Wavecom Announces Third Quarter 2006 Financial Results

Continued strong revenue growth, increasing 12% quarter-on-quarter and up 73% year-on-year.
Issy-les-Moulineaux, France-October 26, 2006

Wavecom SA (NASDAQ: WVCM; Euronext Eurolist compartment B: AVM; ISIN: FR0000073066), a leader in wireless communication solutions for automotive, industrial (machine-to-machine) and mobile professional applications, today announced financial results for its third quarter ending September 30, 2006.

Ron Black, Wavecom Chief Executive Officer, commented, "We are pleased once again to post strong revenue growth in the third quarter of 2006. Furthermore, the overall positive financial results were driven by the successful integration of the acquired Sony Ericsson M2M business, which is well on track". He added, "We continue to see strong design win momentum from our newest products, including our Wireless Microprocessor®, the most advanced, high performance embedded processor that combines wireless connectivity in a single component."

In millions of euros
Historical Wavecom
Q3 2005
Consolidated results
Q2 2006
Consolidated results
Q3 2006
Revenues 32.4 49.9 55.9
Gross profit 15.7 20.4 19.9
Operating expenses 13.1 19.8 19.3
Operating income 2.6 0.7 0.6
Net income 3.3 0.2 1,2

Additional information

Operating income 2.6 0,7 0.6
Stock option-related expenses -- (0,4) (0.7)
Amortization expense related to acquisition -- (2,2) (1.2)
Operating income before stock-option compensation and amortization expense related to acquisition 2.6 3,3 2.5

*Note: The above consolidated results include three months (July, August and September) for the acquired business in Q3 2006 and two months (May and June) in Q2 2006.

Third Quarter 2006 Highlights: All figures are un-audited 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 third quarter 2006 include three months of results associated with the acquisition of certain assets of Sony Ericsson's M2M business unit which closed on April 26, 2006.

Revenues: Third quarter 2006 consolidated revenues were €55.9 million, an increase of 12% from the second quarter 2006 and 73% from third quarter 2005. Increase in volumes is coming from new designs that our customers have been working on over the past 24 months. The Americas region, with revenues of €17.3 million led the growth with a 39% quarter-on-quarter increase, while APAC posted a 25% increase, marking its best quarterly performance since we exited the handset business in 2004.

The breakdown of revenues by region in the third quarter was as follows: EMEA 47%; APAC 22%; and Americas 31%. The customer portfolio remained balanced, with the top ten customers, three of which have come with the acquisition, representing 52% of revenues as compared to 49% in the previous quarter.

Backlog: Our 12-month backlog, on September 30, 2006 stood at €49.2 million compared to €51.6 million as of June 30, 2006. The decrease is primarily in the APAC and EMEA regions coming from a variety of reasons, particularly the reorganization of our regional distributor network.

Gross Margin: Gross margin for the consolidated business was €19.9 million or 35.6% of revenues compared to 40.9% in the second quarter. This decline was primarily due to product mix as we had a full three months of revenue from the acquired business' lower-margin products compared to two months in the previous quarter. In addition, we took reserves for excess and obsolete (E&O) inventory that decreased the margin by nearly 2 percentage points mainly linked to the integration of the acquired businesses' manufacturing activities.

Operating Expenses: Total operating expenses for the third quarter 2006 were €19.3 million, a slight decrease from the second quarter level of €19.8 million. This decrease was due mainly to the fact that the previous quarter had a one-time charge for acquired in-process technology. Expenses for R&D, G&A and Sales & Marketing were all flat compared to the previous quarter, despite the fact that we carried one additional month of the acquired business. In addition, there was a small restructuring charge, €38 thousand, related to the consolidation of our America's region operations into new offices in Research Triangle Park, North Carolina (USA). We expect to complete the transfer of our R&D teams from San Diego to North Carolina by the end of 2006.

As indicated in the table above, during the third quarter 2006, we continued to have a number of accounting charges related to stock option expenses totaling €0.7 million and to the depreciation of the acquired intangible assets for €1.2 million.

Profit/(loss): Operating income for the third quarter was €0.6 million, flat to the previous quarter. Net income for the third quarter 2006 was €1.2 million, showing an increase versus the €0.2 million from the previous quarter, as we recorded a net foreign exchange gain of approximately €0.4 million for the third quarter 2006, compared to a €0.7 million loss in the previous quarter.

As shown in the above table, on a non-GAAP basis, which excludes stock option expenses and expenses related to our acquisition, the operating income would have been €2.5 million, compared to €3.3 million the previous quarter.

Balance sheet: Wavecom's cash position grew to €48.4 million at September 30, 2006, increasing from €37.2 million on June 30, 2006. This increase was due to a better working capital management, specifically a reduction in accounts receivables. Following our acquisition of the Sony Ericsson M2M business, an additional payment of €7.5 million should be made no later than December 31, 2006 once contractual conditions are met.

Inventories of both finished products and components as of September 30, 2006, stood at €11.2 million, compared to €6.7 million at the end of the previous quarter. Inventories increased due mainly to two reasons: First, as announced previously, we began reporting on our books a portion of components and finished goods held by one contract manufacturer of the acquired business in the third quarter 2006, as we have done for our historical business. Secondly, the consolidation of our production activities has resulted in an increase in inventory, for a transitional period, with our established outsource manufacturer.

Business news:

  • Navman selected Wavecom wireless technology for an innovative monitored-vehicle security solution that is soon to be released into the New Zealand market. Silent-i, an initiative between Telecom (New Zealand), Navman and ADT, is a monitored-vehicle security product and service. The full offer combines a five-star car alarm, GPS geo-locator, CDMA wireless connectivity and 24/7 security backup.
  • Expansion of Wavecom-sponsored web-based forum, now called the Wavecom Developer Forum expanded to include discussions on Wavecom's hardware family of Wireless CPUs (Central Processing Units). Launched in October of 2005, the Forum welcomed its 1500th member in September. This very active forum demonstrates that the Open AT® Software Suite is becoming the de facto standard for the development of natively executed embedded C applications in the industrial wireless space.
  • A.P. Systems, a leading Italian subsystem designer for the meter market announced it has selected a Wavecom wireless solution for its newest line of advanced communications subsystems for automatic electricity meters. These types of products will help energy providers as they prepare to operate in deregulated energy distribution.
  • Wavecom signed a licensing contract for its software and silicon technology for a license fee of US$5 million. This transaction, including full payment, is pending execution of certain contractual obligations which are expected to be completed in the fourth quarter 2006.

Further commenting on the state of the business, Ron Black, Wavecom CEO added, "We are very encouraged by the our financial performance in the third quarter 2006 and are extremely pleased to announce the conclusion of a new software licensing agreement. This transaction moves us further along our strategic axis and demonstrates the value of Wavecom's technology in the marketplace."

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 third quarter 2006. To access this call, please use the following numbers: +33 (0) 70 99 42 86 in France, +44 (0)20 7365 1851 in the U.K. and +1 718 354 1152 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 Q4 2006 results on February 8, 2007 at 7:00 a.m. Paris time.