services.

€m, ongoing operations     2010  
Revenue       81.3   + 22%
Gross profit       26.5 32.6%  
Operating expenses       19.4 23.9%  
Profit from operations       7.1 8.7%  

M2M posted revenue of €81 million over the 5-month consolidation period, higher by 15% at constant exchange rates on the previous year on a pro-forma basis(6).

The integration of Cinterion and Gemalto M2M activities progressed well over the second half and the development of integrated offers began by year-end. During this period, revenue expansion was driven by the growing adoption of cellular connectivity solutions in a variety of industries such as automotive and metering.

Gross profit grew accordingly, even if the strong rebound in the M2M applications came with slightly lower gross margins.

Nevertheless, profit from operations doubled on a pro-forma basis, to €7 million, or 8.7% of revenue, benefiting from the strong operating leverage.

Secure transactions

€m, ongoing operations 2009   2010  
Revenue 411.4     462.1   + 12%
Gross profit 99.1 24.1%   140.2 30.3% + 6.2 ppt
Operating expenses 87.3 21.2%   99.0 21.4% + 0.2 ppt
Profit from operations 11.8 2.9%   41.2 8.9% + 6.0 ppt

Secure Transactions revenue grew by 7% over the previous year at constant exchange rates, to €462 million. This growth was once again driven by global worldwide migration to EMV, and was boosted by the rapid adoption by certain countries of upgrades to dual-interface contactless payment cards. As expected, the twin negative effects of the triennial payment card renewal trough in the United Kingdom and of the shift from registered mail to standard mail for personalized card deliveries faded out in the second half of the year, leading to very strong 16% revenue growth in the second semester at constant exchange rates.

As a result of the improvement in product mix, of the better absorption of fixed costs in high growth areas and of higher personalization activity, gross margin increased by 620 basis points on the previous year, to 30.3%. On theof the revenue growth and gross margin improvement, gross profit settled at €140 million for the year, 41% above that of 2009.

Operating expenses were kept tightly controlled and grew in line with revenue despite the consolidation of acquired technology companies and the continued investment in geographical growth areas.

There was hence excellent fall-through to profit from operations from the strong second half surge in demand, and profit margin from operations thus progressed sharply, by 600 basis points, to 8.9% for the full year.


€m, ongoing operations 2009   2010  
Revenue 236.0     318.1   + 35%
Gross profit 85.2 36.1%   129.1 40.6% + 4.5 ppt
Operating expenses 81.1 34.4%   89.7 28.2% (6.2 ppt)
Profit from operations 4.1 1.8%   39.4 12.4% + 10.6 ppt

Security posted another very dynamic year, with excellent revenue growth, up 31% year-on-year at constant exchange rates, to €318 million. Identity & Access Management (IAM) led the way at +50% on theof strong sales of our Ezio solution for ebanking deployments and on the integration of acquired ebanking activities. Government Programs also continued to grow fast, by 16%, as certain large-scale ePassport and eID programs entered their deployment phases. Patent licensing revenue was also extremely strong this year, with revenue exceeding the Company’s plan at €33 million, €19 million above that of 2009, as some on-going licensing negotiations came to an early conclusion. Additionally, a high profile patent litigation was initiated by Gemalto in the US.

Gross margin improved by 450 basis points to 40.6% in 2010, and by 200 basis points when excluding the effect of the higher patent contribution, due to continued productivity gains in Government Programs and a greater share of IAM activity. The resulting gross margin improvement combined with the segment’s double-digit revenue expansion to create a sharp increase in gross profit that settled at €129 million for the year, up 51% year on year.

In this segment as well, operating expenses reflected the consolidation effect of acquired businesses and investment in promising areas, such as eGovernment solutions. Still, operating expenses remained tightly controlled, growing by only 11% to €90 million and bringing operating expenses when expressed as a percentage of revenue down significantly, by 620 basis points.

For the year, the operational leverage of a strong top line growth and gross margin improvement on limited operating expenses expansion led to a 1060 basis points expansion in the segment’s profit margin from operations, to 12.4%. When excluding the patent licensing activity, this increase was 760 basis points, to 6.8%.


€m, ongoing operations 2009   2010  
Revenue 24.5     19.5   (20%)
Gross profit 6.0 24.6%   4.3 22.3% (2.3 ppt)
Operating expenses 2.3 9.2%   2.2 11.5% +2.2 ppt
Profit from operations 3.8 15.3%   2.1 10.9% (4.5 ppt)

Following the disposal of the point of sale (POS) terminals activities at the end of December 2010, POS has been classified as a “discontinued operation” in compliance with IFRS, and its net contribution is thus presented in the income statement as a single line item “Profit (loss) from discontinued operation (net of income tax)” below the “profit from operations”. On a pro-forma basis the POS activity would have contributed in to the Segment “Others” €51 million in revenue and €1 million in profit from operations in 2010 (€52 million and €3 million respectively in 2009).

The Public Telephony activity continues to decline as it is now almost fully substituted globally by mobile telephony.

Balance sheet and cash position variation schedule

€m 2009 2010
Cash and cash equivalents, beginning of period 367 404
Cash generated by operating activities, before cash outflows related to restructuring actions 224 183
Including cash provided (used) by working capital decrease (increase) 9 (38)
Cash used in restructuring actions (24) (9)
Cash generated by operating activities 200 174
Capital expenditure and acquisitions of intangibles (53) (73)
Free cash flow 147 101
Interest received, net 2 2
Cash used by acquisitions (74) (198)
Other cash provided (used) by investing activities 4 9
Currency translation adjustments 8 9
Cash generated (used) by operating and investing activities 87 (77)
Cash used by the share buy-back program (65) (39)
Dividend paid to Gemalto shareholders 0 (21)
Other cash provided (used) by financing activities 14 8
Cash and cash equivalents, end of period(7) 404 276
Current and non-current borrowings including finance lease and bank overdrafts, end of period (23) (20)
Net cash, end of period 381 255

In the full year 2010, operating activities generated a cash flow of €183 million before the €9 million cash outflow related to restructuring and acquisition related expenses. This figure was unfavourably impacted by a €38 million increase in working capital requirement essentially generated by the strong revenue growth of the second semester.

Capital expenditure and acquisition of intangibles amounted to €73 million, or 3.8% of revenue, of which €44 million were incurred for Plant, Property and Equipment purchases net of proceeds from sales (respectively €53 million and €40 million in 2009). Acquisition of subsidiaries and businesses, net of cash acquired, used €198 million in cash, of which €154 million were incurred for the acquisition of Cinterion. Other investing activities generated €9 million and Currency translation adjustments amounted to €9 million leading to a total of €77 million used in operating and investing activities.

Gemalto’s share buy-back program used €39 million in cash for the purchase of 1,281,254 shares in 2010. As at December 31, 2010, the Company owned 4,884,596 shares, i.e. 5.55% of its own shares in treasury. The average acquisition price of the shares repurchased on the market and held in treasury as of December 31, 2010 was €27.03. The total number of Gemalto shares issued is unchanged, at 88,015,844 shares. Net of the 4,884,596 shares held in treasury, 83,131,248 shares were outstanding on December 31, 2010.

On May 31, 2010, Gemalto paid a cash dividend of €0.25 per share in respect of the fiscal year 2009. This distribution, the first ever in Gemalto’s history, used €21 million in cash. Other investing activities generated €8 million in cash, including €16 million of proceeds received by the Company from the exercise of stock options by employees. Combined with impact from the share buy-back program this resulted in €51 million used in financing activities.

As a result of these elements Gemalto’s net cash position(7) as at December 31, 2010 was €255 million. It was €381 million as at December 31, 2009.

The Company also took advantage of favourable conditions to renegotiate and replace its existing syndicated credit facility that was about to expire by arranging a set of bilateral facilities for a total amount of €210 million as at December 31, 2010, and €300 million as at March 10, 2011.


In 2011, Gemalto targets another year of expansion in revenue and profit from its ongoing operations, progressing in its 2010-2013 development plan. The Company expects a substantially lower contribution from patent licensing activities in 2011, due to the public patent litigation it initiated in the USA; stable or expanding profits in Mobile Communication, with a pronounced seasonality due to the large deployments of Near-Field Communication (NFC) mobile contactless services and LTE fourth generation networks announced for the latter part of the year; and reiterates its expectation to have Secure Transactions delivering a high single-digit profit margin from operations in 2011. It upgrades its view on the Security segment, which is now expected to deliver high single-digit profit margin from operations in 2011 even without patent licensing contribution. Gemalto confirms its target of €300 million in profit from operations in 2013.