Wavecom Announces Fourth Quarter 2006 Financial Results

Revenue growth of 46% year-on-year and Gross Margin 46% for Q4 and 43% for Full Year 2006. Net Profit of €4.7 Million in Full-Year 2006
Issy-les-Moulineaux, France-February 08, 2007

Wavecom S.A., today announced financial results for its fourth quarter ending December 31, 2006.

Ron Black, Wavecom Chief Executive Officer, commented, "We are very pleased with both the fourth quarter and full-year 2006 financial results, having realized our second consecutive profitable year since refocusing the company on industrial and automotive wireless applications. Throughout the year we expanded our product portfolio with enhancements to our Open AT® software suite, as well as introducing another first in the market -- Wireless Microprocessor®. Technology ownership has allowed us to continuously differentiate our products, simultaneously bringing customers the lowest total cost of ownership and investment protection. Additionally, in 2006, we acquired and successfully integrated the machine-to-machine business of Sony Ericsson, reinforcing our leadership position. We are well-positioned for an even better 2007, further expanding our customer base and launching even more novel products."

In millions of euros - Under US GAAP

Historical Wavecom
Q4 2005*
Consolidated results Full-Year
    Q3 2006 Q4 2006 2005 2006
Revenues 30.7 55.9 54.8 129.2 188.8
Gross profit 14.9 19.9 25.0 59.3 80.3
Operating expenses 14.0 19.3 21.2 55.3 74.6
Operating income 0.9 0.6 3.8 4.0 5.6
Net income 1.4 1.2 3.1 8.7 4.7
Additional information
Operating income 0.9 0,6 3.8 4.0 5.6
Stock option-related expenses -- (0.7) (0.7) -- (2.1)
Amortization expense related to acquisition -- (1.2) (1.1) -- (4.5)
Operating income before stock-option compensation and amortization expense related to acquisition 0.9 2.5 5.6 4.0 12.2

*Note: 2005 results are prior to the acquisition of the Sony Ericsson M2M business unit that closed on April 26, 2006.

Fourth Quarter and Full-Year 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 full-year 2006 include eight months of results associated with the acquisition of certain assets of Sony Ericsson's M2M business. The figures as reported with respect to the acquired assets are still pending receipt of certain data from the seller.

Revenues: Fourth quarter 2006 consolidated revenues were €54.8 million, a decline of 2% from the third quarter 2006, and an increase of 79% from the fourth quarter of 2005. This sequential revenue decline is solely related to the planned GR/GS and CM-52 product transitions in the acquired business. Revenue from the existing Wavecom products grew modestly. Full-year revenues reached €188.8 million in 2006, compared to €129.2 million in 2005.

In the fourth quarter, the product revenues represented 89% of total sales with a breakdown by region as follows: EMEA 54%; Americas 31%; and APAC 15%. The remaining 11% of total sales were generated by licensing and servicing fees. The customer portfolio remained balanced in the fourth quarter, with the top ten customers representing 51% of revenues as compared to 52% in the previous quarter. For the full-year 2006, the top ten customers represented 46%, five of which are direct customers.

Backlog: Our 12-month backlog on December 31, 2006, increased 5% to €51.5 million, from €49.2 million as of September 30, 2006, with a particularly strong backlog coming from the Americas region. . We also received significant additional orders for the GR/GS and CM-52 products in early January 2007 which are not included in the reported backlog.

Gross Margin: For the full-year 2006, gross margin reached 42.5% compared to 45.9% in 2005. This year-on-year decline was largely related to the low-margin products from the acquired business.

Gross margin for the fourth quarter was €25.0 million, representing 45.6% of revenues, compared to 35.6% in the third quarter. This increase was due to the licensing revenue that we announced and recognized in the fourth quarter, as well as improved margins from products coming from the acquired business. This improvement makes us confident that we are on the way to achieving in 2007 a gross margin for the acquired products that is typical of the rest of our product lines.

Operating Expenses: Total operating expenses for the fourth quarter 2006 were €21.2 million, an increase from the third quarter level of €19.3 million. This increase was due largely to an increase in bonus accrual as company performance surpassed certain financial milestones during the quarter, as well as audit costs related to carve-out financial statements for the acquired business. In a year-on-year comparison, the operating expenses increased from €55.3 million to €74.6 million, owing to the major acquisition in 2006.

As indicated in the above table, during the fourth quarter 2006, we continued to have a number of accounting charges related to stock option expenses totaling €0.7 million, and to the amortization of the acquired intangible assets for €1.1 million.

Profit: Operating income for the fourth quarter was €3.8 million, increasing significantly from €0.6 million in the previous quarter. On a year-on-year basis, operating income increased from €4.0 million in 2005 to €5.6 million in 2006. Net income for the fourth quarter 2006 was €3.1 million, showing an increase versus the €1.2 million from the previous quarter, though we recorded a net foreign exchange loss of approximately €1.0 million for the fourth quarter 2006 versus a net foreign exchange gain of approximately €0.3 million for the previous quarter. For the full-year 2006, net income declined from €8.7 million in 2005 to €4.7 for 2006, due to currency exchange rate effects.

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 €5.6 million for the fourth quarter, compared to €2.5 million for the previous quarter.

Balance sheet: Wavecom's cash position grew significantly quarter-on-quarter to €54.8 million at December 31, 2006 from €48.4 million at September 30, 2006. This increase was due to the strong operating result in the fourth quarter, as well as reduced working capital requirements as the company continued to drive good cash management practices. This increase occurred despite a final payment of €5 million for the acquired business. A total of €30.0 million was paid to the seller in 2006 for this acquisition.

Inventories of both finished products and components as of December 31, 2006, stood at €6.6 million, compared to €11.2 million at the end of the previous quarter. This decline in net inventory was due mainly to the successful completion of the consolidation of our production activities from the acquired business to our historical outsource manufacturer.

Business news:

  • Wavecom announced today the launch of Remote Device Management Services (or RDM Services) to complement its Wireless CPU®, Wireless Microprocessor® and Open AT® Software Suite portfolio. Using this new service, customers can develop or enhance their own offers in areas like after-sale repair, preventative maintenance, and new product feature updates.
  • eRide and Wavecom announced their collaboration that brings a new generation of location and navigation capabilities to mobile applications. This latest Open AT® Plug-In, C-GPS, based on Wavecom and eRide's market-leading A-GPS technology, is designed especially to be used in conjunction with Wavecom's Q2686, Q2687 Wireless CPU®s (Central Processing Unit) as well as Wireless Microprocessor® and targets all devices in the vehicle, people and asset tracking and management markets.
  • Wavecom solutions are now Eclipse™-Ready. Wavecom announced that the Open AT® Software Suite IDE (Integrated Development Environment) tools are now designed to be Eclipseâ„¢ Ready, using tools from the popular open-source development community. Future application developments can be done with Wavecom's Open AT® SDK (Software Development Kit) taking advantage of the Eclipseâ„¢ community. This access to the Eclipseâ„¢ community will be available to developers free of charge, without license fees, NRE (Non Recurring Expense) costs or any additional fees for developer seats.
  • Wavecom announced the availability of an extended warranty period of five years on its Q24 and Q26 series of Wireless CPU®s -- significantly lengthening the current industry standard warranty period of one to two years. This five-year warranty duration fulfills the demands of our customers since many products carry service contracts for as long as five years. The extended warranty option will also be available on Wireless Microprocessor® when they begin volume shipping.
  • Wavecom joined ERTICO alliance. ERTICO is a partnership of companies involved in the European transport system whose goal is to reinforce a future European transport system that is safer, more efficient, more sustainable and more secure than today. Through Intelligent Transport Systems (ITS) and Services technology, combined with the appropriate investment in infrastructure, the partnership efforts will result in reducing the number of accidents and congestion, while making transport networks more secure and minimizing their impact on the environment. A key topic of ERTICO is eCall, a pan-European emergency call service designed to be implemented in all new car models as soon as 2009.

Further commenting on the state of the business, Chantal Bourgeat, Wavecom CFO added, "With the integration of a major acquisition complete, the consolidation of our manufacturing sites well under way, and the launch of new products with higher margins, we are well-positioned to see increased operating margins in 2007."

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 fourth quarter and full-year 2006. To access this call, please use the following numbers: +33 (0)1 70 99 42 67 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 Q1 2007 results on April 25, 2007 at 7:00 a.m. Paris time.