Wavecom announces third quarter 2003 earnings

Revenues: 57.4 million euros. Product gross margin at 32.4%
Issy-les-Moulineaux, France -October 28, 2003

Wavecom SA (NASDAQ: WVCM; Euronext Nouveau Marché: AVM) today announced financial results for the third quarter ended September 30, 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

Q3 2002

Q2 2003

Q3 2003

9 months ended Sept. 30, 2003

Revenues

€171.0

€69.9

€57.4

€215.3

Gross profit

53.7

25.4

18.2

73.0

Operating expenses

27.1

34.8

31.0

100.5

Operating income (loss)

26.6

(9.4)

(12.8)

(27.5)

Net income (loss)

17.3

(6.5)

(10.5)

(21.1)

Earnings (loss) per share (basic)

€1.16

(€0.43)

(€0.69)

(€1.39)

No. shares used for calculation

14,971,841

15,170,367

15,231,484

15,175,084

For the third quarter of 2003, Wavecom reported total revenues of €57.4 million, representing an 18% decline from the second quarter of 2003 and a 66% decline year on year. At constant currencies*, Wavecom revenues would have declined 19% sequentially and 63% year on year.

Wavecom continues to diversify its customer portfolio and during the quarter achieved greater geographic balance. During the third quarter of 2003, four of Wavecom’s customers each represented more than 10% of revenues. Two were from the Asia-Pacific region, one was from the Europe, Middle East and Africa (EMEA) region, and one is a global distributor covering several geographic areas. One of these customers is in the mobile telephone market, two are distributors selling mainly into machine-to-machine applications, and one is in the automotive market.

Wavecom’s top ten customers in the third quarter of 2003 together represented 82% of total revenues, compared to 88% during the previous quarter and compared to 93% in the third quarter of 2002. The geographic split of these customers in the third quarter of 2003 was: 6 in Asia-Pacific, 3 in EMEA and one global customer. No single customer represented more than 30% of revenues. .

Wavecom sales by market and geographic region

Q3 2003 product sales by market:

PCD (Personal Communication Devices)

37%

M2M (Machine to Machine)

6%

Automotive

16%

Distributors

41%

 

Q3 2003 sales by geographic region:

Asia-Pacific

65%

Americas

4%

Europe, Middle-East and Africa

31%

For the third quarter of 2003, sales of WISMO modules represented 89% of total revenues; 10% of revenues came from modems, and services represented approximately 1% of revenues. During the third quarter of 2003, Wavecom shipped 1.1 million units compared to 2.9 million units during the same period in 2002 and 1.4 million units in the second quarter of 2003.

Backlog** at September 30, 2003 grew 20% to €93.3 million, compared to €78 million at the end of the previous quarter. Some customer orders that had been expected to be placed prior to September 30 were delayed and were placed in October with delivery expected in the fourth quarter. Therefore, turns (orders placed and delivered during the same quarter) in the fourth quarter should be slightly higher than usual.

Average selling prices (ASPs) for WISMOs increased nearly 8% from the previous quarter and declined 14% versus the third quarter of 2002. The increase in the quarter is due to higher proportions of sales to markets other than PCD, and of sales of product with more features, compared to prior periods. Management continues to believe that ASPs should decline an average of approximately 20% during 2003.

Product gross margin for the third quarter of 2003 was 32.4% of product sales, once again exceeding the Company’s 30% long-term target. This quarter’s performance compares to 32% during the same period a year ago and 36% for the previous quarter. The gross margin declined compared to the prior period due to higher component costs related to the increased feature list as well as the effect of lower volumes produced.

Operating expenses in the third quarter of 2003 totaled €31 million, and were lower by 11% than the previous quarter, and 14% above the same quarter a year ago. While most operating expenses declined during the quarter, general and administrative expenses increased by €1.1 million from the second quarter, due to a €3.6 million provision for loss related to the consolidation of office space in France recorded during the third quarter. Without the effects of this charge, general and administrative expenses would have decreased during the quarter.

Headcount as of September 30, 2003 stood at approximately 850, about 20% of which was represented by independent contractors and temporary personnel. In efforts to optimize production capacity and efficiency, management is considering the consolidation of all production with one contract manufacturer located in China and the reorganization of the customer care unit. Once social and legal obligations regarding this plan have been completed, a net reduction of approximately 30 positions is expected to begin. This plan is estimated to cost approximately €2.0 million and is expected to reduce overall expenses during 2004 by approximately €10 million euros.

Wavecom recorded a net foreign exchange gain of €1.2 million during the third quarter of 2003, despite the weakening of the U.S. dollar against the euro, primarily as a result of the Company’s hedging program. The Company recorded net tax benefit of €245,000 in the third quarter of 2003, as a result of loss carrybacks and research tax credits in France.

As of September 30, 2003, the Company had cash and short-term investments of €119 million, a sequential decline from €131 million as of June 30, 2003, which reflects the impact of the quarter’s loss. Inventories increased to €17.7 million as of September 30, 2003, compared to €15 million as of June 30, 2003. Accounts receivable for the third quarter of 2003 totaled €43.4 million, representing 68 days sales outstanding, up from 56 days at June 30, 2003 due to a concentration of the quarter’s sales in September.

“Third quarter revenues were impacted primarily by macroeconomic factors, namely the continued high level of handset inventories in China and the normal seasonal slow-down in Europe. In addition, the ramp-up of mass production of our new products, primarily the WISMO Pac P5186, was delayed in the third quarter. However, I believe the fact that we once again exceeded our gross margin target of 30% and that we were able to continue the three quarter trend of reducing operating costs are two very positive signs,” commented Wavecom CEO Aram Hékimian.

Based on information currently available to the Company, management believes that sales for the fourth quarter of 2003 should be between € 70 million and € 78 million. Achieving these sales targets will depend on Wavecom’s ability to meet its production targets and on a significant increase in sales during the remaining two months of the quarter. Management reiterated its 30% gross margin as an ongoing, long-term objective and foresees exceeding this target for the full year 2003.

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

Full year 2003 earnings are scheduled to be announced on February 11, 2004 followed by an afternoon conference call and formal presentation for financial professionals only.

* Calculations are based on the following weighted average rates, applied to sales denominated in U.S. dollars, for the periods July 1, 2002 to September 30, 2002 (1 euro = 0.9832 U.S. dollar) and April 1, 2003 to June 30, 2003 (1 euro = 1.1442 U.S. dollar) compared to the period July 1, 2003 to September 30, 2003 (1 euro = 1.1213 U.S. dollar).
** Backlog is calculated based on orders in hand to be shipped within the next 12 months.