Wavecom Announces Second Quarter 2004 Results

Emphasis shifts to vertical applications.
Issy-les-Moulineaux, France-July 27, 2004

Wavecom SA (NASDAQ: WVCM; Euronext Nouveau March Euronext: AVM; ISIN: FR0000073066), a provider of integrated wireless technology solutions today announced financial results for the second quarter ended June 30, 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
Q2 2003 Q1 2004 Q2 2004 First Half 2004
Revenues €69.9 €38.7 €39.0 €77.7
Gross profit 25.4 7.2 9.8 17.0
Operating expenses 34.8 24.8 36.1 61.0
Operating loss (9.4) (17.6) (26.4) (44.0)
Net loss (6.5) (14.8) (25.3) (40.1)
Loss per share (basic) (€0.43) (€0.97) (€1.65) (€2.62)
No. shares used for calculation 15,014,022 15,240,894 15,342,435 15,292,223



Wavecom product sales by target market (excluding services)

In millions of euros Q2 2003 Q1 2004 Q2 2004 First Half 2004
Vertical Applications €37.3 €21.3 €28.3 €49.6
Personal Communication Devices (PCD) 31.8 17.0 10.2 27.2

Wavecom revenues by geographic region

In millions of euros Q2 2003 Q1 2004 Q2 2004 First Half 2004
Asia-Pacific €47.5 €20.6 €18.0 €38.6
Europe, Middle-East and Africa 21.2 16.2 19.4 35.6
Americas 1.2 1.9 1.6 3.5



Second Quarter 2004 Financial Highlights:

Revenues:

Total second quarter revenues increased 0.6% from the previous quarter and declined 44% year-on-year. Foreign currencies had no meaningful impact on revenues as compared to the previous quarter. Revenues from Vertical Applications increased by 32% from the first quarter of 2004 and represented 73% of total company sales, with distributors contributing more significantly to revenues from Vertical Applications. Revenues from the PCD business declined significantly compared to both the previous quarter and year-on-year. Asian PCD customers continued to demand extremely low prices for core technology thus fueling intense competition in this sector. Wavecom began initial deliveries of its new Flex component solution in June, but, as expected, this new product did not contribute significantly to revenues in the quarter. Average selling prices for all Wavecom products (modules and modems) increased approximately 8% from the previous quarter due to the shift in product and customer mix, with higher volumes sold to Vertical Applications customers. The top ten customers, together representing 65% of revenues, included six from the Vertical Applications Division. The customer portfolio remained balanced with no single customer representing more than 15% of total revenues and two customers above 10%: one Asian and one Global value-added distributor. Total unit sales were 831,000 during the second quarter.

Backlog:

Backlog as of June 30, 2004 stood at €40 million as compared to €60 at March 31, 2004. It should be noted that the backlog figure as of June 30, 2004 comprises 69% of orders from Vertical Applications and 31% of orders from PCD customers.

Gross Margin:

Total gross margin was 25% compared to 19% in the previous quarter. The product gross margin of 30% for the quarter was on-track with management’s ongoing 30% target, yet higher than 21.4% product gross margin the previous quarter. The higher product gross margin in the second quarter reflects the change in product mix to a higher percentage of Vertical Applications sales. This gross margin also compares to an unusually low Q1 2004 due to charges taken in the cost of goods sold principally related to the revaluation of components in inventory during that quarter.

Operating results:

Total operating expenses for the second quarter were €36.1 million, which included a €5.2 million charge for the restructuring plan which is now underway. At the present time, management continues to expect that the total charges resulting from implementation of this plan, including the remaining employee severance packages and related fixed asset write-offs, will be toward the lower end of the previously announced range of €10 to €15 million. Expenditures for R&D increased only slightly compared to the prior quarter. The increase in Sales and Marketing from the previous quarter was due to these expenses being unusually low in the first quarter. G&A expenses increased 67% from the prior quarter, mainly due to additional provisions totaling €3.6 million for excess office space and non-income tax assessments. In addition, a write-off of €1.8 million in intangible assets was recorded relating to the decision to close a U.S.-based R&D subsidiary.

Cash:

Wavecom’s cash position was €60.2 million at June 30, 2004, a decrease from €88.3 million at March 31, 2004. This decrease primarily reflects the funding of operating losses out of cash reserves during the second quarter as well as the use of cash to finance temporary excess inventory levels during the transition to one contract manufacturer from three.

Inventories:

Inventories declined from the previous quarter by 19% to €32 million. Inventories were made up of half finished goods and half components. This decline was the result of intensive efforts to slow supply and reduce finished goods inventory.

Perspectives:

Wavecom Board of Directors announced today that it had elected unanimously Dr. Ronald D. Black as Wavecom’s Chief Executive Officer, replacing Aram Hékimian who remains a member of the Board of Directors, and a significant shareholder of the Company and who will specifically assume direct responsibility for strategic projects as defined by the CEO and the Board of Directors. Dr. Black will join Wavecom on a full time basis on August 16, 2004 and will assume the title of CEO once French immigration formalities are completed.

The strategic studies committee of the Board of Directors has initiated a strategic review of the entire Wavecom business and believes that:

  • The Vertical Applications business, where Wavecom is a recognized market leader, is a sound business and has significant future growth potential. Strategically refocusing on Wavecom’s vertical application business is expected to reduce substantially the Company’s need to use cash resources to fund operations.
  • Although the quality of Wavecom technology is recognized throughout the industry as “best in class”, the pricing pressures in the Personal Communication Device market are extreme.

Wavecom chairman, Michel Alard commented, “Clearly we are not satisfied with our weak top-line performance in the PCD business, which was below our expectations. As a consequence, we are reviewing all strategic alternatives related to the PCD business and we expect to provide an update in the third quarter of 2004 to our business strategy.” Mr. Alard added, “Today’s announcement of the appointment of Ron Black as CEO marks a turning point for Wavecom. Ron’s initial objective is to help us redefine Wavecom’s business model, improve cash flow and return the company to profitability. We believe this will include refocusing our business on the Vertical Applications market, while at the same time determining how we can best leverage the value of our technology and PCD business in the current marketplace.”

Conference Call:

Today at 3:00 p.m. Paris time, Wavecom management will host a conference call commenting on our second quarter 2004 results. Visit the Wavecom corporate website: www.wavecom.com investors section to listen to this conference call commentary webcast (in English).

Wavecom will announce its third quarter 2004 results on October 27 at 7:30 a.m. Paris time to be followed in the afternoon by a conference call hosted by management commenting on the results.