Gemalto NV's (GTOFF) CEO Philippe Vallée on Q4 2017 Results - Earnings Call Transcript

Gemalto NV (OTCPK:GTOFF) Q4 2017 Earnings Conference Call March 2, 2018 7:30 PM ET

Executives

Philippe Vallée - Chief Executive Officer and Executive Board member

Virginie Dupérat-Vergne - Chief Financial Officer

Analysts

Francois-Xavier Bouvignies - UBS

Stéphane Houri - Natixis

Sébastien Sztabowicz - Kepler Chevreux

Alexandre Faure - Exane BNP Paribas

Achal Sultania - Credit Suisse

Philip Buller - Barclays Capital

Philippe Vallée

Thank you, Laurent. Good afternoon and welcome to our Full-Year 2017 Earnings Call. I’m Philippe Vallée the CEO of Gemalto. And today, I’m with Virginie Dupérat-Vergne, our CFO; and Jean-Claude Deturche and Sebastien Liagre, our Investor Relations team. Together, we will commenting – we’ll be commenting the presentation that you can download from our website. We will begin the key elements – with the key elements of the release, and then we will take your questions. So after having carefully read the information on Page 2 and Page 3, I invite you to go to Page 5 to the highlights of 2017.

So on Slide 5. In 2017, Gemalto recorded revenue of €3 billion with over €1 billion in Platforms & Services. In the second semester, the company finished on a stronger note, growing by plus 1%, with solid contribution from Enterprise, Machine-to-Machine and Government Programs. In line with our expectations, the company’s profit from operations settled at €310 million, with savings of €15 million being recorded as part of our transition plan.

As you know, 2017 was also marked by our joint announcement with Thales to create a leader in digital security, bringing together Gemalto with Thales digital assets as a new Global Business Unit within Thales. In the second part of the presentation, I will comment in more detail our strategy and how this combination will help us accelerate its implementation.

I will now hand over to Virginie.

Virginie Dupérat-Vergne

Thank you, Philippe. So let me begin with Slide 7 with our full-year 2017 P&L for the year. As Philippe pointed out, 2017 revenue came in at €3 billion, gross profit stood at €1.1 billion, with gross margin settling at 37% due to gross margin erosion in the Mobile segment.

Operating expenses were reduced by €18 million year-on-year as a result of portfolio adjustments and of the transition plan, which started to generate cost savings. As a result, profit from operations came in at €310 million and profit margin from operations settled at 10.4% of revenue. Finally, adjusted basic earnings per share was €1.96.

I now invite you to turn to the segment information beginning on Slide 8, where my comments on revenue will be at constant exchange rates. So Payment & Identity revenue grew 2% in the fourth quarter, thanks to the strong performance of the Enterprise business, while Government Programs that includes the newly-acquired Identity Management Business grew at a single-digit rate. The revenue decrease in Payment was lower than in previous quarters, as the U.S. EMV normalization comes to a close.

Payment & Identity’s full-year revenue came in at €1.9 billion, lower by 2%. Government Programs revenue increased by 20% at €578 million, essentially due to the contribution of €123 million from the acquired Identity Management Business. In this business, 2017 was the year of organic consolidation and integration of the Identity Management Business after an outstanding organic growth of 26% delivered in 2016.

As of year-end, the backlog hit a record high on the back of a significant number of passport project wins, allowing Gemalto to start 2018 on a solid footing. The Enterprise business revenue increased 5%, with a contrasted pattern along the year. After a slow start, revenue grew at double-digit rates in the second part of 2017, essentially driven by the Data Protection business line that commercializes solutions to prevent data breaches and cyber incidents.

The Payment business revenue was down 15%. Sales in Americas decreased by 16% during the second semester, compared with minus 37% in the first semester, as the U.S. EMV market continued to gradually normalize. Despite increased investments in the Enterprise business and additional expenses coming from the acquired Identity Management Business, the segment’s operating expenses were held at a stable level in 2017. This was due to a strong tightening of operating expenses in the Payment business. As a result, profit from operations in Payment & Identity for 2017 came in at €233 million, resulting in a 12.3% margin.

Turning to Slide 9, performance on the Mobile segment. The Mobile segment revenue was lower by 7% in the fourth quarter compared to the fourth quarter of 2016. Machine-to-Machine continued to deliver solid double-digit revenue growth, while the SIM and Mobile Platforms & Services revenue decreased by double digits.

The Mobile segment annual revenue came in at €1.1 billion, down 7% compared to last year. The Machine-to-Machine business grew by 10%. This healthy trend is driven by a dynamic market demand, in particular, in the automotive, healthcare and smart grid market segments, supported by Gemalto’s comprehensive and integrated offer.

SIM sales were lower by 15%. The removable SIM market is expected to keep declining as mobile network operators continue to redirect their investments toward the next-generation connectivity. Platforms & Services revenue for the segment came in at €222 million in 2017, down 11%, and was marked by revenue volatility from one quarter to another, reflecting the timing of project delivery.

Operating expenses decreased by €19 million, down to €280 million in 2017, despite sustained investments in Machine-to-Machine and next-generation connectivity. This reduction reflects the company’s strategy of managing cost to serve the SIM business and optimizing its portfolio in removable SIMs and related services As a result, the Mobile segment’s profit from operations for 2017 was €86 million.

Slide 10 now. You can find there a good overview of our transition plan and its components. As we announced at our half-year results, this plan will generate in excess of €50 million savings on a full-year basis. In 2017 already, this plan has delivered €50 million savings. This is a very detailed plan based on a bottom-up approach, focusing on delivering additional efficiency and optimizing our structure. In SIM and related services, we refocused our operations on key geographical areas and adapted our sales force accordingly.

In addition, we conducted a portfolio review in the services business that resulted in marketing and delivery resource optimization, as well as the shutdown of a sub-business line. In Payment, we optimized our footprint by further rationalizing our manufacturing setup in the U.S. and in China.

In 2018, the geographical refocus and portfolio review will continue in SIM and services, while we pursue the capacity optimization and operating efficiencies in the Payment business.

Please move to Slide 11 now, where you have the bridge between the adjusted financial information and the IFRS figures. So the main difference between the two income statements this year when compared to last year was the amortization and depreciation of intangibles that came in at €540 million versus €58 million in 2016. Most of the increase came from the one-off non-cash goodwill impairment of €425 million announced in the first part of 2017. To a lesser extent, the increase also came from amortization of the newly-acquired Identity Management Business.

Restructuring and acquisition-related expenses of €114 million, mainly includes the costs associated to the transition plan. The equity-based compensation charge was €37 million, in line with our historical annual run rate. As a result, Gemalto recorded an IFRS operating loss of €365 million for the full-year 2017.

I now invite you to turn to Slide 12 with the cash flow review. In 2017, we invested €759 million, mainly for the Identity Management Business acquisition. In parallel, Gemalto generated throughout the year a free cash flow of €190 million, a 61% conversion rate of profit from operations.

In May, Gemalto paid a cash dividend of €0.50 per share, which corresponds to a €45 million outflow. Cash in hand, net of bank overdrafts amounted to €302 million as of year-end 2017 versus €663 million at the end of 2016.

Considering the €986 million total amount of borrowings as at year-end, Gemalto’s net debt position increased to €684 million from a net debt position of €67 million end of 2016. The company net debt represents 1.5 times its adjusted EBITDA in line with the group’s financing policies.

And with that, I now hand back over to Philippe.

Philippe Vallée

Thank you, Virginie. So if we move now to Slide 14 on market trends. The strong demand in the Government, IoT and Enterprise markets is expected to continue, driven by the need for increased security at country borders, the growing benefits of connected devices expanding across industries and the rising level of cyber incidents and data breaches. The U.S. EMV payment market normalization should come to an end in 2018, and the removable SIM market is expected to keep declining, while the next-generation connectivity usage grows slowly.

If we move to Slide 15, I would like to take the time to outline the contours of our strategy for the coming years. It’s a strategy that focuses on our unique twin expertise in digital identity and data protection. Why do we focus on these? Because if you want to solve the challenges of cyber threats, there are actually only two causes to address. Three quarters of attacks are the result of identity theft and this creates a risk. This risk is compounded by data that is today essentially unprotected. 95% of data breaches were made worse by data sold in clear text formats.

These two causes, identity theft and clear data, are precisely what Gemalto addresses better than anyone via world-class expertise in digital identity and data protection. It is a set of skills and knowledge that we have been accumulating and building upon since the company’s inception. And over the coming years, we want to further leverage these to help Gemalto become the enabler of digital privacy for every business and for every individual.

I now invite you to turn on Slide 16. So in this context, Gemalto will implement a strategy built on two pillars. The first one aims at strengthening our leadership in biometrics, serial identity, data protection and secure the Internet of Things. We will therefore continue to invest significantly in developing our offers to capture the growth in those large markets. The second pillar builds on our leadership in digitalization, while rightsizing operations in the more mature businesses. The implementation of the transition plan is central to this segment strategy.

On Slide 17, you will find our new financial reporting structure that reflects the strategic choices we have made. From this year onwards, we will be presenting our fast-growing businesses in an Identity, IoT and Cybersecurity segments that accounts in 2017 for revenue of close to €1.3 billion, and the more mature businesses in a slightly larger Smartcards & Issuance segments that accounts for close to €1.7 billion in 2017.

We have laid out the 2017 financial indicators for those two segments. And you can clearly see the strong double-digit revenue growth in Identity, IoT and Cybersecurity contrasting with the decrease of minus 13% of the Smartcards & Issuance segments. The gross margin of the first segment is 42%, about 10 points higher than the Smartcards & Issuance segments, while the PFO margin for the Identity, IoT and Cybersecurity stands at 11%. 1 percentage point higher.

On Slide 18, we have the Gemalto’s outlook for 2018. And as usual, I will read it for you. So first, we expect double-digit revenue growth in the Identity, IoT and Cybersecurity segment; second, we foresee a stable PFO margin year-on-year in the Smartcards & Issuance segments; leading, as a third point to a mid to high single-digit growth in profit from operation expected at the Gemalto level.

On Slide 19, you will find a quick recap of the Thales offer calendar as it stands today. We expect a tender offer to begin towards the end of Q1 2018 and come to a close with the necessary regulatory clearances that are expected to be delivered in the second-half of 2018.

So now please turn to Slide 20. I think you have understood, we feel confident that Gemalto is the right company to develop the next-generation of digital security. And tomorrow, together with Thales, we’ll be in a position to accelerate the implementation of our strategy and better revolve the global security, cybersecurity players.

We will operate as a dedicated digital security Global Business Unit within Thales. We will be on top completing our technology portfolio by integrating the Thales set of cutting-edge digital assets, each will contribute its specific area of expertise to our ambition. In our mind, it is a tremendous business proposition and everyone at Gemalto is excited about turning it into a reality.

So this conclude our preliminary remarks. Laurent, could you please explain to us the procedure for taking questions. Thank you.

Question-and-Answer Session

Operator

Yes, of course, sir. [Operator Instructions] And we have a first question from Francois-Xavier Bouvignies from UBS. Please go ahead, sir.

Francois-Xavier Bouvignies

Hi, everybody. Thank you for taking my questions. I have two actually. So the first one is on your guidance for 2018 PFO, given the trend that you see in the growth areas with higher gross margin. It sounds like you need to invest significantly to match this guidance. Can you elaborate a bit more around the reinvestment you have to make if you have to? And yes, which areas, especially would be great?

And the second one is the – with regard to the Enterprise business, did you see any impact of GDPR in Q4 from GDPR regulation in your Enterprise portfolio, especially on the encryption side? And more importantly, in Q1, do you see an acceleration given the deadline is approaching?

Philippe Vallée

Okay. So first of all, first question, Virginie, you want to take it? And I may complete on the business side.

Virginie Dupérat-Vergne

Okay. So thank you, Francois, for your question. This will allow us to explain a bit more what we foresee in 2018. As you’ve said, we try to, let’s say, separate clearly two different set of business and the way we manage those. So clearly, in a – we have today a growing segment, which is Enterprise, IoT and Cybersecurity, and this is the way we will report it to you in the future.

And in this one, for sure, we have a lot of vehicles that should bring additional growth. For that, we will keep on investing in R&D first in 2017 in such domains as authentication in the Enterprise business. But also in the biometrics area, you’ve seen that we’ve been acquiring the Identity Management Business in 2017 from 3M. And this combination with our government business already starts to produce some revenue synergies.

So it seems to us very important to go on pushing in these areas and investing to capitalize on the original investments we made in 2017 and before and bring those to something satisfactory. So this is why we do not really foresee on a lot of flow-through immediate on this area in 2018, as we will be very, let’s say, focused on going addressing the expanding market in every area region.

Philippe Vallée

Thank you.

Francois-Xavier Bouvignies

If I may, do you – what’s the cost saving do you have – do you expect for 2018, given that you reached already €50 million. So your guidance, how much cost savings does it imply?

Virginie Dupérat-Vergne

So and – in the cost savings, let’s say, that on a global range we, as we’ve seen, we expect to do on a full-year basis €50 million. We don’t – do not guide exactly on the timing. As you can imagine, those transition plan takes time to deliver a review. But the transition plan more focuses on the – more mature segments and so on the Smartcards & Issuance part. And this is why, we intend to more focus on a stable PFO margin in 2018, and we will be very cautious in terms of making sure that we deliver a profitable revenue and that we focus our activity in those services and business line around the removable SIM and Payment that still bring us a nice margin and nice cash projection.

So this is why it’s important also to us to show this business being split in those areas. So that you will be able to see the effect on the transition plan on this Smartcards & Issuance business, while adding additional investments that for sure will offset maybe part of the savings of the transition plan in the new Identity, IoT and Cybersecurity segment.

Philippe Vallée

So you had a question also on GDPR. So first of all, I mean and to be clear for everyone, this General Data Protection rule to be implemented across Europe is to be enforced from May 2018. But indeed our Enterprise and Cybersecurity business has already seen some good track to equip European enterprises with more data protection equipment.

If you look at the information by – and the speed by geography, you will see that Europe is increasing year-on-year in 2017. And this is, in particular, due to the contribution of our Enterprise and Cybersecurity business in this specific area, where the performance has been very good.

Francois-Xavier Bouvignies

And for Q1, do you see an acceleration, given the deadline is approaching, so may be the last adopters…

Philippe Vallée

No, no because we are far from equipping the last adopter this is a very progressing, I mean, equipment. So we see rather a steady trend as far as GDPR is concerned, and we’ll keep on equipping people by the way before the – after the deadline, for sure.

Francois-Xavier Bouvignies

Okay. But you don’t see a particular like maybe strong H1, given the deadline is in May versus second-half? You see more like a steady trend across the Board?

Philippe Vallée

Yes, correct.

Francois-Xavier Bouvignies

Okay. Thank you very much.

Philippe Vallée

Thank you.

Operator

So we have another question from Mr. Stéphane Houri from Natixis. Please go ahead, sir.

Stéphane Houri

So good afternoon. Actually, I have two questions. The first one is on the payment business, because you are talking about normalization of the U.S. EMV business, but once this normalization will have occurred, how would you qualify the payment card market? Is it still a growing market for you going forward? That’s the first question.

And the second question is on the SIM business. Do you perhaps have any clue or any vision why the adoption of the eSIM seems so slow, in fact? Thank you.

Philippe Vallée

Okay. Thank you for your question. So on the Payment business, first, I mean, as a quick recap, I mean, the U.S. market was the other big elephant to turn to smartcard for payment after China. And clearly, this process has not exactly been the same when compared to U.S. with China with a very, very amazing ramp at the beginning 2015 and early 2016. And then this over-inventory that had to be resolved in the following quarters.

Now we think that this over-inventory situation is coming to an end. And therefore, we think that now we are reaching a sort of plateau in terms of business for the U.S. market, which then turns into a renewal business, where we’re going to renew whether on a credit card side on the debit card side, the accounts for the U.S. consumer.

So we think that we’ll have other markets to equip going forward, but these are smaller countries. And overall, we think that the market in volume will increase mid single digits between to low and mid single-digits going forward with the opportunity to add more value to the – to this product, because as a reminder, we are far from delivering all our banking card in the dual interface mode.

The U.S., for example, are barely buying any dual interface cards, like many other countries. And we also – we’re also working on biometric banking card to improve the user experience. So all in all, we think that this is a stable layout business, which is to be seen going forward.

Now on the SIM card business here nothing really new on the planet. The name of the game for Gemalto, as we speak, is to equip as many mobile operators as possible. So that we have a significant geography coverage. So that when we interface and work with device manufacturer, we can also offer that player a significant coverage that they don’t have to bother in which country they need to launch their product.

So we are clearly today in the equipment phase of the market, working with both the device side and the operator side. Remember, this technology was only finalized and signed off in November 2016. But today, as a matter of fact, we have a limited number of connected devices within eSIM besides connected car and wearables.

So we foresee a ramp on this service business later, but very, very, very slow ramp up, while in the meantime the mobile carriers are not investing anymore in the traditional-looking mobile SIM. So we have this transition phase to deal with. And that’s the reason why with Virginie, we have decided to really deploy and pursue our transition plan, so that we can really adjust our cost base on the SIM card and not to deteriorate further the profitability on this business.

Stéphane Houri

Okay. Thank you. And you can confirm that the plan to merge with Thales has no impact on the evolution of the transition plan?

Philippe Vallée

No, no, this is a totally uncorrelated event. Today, we are operating as an independent company. And we have to restore our profitability on our mature businesses and that we are attached to do.

Stéphane Houri

Thank you very much.

Philippe Vallée

Thank you.

Operator

So we have another question from Sébastien Sztabowicz from Kepler Chevreux. Please go ahead, sir.

Sébastien Sztabowicz

Yes, hello. Could you please provide a little bit more granularity on the trends that you expect for the different segments within the new business unit Identity, IoT & Cybersecurity? Another one, which segment do you see as outperforming or underperforming the 10% range in 2018?

And also another question on the government business, which has been soft in 2018. If we exclude the acquisition of Cogent, maybe the business was down mid single-digit. So what was the reason behind that? Is there any specific impact? And could you please provide some outlook for government for 2018 and what do you still see as a high single-digit growth market?

Philippe Vallée

Well, I think, if you – first of all, what is important, if you refer to the new segmental reporting that we are willing to deliver in the coming quarter, you have in the press release what is the split between Identity, IoT and Cybersecurity on one hand and the Smartcards & Issuance services on the other. And you’ll see today that the first one represents roughly €1.3 billion and the second one roughly €1.7 billion, and I think we have been very clear in our outlook.

The first segment we want to manage it for growth. And therefore, we will have no hesitation to invest in R&D, in particular, in this segment, like said already by Virginie, and which was already the case, because we indeed made a significant acquisition in this segment in 2017 with the acquisition of Cogent, while on the more mature side of our business.

So the Smartcards & Issuance segment, we will manage for profit. And here we want to aim we are working on a stable PFO margin. And this is – I mean, if you think about this means that the key criteria on the second segment is clearly the top line and not the bottom line, whereas we want to really focus on the top line in the other segments.

So this gives you an indication on the way we intend to monitor our business and this gives you also therefore an indication on how these different – these two segments will equalize or will, let’s say, will evolve in the coming years.

Virginie Dupérat-Vergne

And maybe to complement and to go on your question on government, Sébastien. On the part of Identity, IoT and Cybersecurity, which relates to government, you should expect in 2017 – in 2018, sorry, a kind of traction of the revenue synergies that has started to be seen on the Identity Management business acquisition in 2017, but that will really start to materialize in the way a lot in 2018. So maybe it can help for your modeling.

Philippe Vallée

Yes, but in this segment, I mean, we clearly distinguish what we do on the Platform & Services side. So that softer side of the business, which is clearly accelerating thanks to our acquisition of Cogent and which really justifies this acquisition. And here on this segment, which is overall fingerprint or facial recognitions, or using biometrics and addition – and related software, we see a market growth of roughly a plus 13%.

Whilst on the more traditional document business like driving licenses and passport, we see something around plus 7% as a CAGR over the next three years. So these are the kind of market trends we foresee and we intend to be at par or if not better with the level of market trends.

Sébastien Sztabowicz

Okay. Thank you. And getting the transition plan, can you tell us the amount of restructuring charges that has already been booked in the 2017 numbers, and what remains to be booked in 2018 or 2019?

Virginie Dupérat-Vergne

So we have booked €140 million of acquisition and restructuring-related expenses. And the vast majority of this number relates to restructuring.

Sébastien Sztabowicz

Okay. Thank you.

Operator

So we have another question from Alexandre Faure from Exane. Go ahead, sir.

Alexandre Faure

Hi, good afternoon. Thanks for letting me in. Just quick question, again, on your Payment business in Q4. We did see quite an improvement arguably from an easier base, but still was wondering if you could help us a bit understand what was a major trend in Q4, so by region and maybe by product? Was it dual interface? Was it contact only? Was it a bit more personalization services? Any color you could shed on that would be helpful?

And maybe looking ahead in 2018, I mean, you’ve touched on the U.S. market already. And you mentioned in passing that you’re not seeing a lot of dual interface at the moment. When do you think it might be realistic to expect your interface to come to the U.S.?Thank you.

Philippe Vallée

For example, I mean, on the Payment Smartcard business, the analysis is pretty straightforward one. The U.S. markets represent roughly one-fourth of the total business. So as soon as this market stabilize and normalizes, then you have something, which is not steady. And then we go back to the previous trend with the addition of the size of the U.S. market, in terms of steady and normal pattern, I should say, For example, if you think about the migration towards dual interface.

So dual interface is conditioning all over the place in different countries. But we also and we want to be very cautious on this one. We also witnessed recently just thinking about France, for example, where dual interface has been launched, at least, three four years ago. But only today, we see a significant amount of transaction using that technology so now it’s becoming an habit. We all know that as far as payment is concerned, habits and usages are very slow to transform.

And therefore, we think that overall to make a long story short, the U.S. market is now joining the pack and the global pack we grow roughly between the low and mid single-digit in terms of volume on the payment card and improved – when it comes to migration on – thanks to contactless.

Alexandre Faure

And – but you think it’s too soon to start putting anything in related to positive mix in the U.S. I mean, I understand on the point you’re making on the volumes but on the…

Philippe Vallée

It’s a bit too soon, because we know for a fact that both Visa and MasterCard are marketing the dual interface, especially for the low level, I mean, the cash-based transaction. And so clearly, the intent is there. But again, this is quite complex and definitely the issue on U.S. don’t want redo the same mistake and we want to take their time to really explain and deploy the technology in a wiser matter. I would say the wiser approach.

Alexandre Faure

All right. Very clear. Thank you.

Philippe Vallée

Thank you.

Operator

So we have another question from Achal Sultania from Credit Suisse. Sir, please go ahead.

Achal Sultania

Hi, good afternoon. Two questions, if I may. First, on the payment side again. Like, if I look at your comments, your payments revenues were down 15% year-on-year for the full year 2017. And you said that U.S. is about one quarter of revenues and U.S. was down sixteen 16%. So to me just seems like there is also pressure in other regions outside the U.S. like your other geographies are also not growing in the Payments business.

Now we understand in the U.S., there was an inventory correction on the payment side, which is causing this issue. But I’m just curious to understand what’s happening in other regions beyond U.S. and why that’s not growing as yet?

Philippe Vallée

Right, okay. So as far as the math is concerned, it could be, I mean, we are talking about the stabilization and normalization at the peak of this inception. I would say, the U.S. markets represented as much as one-third of the total revenue market. So we have now, let’s say a correction in terms of this demand, which is stabilizing.

On the other end what we are noticing is that, the Chinese business is a bit depressed as we think, and the volumes and the orders are not as highs as the previous pattern. So that’s the two big, I’d say, elements explaining why we have this kind of normalization effect in 2017. But again, this is mostly explained by the U.S. market.

Achal Sultania

Okay, and – thank you. And maybe a follow-up on the OpEx side. So if I look at 2017, you’re close to €800 million of OpEx, right? And you’re still going to do bulk of the savings plan in 2018. But then there is also this offsetting factor that you basically have 12 months of 3M identity as opposed to seven to eight months of 3M identity OpEx this year. So I’m just trying to understand the puts and takes on OpEx in 2018 like is it fair to assume that OpEx would be roughly flattish, given that you have one positive driver and one negative driver offsetting each other, or there are other things happening on the OpEx side?

Virginie Dupérat-Vergne

So let me take this question, Achal, thank you. Yes, you’re right. We have an increase in the OpEx in 2017 that comes from the inception of our new acquisition on Identity Management Business. As we said, we will go on investing in our R&D and maybe also in marketing in some areas and notably in the new segment Identity, Enterprise and Cybersecurity in 2018. And this will have an impact on the global number of the OpEx on the group margin.

And part of the transition plan effect are not on the OpEx. I want to signals that is that, we addressed the entire fixed cost base of the company and for sure as such both the OpEx and the gross margin areas. So in the €15 million savings that are you see in 2017 part of this and the vast majority of this comes from the OpEx, but there’s also some savings that do come from the cost of sales.

So this is something that you should expect also to see in 2018 then I won’t guide on the OpEx, because I’m not here for that. But really what we will have in the OpEx should help us to maintain the PFO margin on the Smartcards & Issuance segment, whatever, let’s say, the importance of revenue and of – decline of some of the business would be. On the other side will be also very selective in the new investment we make here in the new segment.

Achal Sultania

Okay. Thanks a lot.

Philippe Vallée

Thank you.

Operator

So we have another question from Phil Buller from Barclays. Please go ahead.

Philip Buller

Yes. Hi, thanks. This is Phil Buller from Barclays. Thank you for taking my questions. I have three quick ones, if I may and it’s probably easiest if I just ask one at a time. The first one being and maybe I missed it. But the guide that you are giving for 2018, what FX assumption is that based on please relative to the 1.12 euro/dollar that we saw in 2017?

Virginie Dupérat-Vergne

So we didn’t guide on the…

Philippe Vallée

ForEx…

Virginie Dupérat-Vergne

ForEx, but we do generally work on constant exchange rate.

Philip Buller

Okay. And thank you. Obviously, just on the conversation that’s just been had, there’s a lot of moving pieces between the various division of this year and obviously some lumpy comps that we need to work through as well. But how should we think about the relative H1 and H2 balance at the group level? And how this nets out between both revenues and operating profits for 2019 please?

Virginie Dupérat-Vergne

So on your business – on our business, there’s a huge seasonality. So this seasonality effect is not something that’s new to 2017. If you go in the past, you’ll see that that a lot of our activity is embedded in the back in the year, it’s always been the case. And for sure, there is no reason for 2018 to be a different rate yes in that respect.

Philip Buller

In terms of the H1, H2 seasonality that we saw in 2017, we should expect something similar for 2018 that’s what you’re saying?

Virginie Dupérat-Vergne

Yes, 2016 also the same even if big volumes.

Philip Buller

Okay. And just final one and it may be of limited consequence for you guys. But raw material prices are the topic of the day. How much of your cost of sales are raw material, or how sensitive are you to the recent news that we’ve seen in commodity prices, please?

Virginie Dupérat-Vergne

So I wouldn’t say that we are really sensitive to raw materials a lot of the chips are ours so…

Philippe Vallée

Well, the things that you need to take into account. because this is something, which is a quick specific to our business. But not only is that in each and every element we purchase from outside, we have a multi-supplier policy, which means that in particular on the chip side of the business, which is a significant part of our [indiscernible] and we use at least three suppliers for each and every clients. So which makes us a pretty, pretty immune to variation and layers some flexibility in terms of the way we purchase our key materials.

Philip Buller

That’s great. Thank you.

Philippe Vallée

Thank you.

Operator

So we have no further question. [Operator Instructions]

Philippe Vallée

All right, Laurent, I think, we don’t seem to have any further question. So I would like to thank all of you for your time today. Our next call is set for April 27, 2018, when we publish our first quarter revenue for year. In the meantime, I would like to thank you for your interest in Gemalto, and I wish you a very good end of the week. Thank you.

Virginie Dupérat-Vergne

Thank you. Goodbye.