Wavecom announces second quarter 2003 earnings

Revenues: 69.9 million euros. Product gross margin at 36.3%, exceeding long-term target. Customer portfolio more balanced.
Issy-les-Moulineaux, France -July 24, 2003

Wavecom SA (NASDAQ: WVCM; Euronext Nouveau Marché: AVM) today announced financial results for the second 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

Q2 2002

Q1 2003

Q2 2003

YTD 2003

Revenues

€136.0

€88.0

€69.9

€157.9

Gross profit

39.2

29.4

25.4

54.8

Operating expenses

26.5

34.8

34.8

69.6

Operating income (loss)

12.7

(5.4)

(9.4)

(14.8)

Net income (loss)

5.8

(4.1)

(6.5)

(10.6)

Earnings per share (basic)

€0.39

(€0.27)

(€0.43)

(€0.70)

No. shares used for calculation

14,903,600

15,122,646

15,170,367

15,146,497

For the second quarter of 2003, Wavecom reported total revenues of €69.9 million, representing a 21% decline from the first quarter of 2003 and a 49% decline year on year. At constant currencies, Wavecom sales would have declined 17% sequentially and 40% year on year. 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 Wavecom's reported financial results. This revenue decline is in line with the Company's sales forecast announced on June 16, 2003.

Wavecom continues to diversify its customer portfolio in an effort to reduce its reliance on a small number of major customers. During the second quarter, three of Wavecom's customers each represented more than 10% of revenues. All of these customers are located in the Asia-Pacific region. Two of these customers are in the mobile telephones market and one is a distributor selling mainly into machine-to-machine applications. Wavecom's top ten customers in the second quarter together represented 88% of total revenues; of these, four were from the Asia-Pacific region, five were from the Europe, Middle East and Africa region, and one is a global distributor covering several different geographic areas. No single customer represented more than one-third of revenues.

"During the second quarter, Wavecom continued to build depth among its existing customers. A significant number of handset projects are moving forward as many of our customers are actively looking to develop end-markets beyond China" said Aram Hékimian, Wavecom CEO. He added, "The fact that one of our greater-than-10% customers is a distributor that serves primarily the growing machine-to-machine market demonstrates that we are making progress in our efforts to diversify our base of business."

For the second quarter of 2003, sales of WISMO modules represented 88% of total revenues; the remaining sales came mainly from modems, while services represented approximately 1% of sales. During the second quarter of 2003, Wavecom shipped 1.4 million units compared to 2.1 million units during the same period in 2002 and 1.7 million units in the first quarter of 2003.

Wavecom sales by market and geographic region

Q2 2003 product sales by market:

PCD (Personal Communication Devices)

46%

M2M (Machine to Machine)

2%

Automotive

13%

Distributors

39%

 

Q1 2003 sales by geographic region:

Asia-Pacific

68%

Americas

2%

Europe, Middle-East and Africa

30%

 

Backlog at June 30, 2003 was €78 million, compared to €107 million at the end of the previous quarter. This backlog number is calculated based on orders in hand to be shipped within the next 12 months, although the Company's management expects that a large majority will be shipped during the third quarter of 2003. Product orders in our backlog are subject to changes in delivery schedules and adjustment in volumes, or to cancellation at the option of the purchaser without significant penalty. Therefore, backlog as of any particular date may not be an accurate indicator of sales for a given future period.

With a relatively weak U.S. dollar versus the euro and mounting price pressure in the global handset market during the quarter, average selling prices (ASPs) for WISMOs declined 8% from the previous quarter and 27% versus the second quarter of 2002. Management currently believes ASPs should decline an average of approximately 20% during 2003, though the actual amount of the decline will depend on the overall product mix for the rest of the year.

Product gross margin for the second quarter of 2003 was 36.3% of product sales, exceeding management's ongoing objective of 30%. This quarter's performance compares to 29.2% during the same period a year ago and 34.4% for the previous quarter. Wavecom's ability to maintain gross margin levels on lower revenues reflects careful management of the Company's contract manufacturers, a continuing overall soft market for components, and ongoing improvements in the production process.

Operating expenses in the second quarter were €34.8 million, virtually flat compared to the first quarter of 2003, and an increase of 31% compared to the same period last year. Headcount as of June 30, 2003 stood at approximately 880, about 20% of which was represented by independent contractors and temporary personnel. The general hiring freeze announced at the beginning of this year remains in effect. Overall discretionary spending, such as promotional activities, are being held to a minimum. General and administrative expenses increased sequentially due to an increase in the bad debt reserve and due to the costs associated with moving Wavecom's Paris-based employees into one building from three separate sites, of which the last was vacated during July 2003. Charges related to the exit of this facility will result in an estimated €3 million provision for loss being recorded in the third quarter of 2003. The Company is actively seeking subtenants for the three former sites.

Foreign currency impact was held to a minimum, despite the weakening US dollar versus the euro, as the Company's hedging program helped to reduce its exposure to foreign currency fluctuations. Foreign exchange losses during the second quarter amounted to €245,000, compared to a €922,000 loss in the first quarter of 2003.

The company recorded a tax benefit of €2.2 million in the second quarter of 2003, as a result of loss carrybacks and research tax credits in France.

As of June 30, 2003, the Company had cash and short-term investments of €131 million, a sequential decline from €162 million as of March 31, 2003, which reflects the impact of the quarter's loss as well as €18 million in income tax payments, including the 2002 taxes due as well as pre-payments of estimated amounts for 2003. Inventories decreased by 21% from the preceding quarter to €15 million as of June 30, 2003. Accounts receivable for the second quarter of 2003 totaled €44 million, representing 56 days sales outstanding, up from 42 days at March 31, 2003.

Outlook:

Based on senior management's recent meetings with customers in the Asia-Pacific and Americas regions and encouraging signs from the EMEA region, management remains positive that fourth quarter 2003 revenues will be the highest of any quarter this year. However, given the decline in backlog, third quarter sales this year are expected to be sequentially down as the Chinese market continues to work through its still abnormally high handset inventories.

Wavecom management currently expects margin pressure in coming quarters. Therefore, the Company maintains a 30% annual gross margin as an ongoing, long-term objective.

Management is maintaining its strict cost control measures and currently expects third quarter operating expenses to be fairly stable compared to the second quarter, in spite of the loss provision related to the exit of the leased facility.

Today at 3:00 pm Paris time, Wavecom management will host a conference call for financial professionals commenting on its second quarter 2003 earnings. Visit the Wavecom corporate website: www.wavecom.com investors section to listen to this conference call commentary webcast (in English). A presentation to the financial community in Paris will follow the conference call at 5:30 pm.

Third quarter 2003 earnings are scheduled to be announced on October 28, 2003 at 7:30 am Paris time, and will be followed that afternoon by a conference call for financial professionals.