Wavecom Announces Fourth Quarter 2005 Results

2005 Full Year Operating Income of €4.4 million compared to an €80.9 million Operating Loss in 2004.
Issy-les-Moulineaux, France-February 09, 2006

Wavecom SA (NASDAQ: WVCM; Euronext Eurolist compartment B: AVM; ISIN: FR0000073066), a leader in pre-packaged wireless communications solutions for automotive, industrial (machine-to-machine) and mobile professional applications, today announced financial results for its fourth quarter and full year ended December 31, 2005.

Ron Black, chief executive officer, commented "2005 was a pivotal year for Wavecom. After two years of losses we restructured the business quickly and efficiently achieving profitability and ending the year with a net profit of €9.1 million compared to a net loss in 2004 of €78.8 million. The business is now firmly focused on embedded industrial and automotive applications, for which we consider ourselves to be among the leading independent provider of wireless technology."

Fourth Quarter 2005 Highlights:

All figures are unaudited and reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP). Condensed consolidated financial tables are provided at the end of this release. Please note that all figures related to previous quarters contained in this release, including comparisons, are based on restated figures as indicated in the attached financial schedules.

Revenues: Fourth quarter 2005 revenues were €30.7 million, which was a decrease of 5.3% from the previous quarter. This quarter-on-quarter decrease was the result of a decline in our handset business, as revenue from our core business in automotive and industrial applications increased, 3.1% quarter-on-quarter. As we indicated in our announcement on December 21, 2005, we had hoped for an even larger increase in our core business, but three large customers decreased their demand late in the quarter because of supply chain issues unrelated to Wavecom. Fourth quarter revenue for our core business was €29.5 million, or 96% of total revenues, while revenue for the handset business was €0.6 million, or 2% and licensing revenue was €0.5 million, or 2%. The breakdown of revenues by region is as follows: EMEA (Europe, Middle-east and Africa): 64%, APAC (Asia-Pacific): 27% and The Americas: 9%. The customer portfolio remained balanced, with no single customer representing more than 17% of total revenues in the fourth quarter. The top ten customers combined, 6 of which are distributors, represented 59% of revenues as compared to 56% in the previous quarter.

Backlog: Backlog on December 31, 2005 was €39.1 million, which was an increase of 7% compared to €36.6 million at the end of the previous quarter.

Gross Margin: Gross margin was 48.5%, flat to 48.6% last quarter. The on-going level of gross margin as a percentage of revenues, excluding one-time effects, continues to be high and was approximately 47% in the fourth quarter of 2005. We are very proud of this continued strong margin, which is the result of good performance of our supply chain, manufacturing facilities, product and inventory management.

Operating Expenses: Total operating expenses for the fourth quarter 2005 were €13.6 million, compared to €13.1 million in the third quarter 2005. Operating expenses for R&D and Sales & Marketing increased by 15.4% and 9.1% respectively while G&A declined 11.4% as compared to the third quarter of 2005.

Profit: Operating income for the fourth quarter was €1.3 million, compared to €2.6 million of operating profit in the third quarter. Net income for the fourth quarter was €1.8 million, or €0.12 per share, as compared to €3.3 million, or €0.22 per share, in the third quarter 2005. Wavecom recorded a net foreign exchange gain of €249 thousand for the fourth quarter 2005, compared to a €441 thousand gain in previous quarter.

Cash: Wavecom's cash position was €60.7 million at December 31, 2005, increasing from €60.0 million at September 30, 2005. This increase was a result of continued excellent operating performance in inventory reduction and supply chain management.

Business news:

  • As part of Wavecom's paid-for service offer, it announced the launch of Wavecom University, a professional education program designed to help customers and partners take full benefit of the possibilities of Wavecom's solutions for embedded industrial wireless applications. Nearly 40 software developers and marketing professionals have already attended Wavecom University's first course, "Open AT® development;"
  • Wavecom announced that Infosys, a large global software and IT company, has been accredited as a Certified Competence Center, offering design, development and integration services based on Open AT® , for which Infosys has extensive technical expertise;
  • Datecs, a Bulgarian cash register maker announced it has incorporated a Wavecom solution into its products for the Serbian market in response to a new law passed by the Serbian government under which all cash registers are required to be wirelessly linked to the government's tax authorities. This application is one more example of how government legislation can trigger the development of a wide variety of wireless machine-to-machine communication applications; and
  • Wavecom received ISO 9001:2000 certification with a multi-site certificate covering its four main locations in France, the U.S., Asia-Pacific (Hong Kong and Beijing).

Outlook: While our backlog has increased substantially quarter-on-quarter from €36.6 to €39.1 million, we continue to closely monitor our customers' supply chain issues and their ability to ship products. Therefore we do not have sufficient visibility to provide revenue guidance for the quarter.

2005 full year results:

2005 was a transitional one for Wavecom as we reoriented our business model to focus exclusively on the embedded markets for wireless communication and away from the telephone handset market. Our primary objective in 2005 was to return the company to profitability, which we achieved -- operating income was €4.4 million for 2005, compared with a net loss of €80.9 million in 2004 and net income similarly improved to €9.1 million from a €78.8 million net loss in 2004. Revenue for 2005 was €129.2 million compared with €151.6 million in 2004. This decline in revenue was largely associated with the decrease in revenues from our handset business. Gross margin for 2005 was 46% compared with 24% for 2004. As indicated in our 2004 annual report, the gross margin for the full year 2004, excluding a number of exceptional charges would have been approximately 32% of sales. This significant year-on-year increase in gross margin from 32% to 46% was the result of our on-going performance improvements in supply chain, manufacturing, product management and inventory management throughout the entire year 2005.

Key business milestones: We made excellent progress on several business fronts throughout the year 2005 including:

  • Introduction of a new version of Wavecom's Open AT® software platform complete with two new releases of the Wavecom operating system OS 6.55 and 6.60. A key feature of the Wavecom OS releases include DOTA (Download Over-the-Air) which allows for remote electronic maintenance application and operating system upgrades and enhancements;
  • Introduction of a platform for M2M and Mobile Professional applications based on the EDGE standard;
  • Availability of TCP/IP Plug-Ins as standard with all Wavecom solutions.
  • Migration of the entire line of Wavecom products to lead-free ROHS European Union norms set for mid-2006;
  • Wavecom became part of the European Union initiative known as e-Call aimed at a reducing the number of automobile fatalities on European roadways by using in-vehicle emergency call technology;
  • Two new competence centers for Open AT® development were announced - one in the U.S. and one in Asia-Pacific; and,
  • Customer announcements regarding applications in cash registers, payment terminals, automatic meter reading, automobile anti-theft devices, fleet management and locator applications.

Restatement of 2005 quarterly financials: In the first quarter of 2005 the company recognized revenues of €3.4 million from a licensing agreement. Upon further review of this new business, we, along with our auditors, have concluded that this revenue should not have been recognized in the first quarter, but spread over 21 months to be fully compliant with SOP 98-4 (Software revenue recognition rules under US GAAP). The contract for this licensing agreement includes a clause allowing for free updates if and when available. Although no updates have been, nor will be provided, SOP 98-4 requires that revenue recognition be spread over the life of the license. From a technical accounting standpoint, since vendor specific objective evidence of fair value for this post-contract customer support could not be determined at the time the contract was signed, the revenue must be spread over 21 months. Out of the €3.4 million revenue from this contract, €1.9 million will be deferred in 2006, and the remaining amount (€1.5 million) has been recognized over the last three quarters of 2005 as delivery occurred at the end of March 2005. It should be noted that the €3.4 million of license revenue was fully paid for in 2005 and therefore this restatement has no impact on Wavecom's cash at year-end.

Wavecom will announce its Q1 2006 results on April 27 at 7:00 a.m. Paris time.

Conference Call:

Today at 3:00 p.m. Paris time, Wavecom management will host a conference call commenting on its fourth quarter and full year ended December 2005 results followed in the afternoon by a presentation to the financial community in Paris. Visit the Wavecom corporate website: www.wavecom.com investors section to listen to the conference call commentary webcast (in English).