Gemalto NV (GTOFF) CEO Olivier Piou on Q2 2014 Results - Earnings Call Transcript

Aug.29.14 | About: Gemalto NV (GTOFF)

Gemalto NV (OTCPK:GTOFF) Q2 2014 Earnings Conference Call August 28, 2014 9:00 AM ET

Executives

Olivier Piou - CEO

Jac Tierny - CFO

Gabriel Rangoni - IR

John Lineberger - IR

Analysts

Stephane Houri - Natixis

Achal Sultania - Credit Suisse

Sébastien Sztabowicz - Kepler Chevreux

David Mulholland - UBS

Susan Anthony - Mirabaud Securities Limited

Youssef Essaegh - Barclays Capital

Emmanuel Matot - Oddo Securities

Gianmarco Bonacina - Equita

Alexandre Faure - Exane BNP Paribas

Operator

Thank you for holding and welcome to Gemalto’s First Semester 2014 Results Presentation. You can listen to the presentation on live audio webcast via the link on the investor relations section on gemalto.com. (Operator Instructions)

I now hand it over Mr. Olivier Piou, sir, please go ahead.

Olivier Piou

Thank you and thank you all for joining Numeris today. I am Olivier Piou, CEO of Gemalto and with me today we have Jac Tierny, our CFO and Gabriel Rangoni and 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 publication that we will use to comment our first semester of 2014 results. Both are available for download from our Web-site at gemalto.com.

As usual, we shall stop with some prepared remarks and after that we’ll take your questions. So if you have the presentation in front of you and have read information on page two and three, let’s go straight to page four to the highlights of this semester. So the first semester was particularly bust in preparation for year with prolonged seasonality. Gemalto’s revenue came in at €1.13 billion plus 5% at constant exchange rate and our profit from ongoing operation was €120 million, 8% on our last year’s figure. During the period, we extended our commercial momentum as revenue growth accelerated in the mobile segment over the period. Mobile financial services leads our way with plus 24% increase in revenue and in the payment and identity segment the continued strong showing in EMV payment cards which grew plus 22% was dampened by lower revenue from the e-government document business. In this government sector, new contracts were signed that will generate significant revenue going forward.

Looking ahead we anticipate an accelerated revenue growth at constant exchange rate in the second part of the year as well as our double digit increase in profit from operations for the full year 2014 excluding the recently announced acquisition of SafeNet. The ramp up of EMV, the acceleration in the government sector, the launch of the previously delayed mobile contracted services and our expansion in the identity and access management business all supported this outlook.

If you look in more detail on slide five at our P&L you will see that our plus 5% revenue growth was supported by contribution from both embedded software and products helped by plus 5% and platform and services up by plus 10% while patents contribution to revenue was slightly lower. Growth in embedded software and products came mostly from EMV payment cards. Platform and services contributed 37% of the total revenue growth and this double digit increase was driven by solid performance in the mobile financial services as I already mentioned as well as Enterprise, eBanking and Government Program services. If you focus on the table on the left hand side for the period though actual currency exchange rates reduced by 5% plus point the growth at constant exchange rates our gross profit was down only 2% at €418 million resulting in a gross margin of 36.9% of revenue.

Operating expenses for all operations were essentially unchanged year-on-year as we strictly controlled our expenses and carefully evaluated our operating investment. So profit margin from operations came in lower by 1 percentage points at 10.6% of revenue as we also endured the negative impact from our net exposure to the values unhedged currency evaluations. Finally our adjusted income tax expense was €22 million higher this semester on because it was way too our long term ETR and leading to earnings per share of €1.11 per share.

So with this introduction let me hand it over to Jac who will now comment more in detail on this semester business.

Jac Tierny

Thank you Oliver and good afternoon ladies and gentlemen as you know we’re reporting metric, the profits from operations and we provide you with a detailed bridge between the profits from operations and the IFRS EBIT. So this semester, you can see an increasing of restructuring and acquisition related expenses to €21 million up from €1 million in the first semester of 2013 which is due mainly to the rebalancing of certain industrial and engineering capabilities across worldwide sites in order to optimize future productivity.

You can also see an equity based compensation charge of €27 million which is higher than the €13 million of the first semester of 2013 as the company has introduced a new long term incentive plan that is aligned with the 2014-2017 multiyear development plan objectives and this new plan is conditional on overall communities progress to be recorded over the period.

I invite you to go to Slide 8 to review our main segments performance. As usual my comments on revenue variations will be at constant exchange rates. First, the Mobile segment; the Mobile segment posted revenue of €586 million up 2% year-over-year at constant exchange rates. Our flat revenue variation recorded during the first quarter of 2014, performance improved sequentially with 4% in the second quarter, this came on top of the strong plus 12% year-over-year growth that was posted for the second quarter of 2013.

Revenue from Embedded Software and products increased by 4% for our second quarter, after a 1% deep in the first quarter resulting in 2% growth for our first semester overall. Deployment of Upteq multitenant SIMs continued in the United States and the roll-out progressed in Asia as more countries prepare for launches and in Europe where we finalized agreements for multi-country commercial deployments that will start in the second semester.

Platforms and Services grew by 6% this came on top of the plus 44% revenue growth that was recorded for the first semester of last year, with uneven performances with the portfolio of offers.

Mobile Financial Services and Mobile Subscriber Services grew by 24% and 13% respectively. In these businesses, Gemalto won the bulk of the new TSM tender awarded during the first semester and revenue from licensing, maintenance and support is beginning to rise over integration revenue assistant staff to operate commercially.

Netsize activities shrunk by 12% for the first semester this is due to the adaptation of IPX business to new European regulations in the payment and opt-in messaging space. As a result, gross profit from the entire Mobile segment was lower by €13 million at €237 million this is due primarily to the reduced revenue in the cards business in the first quarter and also the reduced Netsize activity. With operating expenses increasing slightly, by €3 million during the first semester, profit from operations of €64 million around 11% in PFO margin.

Please turn to Slide 9 now for comments on the Payment and Identity first semester revenue was €537 million, increasing by 10% compared to the same period in 2013. Commercial momentum for EMV continued to build around the world as all regions contributed double-digit growth generating together an 18% increase in payment activity revenue.

In China EMV migration continued and began encompassing additional Tier 2 and Tier 3 regional financial institutions. In the U.S. we reinforced the organic investments we made over the last two years with two key acquisitions that provide personalization and card services to U.S. financial institutions. Activity increased quarter-on-quarter with the first banks initiating their deployment of EMV accounts and more preparing their plans for a rollout during the second part of the year.

The Identity businesses were lower by 3% overall in the first semester of 2014 as a strong plus 13% increase in Internet and mobile banking activities was offset by lower performance in Government Programs. Indeed the Government business was slower in both the first quarter and second quarter and this is due to lower deliveries of e-documents, especially in the Middle East. With the backlog of contracts won this activity is expected to drive high single-digit to low double-digit revenue growth during the second semester.

In the Identity and Access Management business, the important news was that Gemalto entered into a definitive agreement to acquire SafeNet, thereby extending its position on the online security market from edge to core. In this segment, overall, gross profit rose by 5% to €172 million and as operating expenses help slightly as a percentage of revenue profit from operations for the first semester of 2014 came in at €53 million, up 16% from the €46 million recorded in the first semester of 2013.

You can now move to Slide 10. That illustrates the impact seasonality has on our profit generation. As many of you know, Gemalto typically records a larger share of revenue in the second half of each year. With our high operating leverage, the additional revenue we recorded in that second part of a year generates high incremental profits.

This effect explains the strong seasonal swings in profit that usually characterize our performance. On the left, we have mapped out the revenue growth rate of the first two quarter of 2013 and 2014. The sequential increase in absolute terms from Q1 to Q2 is evident and you can see the high base of comparison we faced in Q2 this year, which came on top of plus 16% growth recorded in Q2 2013 and that also have led to a level of 5% revenue growth of the first half of this year.

As we expect an acceleration in our year-on-year growth rate in the second semester excluding any contribution from SafeNet and as our cost base is essentially stable, we know that is really large base of the incremental revenue we expect to record in that second semester will fall straight through to our PFO. To help you visualize this mechanism, we’ve laid out on the right the number of revenue and profit from operations for the first semester and we’ve illustrated the full for [ph] impact incremental revenue would typically have on our profit in the second semester. It’s on the basis of that operating leverage effect that we confirm our outlook of double digit expansion in profit from operations for the full year.

Let us now go to slide number 11 to the key items on the cash flow statement. In the first semester of 2014, operating activities generated the cash flow of €128 million before changes in working capital, which is a figure comparable to last year’s €127 million. Changes in working capital reduced cash flow by €75 million compared to €83 million in the first semester of 2013.

Cash generated by operating activities was slightly higher at €49 million up from €45 million a year ago. Capital expenditure and acquisition of intangibles amounted to €50 million or 4.4% of revenue. Remember that in our objective on average over our four year plan, we plan to limit such expenses to 5% of revenue. So, we’re in line. Acquisitions, net of cash acquired, used €43 million in cash, this includes the acquisitions made in preparation for the migration to EMV payment card in the United States that is expected to ramp up in the second part of 2014.

We also used EUR40 million in cash for the repurchase of shares and return an additional EUR53 million in cash to shareholders via the dividend for a total of EUR47 million. As a result of these elements, Gemalto’s net cash position at end June 2014 was €363 million up 32% when compared to June 30, 2013. Thank you very much ladies and gentlemen, I now hand back to Olivier.

Olivier Piou

Thank you, Jack. So let’s move now on to slide 13, we begin this last part of today’s presentation by addressing a hot topic for us and for many of you I’m sure. Indeed as expected for many years and even decade by some 2014 is a year in which EMV in the United States it becoming a reality. 80% of the credit card market lead by the top 10 issuers will begin migrating this year and on the debit side it’s already 25% of this market that plans to stop migrating in 2014.

As you can imagine, this has a major impact on the number of chip-enabled payment card that I expected to be issued over the next 18 months and we expect over €0.5 billion cards to come into circulation by the end of 2015 in the U.S. As the EMV standard continues to hold out, we expect that total market figure to double afterwards. It is on purpose, it’s something we’ve been preparing carefully, once we sense the opportunity was really becoming a reality, we chose to invest organically as you’ve seen over the past semester and also to selected acquisitions to address the various needs of old types of financial institutions in this market.

The timing is right and our team is probably in place already actively pursuing and converting the many opportunities generated by the strong expansion in market demand. On the next slide, slide 14, and in response to many questions we had in the past few months, we wanted to remind you we at Gemalto’s value proposition of mobile digital security stood in today’s multiple service, multiple operator and multiple devices context.

Begin with the service providers they can be financial institutions, enterprises or online retailer. They are faced with the task of ensuring security for their customer in a complex technological environment. As you can see on the left the technological considerations to ensure protection of their assets many and varied and the all coexisting different proportions depending on each local market; for example, in a given country mobile network operators can choose to deploy a standard SIM our Multitenant SIM depending on their market ambitions regarding the protection of surpassing mobile services. And in the same country each device manufacturer will have their own strategy regarding the implementation of security measures in their devices from pure software implementations to embedded secure elements all depending on the breadths of features they want to propose. What service providers want is to cover comprehensively their own client base that overlaps multiple carriers and multiple device brands and that’s why we come in precisely because Gemalto is a one that can address all these configurations and we provide them with a unique way to raise the assurance of service security in a seamless fashion whatever the local technological environment they face.

Beyond the technological configuration, it becomes even more complex when the diversity of mobile services offered eventually means different business agreements between multiple service providers that’s when multiple security enablers and features might be set up. There are different level of security and maturity of course in the market and what’s interesting is that progress being made as the market pricing currently happening for these various options. Because this market pricing is really converging and as you can see on the right hand side of the slide Gemalto hub services at the as the art of interconnection between the device manufacturers, the mobile operators and the service providers of all kind it’s simply the most compelling way for all factors [ph] to make protection of mobile connections simple in this pretty sophisticated and evolving environment.

On slide 15, you have what will another key component in this digital security value proposition of ours. With the acquisition of SafeNet we are becoming the world leading supplier of solutions to secured data, software, users and networks, both in the cloud and in private networks. I don’t need to remind you that with everyday passing in a way here of another message reach in data that is damaging to corporate reputations and detrimental to consumers. That’s what we want to be able to address with the technological and commercial offerings that is clear, simple to deploy and easy to prove efficient. So by coupling our expected and solutions and security at the edge with SafeNet’s track record and offering in security at the core of the cloud, we will be providing a unique end to end solution to consumers and customers and service providers on a worldwide basis.

In addition, Gemalto historical trusted relationship with telecom operators, banks and governments will perfectly complement SafeNet’s large and high skilled partners and retailers’ network and enterprise business. Judging by the feedback I have received after the August 8th announcement this great fit makes perfect sense to all of them. Finally, if we switch to slide 16, I will close with our outlook for the year that we’ll read out to you.

For 2014, Gemalto anticipates double-digit expansion in profit from operations for the full year as well as an acceleration of year-on-year revenue growth at constant exchange rates for the second semester. This does not take into account the SafeNet acquisition that is expected to start contributing at some point in the fourth quarter of 2014. As a result of the acquired business anticipated profitability growth and synergies Gemalto expects to increase its 2017 profit from operation objective of 600 million at present by approximately plus 10%.

That’s it for today. So Charlotte could you explain the proceeding for taking questions please.

Question-and-Answer Session

Operator

(Operator Instructions) We have the first question from Stephane Houri from Natixis. Please go ahead.

Stephane Houri - Natixis

I have got two questions actually, if I may. The first one is on the PFO. The second one would be on the US EMV. So, I wanted to come back on your PFO double-digit growth guidance. Could you please elaborate some of the assumption that you have, that's enabled you to be enough confident that after minus 8 in H1, you will achieve 10% or more for the full year, which means barely over 20% growth in PFO in H2? Another way to say it is usually you have one-third, two-thirds for the PFO of a normal year. This year should be a bit above 30%, 70%? What is different this year? And the second question is on US EMV. You have recently or, well, last time commented on the fact that this market will be a market of 100 million cards for 2014. Now you say that 500 will be deployed in 2015. So does it mean that we should expect 400 million card next year? And if yes, which market share do you want to take this year or next year?

Olivier Piou

So two interesting questions. The growth assumptions, the PFO essentially as Jacques demonstrated depends on the growth assumptions that we can have for the second semester. And it doesn’t, we don’t need a massive performance to reach 10% growth in PFO for the full year simply due to that leverage that Jacques explained. I read this morning that few of you tried to engineer what it would take to get to 10% for the full year and coming with essentially the same result and the same result that I have which is you just need to do about 8% in H2 to reach the 10% for the full year simply due to that leverage that we have.

So if you simply take into account that the mobile financial services that we have delayed in the first quarter come into play and you’ve seen the public announcement of the operators. If you take a simple recovery of our government program business by 10% because we will not have, cannot be mature than what we were in H1 and we have several large contracts that we announced like Quebec that was just one publically announced by the Quebec government -- and so on we start to kick in. That’s not very complicated, mobile com. doesn’t need to do a stellar performance much more than H1 or H2 last year. You have EMV starting in the U.S., you mentioned it in your second question it is a basis of comparison here is very low because we essentially did nothing of a little last year and first semester.

So you have this acceleration in the security front prices that we see ourselves even without SafeNet. So all of this makes it I think that’s why we’re very comfortable. Now that growth assumption of course there is always some scenario planning that we’re doing depending on what could be different scenarios but on the solid side.

Stephane Houri - Natixis

And sorry, but on the gross margin what is your assumption for the second half?

Olivier Piou

Gross margin we simply take a mix, we have different models of mix but in general if you look at the sensitivity of the gross margin, it’s not varying. So U.S. EMV as a reason I am not giving market share number simply that I am always prudent about this price of the market. If you remember at the beginning of the year I was thinking that market will be more 70 million or 80 million for the year and at the end of the first quarter in April when we made the publication, yes I was telling you it may reach 100 million maybe a little more. Now we speak more 115 maybe even more for 2014.

So when you are in this very steep acceleration Phase of the S-curve as the deployment, you want to go for the volume, don’t try to compare the market share because if you prepare a lower market share on a larger market than the bigger market share on the smaller market.

So we’re the new comer in this market, because we have very limited presence, but we have been preparing for it to large financial institution know us by acquisition or simply due to their international operations. We’ve strengthened our reach with the two small acquisitions that we did in the first semester. So I don’t know exactly what market share will have but in terms of volume and business I can tell you it will compare very favorably compared to last year. So it’s not rocket science.

Stephane Houri - Natixis

Yes, but on your chart you are saying that the top 10 issuers will begin negating in 2014. Can you tell us if you work with half of them, all of them?

Olivier Piou

Not all them because you can’t win it all. But half of them certainly a good understanding, now with some of them have multiple sources and some of them don’t buy simply products they also buy services, personalization and thus of course we tried to sell as much as we can all the services we have. And this is where those security breaches that are inside the corporation the effects that are happening on the corporate security also helping us, because we tend to have those communications at much higher level than what we used to have when we were speaking migration in the UK or in China.

Operator

A question from Achal Sultania from Credit Suisse. Please go ahead.

Achal Sultania - Credit Suisse

Olivier, one question on the Government business. I think in the past you have talked about this business having the potential to do about mid-teens growth. Now we’ve already seen this year probably going to be doing a low single digit. Just trying to understand is what’s your normal kind of growth for this business going forward let’s say in 2015 and 2016. And then a second question is on Google Wallet and the HCE. So what kind of a, what’s the latest update in terms of what have you heard from competition on this issue. Like is there still -- what are the concerns in terms of adoption of Google Wallet via HCE?

Olivier Piou

So I’ve not change my forecast related to government program. And you know it’s -- the penetration is still low there is still some demand on the market, there is a lot of tenders that are being negotiating are awarded. So there is a slower growth that we have been in the first semester of this year is essentially twofold. It’s mostly as a Middle East due to, A, a larger base of comparison and, B because there is government in these regions have other preoccupation, and when you talk with them it’s simply very legitimate and the police department of those various countries of the Gulf have many other problems to chase and to deploy digital identity. So this is understandable. But overall, if you speak 2015, you take some exchange and I think you’re absolutely right. Now in terms of Google and HCE, what’s interesting is that you start to see some pricing point; some public data is what MasterCard has published. You see that is not free at all. You speak $0.50 every six months. You speak a fee every time the API is called; you speak a different fee structure for the merchants EBITDA. So, the pricing of those systems is going to be very comparable to what for example ICT is offering us. So what I think is that you have convergence in the cost to ensure the security in the mobile payment world and you will have competition but nothing is free. What’s interesting is that the people will believe that everything would be free. I think they have to rewrite their models and I think we were right to keep a pricing that would be flexible but that would be also something you get rewarded for the value you win because this would happen now in terms of technology, of course we SafeNet, we will have the capability to offer solutions that are very similar HCE or HCE themselves when it will be finalized because tokenization is something that we know from a traditional business of online security for users inside the corporations. And we will be even better placed with the acquisition to deliver it.

Jac Tierny

But remember, we are agnostic to those technologies. We manage tokens our credit card numbers and all other credentials that you want to provide that we don’t really, we don’t make, we don’t have a bias on which one we will put in the object.

Operator

A question from Sébastien Sztabowicz from Kepler Chevreux. Please go ahead.

Sébastien Sztabowicz - Kepler Chevreux

I have got one question for you, Olivier. Could you please provide a little bit of color on the outlook for mobile premium business notably on the key areas, notably Europe. When do you expect the large deliveries in the video brand markets mainly for Vodafone and Orange to start to begin and what is the obvious visibility there? And also what is happening to this in Asia and in China in mobile implements? And I have got also a follow-up. I am not seeing many new TSM tenders for mobile payment. I would say who are above the last human fees [ph]. And that they'd be on the service provider side. Have you got any significant undisclosed dealer recently or we are seeing a bit of slowdown in the market? I would like to understand what is happening there. Thanks, Olivier

Olivier Piou

So the latter is quite easy. First Jacques told you that we won most of those business, but I going to the feedback that you were all fed up with us broadcasting our various wins. And what happens with the service provider, also, is that as we reach a larger population of them, they tend to also prefer to connect to our hub. So that’s why we have stopped making a lot of noise about it. But it’s not that there is no business. I think we won the vast majority of all the tenders. It is simply because our technology is proven and we are the reference there clearly. In term of US [ph], as a part was in mobile payment, we don’t need the extremely decrease in Europe but yet it’s progressing. You have seen that the team over in Germany has announced that it was launching. Vodafone, I don't to still that’s under as a customer they have to the announcement; I can’t give you the date. And in Asia, you have as usual suspects. Japan Korea of course we’re not very present. Hong Kong is very much our technology in many places. There was a little less in Japan in the first semester for two reasons. One is that we had a great Japanese business in H1 of 2013 and second is that the revenue completed from yen into euros went down by 30% but you saw simply because the currency has evaluated 30% but you saw actually that we did within this year recently going well down to they are converting their technology from the old FeliCa technology or the NFC as we know it in the U.S. or in Europe.

Sébastien Sztabowicz - Kepler Chevreux

You mentioned that you already signed up some service providers to be connected to your GSM hub. How many service providers have already signed so far?

Olivier Piou

We don’t disclose at least but some of them are in this country for example.

Sébastien Sztabowicz - Kepler Chevreux

Okay, thank you very much Olivier.

Operator

So question from David Mulholland from UBS. Please go ahead.

David Mulholland - UBS

Hi, it is David from UBS. Two questions, please. Firstly within the mobile business and specifically on the product side, I wonder if you could give us a bit of color on the dynamics you mentioned. There was solid progress on multi-tenant and LTE but can you give us some color on what caused the decline in the first half then if those were growing? Is it all legacy or was there anything else driving it? And then, secondly, I wonder if you could give us some comments on OpEx expectations into the second half? Should we be expecting spending to be broadly flat again or and how does this compare against your longer-term plans which were somewhere in the range of 8% to 10% growth in OpEx longer-term. Is that still in place or are you starting to slow down on spending?

Olivier Piou

Second part is easy and I will ask you so we commenting this last question because I am not sure I understood it. On the OpEx it’s very simple and you saw that the first quarter was relatively slower because of those delayed projects to very early in the year. We started to strictly control our expenses and be very careful compared to the -- with over investments. So if you look at this time there is no real reason why we would spend much more in the second half and also of course we are helped a little by the foreign exchange because even though we don’t like the foreign exchange impact to the top line some of our expenses are in foreign governances and they are helped from this side with the ForEx. So overall I cannot predict the ForEx for the second half but may you have a little increase but nothing that should be very significant.

And on your first question I am not sure I got exactly what you wanted to -- if you can refer to it.

David Mulholland - UBS

Yes, sure. I will put it another way. I wonder if you would comment on what happened in the legacy SIM card business within mobile in the first half. And also just on that, what caused the decline in gross margins within mobile year-on-year. Is it just Netsize or was there something else driving that?

Olivier Piou

So in the gross margin of mobile you have not only the SIM card you have also the platform and services and the impact of Netsize that you mentioned and the product mix of course is also in there now we have what we have is that we have an increase in the Multitenant SIM that we have observed we have also an increase in the LTE products but because of LTE products available from multiple sources their margin will be the little and simply mechanical because LTE products are not anymore flagship products.

But that is a main driver on the profit generation in the mobile. It is not going to be that mix now for the second for example the rise in the services is going to have an important effect on simply the volume, the volume effect because simply our facilities are fixed and our R&D at the sense OpEx side essentially fixed and the services delivery are essentially fixed. It’s simply very much also from additional revenue to the bottom line.

David Mulholland - UBS

That’s great. Thanks very much.

Olivier Piou

And also the fact that maybe I mean one thing that comes to my mind just to complement is the fact that in mobile and the mobile payment service you have also all the additional licenses and usage not for the additional licenses on mobile financial services platform they come at 80% or 90% slow simply because the software is installed and you have additional users but you don’t have additional expenses.

Operator

The question from Susan Anthony from Mirabaud Securities. Please go ahead.

Susan Anthony - Mirabaud Securities Limited

Good afternoon. Can I fall back on my former question I used to ask a lot, as to what do you consider today your biggest challenge?

Olivier Piou

My biggest challenge is that I mean integrating SafeNet is going to be a challenge but it’s something we know that it work but it’s not it’s execution more. What gets me busy I would tell you that the acquisition during the summer is to try to have to work on many scenarios because usually during summer you have a better visibility on the technology rollouts and the sensitivity of it and if you when you look at just what we’ve discussed, the sensitivity of U.S. EMV volumes is important because it’s essentially coming on top of an existing infrastructure. So it has strong flow-through. So what are the assumption, what do we have really in order, do we have enough capability to deliver there? There was a mention about mobile services. People speak about how far [ph] that being NFC or not NFC down new technology I have no clue but what are the various impacts, of course if there is some NFC whether there is a sim card in it we don’t really care -- it would give a lot of credibility to the technology so there will be competition. So it gave nothing what does it do? So that’s why what was a challenge was more of the modeling of the various scenarios and how they interpreted that’s why I wanted to be a little more prudent on the forecast of the top line even though there’s still the option that we do great performance in terms of top line growth but what is interesting from oldest modeling and simulation and in with the regions and what they have in their forecast and in their books is the solidity of our PFO forecast. So, certainly that was certainly making distracting my head in many directions.

Susan Anthony - Mirabaud Securities Limited

And obviously in the first quarter there was a little bit of surprise in terms of some of the mobile contracts, that were postponed a bit and then presumably also this quarter that the government programs took you a little bit by surprise. Is there anything else or was everything else pretty much as you had expected?

Olivier Piou

Mobile contract -- in terms of mobile financial services in Europe did not take me lot much by surprise in the sense that Europe mood is not great and it’s more a question of what is a risk appetite of the telcos which – the second part that you mentioned the sensitivity of the unrest in the Middle East to passports frankly I do not expected that much. It’s not that we’ve lost any contract we still are exclusive supplier and we still have those businesses in hand but what makes people travelled versus asking the new passports versus not. I don’t think we have a very good model and take Sweden for example, we have five year contract we know that passport last five years so statistically every Swede will have a new passport during the time of the contract now in which quarter this folds and under which circumstances this Swedes tend to ask for more passport or less passport I don’t think we know very well and when it happens for the Middle East, we are -- take a year ago everybody of the Gulf course country -- the GCC was trying to make a common market even inviting countries of the Maghreb to join etcetera, and now they fight each other. So these things can change and the impact was a little lower. It doesn’t change that the overall the period they will all need to have a new passport because every five year but surprise meeting tends to be on one year on one quarter.

Susan Anthony - Mirabaud Securities Limited

And on the basis that you were saying before that 15% to 16% or mid-teens, rather, doesn't look and unrealistic figure for next year and the following year. Does that factor in, say, some of the delays that you had already or would those extra delays come on top of that, would you imagine?

Olivier Piou

No, what I have in mind when answering the previous question is simply the new contract that we’ve won. I think I told you and people in the call in Q1 that, there was a lot of business activity being tendered in the first semester, we’ve won good share of it and there is and you know them Algeria, Belgium, Slovakia, Quebec, as I mentioned last night EBITDA. So, all of this simply kick in, they got really kick in so we know what they are, what they are worth. I don’t know what will be the catch-up for the Emirates or Forman frankly. So I have not factored that in.

Susan Anthony - Mirabaud Securities Limited

Okay. Lovely. Thank you very much.

Olivier Piou

And I’m happy to hear you Susan, because I heard you had an accident and so I’m happy to hear that you’re back.

Susan Anthony - Mirabaud Securities Limited

I am sort of back, yes. Thank you.

Operator

A question from Andrew Humphrey from Morgan Stanley, please go ahead.

Andrew Humphrey - Morgan Stanley

Hi, can you hear me?

Olivier Piou

Yes.

Andrew Humphrey - Morgan Stanley

Good, thank you for taking my question. I had a couple, if I may. The first one I wanted to come back to this point on pricing for the TSM. You mentioned the announcement that we have seen from MasterCard recently. Reading through that, I mean it looks from that as though the price for their version of the TSM for embedded secure elements is somewhere below $1.50. To my mind that was a surprise compared to the SP, PSM [ph] model that you have outlined in the past, where you would stand to make a few euros per user per year. When you say pricing is converging across the various different security options you outlined on slide 14, are you in effect saying that the pricing is converging down to sort of that level of pricing and the market? And I have a follow-up, if I may.

Jac Tierny

USD1.5 is not very different from €1 and so I think this is type of conversion. I don’t think we said a few euro per year because there an issuance of our products every two years if you compare this to credit card. So you get back to the type of year-over-year. Now what’s interesting for me that six months ago if we had that conversation many people would have said HD will be free and it’s only online and everything is for free? So no, everything is not free because you need to do the comparison to the service, you need to maintain it.

So I think that type of pricing is something that you see on the market, and I am sure it will erode over time, because of this scale but that is starting point is interesting to see that we’re seeing the same ballpark. And you said you had a follow on?

Andrew Humphrey - Morgan Stanley

Yes. My follow-on question was around OpEx and also below the line expenses this year. You have done a good job of keeping OpEx under control as you outlined on the call. You have, however, seen a pretty significant increase year on year in stock-based compensation and in restructuring, both of which you have gone through. But I wonder if you could help us to understand as you particularly the restructuring charge a bit better and give an indication of how much you expect that restructuring charge to save you on an ongoing basis in terms of OpEx?

Olivier Piou

Share based compensation is simple, there was a plan associated with previous long hunch plan that ended in 2013 but one of the conditions was to be present in the company on December 31, 2014. So even though the performance condition were met, because there is a service condition that is to be present in the company on December 31, 2014 and we still have to amortize it. So this year in 2014 you have the overall lap of the old plan, which is not technically effective it’s not -- I people need to be there on December 31. So accounting wise and I remind you that this on cash, accounting we have to simply amortize it.

So you have some of the two plans in 2014. Now for the future I have to refer the question to my Board. You ask them or you come in the next GM this is definitely the best solution. In terms of restructuring the pay back typically is certainly between one 1.18 years. The key question here is simply making sure that we can execute it in proper way because we want to take care of our people, we want to make sure that they are well treated, so that’s why we simply make sure that we’re ready and everybody has a fair treatment and even a good treatment and that’s what we’ve done during the first half of this semester.

When you have a new plan that it is widely communicated people understand, people also understand that when you restructure your configuration or you adopt is not against them it’s simply that the world is changing, technology company you have to adopt in dominance, and it was easier to do in the first half of this year.

So it’s a one-off hit in the first semester and there will not be the same in the second semester.

Operator

A question from Mr. Essaegh from Barclays. Please go ahead.

Youssef Essaegh - Barclays Capital

The first one I have is on the long-term plan. You have talked initially about double-digit growth of the top line on top reaching 600 million, so but so far you have been tracking a little bit behind. So I was wondering what do you think about potentially rewriting these targets today or if you really think that you have enough in your backlog to justify your very strong acceleration in the later part of the plan and then I have a follow-up.

Olivier Piou

Yes, so of course when we do those forecast, our Board is taking and asking and our auditors but this not very far behind. And that Jacques mentioned in his introduction our objective since we just discussed share-based compensation is based on the cumulative on those plans. So if we have not faced, we will do the plan we will not have accrued for the plan as we have done. So we’re well on track and there we don’t see the guidance in. Remember with a difference we’re speaking today maybe 10 million or 15 million we speak just for the year making €385 million to €400 million and if you look over the plan you speak almost €2 billion of profit. So it’s not that we’re that late.

Youssef Essaegh - Barclays Capital

I was talking more actually about the top line.

Olivier Piou

I mean we’re in discussion that first year, I think we have enough upside that we discussed to just make it up. Just look at what we’ve discussed a few minutes ago about U.S. EMV we see much bigger than we saw simply three months ago and even more bigger than we thought six months ago. So, no we don’t have a few hundred there.

Youssef Essaegh - Barclays Capital

Okay. Well, your long-term plan covers 2013 as well but I mean anyway, what counts as the EBIT, isn't? Now, I had a second question regarding the tax rate. It was practically high in the half year, so I was just wondering how fast do you expect it to go back to normal rate of about, I think 25% is your target for the long term. Thank you.

Olivier Piou

We’ll defer this to Jac but realized that the faster we get them in the more profit we make because we are consuming our DTAs and to be honest when we merged between XL to [indiscernible] and there was also DTAs. I thought we would never use them now we have almost having use them which means that we have made much more profit than we ever thought. But Jac maybe do you have…

Jac Tierny

First, the tax amount that we paid came from 17 last year to 12 this year. Secundo the percentage was impacted by the profitability and the fact that restructuring is not deductible is not tax deductible so if you account for that you come to a number of percentage last year we were at 17% and this year we were 20.7% if you adjust our restructuring charge you will see that we are not far. Now in the last slide of your question we are looking for going to 25% over within the next full into full year.

Youssef Essaegh - Barclays Capital

Okay, thank you. Can I have the very last one? First one? [multiple speakers]. Regarding what you said a little bit earlier about the stock-based compensations. So my understanding is that now it is over shooting for and it is a one-off. It is not going to be additionally going forward. Correct?

Olivier Piou

I don’t know it’s not my decision. The reason why it has an overlap is simply that we had decided the Board has decided that it would not be simply the previous plan was not be simply achieving 300 million in 2013 it would be achieving 300 million in 2013 and as a retention measure to be also present on December 31, 2014 38 simply the overall assets we have at the moment. Now to be honest I think that long term incentive plan that was designed for all the employees is one of the reason why we greatly exceeded our long term plan last year so because it’s a dilution and not really a cash item, I think it’s I have no opposition personally that all the employees are associated with the performance of the company and not simply the shareholders.

So for 1% there are 2% of dilution I don’t know what it will be. I think it’s a good investment and so I don’t know what will the Board will decide but I think it was a very wise decision that the business to do what we call internally the old stuff plan which is that every single employee from the lowest in the organization in China to the CEO would have the same metric and the same performance criteria and the same incentive to succeed and to be rewarded in shares which is the acquisition that the shareholders have. So I don’t know I am not the guy who does it but I think it’s a good alignment and I am surprised actually that you asked that question because usually in the U.S. or UK mindset this is more acceptable than to the French Union’s but I think this is really a good alignment of performance.

Youssef Essaegh - Barclays Capital

No, no. I mean I have no problem with that. It is just because it is becoming a big number, so I was just wondering if we should continue trying just for it even if it is not on a perspective.

Olivier Piou

Realize that in quarter the cumulative objective that we have in and we don’t know this but factors the cumulative objective that we have in the long term incentive is also related to the earnings of share. So in fact we even if it’s counted into what we are supposed deliver. Again I just quite something I said restructuring was not acceptable I was meaning stock based compensation is not that deductible I am sorry I am do correct the positive…

Youssef Essaegh - Barclays Capital

Not a problem. It was just a -- Thanks for your time.

Operator

The question come from Emmanuel Matot from Oddo. Please go ahead.

Emmanuel Matot - Oddo Securities

Good afternoon. Thank you for taking my questions. First I have got a question on the competitive landscaping in the Multitenant SIM card business. How many companies a year are about to deliver today, high-end products to telecom operators? Are you seeing new guys in front of you for new contracts such as the one with NTT DOCOMO? Is that right you are actually the supplier for this Japanese telecom operator? And my second question is about Netsize. What is exactly in H1? I'm not sure I understand well. Do you expect a strong recovery for the top line of Netsize and could you remind us what is the size of this business for Gemalto and maybe long-term perspective and if it is still strategic for the group? Thank you.

Olivier Piou

And you asked many question the last one in terms of Multitenant SIM cards you have several suppliers and they are different depending on the regions I don’t want to answer specifically for NTP but we were not the only bidder and in the U.S. it’s a same and you opted the same business, it's not necessary the same competitor but we have a good market share globally but we are not the only supplier is this is your question. In terms of Netsize, it’s about 70 million of revenue, it’s a business that have been composed of two parts one that which is the Netsize and the other is the ITX box which is coming from that we acquired from Ericsson and there was some patents. So total instead of 70 it may go down to 60 or something like that but it’s not extremely material that is still when you argue we discuss that 1% makes the last 1%. So I think it’s important because in the mobile payment that can be many varieties of it but it’s not critical. And if your question is, do we intend to selling the answer is no, because when you say strategic I sometime wonder it should mean that this is for sale, no. We believe that is there is a change of regulation which is actually good for the consumer than they would have supported which is to make it with more pins and making sure that there is more protection. The service provider that to adapt their software we have to adapt our software apps which communicates with each other to verify that this has been done and so you could even make the argument that it’s tough for the regulation the better is going to be for us because the small players will have difficulty to adapt. So, I’m not too worried.

Emmanuel Matot - Oddo Securities

Okay. I understand. Thank you very much, Olivier.

Olivier Piou

Sure.

Operator

A question from Gianmarco Bonacina from Equita, please go ahead.

Gianmarco Bonacina - Equita

A couple of questions. The first one is about the sales guidance. Because at the end of April you were guiding for double-digit growth and today you are guiding for lower sales growth. You mentioned maybe something like 8% in the second half which could mean, let's say, 6%, 7% for the full year. But, so the question is given that you only had some shift in the shipments like for example for NFC seen aura [ph]. You expect good growth in the NV, so what actually led to the decision considering that the short fall in the government I think is not enough to justify for these reductions in the top line? And the second question is about your statement acquisition. Now that, let's say a few weeks after, can you give us a little bit more insight what you think could be the margin in the midterm? Because they have a 70% gross margin and they have 55 -- 50%, 55% SG&A while Gemalto is 25% G&A. So clearly there is a big over writer which could be say reduced if the company's integrated into Gemalto. So if this is reduced, what kind of margin could this achieve long term considering that the gross margin can remain at that high level? Thank you.

Olivier Piou

So first I want to congratulate you on the second half because I think it’s exactly the analysis I’m doing which is 55% of OpEx is simply too much but this is very explainable by the scalar, it’s very difficult to be a global company present in so many countries when you due $370 million of revenue, when I -- few years ago when we’ll be advising the organization of Gemalto. I was telling Sir James Pruce [ph] and EXELTO people look it can’t really be global if you have not EUR300 million or EUR400 million minimum because simply you need a minimum of support and energy and such on tour [ph]. So you’re right, simply the scale effect that we bring to SafeNet is having a tremendous force. So actually a lot of the synergies that we have in mind are simply facilities related. They have facilities in Gen 2Q and it cost them a fortune and legal entity and they need to do accounts we’ve one just announced it, too and it is much easier. They are nonpayer [ph], we are in Verdon, we are both in Noida in India, simply that set of expense that you mentioned making it integrated and common brings a lot of money. So then you have all the upside of services and cost selling and you easily see that at 70% gross margin it makes a big difference. So I let you make the math as I’ll be a little more precise after we revise because we’ll probably update our objective sometime around the year-end or early next year to be more precise for you but I don’t know where you found those data actually this is not correct and so you have very much what I have in mind. On your first question, as a main part of the reduction in the top line perspective is not really linked to SIM, the SIMs are growing, they were growing nicely in the second quarter et cetera. And they were growing despite the plus 12 that we posted in growth in Q2 of 2013. So it’s not question, the question is we have to realize that the revenue in the first half of the year was lower and when you read run all those scenarios that I was describing to Susan and Tony later -- earlier on. There are cases where you don’t make the 10%. So I am on the prudent side. I prefer to tell you, bear in mind and tell you is not to show off. But on the other hand take it I have a lot of confidence in our [indiscernible] in PFO. So if we were to do plus 8% or plus 10% in the second half, that’s already plenty enough to do the target that we have and the consensus is that I don't know where it is 395 or so 385 or 395 doesn’t make a big difference.

Now if we do 10% for the full year which means 12 for the second half, it means all the odds are aligned. It’s not undoable but it’s not the central scenario and that’s why I prefer to be very straight forward with every one of you and then on the prudent side that’s just my education.

Gianmarco Bonacina - Equita

Okay and just a very quick follow-up provided that the delivery of the seams which were delayed from the second half, in the second half. What is the new element in your scenario which makes you a little bit more cautious? Is it just maybe on the government which you are factoring in? Maybe the growth will be only say single digit instead of double-digit or what else is --?

Olivier Piou

I have zero change on my scenario in SIM and H2. It’s not all where there is [indiscernible].

Gianmarco Bonacina - Equita

Okay, it’s just a base.

Olivier Piou

Exactly. Now you have upside that you can argue with, I have no clue without the iPhone we will have NFC function or not I mean we see it has a great NFC function that have acquired a super multi-tenant seen in every one of those gizmos where we of course beat the expectation but I have not changed my forecast, my scenarios. This is the SIMs, multi-tenant SIM for H2; it’s something which is actually very resilient and stable.

Operator

A question from [indiscernible]. Please go ahead.

Unidentified Analyst

Yes, good afternoon Olivier, John, Jacque and Gabriel. I had just two questions. The first one regarding the seasonality between the Q3 and Q4, can we have a bit more color on that? And the second question would be just a little bit more what currently happening in Europe under the [indiscernible] segment? I don’t really get what’s happening in terms of the deployment with mobile operator, could you just give us a bit more details on that please?

Olivier Piou

Europe is going as we planned; we have not a lot of expectation on Europe. I mean you are European and every time I go back to my home country, I have travelled a lot in the first half and during summer. Every time I come back I am always puzzled by the lack of confidence in this continent. But you know there is, it’s not the main matter for second half. It’s not the main matter for second half are a lot of them are in the U.S. And so the good news is that we have a better phase in our future.

Unidentified Analyst

Seasonality between Q3 and Q4, especially in terms of revenue, what are you expecting.

Olivier Piou

I don’t have a good point because the ratio is depending on what we did last year and frankly I have the number in mind but I don’t have the rate up there on the quarter. I would have to come back to you on that. Q4 last year was lower in terms of growth. So it should be a media comparison but that I mean you can easily try to look at what we’ve done last year to try to see how it should be biased. Q3, what’s important to understand is that Q3 will be better than each one, if this is your question.

Operator

Last question from Alexandre Faure from Exane. Please go ahead

Alexandre Faure - Exane BNP Paribas

Just one question left for me, thinking of machine to machine. I think you mentioned in the press release that margin was a bit softer due to increased amortization charge. Is it related to capitalized development costs that you finally started to amortize and if so, I guess it’s quite a good news, meaning that as you have got large projects actually kicking in machine to machine. Is this the right way of looking at it? And if so in which verticals, if anything in particular, you want to highlight?

Olivier Piou

It’s exactly what you described. We explained to you and to investors that we are forced to capitalize some developments due to IFRS and it’s mostly in the automobile industry where you see the pickup of that technology. So the depreciation is kicking in. So it’s automobile related.

Alexandre Faure - Exane BNP Paribas

Okay. Is it mostly Europe related to equal regulation? I mean anything --?

Olivier Piou

No it is not regulatory. It is simply this business is developing. You see it with our dealership with them now you see it with Toyota and Japan and you see it within China. So just the card get connected and they use our technology and we depreciate it which is normal. Actually it’s run some of supplies business.

Alexandre Faure - Exane BNP Paribas

Thank you.

Operator

We have no more questions.

Olivier Piou

Okay. Charlotte. Thank you and so thank you all for your interest and all your question and your time today. Our next call I think is October 23, when we will publish our third-quarter revenue figures. From tomorrow on, we will meet investors and analysts during our roadshow Europe in the U.S. and in Asia. So we are all at your disposal. If you have any further questions and let me again tell you that we appreciate your interest in Gemalto and good bye.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you all for your attendance you may now disconnect.

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