Gemalto's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 6.14 | About: Gemalto NV (GTOFF)

Gemalto NV (OTCPK:GTOFF) Q4 2013 Earnings Conference Call March 6, 2014 9:00 AM ET

Executives

Olivier Piou – Chief Executive Officer

Jacques Tierny – Executive Vice President and Chief Financial Officer

Analysts

Stéphane Houri – Natixis SA

Alexander Duval – Goldman Sachs International

David T. Mulholland – UBS Ltd.

Achal Sultania – Credit Suisse Securities Ltd.

Sébastien Sztabowicz – Kepler Capital Markets SA

Andrew E. Humphrey – Morgan Stanley & Co.

Antonin Baudry – HSBC Bank Plc

Alexandre Faure – Exane BNP Paribas SA

Emmanuel Matot – Oddo & Cie SCA

Glenn T. Fodor – Autonomous Research US LP

Johannes Schaller – Deutsche Bank AG

Andy R. Perkins – Société Générale SA

Operator

Ladies and gentlemen, thank you for holding, and welcome to the Gemalto's Fully Year 2013 Earnings Presentation. You can listen to the presentation on live audio webcast via the link on the investor relations section on gemalto.com. For those planning to ask questions in the Q&A, please remember that the webcast is listen-only and questions will be taken via the telephone conference call.

I now hand over to Mr. Olivier Piou. Please go ahead Mr. Piou.

Olivier Piou

Thank you, Lora, and thank you all for joining. So, I’m only Olivier Piou, the CEO of Gemalto, and with me today we have Jacques Tierny, our CFO and Gabriel Rangoni, John Lineberger from our Investor Relations team.

I hope you had the opportunity to look at the financial press release we published this morning and the presentation that we will use to comment our 2013 results. Both are available for download from our website at gemalto.com.

As usual, we shall start with some prepared remark and after that we will take your questions. So, if you have the presentation in front of you and you have read carefully the information on Page 2 and 3, let's go straight to Page 5 to the highlights of 2013.

As you can imagine, we are very pleased with the performance we report today. The revenue grew to a record at €2.4 billion, so new record for the company and double-digit plus 11% increase at constant exchange rates, as market momentum developed favorably in our different businesses.

The Platforms & Services activities led the way growing plus 21%, representing a third of the company’s increase in revenue to account for €462 million as our teams continue to deploy milestones program for the LTE networks, mobile security and payment as well as for government organization.

Our embedded software and products also performed very well at plus 8% on the right side of our expectation. As a result of this growth, our profit from operation just up plus 14% to €348 million, representing 14.6% of our revenue, and surpassing the 2013 development profits from operation objective that we had by close to 40%.

This strong increase also highlights a more finance seasonality in profit from operation between the two semesters of 2013 that we had anticipated, and committed to take it to you at the years onset.

Finally, the year seasonality was also strong in cash flow generation, as we recorded €163 million in the second semester of 2013, ending the year with a very substantial increase to our cash file.

If we are moving now to Slide 6, and we look into in more detail at our P&L this year, you see year once again, the leverage on gross, which is the cash taxes of Gemalto. So, how our plus 7% top line revenue growth at historical rate impacted by the adverse guarantee translation effect compared to growth at constant exchange rate, completed into an new gross profit increase of plus 9%, plus 70 basis point improvement in gross margin and into plus 14% improvement in profit from operations at €348 million.

In addition to this improvement, another important element to our strong performance was a tight control to our operational costs, which grew more moderately than our top line growth at plus 6% over the year, an increase which is essentially corresponding to the increased investment we initiated at the end of 2012, to drive business development beyond 2013.

Less capital increase was a key to laying down the foundations for most of what’s to come in the new plan, and we already playing a stronghold in ensuring we will remain a step-up ahead of the competition, in many of our businesses. Finally adjusted earnings per share grew nicely also, they were up by 17% to €3.67 per share, as we recorded additional profits from our minority affiliate.

If we move to Slide 7, we’ve assembled here the metrics that will presented to you at our 2017 development plan conference, which provides you with a clear snapshot of our company dynamic. When we apply this metrics to 2013, you can see the Platforms & Services activities, which now represent close to a fifth of our revenue, already grew last year in line with the CAGR projections, we’ve drawn for the new plan.

Our objective in the next four years is to more than double the 2013 figure. As you know it’s an ambitious goal that we are very determined to achieve and that will be key to our future success.

As for our Embedded software & Product business it’s plus 8% revenue increase. It was a little on the high side compared to the projection we have for the 2017 plan, but it’s a welcome launch pad for the next step. The sector performances which theoretically in this job also pretty much in line with our expectations for the next four years.

Mobile at plus 5% was slightly lower in 2013 than the high single-digit revenue growth we anticipating. While payment and identity, which accounts for almost half of our business today surpassing 2013’s mid-teens mark that we expect in the future with revenues goes up plus 16% in 2013 powered by the outstanding growth performance in Secure Transactions, once again, the rectified activities that compose Gemalto’s business lead to a [indiscernible] more resilience to adverse business condition and overall a more predictable performance.

So with this in introduction, let me now hand it over to Jacques who will comment more on the detail of this year’s results. Jacques?

Jacques Tierny

Thank you, Olivier. Good afternoon, ladies and gentlemen. as you know, we’re reporting our operational metrics, profits from operations and we provide you with a detailed bridge between the profits from operations and the IFRS EBIT. so this year, you can see slightly higher amortization charges of intangible assets in 2013, which is due to a full year impact of acquisitions we closed in the latter part of 2012 and conversely, this higher amortization charge is offset by lower equity based compensation and by restructuring expenses lower than last year.

I now invite you to go to Slide 10 to review our main segments’ performance, while my comments on revenue will be at constant exchange rates. First, the Telecom businesses, in mobile communication, revenue increased by 5% over the period to almost €1.1 billion, our Embedded software & Products and our Platforms & Services activities contributed to a growth with the latter increasing by 19%, as activity remained intense throughout the year.

The run rate of core subscriber services including LTE subscription activation platforms, as well as growing pipeline of commercial projects for mobile payments have generated the improvement, we also – we call this strong improvement in the product mix with both a significant reduction in sales of our entry-range products, and a strong increase in sales of high-end products. This evolution drove gross margin up to 46%, which is, as you can see, a 230 basis points increase, despite extensive integration work in the Platforms & Services activity. As a result, the segment’s profits from operations rose to €205 million representing close to 19% of the revenue.

Next let us look at the Machine-to-Machine segment. This segment’s revenue grew to €200 million, at 7% and driven by automotive with a wider use of secure elements in machine identification and service contracts.

Gross profit was up by 13% to €72 million, due to the increase in sales and also a temporary uplift in gross margin of 280 basis points, which was related to lower technology licensing charges this year. Profit from operations rose sharply by 57% to €22 million, or 11% of revenue.

Secure Transactions, once again go very strongly posting revenue of €660 million, it is up 20%. The growth momentum was driven by EMV ramp up in Asia, and increasing the adoption of dual interface payment cards, which represented more than half of payment cards we served worldwide over the last six months of 2013.

Now there’s a number of contactless payment terminals expected to be in the field, although the next one to two years is sufficient for massive contactless service promotion, financial institutions are accelerating their deployment of contactless payment cards to avoid having to replace them an accelerated base later.

Gross profit increased by 13% with steady improvements in operational efficiency at new facilities, which offset increasing integration work for mobile payment projects and led in the second semester to a slight increase in the year-on-year gross margin. With this, and also operating expenses under tight control, profit from operations grew by 23% to €77 million, up 60 basis points to account for 12% of revenue.

And now, security, the segment delivered another year of double-digit revenue growth, up 11% at constant exchange rates to €416 million. this came on top of 19% increase recorded in 2012. Gross profit increased to €148 million, it was up 4%, gross margin improved throughout the year as operational performance of last year in newly opened facilities to support growth in Government Programs, so gross margin returned in the second part of the year to about the same level as the one of last year.

as a result, profit from operations of 2013 came in at €41 million up 10% of revenue lower by €4 and 2 percentage points under 2012 performance.

On Slide 12, we have laid out the operation from 2012’s profit from operations to 2013’s with evaluations in the various product activities and to the right you can see the changing profit from operation contribution under platform and services activities as well as the variation in contribution from patterns and one-offs. You can clearly see that the positive [indiscernible] effect of the product mix improvement in mobile communication and of the revenue growth in secured transactions, the negative change in variation in securities and Embedded software & Products activities reflects the initial cost of the new facilities in this segment. It is over now.

Turning to the Platforms & Services variation in contribution, all segments posted an increased invest contribution except secured transactions which invested strongly in mobile financial services. Additional resources expanded by service delivery teams also wait on the platforms and services profit expansion but even with the slower margins sales, there was a positive contribution on platforms and services to the global profit improvement of the company.

Let’s now go to Slide number 13 to the key items on the cash flow statement. In 2013, operating activities generated cash flow of €330 million beside changes in working capital which is up 9% on the €304 million generated in 2012. We used €76 million in additional working capital compared to €18 million in the same period of 2012. [Indiscernible] which occurred entirely during the first semester is primarily due to the longer cash collection cycle which is associated with specific secured transaction businesses in Asia. In the second semester while our business where continued to develop strongly, we also started to collect the cash which was related to revenue recognized during the first semester which in turn led to a better consumption to cash.

Capital expenditures and acquisition of intangibles amounted to €103 million, which is 4.3% of revenue. It is down from last year’s figure of €125 million. And this is despite the investment in new facilities to support innovative product launches and future growth in the financial services and government sectors. Acquisitions and divestiture of the [indiscernible] businesses, net of cash acquired, used €30 million in cash, down by €43 million on the figure of the year ago.

We also used €25 million in cash for the repurchase of share and returned an additional €29 million in cash to shareholders via dividend for a total of €53 million. As a result of these elements Gemalto’s net cash position and the end of 2013 was €449 million, up €97 million on the year ago.

Before I conclude on 2013 and on our previous full year development plan, I would like to take a step back and look at how far we’ve moved forward away of this cost. On Slide 14, you have an update of our main dashboard indicators, solid numbers. Since 2009 our revenue has grown by close to 50%. We’ve been almost doubling in our share of our Platform & Services activities.

This represented 19% of our revenue this year more that €460 million, and as you know this should stand to account for €1 billion revenue by the year of 2017. That is more than a doubling in the size again. Our profit from on going productions was more than doubled over the course of the plan, which just goes to show our sustained commitment to profitable growth.

You can see the strength of our business at work, which is strong revenue growth, generating much stronger profit increase. Also important is the fact that the success of that profit has significantly diversified with the share of contribution to profit or mobile communication, reducing from 82% to 59% and this while still going in value.

The IFRS net profit more than doubled as well, posting improvement well in line with our profit from operations. Although the past four years, you can also see that this performance was creating value for shareholders in turn of our return on capital employed and that was upto 17.9% in 2013. And dividend grew double-digit every year and was up 52% since 2009.

This evolution reflect to perform transformation as this company has achieved although the past four years, during the period of times that many have displayed as being marked, by economy turmoil on a global scale. So, we now embark on this new plan with good momentum following a year of intense implementation of a projects we have own since 2011. We have come long way since Gemalto was born and we feel confident in the future and in the many opportunities we have in front of us.

Thank you very much, ladies and gentlemen. I now hand back to Olivier.

Olivier Piou

Thank you, Jacques and for this very good description. Let’s now move on to Slide 16, to our outlook for 2014. It’s very straight forward and short. So, I read it out to you. For the full-year of 2014 Gemalto anticipates double-digit expansion in both profit from operations and revenue at constant exchange rates. I don’t think we can make it more simple. And as you can see, we are confident in our future and we look forward to 2014.

Now let’s conclude with the focus on some written developments in the mobile payments world and marginally on the main trends we see driving our businesses this year of 2014.

So, on Slide 17, I will begin with some insights on the token based mobile EMV standard, that gather quite a bit of attention recently. We are talking here about software tokens, another physical kind of tokens that some of you have maybe for online banking. And we are focusing on EMV software tokens, as there are also a lot of other kind of software tokens.

As many of you know at the end of last year, Visa and MasterCard announced that they were working on a variant of the NFC contactless payment standard. The token solution simply offers a way to limit the circulation of the real credit card numbers. In deed there is a concern, it’s a true concern, when this real credit card number can be stolen from a mobile phone or hacked out of a large retail merchants computer and they end up being collected on some databases and used for fraudulent online payments.

So the characteristic of this token variant is that it is very close to existing mobile payments specifications in order to ensure compatibility with the existing technological acquisition infrastructure, the merchant infrastructure. That’s why we call them EMV software tokens and this is important as it need to EMV compatible to be accepted at most merchant sites.

At the top of the slide, you can see, we have mapped out the characteristics of each solution to give you a clear picture of how its configuration works. The implementation orders in its case are slightly different. For the already certified solution, which is a secure element, which is usually the SIM card when we speak of a mobile, the other is that we secure – that the secure element is not always easily accessible by the bank.

For the token reduction which is also a solution that has already been tried in the U.S. in France [indiscernible] or in China by ICBC for example. It’s really a question of standardization. So, that this tokens become interoperable, i.e., that the merchant doesn’t have to worry about which token issuance system it has to use. In the system to convert the token back into the real bank account. So that the merchant we paid.

There are also issues to overcome around risk management and there is also tend to market challenge to standardize and deploy all this, that all have to be addressed. With this and in order to facilitate the adoption of mobile payment, Visa and MasterCard has given issuers more flexibility in their deployment strategies as these bank issuers as one, who are responsible for the risk management policies they choose to enforce and we are the one we will decide the minimum level of security, they required to authorize installation of their payment guard in the mobile device.

In the end if they call and the Visa and MasterCard are here enlarging the spectrum of options with this announcement. Of course as with existing payment card, using a secure element to run the card application and install the payment tokens is a most effective protection against malware and the risk of fraudulent use of payment tokens or even fraudulent access to token download system. And as a deployment of secure element in mobile devices continues, issuers will increasingly have access to a widely accessible cost effective and non-inclusive low risk mobile payment system.

So, in addition with what is displayed here you could have even various blends of it. After two years of work we are reaching the tipping point for conditions to a global introduction of contactless mobile payment to consumers in 2014 by this year on 2014 the GSMA expects 30 [ph] commercial mobile NFC services to be live while other industry observers estimate that 30% of the point of sales terminals and the roughly half of the smartphones in the field will be contactless enabled.

So the momentum for NSD and contactless is very much enforced by the flexibilities that’s provided by Visa, Master Card and others to issuers and NSD services become easier to program with [indiscernible] and so it’s clear now to all Visa, Master Card Google, Gemalto and others that NFC is now the technology of choice for all the main players of the ecosystem and I think this is a big progress and a good news for everybody.

On Slide 20 our mobile payment platform continue to grow and the project pipeline is also maturing well, in 2013 we secured an additional 13 projects net of those that we are launched so today we are the undisputed worldwide leader in both service provider of GSMs and operators GSM and for most of these market we have more than twice the number of references of our nearest competitor, so we are essentially at the point in time where equipment and integration revenue stream start to intercept and the strong mix that you have witnessed in 2013 when reading our results.

And both revenue streams will continue to grow and will be the underlying, will be underlying Gemalto’s development over the course of the new plant. Finally if we moved on to Slide 21, I’ll conclude and the trend that we’ll be driving our businesses in our two main sectors in 2014. So in mobile you will have of course the increasing penetration of LTE that should continue to drive demand for connectivity management platform and upgrade of SIM cards in addition the maturing of the trust infrastructure and the NFC ecosystem should allow for progressively wider deployment of multi-tenant secure elements and we expect the commercial phase of dynamic connectivity solutions to begin in M2M which is said to be very promising and the On Demand connectivity of the machines when they are deployed in the field.

In Payment & Identity EMV in China should extend beyond to Tier-1 issuers while the U.S. begins some larger EMV card rollouts. In parallel, we expect financial institutions to continue to deploy their mobile payment infrastructure and to own a new set of launches. In government business, we see a strong market demand and a product backlog should remain highest for the year. There was probably more lumpiness in the revenue, due to the increasing size of projects that we now address and we also expect to see an acceleration of initiatives for better securing the web, the cloud internal enterprise services and all the enterprise internal services that enterprise provides to subparty.

All in all, it should be a quite exciting year and we are really energized by the 2013 results and I hope you can sense that. And we both Jacques and I look forward to 2014 with confident.

That’s it for today in the introduction. So Lora, could you explain us the procedure of taking questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Stéphane Houri, Natixis.

Stéphane Houri – Natixis SA

Yes, hello, good afternoon. I have two questions. The first one would be about the HTE Visa initiative. I would like to understand how it would impact your business on the hardware and on the platform side. Do we still need a TSM if we use HTE and the second question in on the mobile division? Well, you had very, very strong profitability in terms of gross margins, but still a lower growth at the end of the year, even a decline. Can you give us some elements on what you see for 2014 on products and platform and by the way, if you could comment on the margins of the platform business? Thank you.

Olivier Piou

Thank you, Stéphane. And it’s a quite difficult question, so in terms of HTE and Visa and Nex-Tech, I was anticipating this question, so I was trying to give you some data and some program in the presentation. What you have to understand is that HTE is mostly a good way to program the applications and for this purpose, we find it extremely interesting and useful. It will make the application development more simple the access to card whether it’s emulated or the secured device much more simple.

Now the issuers we will have to decide where the secured data, or where their data were used – reside, the tokens they are less dangerous to store than credit card number but they still have present value and if you store them in an unsecured place you can always have a malware that we see driving and send it back to somebody else we use it.

So, at the end of the day what I find as a good news in the tree is the deployment of application much more easy. It doesn’t change where tokens are leaving and that still requires a token server and so in the same way we have to issue credit card numbers and push them above the air, somebody will have to push those token above the air and ensure that the outlook.

So, I also seeing that it’s you know there is great recognition by Google that NFC the technology of choice only three months ago or six months ago we are making arguments whether there would be [indiscernible] and Wi-Fi and all sort of Bluetooth and so on. I think today we can say that NFC the technology of choice by everybody.

Now in terms of visa and Master Card it’s a little difference in the attitude is that the trust you need to read in this, they are very committed to contactless in order to substitute catch and this is perfect alignment with what the Gemalto is trying to do and as a piece of information you know in the second half of 2013 one reason why secure transaction is really well is that half of our shipments, where contactless are dual [indiscernible].

So, there is real traction and I can also tell you that the visa is trying hard now to join as a French government initiative on contactless services. So, we are really committed to it and we have the same so.

Overall you should read these announcement as a fact that NFC is really the technology of choice and you know there is a strong push proper contactless. Doesn’t change anything about value store the sensitive data and I think anybody where the brand we will try to put it in a safe place.

Stéphane Houri – Natixis SA

Sorry to interrupt, but do you mean that to install the tokens you still need a secure elements in the mobile phone.

Olivier Piou

Yes, you needed to. I mean unless you are ready to risk for it be compromise. Now these secure elements can be of different verity, and the same of course, but it can be micro SD, we’ve invented several years ago something called a LTE which we commercialized as for joint venture with [indiscernible]. So there are several ways to store it, but you would be crazy to just put some important data in a secure place, now the banks will have the choice, so banks will manage all these policies of Visa and Master Card, so the banks will have the choice to store their [indiscernible] in or out of a secured place, but today I don’t see them compromising their existing system, especially at the time where you know operation at least for them means additional capital on their balance sheet and the capital is difficult to raise so now of course THE is better than max types, but anything is better than max type.

So we have are in some kind of intermediate level between and secure elements. So maybe if your coming from the U.S. you will realize that THE is better than – HTE and storing in the mobile would be better than the max type, but its not very hard to do, but in most cases like things that banks will have a brand reputation to protect [indiscernible] target issue and there was another big hacking of data of banking data in Korea recently, these tokens will have to be stored also.

now we can accompany our clients the way they want to evolve and we have different variety of clients, different phones, different operators, they are not all android, they are not all capable of doing everything and we have a management platforms that are capable of all these customers, so to make it simple for the bank’s people, its also very nice to discuss the technology and make a chart of all the possibilities, but at the end of the day somebody needs to do the job and we tend to do that job which is not that easy.

Stéphane Houri – Natixis SA

Okay.

Olivier Piou

Now in term of mobile and as a profitability of mobile, of curse I’m happy that you noticed it, because – and we can even [indiscernible], I used to say that in our staff meeting we don’t have the voice at the table [if you don’t do 10% profit, so all the divisions have a double-digit profit, so they are all talking and we have longer staff meeting, but the strong profitability of mobile is linked to two things, one you mentioned lower goals, the lower goals is essentially due to the fat fact that we did not want to take the very low end business, you know there was a contraction of the businesses in India, all our competitors runs into it, and killed each other and we explained this in Q1 and Q2. It led to changes in management and so [indiscernible] it was rightly care, a trap that was very useful to focus them on these – and while we could enjoy the high end part.

So of course, you have a lower revenue but it’s a revenue, what’s a revenue which is missing to – in our profits, so why we are doing work for no profit. And in the products we have the margin of the innovative, so we’ve got the plowings [indiscernible] as you run. And the platform margin, believe me we are doing quite a bit and it’s contributing, as Jacques said to our profit expansion.

Stéphane Houri – Natixis SA

So positive margin but not yet delivered of the product, is that the right way to see it?

Olivier Piou

No, I have not said that, [indiscernible] fact in Telecom, where you have a low, if you think all the platform and services that are less participle and as the telecom products, if telecom products are making profitable. But you should think some there are platforms of mobile, it’s a gross margin of platform of mobile is very similar to what we have in product.

Stéphane Houri – Natixis SA

Okay, thank you very much.

Olivier Piou

You are welcome.

Operator

Thank you. the next question is from Alex Duval, Goldman Sachs.

Alexander Duval – Goldman Sachs International

Thank you very much for question, I’d like to offer [indiscernible], two quick questions, and first of all Secure Transactions that really have now outstanding quarter driven by [indiscernible] performance in China, which seems to be moving quite quick easy shipment and payments.

So how do you think about the number of units in the make that need to be converted, what kind of key any run rate of volumes could we see and how do you think, Gemalto share within that and then also is there any update on the [indiscernible] given the recent – targeting so forth you’ve mentioned.

Second question on security that historically been a very segment for you in terms of trying to progressively, progressively increasing gross margin and EBIT margin with strong drop through. How do you reference, there was some increase in investment of that but I was wondering, how to – 2014 and beyond is the slow potential for that strong EBIT flow through to continue, thanks.

Olivier Piou

So I think the second one first, because it easy to – easier and more simple than the other one. So we guess, we expect the continues of double-digit gross in security and that corresponding first rule. as I mentioned in my introduction, it’s going to be probably a little more lumpy, because we take bigger, bigger programs. And so the revenue recognition always makes that you will have more lumpiness in this activity, but we used to have that at the very beginning.

And in terms of profitability, it’s still nicely profitable, because as Jacques explained, most of the gross margin erosion that we witnessed in the first part of the year was due to the fact that we have decided to invest in new facilities, two new facilities and it’s – you don’t simply address same productivity out of a new facilities and what you have that something, which is already well opening, but it’s – it just shows that our confidence in the growth in the future.

As to ST, you’re right that’s an outstanding performance. In China, the market is still accelerating. but of course, the comparison with last year is going to be more challenging, because we’ve started from a lower base. so we’ll see growth, but probably not at the same pace as last year in China, a little slower. but I don’t want to put estimates, but I think we need to be conservative a little at this moment of the year.

And in terms of profit, we have progressed of course, a year in secure transaction. and I would say that the gross margin that we have at the moment is that the report now is a good basis to keep. We’ll still try to improve it, but we also have to improve and increase capacity, because China is our large place. So the gross margin, I don’t think we’ve changed a lot, but this should still be a closer and would be a full improvement.

in terms of U.S., so U.S., it was a relatively slow start last year. you have witnessed in the U.S., you have witnessed all the issues surrounding is a target breach that as CFO and off target and stabilize our people have to witness in front of senate, what kind of measures that would do. and they have all pushed that, why is U.S. not protected like Europe or the rest of the world.

So this will create a movement. Now at the end of the day, you still have the confusion between who is paying what. and I’m not sure that various declarations I’ve seen from the various properties are very constructive. it will have to be sorted out. so we will see this year an acceleration in the U.S. market. remember that here, we are not incumbents. We have two ways, one with incumbent, and I think so it should help us in terms of growth rate, but in terms of the volume and market share will be a smaller players in the rest of the world.

Alexander Duval – Goldman Sachs International

It’s very clear. thank you very much.

Operator

The next question is from Susan Anthony, Mirabaud Securities.

Susan A. Anthony – Mirabaud Securities LLP

Yes, good afternoon. thank you for taking my question. on the back of the stories that or the worries that sometimes arise in the market when various players suggest something that maybe is new to us, even if it’s not new to you. I was wondering if you could maybe talk a bit about, in the past, have there been developments that have taken you by surprise, and can perhaps; you could help us understand if they have, how you then respond to those, so that they don’t derail your progress. just to try and give us some level of comfort as outside observers that obviously you are very – I’m sure, you are very aware of what goes on in the market, but just to help us feel a little greater comfort that if we hear a story about something new that we want to be aware of. it doesn’t necessarily mean that it’s a problem for you, or a shock to you, or something that you haven’t already thought about, and how you would address this and sort of combined with that, and where do you stand currently on potential M&As. are there any gaps that you think you need as some of these developments happen in the market?

Olivier Piou

So I can’t say that they think of everything. I simply didn’t around for quite a while – and I’ve lost quite a few of my head on trying to contain some of those rumors there. it’s a free world, Susan. and I cannot prevent people or journalists to try to make some sectionalism about stories. What you have to keep in mind is that first, we operate at a global scale. we serve billions of individuals all over the planet and the planet doesn’t change overnight.

Okay. So you have a question of speed and attention and speed of deployment. you remember when Apple started something, people were getting all excited, and mostly because they were in California and close to Apple. and when I was saying, it takes some time to get market share and market traction 10 years after and we still are only at 50% of smartphones worldwide and share of latter brand is very different than [indiscernible].

So we have to put a little perspective between the event and when it will start to be material, be incremental. there was a surprise. Now there could be surprises. And it’s a point that I think we’ve tried to do is to not be too sensitive to be – to a single event. We used to be very sensitive to Telecom; I mean the increase was almost 100% Telecom. And certainly, more than 100% of its profit was coming from telecom.

and I’ve been very straightforward to you all for many years that we wanted to balance our portfolio. We grew as a Government Program. we grew Secured Transactions. we grew the identity and security for enterprises. we moved to reemphasize, there was a product site there to be less sensitive to it, and develop the platform and services. It doesn’t mean that we don’t like them. it’s simply that we have a variety of exposure.

We also are very global. so sometimes, people say in 2009, people were saying oh, you know, this is the end of the world, the finance is finished. Okay, we do finance but we do also Telecom and Government, or if there is a crisis in Ukraine. today, we are not only in Ukraine; we have also the rest of the world that used to be the Southeast Asia crisis 15 years ago. then there was South American crisis, the 2009 was a U.S. crisis, now is a Europe crisis, the world is never perfect. So we’ve tried to become very resilient.

And there is a lesson, is that you always have to look at Gemalto, as it is different factor, it’s difficult, because most of the observers have a passion, they have a passion for mobile payment, or passion for government, or passion for something and they speak of it passionately and I’m usually passionate too. But you simply take a little distance as a digital security market.

In this market, we will not be alone, we don’t have, we don’t ambition to 100% market share, that’s why we licensed broadly our technology. It’s a market that grows that will keep growing for years and probably many years and we’ll give out new stuff. The fact that we license our technologies also make that you can have of course, licenses and you can have ways to discuss.

So all in all, I can’t promise that we are alone; I don’t feel that at all. But we try our best to be resilient towards this capacity to, we spend different changes and that the – for the finance market, what is the most worth saving to me that it’s more homerun and news. You should remember or direct me what surprised me. last year at the – right before the GSM work on that, so exactly, one year ago, there was the announcement that visa was doing TSM for everybody.

If you remember, there was a big overreaction on the Gemalto share price. One year after who speaks about it. So be simply literal, if you are long, long in Gemalto, you know that the world is getting digital and mobile that it’s very convenient and security and you should give us the confidence of the trust that we have executed. If you are playing the volatility, I can’t do anything for you this morning.

Alexander Duval – Goldman Sachs International

Okay. On M%A?

Olivier Piou

If I need a gap, I mean most of our plan is organic. we will still need a few minor techno breaks. you’ve seen us by end of last year, for example, it was techno break that we hesitated to do, to buy and because we could find a new agreement about buying this company, saved us some R&D in some time. In our R&D processes, we will continue always towards this [indiscernible] by approach.

And yes, we have large cash file. It’s bigger than exult [ph], that’s a good news, but nothing major of that is hot. And as I told you I think last time we discussed we are not incentive by idea more intense. Don’t worry about it.

Alexander Duval – Goldman Sachs International

All right, keep easy. Thank you.

Olivier Piou

Thank you for your following us. It’s a last time [indiscernible].

Operator

The next question is from David Mulholland, UBS.

David T. Mulholland – UBS Ltd.

Hi, just two quick questions. Firstly, obviously there is a couple of weeks passed since we had I assume last month recording endorsing [ph] you’d see. I just wondered if you’ve seen any reaction from your operator customers because obviously it changes the balance a little bit and any negotiations they maybe having with financial services companies.

And then secondly on the Patents business there was a comment in the release that you expect this to resolve itself through the first half of the year. I just wonder if you could provide a bit more color on what that means and what we should we expecting for patent licensing in the second half of the year?

Olivier Piou

So, on the cost side, I can’t fully give you insight, but I think it’s pretty clear that it has put some pressure on the telcos in order to open up a little factor in the secure element. So, what are the status of those negotiation and how easy we ago I can’t really comment. I guess if you talk more to the supervisors for example on that, he was making some presentations at Barcelona. And he was very clear that he was more open than before now. Now what is applies you should asking may not even know what it is, simply operating the system and I’m seeing more and more people are getting onboard.

That ends it’s relatively simple. It’s a appeal hearing happened early February. So, now it’s the Appeals Court has to make its decision. Since the case is now extremely well contained this decision of the Appeals Court will essentially impose itself to the two parties. If they are reasonable and they will find an agreement one way or another. I don’t to judge how it will be the outcome, but I think it will be quite effective going forward.

And I don’t see because there is a problem is now so well contained and defined. I don’t see that it will go to Supreme Court or something like that. Now you can always have reasonable party [ph], but I don’t see, I don’t.

So, we should have the news of the Appeals Court somewhere in the second half and – in the second quarter and from there we will go straight. We should have no expectation, because I’ve seen that all of you have put zero in the battle column, and if we get a lot of money, you should trust us that we will do a good usage of.

David T. Mulholland – UBS Ltd.

That’s clear. Thanks very much.

Operator

Thank you. The next question is from Achal Sultania, Credit Suisse.

Achal Sultania – Credit Suisse Securities Ltd.

Thanks guys. Olivier one question on the Mobile Communication business, obviously we’ve seen strong growth in the platforms and services division within that. Can you help us understand as to how much is this remote administration, where you talk about subscriber management, is it like half of your revenues within platforms and services, is it significantly less than that, and is the growth and what exactly are you offering to operators in that particular service. And then I have a follow-up on Isis after that.

Olivier Piou

Some subscriber is so excited, here we speak of campaigns and activation, etcetera. So, no, it’s not the majority of it, because we have quite a bit of offers. We have also mobile marketing platforms. We have also LTE activation. We have the holding platform etcetera. So, this is we have quite a bit of offers and the trust management is one of them. It’s a fastest growing and most active, but we have all the other that are essentially paper use, paper campaign or paper subscriber.

We have also some remote management of machine to machine, which is getting hot that has just been standardized by the GSMA. So, it’s getting a lot of traction, and its an evolution of our subscriber management platform. So, we sell it easier as a brand new platform, when we sell it to industrial companies that we have never seen before or we sell it as an upgrade to the telcos who operate our platform. So, I mean that’s why we lumpy, because if we truncate it to so many small pieces, you would have a divergent model. So, that’s how it works. So it management of subscriber whether subscribers are individuals or machine. I’m sorry, you were asking, you have to ask the second question I forgot.

Achal Sultania – Credit Suisse Securities Ltd.

Yes, and that’s the second question was an Isis, obviously we saw the re-launch of Isis late last year. What’s the consumer feedback that you are receiving from your partners as in we had some issues with the user interface, with consumer awareness, when it was first launched in late 2012, has those issues been resolved and if you yes, are there any other issues that operators need to fix before we see more increase level of production in the U.S.?

Olivier Piou

So what we described is, exactly why there was a soft launch in Austin and Salt Lake City. So as the user interface was done by another company [indiscernible] if I remember well and it needed some reworking because it’s just not that straightforward to align on this, it had nothing to do with our back office platform. And it has been generally launched by [indiscernible]. It is very healthy vis-à-vis and it seems they have something like 10,000 activation a day and yeah they said that they were matching the expectations in term of pick up and they are also published on data about how many cards activate and they [indiscernible] but it is I think on the IC swipe side.

They also say that, when I talk to [indiscernible] in Barcelona, he said that the people are adopting their services. We are using it more than this sort. I think it make six or seven transaction more than I don’t remember what was the frequency, but he had made a presentation in Barcelona [indiscernible] as you just look at it, that his number of what we are seeing is there is a good marketing and that they have made a much more simpler marketing than most people. They did not try simply at the campaigns how to make it and the supply board, they gave [indiscernible] for usage to get soft edge and when people get that system to use it, this is – they don’t live without it, it’s like 4G. I think I told you several years ago, when you try to really complete without it, so at the same when you start to get used to it and you see that you have some pre-money that you can spend. You spend it just to try and then you get accustomed to it.

Achal Sultania – Credit Suisse Securities Ltd.

Great thanks – thanks a lot

Olivier Piou

So overall, when it’s pushed, it works very well. It’s not a question of technology, it’s a question of education and that it’s available and just do it.

Achal Sultania – Credit Suisse Securities Ltd.

Thank you.

Olivier Piou

Sure.

Operator

Thank you. The next question is from Sébastien Sztabowicz, Kepler Chevreux.

Sébastien Sztabowicz – Kepler Capital Markets SA

Hello everyone I’ve got one question on the innovation that you associate with the Mobile World Congress, which is mobile connect. I would like draw into bit your current and quarter opportunities coming from this new offering and have you already signed some contract with this new approval and also in which do you seek the strongest potential midterm. We use mobile connect and also the follow-up on the carrier billing activity, could you please provide an update on the growth opportunity in this business and the joint market development [indiscernible]?

Olivier Piou

Sure. So, Mobile Connect, it’s an interesting development, where as a group of telcos led Orange, but several telcos came to us and said, look here it’s incredible, there is Facebook Connect, there is Google Connect, but we is a telco are most legitimate to connect.

Do you have a solution? Okay, and so we explained to them that these asset for the SIM card that was we made our seven and that they could use it and we design of sure a few ways to interact, but some telcos like in Latin America, people like NOTT [ph] and some other simply, when you connect to the web instead of entering your credit card number, you enter your mobile phone and you’re sent back a message saying, are you really [indiscernible] and installing [indiscernible] at the ATM in front of [indiscernible] and its sufficiently compact the way that you cannot authenticate the person okay.

So, for us it is another type of service, another type of software that we can put in the SIM card and these value to that asset. It is the asset of the telcos, and don’t forget that it has two sides. One side which is, what you put in the software that you put inside the SIM and the other side, which is how you activate and manage ISIS [ph].

So, what is Mobile Connect? is essentially an authentication functionality. And what is interesting is that we have already signed, what’s on top of it. Authentication is a basic, and on top of which you can sell other services like digital signature, legally binding digital signature just like what we do in Sweden or in Norway and Finland etcetera, or in the Emirates, in Singapore, where once you’ve authenticated somebody, he can do something, which is legally binding because the SIM card is of sufficient quality. It is the L 4 plus certified and it is – that’s multiple application to do something most frequently accessing of the government service.

So yes, I’m checking with the Gabriel, I don’t know if it’s already announced, but it will be announced imminently. We’ve signed the country, who are decided not only need to use Mobile Connect, but to other platform on top of Mobile Connect to do digital signature and so it just get action already. It was announced few days ago. So, I get some phoning from Gabriel that it’s not yet announced, but it will be announced very soon, and it’s a way for us to sell up on top of what’s the functionality which is globally available to everybody. Okay, so that’s geographical that you mentioned in the case is government program. So it’s an opportunity simply because it gives us, it puts more software into this income.

On your second question which is the tie up billing, I’m glad you had that question because it’s one other of these jewels that is in the rough and not that were known within Gemalto a little like a gold pack that used to be, we’ve introducing on the stock market that was participation in gold pack in China and our 20% and now it was $100 million whereas when they were inside Gemalto there was nothing.

Tie up billing is a little bit of same this platform it would be extremely difficult to replicate to that, because it’s connected to a very large number of Telcos around the world and if you want to connect to their billing system you may get the authorization to connect to three or four but you know those billing systems are now so complicated that the Telcos don’t like that you connect to it, so to reproduce it at that scale will be extremely difficult and time consuming.

We at Gemalto when there is traffics for that platform we recognize only the value add that we do, which is the billing activity. But of course if you think about older the topic that goes gross rate, which is mostly the app stores and several messaging depends at gross rate. You speak a several hundreds of millions of Euros that traffics for that platform. So it’s probably one of the largest mobile payment platform in the world but since we recognize the revenue only our contribution to that traffic it’s a few tens of millions in our average.

So growth opportunity is that, it’s one more of this payment mechanisms and when you speak small amounts the user will have the choice to bill it to pay contactless was preloaded way or it complements very nicely [indiscernible] no half cash with F1 cash that just being launched it’s one more technology that is in our arsenal to serve our system.

Sébastien Sztabowicz – Kepler Capital Markets SA

Okay, thank you, Olivier.

Olivier Piou

You’re welcome.

Operator

The next question is from Andrew Humphrey, Morgan Stanley.

Andrew E. Humphrey – Morgan Stanley & Co.

Hi, there thanks for taking my questions I’ve got a couple if I may, first is on product revenue and mobile communications, the impact of the [indiscernible] product I think is something you’ve been mentioning since Q1 of this year.

Olivier Piou

Yeah, so we just done we’re surprise to anybody it’s about three point impact of other the year, and it impacted also year, so I had that questions at all time this morning, but I’m glad that you remind everybody [indiscernible].

Andrew E. Humphrey – Morgan Stanley & Co.

Sure. My question is you reported kind of positive organic growth quite materially for the nine months of the year but negative in Q4, so I mean assuming that impact was relatively evenly spread over the year. What else was going on in mobile comps that lead to that negative growth number in Q4. And my second question is around HTE and I think you expect about the potential impact on Telcos and how they – access to the secure element, how is that made you think about how you price the TSM business to any service provider as you made want to work with you, but now have THE as an alternative.

Olivier Piou

So in the Q4 numbers you have several points, you have not only they keep so effect you’ve also Netsize revenue recognition change due to the amount of with IPX we have to harmonize all this which is another 2% to 3% and you have the fact that Q4 for 2012 was a very strong Q4, but all of this makes that a you have the different now if you look at our quarterly performance in mobile communication, it ranges from 0% to plus 10% or 12%, so on the quarter to quarter you should not take to much that’s why I see this [indiscernible] year as you having today, [indiscernible] but to think a longer value.

[indiscernible] it’s not a management platform, it’s a way to pull on and activate those values [indiscernible] and you can, you maybe the GSM you may not be the GSM depending on what you’re doing and at GSM helps to store and make sure that what you, what is the important gets conveyed properly into the secure element, because all those networks are open and so flexible to attack so you need to manage it along that traffic.

At the end of the day when we are further GSM as a service typically we do a very similar pricing towards we doing [indiscernible] personalization for our banking [indiscernible] so for the financial institutions this is very well known the by products that were here from [indiscernible] so this is – as I understand that on the one side we have less cost in terms of facilities because it’s all done over there on the other side they realize that this a little more complicated, because in this environment, it’s quite your style. so we don’t have that much pressure around it. Anyway, it will cause financial institutions, something to issue those data and deliberate into the mobile.

So each issuer need a service platform to load and manage their data, whatever the recipient was there – the recipient in LTE secure element, I would see, and they have also a very diverse issue, also it’s a diverse base of client, so that platform needs to be able to download the data in 2G mobile, whatever was a brand. So if you take all that complexity, it was an multibrands, I mean people are working systems in multiple type of country, sometime while you operate and the fact that this cannot change, you don’t want to lose your customers in particularly changing from effort to employees to blue moon or red carpet, which will be the next in [indiscernible].

You need somebody you can accompany you, that’s what we provide. So there are also different schemes in addition, you want to be able to pay at the merchant, which is possessing Visa, MasterCard, JCB or with China UnionPay. So again, we make it simple. and today, the TSM solution is common. it works, you see it in the U.S. related, it operators every day, at large scale, without failing. So there will be competitive offers, but we don’t really see a price pressure.

Andrew E. Humphrey – Morgan Stanley & Co.

Okay, thank you.

Olivier Piou

Sure.

Operator

Thank you. The next question is from Antonin Baudry, HSBC.

Olivier Piou

Antonin? Lora, I think we can hear Antonin.

Antonin Baudry – HSBC Bank Plc

Do you hear me?

Olivier Piou

Yes, I can.

Antonin Baudry – HSBC Bank Plc

Okay.

Olivier Piou

Good afternoon.

Antonin Baudry – HSBC Bank Plc

Good afternoon, Olivier and Jacques [indiscernible] if possible to do a point of the MCX contracts. did you see where you link to this contract so far, and what you’re seeing abut the recent partnership put in place by MCX in mobile payment solutions, this is my first question. The second question is about free cash flow generation on your cash file. Do you expect to put in place something to increase the free cash flow generation, I mean to manage the working capital requirements are actively on the – after the €450 million of net cash at the end of 2013, which is above your expectation. you will have to add the free cash flow for 2014. So if you do not do acquisitions, what do you think to do with this cash file, if possible to do if you aim to increase the return to shareholders, thank you Olivier.

Olivier Piou

So, MCX is not yet launched, so it’s not a question of how it’s operating. It’s a project like every project it’s different phases, in addition it’s a little more complicated because MCX was created by their founding member, then recruited a new management et cetera. So it has such changes. Our contract is still in place, I read somebody, said we don’t have a contract, it’s still in place.

Now was that contract can evolve? And what the event that target has made there are many discussion around what kind of level of security, we should use, long-story short. Nothing to report specifically, it was not very material in our 2013 number, simply because it’s development in progress. In term of free cash flow generation, Jacques, you want to answer?

Jacques Tierny

Yes, I would like very much to answer Antonin, tell him that we very actively manage our networking capital, that for sure. And with testament for that is our return on capital employed. So yes, sometimes you could H1 that we used it in receivables and that was for business. That was a good move, in the crisis I remember we bought some equipment at cut-price because it was the right time to buy it. So we are aware of what you can get when you have flexibility, and we would certainly continue to promote flexibility on our balance sheet.

Antonin Baudry – HSBC Bank Plc

To say, do you expect room for improvement of your working capital requirement in the coming years? Due to a higher work on the delay of payments?

Jacques Tierny

Of course, I’m always looking for the best terms of payments, but sometimes your client will ask you something, and we will give you something in returns, so we have to trade off every operational decision, and that’s what we do looking trying to get the best return on capital employed for our company.

Olivier Piou

If you look at [indiscernible], I think the increased on [indiscernible] 13% or so, it’s not that much if you consider as growth of the company and Chinese impact was a payment terms are always longer. So I respect your question, but no I think, I’ve always been clear with you that your first and best usage of our money to invest it in our company, sometime we invest it in assets. But you know, we don’t need a lot of assets, I was surprised myself to read in our own press release that the net book value of our plant, property and equipment was only €230 million total, but when we provide payment terms or we buy the chips in advance in order to grow our business in China. We are happy. That’s the best where you can imagine of our cash file. We generate 18% return on capital employed. If you know another place, where I can put my money for 18%, tell me I’ll buy it straightaway. So, I think it’s a good usage of our cash and you should not be careful about it.

Antonin Baudry – HSBC Bank Plc

And about the return to shareholders, are you expect to improve the level these campaign are coming?

Olivier Piou

I will leave this to the board, we have a dividend policy. It has not changed since the long time, when we created a dividend, some people were telling us so why do you return money to show a dividend. That companies don’t pay dividend. I think it’s a good discipline to pay dividends, simply to remind everybody inside the company that we need to evolve the shareholders for the trust and the faith that they put their money in our company.

Now we will never be a high yield company at least not anytime soon, because whenever will be high yield, it means that we will have exhausted the growth of our businesses and I think we have quite a bit of time before that. So, let us use that money for growing and if we really have way too much, I’m sure I know my board they will not hesitate to give a dividend. but in increasing double-digit percent every year has been quite a good track record. So, let’s go with that.

Antonin Baudry – HSBC Bank Plc

Thank you.

Operator

The next question is from Alexandre Faure, Exane BNP Paribas.

Alexandre Faure – Exane BNP Paribas SA

Hi, good afternoon. Thanks for squeezing me in. Just a one question left on research and development expenditure that were only slightly up year-over-year. And actually, if you add back the capitalized development costs net of monetization [ph] it was down by almost €10 million. So, I do understand that possibly you’re investing less in machine to machine and there might be a bit of [indiscernible] still as you said, the use of your cash is to invest in your business to engage 18 percentage on capital employees.

I’m just trying to get my head around, how you’re thinking about OpEx and then particular about R&D for the company? Thank you very much.

Olivier Piou

I’m really happy of your question at this time, because I read this morning a note that, I wanted to react to and I found that and the note was that, is it sustainable, because the percentage of growth we do, when the percentage of OpEx was not denied [ph]. We don’t see that way. We have the money to invest more, if we have more interesting projects and we have also the discipline to work only on those projects where we have good numbers.

Now we take some risks. We innovate, but there is no project, including the project as a business innovation garage, the most speculative project that we do. That are with all our retirement, it’s a good discipline, it’s important, it’s focused everybody to have milestones, so that, if you don’t have – still we can stop the project and if we stop the project thoroughly, everybody is good for everybody. It’s good for the money and the company. It’s good for the pride of the engineer, because there is no attachment that [indiscernible] fail or whatever. We tried. We have a few simple measurable milestones if we don’t feed them. No problem, we’re just back and do something else.

So I was aware I think in terms of R&D is that, we fund the R&D that is not a good return, and we are quite exigent, because in our business, we could be easily be focused to chase too many rabbits. That’s also why we do that all your plan, it’s to communicate through the customer, what we will do and what we will not do, communicate to the employees what is important for our business and what is less important and also communicate to you what’s our ambition.

At the end of the day, when you make that balance, we stepped up our expenses in 2012 in preparation for the future, but we don’t need to step up our expenses in production to revenue growth. So, you will have a focus, which is that if we are stronger, we should have leverage on these OpEx. In addition, you have leverage on G&A. You need only one CEO and one CFO, even though that is the company is now 50% bigger. So, in our case some savings.

And in terms of sales and marketing, it’s probably the one, which is most linear, the sense that we need more footprints in the field in order to sell. We have more diversified activities. So we have to invest in the sales coverage and in training people to explain our offers, and that you have also in 2013 foreign exchange impact, we complain about it when it is at the top line. But we have to recognize that this was beneficial, when it is OpEx, because if people use the reported OpEx, maybe in the second half. But, so the impact of forex was not only on the top line.

It was also a little on the cost side. I will not hesitate to spend if we find a new goldmine. I told you this mid-2012 or in Q1 2012, when I told you that’s we would step-up our holiday [ph] because, I felt that we would be in good shape to make our €300 million. I can tell you at that time internally people who are telling me you believe in Santa Claus. You’re absolutely correct, that we are doing it.

Yes we would do it as €300 million. If we will have a discussion that as long as we deliver on our promise to the stock market and to the external world and our customers, yes we can add that value into R&D, but today we evolve what we.

Alexandre Faure – Exane BNP Paribas SA

Okay. Thank you very much. I have a quick follow-up on cash allocation if I may. How do you think of potential dilution because I noticed that you bought back very few shares this year compared to what you used to do in the past. And what is your level of treasury shares has come down quite dramatically and it seems to me that your stock option plans are not covered anymore, not fully covered, at least. Is it something you plan of resuming when you have future buying more shares back to make sure dilution remains under control or that not priority for you any longer?

Jacques Tierny

I mean it was never our top priority. It’s happens that many people have exercised their stock options is able to contingent [ph] first date of from the IPO of [indiscernible] those options have an expiration date. It was tenure that after the grandson. We IPO-ed in 2004, so 2014 is coming up as they we are simply exercising their options to that credit. We are very confident in the company because [indiscernible] at 14.8 year old and now is a share that’s 80 something.

So we are happy that’s we pocked €40 million or so of cash from the employees, when they exercise this stock option. It’s the other side of the IFRS, is that you take a charge on your balance and your IPO and then, but you get the credit on the cash line. And we did not buyback so many share this year in 2013. Simply because we have to fund our working capital.

I have told you that in our priorities, investing in our company was a first thing. So, I think the dividend was the second thing. Buying small companies that will make a difference for us, was a self priority. And buyback was the only rules, with the left over money. So, that’s how it went. Now we fund that, we need to issue shares simply because to provide for the employees. That’s okay, so most companies do this. It should not be major and today we still have plenty of treasury shares so it should cover certainly for 2014.

Alexandre Faure – Exane BNP Paribas SA

Thank you very much.

Olivier Piou

Sure.

Operator

The next question is from Emmanuel Matot, Oddo.

Emmanuel Matot – Oddo & Cie SCA

Yes, good afternoon Olivier and Jacques, Gabriel and John. Two questions please. First how shall we look to the patent division in 2014. Do you expect to book some old news in H1 and it was the case in 2013 or maybe in H2 it just that does the end of your law suit in the U.S.

And my second question is about products [ph] because lots of guaranties is elevated since the beginning of the year in several emerging countries. At current levels is there a risk of significant impact on your adjusted EBITDA for 2014. How are you head for this year and for your long-term plans in queue?

Olivier Piou

So, patents, I mean we expect a very little and it’s a reason we expect very little is that is going to be very binary this year, either it will be small or it will be very big, okay. I can’t give you a guidance. We’ve discussed the Google case. So, I’m sorry I don’t have a good forecast to give you and so be conservative and anything is the upside, anyway you cannot put big number either or so zero or very little and you will be safe.

Emmanuel Matot – Oddo & Cie SCA

But yes, which is excluding the Google last suit?

Olivier Piou

Yes, we have.

Emmanuel Matot – Oddo & Cie SCA

Okay.

Olivier Piou

So, actually we will return to the additional numbers, but I don’t know when and certainly not quite so high I don’t know.

In term of forex, we don’t try to neutralize the forex at least square about it. We try to smooth the valuation of the foreign exchanges. What we believe is a different currency we evaluate a lot for long period, somewhere the prices will adjust, they will adjust for us. They will adjust for the competition.

So, we don’t try to be to pick what is best rate after try to completely neutralized currency exchanges first it will be very dangerous. Second, if we know how to do it, we would traded in foreign currency [indiscernible]. So, we know it’s not an option for us. So, we smooth it. So, we stopped from a lower base as before. So, yes it has some impact compared to when we started two or three years ago. But at the end of the day, we will so expect that you know if guaranties are very low in most countries, prices will have to adjust, because our competition is in the same situation of this.

So that’s our figures of [indiscernible] and we cannot anyway balance completely our exposure, I remind you how we work. We have about 40% of our revenue in Euro 40% in U.S. dollar denominated or associated currencies and 20% in other currencies, other currencies are the one that have been fluctuating most in recent times. Our costs is a first way to neutralize this currency evaluation we try to balance the costs by regions, which we are ill overweight in Europe.

And actually not due to factories but mostly due to the R&D and the headquarter now

I should not I don’t think we should move the headquarters at the year of depending and the forecasts one year in Japan, one year in the U.S., one year at [indiscernible] that would be expensive so we have to accept that the SIM balancing this and we try to neutralize it, but we don’t try to compensate it, try to smooth it if you will.

Emmanuel Matot – Oddo & Cie SCA

Okay, that’s basic enquiry on the short-term I mean regarding this your selective addition?

Olivier Piou

It’s going to be I mean if it degrade it’s going to be a strong smooth degrade for everybody and if it lost many years yet maybe might oppose there is a board within me I look why not you move in what’s in turn I not know where but the contraction if we move Jacques Tierny to the U.S. it maybe will be paid in dollars but it’s probably our salary will be straight from that it’s not going to change a lot.

So yes a few things that I’ll touch on and the few things that you do progressively that for example we are happy that our business in the U.S. is increasing so much, that it was 15% of our revenue when you believe that we think that there is not even a single banking card issue, banking card that cheap and pin that had it’s balancing so I mean you need to be more detailed no big worries I guess would be a good answer.

Emmanuel Matot – Oddo & Cie SCA

Okay, thank you very much.

Olivier Piou

We care, but we don’t work.

Operator

The next question.

Olivier Piou

Go ahead.

Operator

The next question is from Glenn Fodor, Autonomous Research.

Glenn T. Fodor – Autonomous Research US LP

Hi, good afternoon thanks for taking my questions, I appreciate it. thanks for the detail earlier on cash flow trends looking farther out but just near-term and more tactical to ensure there is improvement in this quarter can we see this trend continuing into sort of the next quarter and then the next quarter beyond that I mean are we it is a sort of temporary sort of benefit you are seeing are is it kind of sustainable over the near-term?

Olivier Piou

I mean there is no magic on December 31. There is a same weather. There is no magic on March 31 of [indiscernible] there is no specific event for our customer. So, you have to take this on longer time. What you have to realize is that we are appreciated by our customers, they pay us. It’s not like we have the force or anything like this. And so typically we collect our cash because our customers are reputable customers they are Telcos and they are rich enough to pay us at present 0.1% of their expenses. They are the financial institution same we are very small part of the expenses, government and difficulty, but I wish we would be materially their expenses. Still be a small. So, no big risk in terms of cash, but they don’t have a milestone quarter-by-quarter.

Glenn T. Fodor – Autonomous Research US LP

Okay. And there is one last one, the one of the HTE debt, but I want just a little more clarity because we are getting a lot of questions about it. With them as it relates to MCX and we are all see that partner with [indiscernible]. Can you just sort of discern for us the sort of the division of labor between what [indiscernible] doing for them just once again versus the way you see it what they expect to get out of [indiscernible]. Thank you.

Olivier Piou

I don’t think it’s to me to explain the project architecture. I have never done this on any project, whether GSM or whatever. So, this is too MCX and I should not answer that question. On HC there is nothing to do with MCX. There is no plan to my knowledge to use it HC and MCX or that is one [indiscernible] I never thought about it. So, you should have major connection.

Glenn T. Fodor – Autonomous Research US LP

Okay. Thank you. I appreciate it.

Olivier Piou

Sure.

Operator

The next question is from Johannes Schaller, Deutsche Bank.

Johannes Schaller – Deutsche Bank AG

Yes, thanks for taking the question. And congratulations on the good year of growth again. On the demand for both in secure and multi-tenant didn’t really how we should be thinking about this for 2014 and going forward. Will it be more driven you think by subscriber uptake mobile payment app or these being done lot of carriers new customer base that are just aided to feed the market and you use difference for payment, but also for other security sensitive applications going forward, and then secondly if you could give us a little bit of an update on TEE and the Flextronics joint venture. I think they are more devices coming to market that are enable and maybe if you could give us a bit of view over the next one, two, three years if that could start contribute a little bit of profit already to you and then the joint venture partners. Thanks.

Olivier Piou

Thank you for bringing the attention on the TEE, because it’s one more asset that we have and I’ll try to cover this. Starting first by the multi-tenant SIM; you have the two effects and your right there about the same order although of magnitude. Now that the NXG SIM is proven to work and to be capable to be deployed, it’s a very similar, in terms of hardware it’s the same chip so it costs the same in term of hardware to buy that device and its purely a question of software packs, when you make it more dependent, so you can either feed it and activate it afterwards. And so we have schemes with some customers, where they pay us when they activate it, and we can control this quite easily with our platform so that we are straight forward, and so much as a [indiscernible] like in the U.S., it will be [indiscernible] due to ICs and other services that they want to launch like Mobile Connect, but in Europe for example it’s mostly a [indiscernible] and early launch.

In TE, TE is one more way to secure the data and the transaction in the mobile phone. It’s also a good way to – you need to secure the interaction between the secure element and the keyboard is also displayed. So it’s an important mechanism that they I would be in most telephones. It would try and send overall security of the system against malware.

We have contributed technology to the JV with ARM, simply because we believe that there is lot of ARM chips around and that’s a good way to propagate our technology. We have also quite a bit of patents on this technology, but I hope that it will propagate, its a good technique for example for tablets and other objects, connected TVs that they are game box – game consoles of all sorts. So I think it will get traction, but it’s only a couple of year away.

Johannes Schaller – Deutsche Bank AG

Understood, thanks very much.

Olivier Piou

Its for us, in that case its just royalty on our software or its we make the money out of GSM activation, as our remote positioning but things we don’t supply, there is a chip, we don’t do the buy and sell of chip or the plastic which purely software and activation and remote management of the data.

Johannes Schaller – Deutsche Bank AG

Got it, that’s very clear. Thank you.

Olivier Piou

Sure.

Operator

The next question is from Andy R. Perkins with Société Générale Securities

Andy R. Perkins – Société Générale SA

Hi guys, thanks for taking my question. Just a brief on really, on the low-end SIM cards, we obviously were down quite considerably during 2013. I just wonder whether you think that’s the same pattern going to be seeing going forward whether you think you’re just going to have low sales of those costs in the market as a whole. And the second question, what are your views on seasonality for this year, I might have missed that earlier on this product, but could you just address that as well. That will be great, thank you.

Olivier Piou

So the low end market in 2014 was – isn’t fully affected by the situation in India, it was not a market, the low end market in India was not the market where we are here at presence. But it’s a driver, made that our competitors went into the low end part and just [indiscernible] in it and we avoided to be quoting that better and we needed our resources to the probably high end technologies. So that went fine. It should not be the same effect in 2014, so I think that volume will come, the licenses system is now square in India.

Now there will probably be – still be some consolidation in India, because I think there is still eight or nine operators and even thought India is very big, it’s still way too much and they badly make money. So I will not be surprised that there is more consolidation there, but the volumes should assume, for us we are happy to not participating it, I told you in 2012 that it was contributing that 1 million out of the 305 million that we have done that year. This year, I contributed nothing of course, because we are selling and that is – we do not lose money and I think next year, I mean 2014 if some customers want us a one-stop-shop as we used to do before, of course, we’ll supply to them and making sure that we make money. We are not a charity, and we don’t work for nothing, but I don’t think it will be very material in our number, certainly not much in the PFO number.

Now in terms of seasonality, which was your second question, I don’t think I mean for sure, we will not have the OpEx seasonality that we add in 2013, because this was more question of comparison for this year. And for the top line, let’s wait a little in – later in the year to see there is specific pattern developing. I don’t see much at present, so it should be more usual seasonal pattern, but if IT and its team developing, I’ll be offshore reporting.

Andy R. Perkins – Société Générale SA

Okay. Thank you very much.

Olivier Piou

Sure. Thank you for your interest.

Operator

Thank you. We have no further questions.

Olivier Piou

Okay, good, Lora and thank you for all your interest. We have a very long list of question today and I’m happy we could take all the question. Our next call is set for April 24 when we publish our first quarter revenue figure, so its not that far I want simply to mention that our 2014 AGM it was Annual General Meeting of shareholder is slated for a months later which is on May 25, so we would be of course happy to have you all enjoying if you are shareholders and all of us remain at about this disposal of for any further questions that you may have otherwise and thank you again for your interest in Gemalto. Much appreciated, so good bye for now.

Operator

Ladies and gentleman thank you for your attendance. This call has been concluded. You may now disconnect.

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