Wavecom announces first quarter 2003 earnings

Product gross margin remains strong at 34.4% of sales. Action plan delivers sequentially lower operating expenses. Backlog increased 12.6% over last quarter.
Issy-les-Moulineaux, France -April 29, 2003

Wavecom SA (NASDAQ: WVCM; Euronext Nouveau Marché: 7306) today announced financial results for the first quarter of 2003. All figures are unaudited and reported in accordance with U.S. generally accepted accounting principles (US GAAP).

In millions of euros
except for share and per share data

Q1 2002

Q4 2002

Q1 2003

Revenues

€108.6

€135.4

€88.0

Gross profit

28.0

53.6

29.4

Operating expenses

21.7

43.1

34.8

Operating income (loss)

6.3

10.4

(5.4)

Net income (loss)

7.8

11.2

(4.1)

Earnings per share (basic)

€0.53

€0.75

(€0.27)

No. shares used for calculation

14,841,415

15,052,768

15,122,646


For the first quarter of 2003, Wavecom reported total revenues of €88 million, representing a 19% decline from the first quarter of 2002 and a 35% decline from the fourth quarter of 2002. At constant currencies, Wavecom sales would have declined 5% year on year and 31% sequentially. Nearly all of Wavecom’s sales from Asia-Pacific and the Americas are denominated in U.S. dollars whereas the Company’s reporting currency is euros, therefore movements between these two currencies impact financial results. The three key factors that had an impact on first quarter sales performance included: the seasonality effect of the Chinese new year, an extremely competitive environment in the local Chinese market for mobile telephones and the weak U.S. dollar compared to the euro.

For the first quarter of 2003, sales of WISMOs represented 91% of total product revenues; the remaining product sales came from modems. Revenues derived from services were less than one percent of the total. During the first quarter of 2003, Wavecom shipped 1.7 million units compared to 1.5 million units during the same period in 2002 and 2.3 million units in the fourth quarter of 2002.

Wavecom moved to a more balanced customer portfolio in the first quarter of 2003 as two customers represented more than 10% each of sales, but no single customer accounted for more than 50% of total sales. The top ten customers represented 85% of sales, down from 87% in the preceding quarter and down from 92% in the first quarter of 2002.

Wavecom sales by market segment and geographic regions

Q1 2003 product sales by market segment:

PCD (Personal Communication Devices)

75.8%

M2M (Machine to Machine)

2.2%

Automotive

5.6%

Distributors

16.4%

 

Q1 2003 sales by geographic region:

Asia-Pacific

80%

Americas

1%

Europe, Middle-East and Africa

19%

Backlog at March 31, 2003 increased by 12.6% from €95 million at December 31, 2002 to €107 million.

Average selling prices (ASP) for WISMOs continued to trend lower, decreasing by 11.2% from the previous quarter and 27.8% year on year. Some of this decline has been due to the weakening of the U.S. dollar against the euro during the past year. Management continues to expect ASPs to decrease, targeting a 20% annual decline for 2003. However, there may be variances in this rate from quarter to quarter during the course of the year, especially due to currency fluctuations.

Product gross margin for the first quarter 2003 reached 34.4%, exceeding management’s ongoing objective of 30%, compared with 40.4% for the previous quarter and 26.7% for the first quarter of 2002. Product gross margin levels reflect the declining ASPs, offset by: an overall soft market for components resulting in favorable pricing, lower manufacturing costs due primarily to further shifts in production from Europe to China, and ongoing improvements in the production process.

Operating expenses declined 19.3% from the fourth quarter of 2002. At March 31, 2003, total salaried personnel (or full-time equivalents) remained stable compared to December 31, 2002 at nearly 700 while the number of independent contractors numbered just over 200. In addition to the effects of our hiring freeze, operating costs decreased as discretionary spending, such as travel and promotional activities, was minimized. While operating expenses declined compared to the previous quarter, they increased from €21.7 million in the first quarter of 2002 as the Company built its infrastructure to support the business’ growth in 2002.

Aram Hékimian, Wavecom CEO stated, “We were extremely pleased to achieve this level of reduced operating expenses quickly and efficiently without compromising Wavecom’s future growth.” He added, “We are now realizing the positive results from the aggressive action plan we put into place at the beginning of this year that included a corporate-wide effort to reduce overall operating expenses. Given our more efficient organization and cost base, we can now refocus our efforts on Wavecom’s growth drivers such as sales and technological innovation.”

During the first quarter of 2003, the Company implemented a hedging program to reduce its exposure to foreign currency fluctuations. Hedging instruments helped to limit net foreign exchange losses to €922,000 in the quarter, despite significant foreign exchange volatility during the quarter. This was the first time the Company has used such a program.

A tax benefit was recognized in the first quarter of 2003, primarily due to tax benefits recognized on losses and research tax credits in France.

As of March 31, 2003, the Company had cash and short-term investments of €162.2 million representing a sequential increase of 21% above the €134.5 million as of December 31, 2002. Inventories decreased 37% from the preceding quarter to reach a level of €19.0 million as of March 31, 2003. Accounts receivable totaled €40.7 million, representing 42 days sales outstanding, down from 57 days at December 31, 2002.

On February 10, 2003, Wavecom received COB (French stock market authority) approval to implement its share repurchase program. To date, the company has repurchased approximately 1% of its shares.

Outlook:

In the context of an uncertain global climate, Wavecom management believes that revenues in the second quarter will be equal to or moderately down from the first quarter, and then will increase sequentially for the remainder of 2003, as many customers introduce new products into mass production, with full year sales levels expected to be in line with 2002. Management believes that, with this level of sales, the Company will be able to achieve breakeven for the second half of 2003 at the operating level. Management does, however, caution that certain elements beyond its control, notably the SARS epidemic in Asia and the continued volatility of the U.S. dollar could have a material impact on future short-term results. It should be noted that the outbreak of SARS has had no noticeable effect on Wavecom’s business to date.

Today at 3 pm Paris time, Wavecom management will host a conference call for financial professionals commenting on its first quarter 2003 earnings and strategic initiatives. Visit the Wavecom corporate website: www.wavecom.com investors section to listen to this conference call commentary webcast (in English).

Second quarter 2003 earnings are scheduled to be announced on July 24, 2003 at 7:30 am Paris time, and will be followed by a conference call for financial professionals and a presentation to the financial community in Paris.