France-based Gemalto is forecasting double-digit growth in revenue this year, following a strong 2012, in which it reported gains in both sales and profit and the first significant returns for its trusted service management business.
Gemalto reported Thursday that total revenue topped €2.2 billion (US$2.9 billion) for 2012, up 9% from 2011 at constant exchange rates. Net profit reached €261.6 million, an 11% increase from a year earlier. And the vendor noted that it exceeded its goal of €300 million operating profit a year ahead of plan.
Gemalto did not specify how much it is projecting sales to increase this year, though that is expected to be around 10%. The vendor’s 2012 results and 2013 growth forecast generally beat analysts’ projections.
More than 80% of Gemalto’s revenue in 2012 again came from sales of SIM, banking, ID and other smart cards. But Gemalto for some time has been heavily promoting its move into services, especially securing networks. That includes its TSM business for NFC rollouts.
Services, in general, carry higher profit margins and have the potential to broaden Gemalto’s customer base, while locking customers into longer-term contracts. It also complements Gemalto’s smart card business, of which the vendor is the largest worldwide.
But much of the smart card market is commoditized, even though Gemalto is beginning to sell initial quantities of high-priced NFC SIM cards for early rollouts. Some of these NFC SIMs are part of up-market LTE SIMs Gemalto is selling to telcos rolling out 4G service. And the vendor is also producing millions of higher-end dual-interface banking cards.
Promoting Platforms
But Gemalto is pinning its strategy for future growth on its platform and services business, which still accounts for less than 20% of total sales. But it generated 40% of the company’s revenue growth last year.
All told, the platform and services business, which includes TSM revenue, made up 17.5% of sales in 2012, or a total of €392 million. That is an increase of 26% from 2011. Much of the revenue is banking card personalization, over-the-air provisioning for 3G and LTE mobile services and Internet security. But some of the revenue came from initial deployments of TSM platforms for mobile operators and banks rolling out NFC.
“2012 will also go down as a year in which we secure a large number of long-term contracts in the mobile payment and government sectors, in particular, which will bolster our profitable expansion into the future,” CEO Olivier Piou told financial analysts Thursday, in prepared remarks.
Gemalto did not release sales figures for its TSM business. In total, it said it had revenue of €210 million for platforms and services in its mobile communication business segment and €115 million in its secure transactions, or banking unit. Only a piece of this revenue was TSM business.
And nearly all of the TSM revenue in 2012 came from fees Gemalto charged to telcos and banks to set up the TSM platforms for them, that is, “integration” charges.
Under Gemalto’s business model, most of the company’s TSM revenue–and presumably its return on investment–will come later, in the form of licensing and transaction fees that telcos, as well as banks and other service providers, would pay to Gemalto to manage their applications on secure elements in mobile devices.
That assumes its TSM platforms will eventually be handling millions of consumer accounts for telcos and service providers.
Gemalto also believes it will earn significant revenue from hosting and maintenance of TSM platforms, apparently for telcos and banks and other service providers that want to run their own TSMs.
Gemalto projects TSM revenue not only from managing applications tied to secure elements in NFC phones but also from managing security in the trusted execution environment, or TEE, that is expected to become activated in millions of smartphones.
The TEE uses a secure area on the ARM-based processors in mobile devices. The TEE is not as secure as SIM cards or embedded secure elements, but, for example, could be used to protect PIN entry on handset keypads and to store keys for digital rights management.
Gemalto launched a joint venture, Trustonic, with ARM and competing smart card company Giesecke & Devrient in December. Gemalto in one of the notes to its annual report, released late last week, said it contributed at least €5.6 million to the venture, through the sale of its Trusted Logic Mobility unit.
France-based Trusted Logic, which was fully acquired by Gemalto in 2009, was the first to come up with software for TrustZone, the secure hardware area ARM has been providing for years in its processor designs. G&D followed with its own product, MobiCore. Gemalto and G&D each own 30% of Trustonic and ARM owns the remaining 40%.
Locking in Customers
Among Gemalto’s strategies is to try to lock up TSM contracts early, which would make it difficult for operators, banks and other service providers to switch to other TSMs.
Gemalto’s Piou acknowledged as much in response to a question from an analyst. Piou was seeking to justify the substantial investment Gemalto says it has made in its TSM platforms.
“Customers will have only one TSM,” he said. “It’s like a billing system. If you are in, you know, it’s harder to get you out, rather than if you fight to get in.”
Gemalto appears to be widening its early lead in TSM business, and last year it announced contracts with such large mobile operator groups as Vodafone, Deutsche Telekom and Telecom Italia, and such other major telcos as Rogers Communications in Canada and KDDI in Japan, along U.S. bank JPMorgan Chase. Gemalto also serves as TSM for the Isis joint venture in the U.S. and a government-sponsored NFC project in Singapore.
Other contracts have yet to be announced, but Gemalto says it has won more than 40 commercial contracts for TSM business for NFC rollouts.
Other major TSMs, Giesecke & Devrient, Oberthur Technologies and Safran Morpho, the latter though its purchase last year of Cassis International, have won major contracts, as well. But Gemalto appears to have the momentum of late, taking advantage of its greater size and resources.
Gemalto already provides many telcos with their over-the-air platforms to manage their SIMs and often supplies the SIM cards themselves; and it also provides banks with card personalization. So the vendor is well positioned to expand these contracts to TSM services.
But Gemalto executives during their extended conference call Thursday following release of the year-end results characterized the company’s growing TSM business as a direct result of early investment and research and development. And Piou added: “The more we propagate the technology, the better off we’ll be, (and) the harder it will be for competition and alternative system to deploy,”
Piou: Samsung’s Embedded Chips Won’t Hurt Business
When asked about the announcement last month by Visa that it had signed a global agreement with Samsung Electronics that would see a Visa payWave application preloaded onto embedded chips in new NFC-enabled Samsung devices, Piou contended that it wouldn’t hurt Gemalto’s business, even though Visa has a deal with Gemalto rival Oberthur to serve as TSM for Visa’s mobile provisioning service.
The provisioning service would enable banks to personalize the preloaded payWave applications over the air.
Samsung later announced it would support preloaded payment applications from other brands, as well. Banks could use their own TSMs to provision the preloaded applications with their customers’ account data.
Piou did not mention Oberthur’s contract with Visa or any potential loss of sales of NFC SIM cards in response to the question about the Samsung embedded secure elements.
“We have never been constrained, whether you have a removable secure element, or if you have an embedded secure element, and this secure element is provided by OEMs (original equipment manufacturers) or whether it’s provided by a payment operator or a mobile operator,” said Piou. “What is important is that there is a secure element, and it provides the opportunity to remote manage those secure objects; Because you will need to download into those secure objects, credentials and data and manage those data along the lifecycle, and this is what we do.”
100% Market Share on NFC SIMs?
Piou also told analysts that Gemalto controlled “essentially 100%” of the current market for NFC SIM supply, and that this SIM market is “essentially untapped today, except (for) Japan.”
At least two Japanese telcos, KDDI and NTT DoCoMo, are issuing standard NFC SIMs to go with the hybrid FeliCa-NFC handsets they began selling last year. But there remain few standard NFC services in Japan, which has a massive infrastructure of FeliCa terminals. Gemalto probably supplies the NFC SIMs for both telcos.
Gemalto is believed to hold the largest market share globally for NFC SIMs, including supply of SIMs for such early NFC rollouts as Turkcell’s mobile wallet launch in Turkey, launched in 2011. It also was the first vendor to win a contract for NFC SIMs in France. But at least two other French vendors, Oberthur and Morpho, have said they are also preparing to supply French telcos with their NFC SIM rollouts. Those rollouts are behind schedule, however.
Piou, however, didn’t mention the NFC SIM rollout in South Korea, the largest to date worldwide.
Telcos KT, SK Telecom and LG U+ as of last November had rolled out 10 million SIM-based NFC phones, according to the GSMA trade group. All three telcos are issuing standard NFC SIMs
Gemalto is one of five or six vendors that have supplied SIMs to the telcos, including some Korea-based SIM suppliers, a source told NFC Times. Gemalto may have supplied modules or licensed operating systems to one or more of the other vendors.
In addition, China’s No. 2 telco, China Unicom, has apparently bought only limited quantities of NFC SIMs for its commercial launch in December, both from Gemalto and Giesecke & Devrient. Gemalto last month said it had been chosen by Unicom to “secure its mobile wallet program.” Yet, sources say Unicom hasn’t yet held its bidding process for its larger planned NFC SIM rollout. G&D announced an initial order from Unicom last November.
NFC SIM prices still run around €4 or €5 apiece, sometimes more, since volumes continue to be low in most markets, said sources. The prices are perhaps lower in Korea and and France.
Piou did not mention prices in the conference call, but affirmed that the NFC SIMs are “expensive,” and told analysts that while he expects more competition for NFC SIM business, Gemalto’s profit would increase because volume would grow starting this year and continuing in 2014 and beyond. “So the profit pool–it’s going to increase for the entire market, including for us.”
Multiple Wallets and TSM Fees
In response to another question from an analyst, Piou also predicted a “proliferation” of mobile wallets, and contended that this would help Gemalto’s business, as well.
“A year ago, essentially I was expecting you would have one mobile wallet for (each) one of the operators,” he said. “Today, since we have propagated the technology, you will probably see a flurry of mobile wallets. The one of Google, the one of Amazon, the one of BNP (Paribas), the one of Orange. And they will all spread, and it will be good for us in the sense that the same physical card of your bank will probably be downloaded in several wallets.”
Under Piou’s scenario, consumers will try several wallets out until they find the one they like. “It will be like the apps; you know, you load a bunch of apps, take weather, you load five weather services and then after some time, you like one better than others.”
The proliferation of wallet apps could last for three to five years, and even then, different users could decide on different wallets, whether it’s one from their bank, Amazon or Manchester United, Piou said. But issuers would have to have their applications available for all of them, he contended.
“For us, the good news is, we will deploy multiple wallets, probably you will try them by loading your card in them, so we’ll be paid multiple times even though you only have one physical card,” said Piou. “Then, over time, it will smooth out. But in terms of security, we will have to do this. All those wallets will need to contain secure data related to your banking card. They will need to have the secure software to protect the payment transaction. This is what we do.”
Whether banks or other service providers go along with that, remains to be seen. While Gemalto hasn’t released its pricing for TSM services, some estimates have placed TSM fees at about $2 per account, per year. Gemalto also offeres mobile-wallet software.
Piou: ‘I’m heavily exposed’
Finally, Piou was asked about the sale of nearly all of his common stock in the company in December.
Piou sold of 667,000 shares on Dec. 10 and 11. Gemalto’s share price had been trading at historic highs, having doubled in the previous 12 months to just under €75 when Piou unloaded the shares. The sale earned Piou €49.7 million (US$64.2 million).
Gemalto’s share price dropped more than 8% the following week. It later dropped further before recovering, but has not yet reached the peak of €75 again. The price fell back somewhat last week, to close at just over €70 per share on Friday.
Piou, as he had done earlier in interviews with the financial press, told financial analysts Thursday that he sold the shares to repay a loan he had earlier taken out to exercise his stock options and which was coming due at the end of last year. He also wanted to diversify his assets, he said. He defended selling the shares near their peak price.
“I also would have sold them if the share would have been at €38 or €65, whatever the price,” he said. “So I indicated that I would do it. So simply I did it, as expected.”
After the sale in December, Piou retained 65,000 common shares as well as 265,000 restricted shares in the company. Earlier this month, he converted more than 200,000 of the restricted shares to common stock and now holds 273,000 shares of common stock.
“I’m really exposed to Gemalto’s performance,” Piou contended. “You know, I have received, because of the performance of the company, some other shares, so I (have) something like 200,000 shares or even more than that these days, so I’m heavily exposed.”
According to Gemalto’s annual report, the company awarded Piou an additional 50,000 restricted share units last March, which Gemalto valued at a little more than €1.9 million. That’s in addition to his base salary of €800,000 and bonus of €1.44 million he received for the year, the maximum allowed under his employment contract.