Wavecom Announces Second Quarter 2006 Financial Results

Strong sequential revenue growth: + 24% organic, +77% including acquisition. Integration of acquired business ahead of plan.
Issy-les-Moulineaux, France-July 27, 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 second quarter ending June 30, 2006.

Ron Black, chief executive officer, commented, "We are extremely pleased to report Wavecom's strong performance for the second quarter of 2006, with significant organic growth in our core automotive and industrial activity on both a quarter-on-quarter and year-on-year basis. Additionally, integration of the acquired Sony Ericsson M2M business is ahead of plan. The combination of our organic growth and the smooth integration of a substantial acquisition are proof points that demonstrate our ability to deliver on our previously-stated priorities, including, profitabilty, market-leading growth and superior customer service."

For comparative purposes, we believe it is important to review this quarter's results showing the effect of the acquired activity and reflecting the impact of certain expenses related to stock-based compensation and certain recognized intangible assets as indicated in the charts below.

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 second quarter ending June 30, 2006.

Ron Black, chief executive officer, commented, "We are extremely pleased to report Wavecom's strong performance for the second quarter of 2006, with significant organic growth in our core automotive and industrial activity on both a quarter-on-quarter and year-on-year basis. Additionally, integration of the acquired Sony Ericsson M2M business is ahead of plan. The combination of our organic growth and the smooth integration of a substantial acquisition are proof points that demonstrate our ability to deliver on our previously-stated priorities, including, profitabilty, market-leading growth and superior customer service."

For comparative purposes, we believe it is important to review this quarter's results showing the effect of the acquired activity and reflecting the impact of certain expenses related to stock-based compensation and certain recognized intangible assets as indicated in the charts below.

In millions of euros
Under US GAAP
Historical Wavecom
Q2 2005
Historical Wavecom
Q1 2006
Historical Wavecom
Q2 2006
Acquired Activity*
Q2 2006
Consolidated results
Q2 2006
Revenues 31,2 28,2 35,1 14,8 49,9
Gross profit 14,8 15,0 17,3 3,1 20,4
Operating expenses 12,7 14,4 14,3 5,5 19,8
Operating income (loss) 2,1 0,6 3,0 (2,3) 0,7
Net income (loss) 4,3 0,2 2,6 (2,4) 0,2

Additional information
Operating income (loss) 2,1 0,6 3,0 (2,3) 0,7
Stock option-related expenses -- (0,3) (0,4) -- (0,4)
Amortization expense related to acquisition -- -- -- (2,2) (2,2)
Operating income before stock-option compensation and amortization expense related to acquisition 2,1 0,9 3,4 (0,1) 3,3

*Note: The acquired activity (Sony Ericsson M2M business) represents two months of results, May and June for Q2 2006 and reflects the impact of amortizing certain recognized intangible assets.

Second Quarter 2006 Highlights:

All figures are unaudited and reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP), unless otherwise noted. Condensed and consolidated financial tables are provided at the end of this release. Wavecom consolidated financials for the second quarter 2006 include two months of results associated with the acquisition of certain assets of Sony Ericsson's M2M business unit which closed on April 26, 2006. Financials for future quarters will be reported on a consolidated basis only and will not break out the acquired business.

Revenues: Second quarter 2006 revenues were €49.9 million, which was an increase of 77% from the first quarter 2006, or 24% organically, excluding the acquired business. On a year-to-year basis, revenues increased 60%, or 12% organically. Performance year-on-year was even better in the core industrial and automotive business (i.e. excluding handsets), where revenues grew 87%, or 32% organically. The significant organic growth was largely the result of new customer programs ramping in the Americas and Asia Pacific and robust add-on orders from existing customers in the EMEA region.

The breakdown of revenues by region was as follows: EMEA (Europe, Middle-east and Africa) 55%; APAC (Asia-Pacific) 20%; and Americas 25%. The customer portfolio remained balanced, with the top ten customers, three of which have come with our acquisition, representing 49% of revenues as compared to 64% in the previous quarter.

Backlog: Our 12-month backlog, on June 30, 2006 stood at €51.6 million, 32% of which comes from the acquired business. The backlog from the historical Wavecom business at June 30, 2006 was €35.2 million, compared to €38.3 million at the end of the previous quarter. This reduction was totally associated with our handset business, for which we have no recognized backlog this quarter. As such, the core industrial and automotive business backlog was flat sequentially.

Gross Margin: Gross margin for the consolidated business was 40.9% of revenues. As previously indicated, the gross margin from the acquired activity, at 20.9% of sales, was significantly lower than the historical Wavecom business at 49.3% of sales. The gross margin for the historical business declined from 53.2% of sales in the previous quarter mainly due to a significant intellectual property accounting adjustment made in the first quarter of 2006.

Operating Expenses: Total operating expenses for the second quarter 2006 were €19.8 million, of which the acquired activity represented €5.5 million, or 28%. For the historical Wavecom business, operating expenses increased sequentially in R&D, mainly due to network certification of our products, and in sales and marketing. These increases were off-set by a sequential decrease in G&A mainly due to the fact that there was no longer a bad debt reserve in the second quarter 2006 as compared to the previous quarter.

As indicated in the table above, during the second quarter 2006 there were a number of accounting charges related to stock option expenses and our recent acquisition that adversely impacted our operating result. In accordance with SFAS 141, certain intangible assets and in-process technology are being identified within the former Sony Ericsson M2M activity. A complete identification should be finalized during the second half of 2006. At the current time, in-process technology has been estimated at €1.4 million which was expensed in the second quarter 2006, and the acquired intangible assets have been estimated at € 13.7 million, and will be depreciated over a period of 1 to 4 years, resulting in a depreciation charge of €0.8 million for the second quarter of 2006.

Profit/(loss): Operating income for the second quarter was €0.7 million. The historical Wavecom business contributed €3.0 million compared to €0.6 million in the first quarter 2006. The acquired activity contributed a loss of €2.3 million, including the previously-mentioned expenses related to the acquisition for the second quarter of 2006.

Net income for the second quarter 2006 was €0.2 million. Wavecom recorded a net foreign exchange loss of approximately €0.6 million for the second quarter 2006, compared to a €0.7 million loss in the previous quarter.

As indicated in the above table, on a non-GAAP basis, which excludes stock option expenses and expenses related to our acquisition, the operating income was a solid €3.3 million, with the historical Wavecom business generating €3.4 million and the acquired activity having a slight loss of €0.1 million.

Balance sheet: Wavecom's cash position was €37.2 million at June 30, 2006, decreasing from €59.0 million on March 31, 2006. This reduction was the result of the €25 million cash payment related to the acquisition of certain assets of the Sony Ericsson M2M business unit.

Inventories as of June 30, 2006, including €1.4 million of finished products from the acquired activity, stood at €6.7, essentially flat from the previous quarter but declining for the historical business from the previous quarter.

Business news:

  • Wavecom announced acquisition of NexGen Software S.A. : This acquisition brings to us an internally-developed TCP/IP (internet) suite of protocol stacks and internet software expertise along with a worldwide customer base of over 100. It represents a strategic acquisition for Wavecom. With it, we eliminate our reliance on external, third-party, TCP/IP vendors and further strengthen our already extensive software expertise.
  • Wavecom announced design win with Peiker Acoustic: Peiker Acoustic is a tier one supplier to leading German car manufacturers. In a new design win, Peiker will use Wavecom technology to equip hands-free embedded phones in German luxury models.
  • Wavecom announced a line extension of it most popular wireless CPU (Central Processing Unit): This line extension includes four versions -- Q24 Classic, Q24 Plus, Q24 Extended and Q24 Auto; targeting a variety of wireless devices. By being hardware and software compatible with our existing Q24 family, this new series allows for the seamless upgrade of customer products and devices, thus saving on new design or re-design costs.

Further commenting on the state of the business, Ron Black, Wavecom CEO added, "I am extremely proud of the work our combined team has done to smoothly integrate the new business, further positioning us as a leader in automotive and industrial wireless solutions. Our strong results for the second quarter make us optimistic about the second half of 2006, although we remain cautious that the traditional summer slowdown may temper sales somewhat despite our strong backlog."

Conference Call:

Today at 3:00 p.m. Paris time, Wavecom management will host a conference call in English reserved for financial professionals commenting on its second quarter 2006. A meeting of financial professionals will be held at 8:30 a.m. in Paris tomorrow, July 28. To access this call, please use the following numbers: +33 (0)1 55 17 41 49 in France, +44 (0)20 7138 0816 in the U.K. and +1 718 354 1171 in the U.S. Visit the Wavecom corporate website: www.wavecom.com investors section to listen to the conference call commentary webcast (in English).

Wavecom will announce its Q3 2006 results on October 26 at 7:00 a.m. Paris time.