Wavecom announces first quarter 2004 results

Issy-les-Moulineaux, France-April 28, 2004

Wavecom SA (NASDAQ: WVCM; Euronext Nouveau March Euronext: AVM; ISIN: FR0000073066), a provider of integrated wireless technology solutions for Vertical Applications (machine-to-machine, automobiles and wireless local loop) and Personal Communication Devices (PCDs: telephone handsets and smartphones) today announced financial results for the first quarter ended March 31, 2004. All figures are unaudited and reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP).

In millions of euros
except for share and per share data
Q1 2003 Q4 2003 Q1 2004
Revenues €88.0 €60.3 €38.7
Gross profit 29.4 29.5 7.2
Operating expenses 34.8 32.9 24.8
Operating loss (5.4) (3.5) (17.6)
Net loss (4.1) (4.8) (14.8)
Loss per share (basic) (€0.27) (€0.31) (€0.97)
No. shares used for calculation 15,122,646 15,183,387 15,240,894

Wavecom product sales by target market (excluding services)

In millions of euros Q1 2003 Q4 2003 Q1 2004
Vertical Applications €21.1 €36.2 €21.3
Personal Communication Devices (PCD) 66.0 22.4 17.0

Wavecom revenues by geographic region

In millions of euros Q1 2003 Q4 2003 Q1 2004
Asia-Pacific €70.4 €35.5 €20.6
Europe, Middle-East and Africa 16.7 21.5 16.2
Americas 0.9 3.3 1.9

First Quarter 2004 Financial Highlights:

Revenues: Total first quarter revenues declined 36% from the previous quarter and 56% year-on-year. At constant currencies, Wavecom revenues would have declined 35% from the previous quarter and 52% year-on-year. Revenues from Vertical Applications decreased by 41% from the fourth quarter of 2003 reflecting lower demand from Wavecom’s network of value-added distributors. Sales to distributors represented over half of the revenues from Vertical Applications. The year-on-year decline in PCD revenues reflects a shift in demand by Asian customers away from the higher-end products offered by Wavecom toward cheaper solutions. Wavecom’s new Flex component solution, designed to address a wide range of customer requirements, including the needs of customers seeking a less expensive wireless solutions, is expected to be available for shipment late in the second quarter of this year. Average selling prices for all Wavecom products (modules and modems) declined approximately 10% from the previous quarter, mainly due to planned price reductions. The top ten customers represented 70% of sales, including two Asian customers each representing more than 10% of total revenues. No single customer represented more than 15% of total revenues.

Gross Margin: The product gross margin of 21.4% (excluding revenues from services) for the quarter was below management’s long-term target of 30% and significantly lower than product gross margin the previous quarter, which had been exceptionally high at 51%. The weak revenues in the first quarter of 2004 resulted in considerable pressure on gross margin as percent of sales, as fixed overhead costs were allocated over lower volumes, causing the cost of goods per unit sold to increase. In addition, Wavecom recorded €2 million in charges in the cost of goods sold related to the revaluation of components in inventory for which market prices had dropped, as well as the write-off of inventoried components used in products whose end-of-life has been decided.

Operating results: Despite the Company’s success in reducing its operating expenses, this quarter marks the fifth consecutive quarter that general operating expenses (excluding goodwill impairment charges) have declined. The operating cost base coupled with lower revenues in the first quarter resulted in an operating loss of €17.6 million. Wavecom took a charge of approximately €1 million during the first quarter of 2004 related to initial headcount reductions under the restructuring plan announced in October 2003. This charge related primarily to the elimination of positions in France. A further restructuring plan, announced in January 2004, which aims to reduce significantly overall operating expenses, should begin to show a positive impact on operating expenses in the second half of this year. Consultations with the workers’ council in connection with headcount reductions under this plan are expected to be finalized during the second quarter. At the present time, management expects that charges resulting from implementation of this plan to be toward the low end of the forecasted range of €10 million to €15 million.

Cash: Wavecom’s cash position decreased from €111 million at December 31, 2003 to €88 million at the end of the first quarter 2004. This decrease primarily reflects the funding of operating losses out of cash reserves during the quarter as well as a large lump-sum royalty payment for the utilization of intellectual property rights under an existing agreement. Wavecom’s management expects that its cash reserves will continue to decline at least through the third quarter, as the Company expects to incur further operating losses. In addition, Wavecom estimates it may need to use a significant amount of cash during the second and third quarters of 2004 to finance temporary excess inventory levels while the company transitions its outsourced manufacturing from three contract manufacturers down to a single contract manufacturer.

Inventories: Inventories grew from the previous quarter by 17% to €39.7 million euros. While inventories of finished goods declined, component inventories increased. This increase was the result of ordering in previous quarter; strategic forward purchases of key components during the first quarter; and the transitional impact of transferring of all of Wavecom’s production to a single contract manufacturer. Once the consolidation is completed in mid-2004, management expects component inventories to decrease and return to normal levels by the third quarter.

First Quarter 2004 Business Highlights

Vertical Applications Business Division: Orange, a major European wireless network operator, has joined with Wavecom to offer a solution that combines a Wavecom module with Orange’s embedded protocols and related services. This combined offer is aimed specifically at the growing machine-to-machine market. During the quarter, Wavecom also launched two new products for vertical applications: the WISMO® Q2400, offering cost-effective solutions to wireless local loop applications; and the Fastrack® M1306B a compact, durable modem.

PCD Business Division: During the first quarter, Wavecom signed a software licensing agreement with TCL, a major Chinese manufacturer of portable telephones and a long-time Wavecom customer. Also in the quarter, the first samples of the Flex component solution were manufactured successfully. This product is Wavecom’s initial integrated chipset solution, one that Wavecom hopes will compete successfully directly with wireless reference design solutions for the PCD market.

Management News: During the first quarter Luc Degaudenzi, previously with Sony Ericsson, joined Wavecom as the new Group Vice President in charge of the Systems & Silicon division.


Based on information currently available to the Company, including backlog of €60.3 million at March 31, 2004, management expects that sales during the second quarter will increase marginally compared to the first quarter. It should be noted that backlog as of any particular date may not be an accurate indicator of sales for a given future period. Management also anticipates continued pressure on product gross margin, with second quarter 2004 gross margin expected to remain below Wavecom’s 30% long-term target.

"Despite the difficult period that we are going through, we continue to build strong customer and technology partner relationships,” commented Aram Hékimian, Wavecom CEO. “Our goal is to enter the semiconductor industry by the end of this year by bringing our years of expertise and know-how as a systems integrator to bear on truly innovative wireless solutions.”

Conference Call:

Today at 3:00 p.m. Paris time, Wavecom management will host a conference call for financial professionals commenting on our first quarter 2004 earnings. Visit the Wavecom corporate website: www.wavecom.com investors section to listen to this conference call commentary webcast (in English). Wavecom’s annual report (SEC Form 20-F) for 2003 is now available on the corporate website.

Wavecom will announce its second quarter 2004 results on July 22 at 7:30 a.m. Paris time to be followed in the afternoon by a conference call hosted by management and presentation to the financial community in Paris.