May 1008 Interview with: Gemalto (Euronext NL0000400653-GTO), Executive Vice President, Corporate Marketing & President, North America, Paul Beverly - featuring: their Smart Card SIM Card, e-passport, e-government, USB tokens, digital society for enterprises, governments and individuals’ identities and safety—including data breaches, identity theft, national and border security.

Gemalto (Euronext NL0000400653-GTO)

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Company Profile:

Gemalto is at the nexus of two macro trends shaping our digital society. First, the freedom to travel as well as communicate, shop, bank, and work—anytime, anywhere—has become an integral part of what people want and expect. At the same time, the need for security has never been greater. The threats to enterprises, governments and individuals’ identities and safety—including data breaches, identity theft, national and border security—fill the daily headlines.

Gemalto reconciles these two trends by putting personalized digital security devices in the hands of consumers, employees and citizens and providing the systems and services behind the devices to make people’s digital interactions more convenient, secure and enjoyable.

Governments, wireless operators, banks, enterprises and more than one billion people worldwide use Gemalto’s secure personal devices such as SIMs in mobile phones, smart bankcards, e-passports, identity credentials and USB tokens for online identity protection. 

Gemalto is traded on the Euronext stock exchange (Euronext NL 0000400653 GTO). The company has pro forma 2007 annual revenues of over €1.6 billion, more than 85 offices in 40 countries and about 10,000 employees including 1,300 R&D engineers. The website URL is: www.gemalto.com.

CEOCFO: What was the vision for Gemalto when it was created and how has that developed so far?

Mr. Beverly: “Gemalto was created in June 2006 by the merger of the two smart card leaders; Axalto and Gemplus. The vision that we had was to move beyond the traditional smart card businesses we had created, which grew rapidly during the late 1980s and through the 1990s, to take advantage of the trends developing around digital security. Whether it’s managing your health records, making online payments and wireless phone calls or using the Internet, we have become a society that loves the convenience but is overrun with weak passwords, leaving everyone concerned about security. Our vision is to enable digital interactions and to make them safer, more convenient and available anywhere. Our merger gave us the scale to act on this vision. It is unprecedented in our industry. It’s on par with a hypothetical merger between HP and Dell or Coke and Pepsi. It has improved our ability to be more cost-effective, shift our resources to potential high-growth areas and pursue our strategy of being the world leader in digital security. What’s exciting is we’re seeing the results in terms of profitability and revenue growth, as well as success in new application vertical markets that will fuel our future growth.” 

CEOCFO: Does digital security resonate with people; do people really understand what is involved and what the needs are?

Mr. Beverly: “Absolutely! People might be hooked on the convenience of the digital world but they are also very much afraid of it. Just recently Gemalto did a survey in the U.S. called the Digital Trust Barometer. It shows banks and other e-commerce providers have a long way to go to build consumer trust in the online channel. For example we learned that 74% of Americans are afraid of identity theft, 57% of Americans are worried that someone will steal their account passwords when banking online and 38% do not trust online payments. Those are the kinds of problems that we solve and why people are looking for digital security. They don’t necessarily want to understand it; they just want to trust it. Today, most don’t.”
 

CEOCFO: Give us an example of how you help people get over their security fears?

Mr. Beverly: “One good example would be the electronic passport program here in the U.S. It helps make travel documents virtually impossible to counterfeit and it helps border guards make sure that the bearer is indeed who they say they are. E-passports are currently being produced in our secure facility outside of Philadelphia. Since the program is global, we are supplying about 15 other nations including Russia and France. Gemalto is considered the market leader in the delivery of e-passports. Another example is electronic driver’s licenses in Mexico. The card contains a microprocessor chip that securely stores the driver’s data and biometric characteristics, such as fingerprints and a photograph, to protect against identity theft. All of these e-government programs protect people as they travel, provide better border security and more efficient government by letting citizens identify themselves with a trusted e-document, in person and online.”

CEOCFO: Are there areas in the world that are more attuned to digital security than others, or do you see the development worldwide?

Mr. Beverly: “We’re doing business in 140 countries right now. We hold approximately 40% of the global market. The market for digital security is developing worldwide, but the application emphasis and timing varies by country. Canada, for example, is undergoing a rapid migration to EMV chip-based bankcards that’s expected to reach critical mass by 2010. The speed of the changeover is indicative of the commitment by the financial institutions to prevent fraud and protect privacy. The U.S. federal government is issuing a smart ID card to each of its employees and subcontractors. Germany is issuing smart health cards. We’ll see even greater demand for digital security everywhere as the online, wireless world becomes more pervasive, but our impact is already huge. To put that in perspective, Gemalto will ship 1.3 billion of our intelligent devices, which include banking and transit smart cards, SIMs, USB tokens and e-passports, this year. Compare that 1.3 billion to about 300 million personal computers and approximately one billion mobile phones and handsets sold each year. That shows you the kind of impact Gemalto has on consumers worldwide.”

CEOCFO: The mobile phone market is important for you.  Please tell us about the outlook there and what you provide.

Mr. Beverly: “In North America for example, we are a provider of SIM cards to major mobile network operators such as AT&T, T-Mobile and Nextel. The wireless market outlook is especially good. There will be more than a half billion mobile subscribers added to the GSM network, so the worldwide market is growing and this is certainly good for Gemalto as we are the leading provider of SIM cards. Verizon recently announced that they are moving to a broadband standard called LTE. It means their handsets for the first time will contain SIM card technology. 3GAmericas forecasts that by 2012 the 3G wireless broadband market will include a total of 1.7 billion subscriptions. Every one of those devices will require digital security technology.”

CEOCFO: You mentioned that you have 40% market share, which is phenomenal, but what is the competitive landscape like and why are companies choosing Gemalto?

Mr. Beverly: “The next closest competitor has market share of approximately 15% so you can see that we have created a very strong, financially sound company with resources spread all over the globe which is helping develop our business more rapidly. The competition tends to be more geographically isolated. In addition to our scale advantage we have the resources to pursue our digital security vision of bringing more software and more services to our blue-chip customer base. Our goal in merging was to give us the resources to evolve into something bigger and to move in new directions. The merger gave us reach, resources and financial strength. We have local teams that can get right to work just about anywhere. For example, we operate the largest over-the-air (OTA) platform as a global service for wireless operators, managing over 700 million subscriber handsets. Another big positive is our development resources. Not only do we have more engineers, now we can apply those resources to new markets and opportunities worldwide instead of developing redundant solutions for the same application. Of our 1,300 engineers, 1,000 are software engineers creating new applications. And as a profitable 1.6 billion Euros company, we have the financial strength to pursue significant opportunities. I know that our customers consider and trust us as a partner to help them improve their own business metrics.”

CEOCFO: What are you looking at for longer-term growth?

Mr. Beverly: “There are a number of exciting growth opportunities in both new and existing sectors, starting with e-government. Security is top of mind worldwide and this is fueling programs like e-passports, national ID cards and smart driver's licenses. We are a major supplier to these rapidly growing identity credentialing programs worldwide. In fact, we are forecasting a CAGR of 30 percent in revenue between 2007 and 2010.
 

Gemalto is also active in a number of high potential nascent markets as well. Here's an example. Have you ever been in a hotel room where your mobile phone signal is too weak to use, but your laptop works fine over the hotel's Internet connection? Gemalto makes a smart USB dongle that lets you use your mobile subscription from your laptop over the Internet. Here's another example. Think about what happens if you lose your phone; just making something as basic as phone book backup convenient and secure is a perfect example of what we are doing. As wireless becomes pervasive in all of our lives, telecom continues to grow and we are growing with it. Also online banking and the requirement to reduce fraud and to have more secure banking is a very important avenue of growth for Gemalto.”

CEOCFO: Are there areas you are not involved in now either geographically or product-wise that you have plans on entering?

Mr. Beverly: “Our roots make us very much an international company and we are fortunately in most of the major markets around the world. We will offer more software and services on top of the products we have championed as leaders in smart cards and secure personal devices. Because of the merger, the fact that we now have the resources and the scale and the strength, the investment that we have is around our software and service activity. We spend today 7% of our revenue in research and development to ensure that we have the right software applications and provide the services necessary for our customers.
 

Here’s another example we think will be a home run. Mobile phone subscribers don't leave home without their phones, and soon they will be able to pay with them. Gemalto is using its position in the wireless and banking sectors to bridge the gap between them and create a new mobile payments ecosystem. We are making it possible for consumers to securely put their bankcard account information into their mobile phones. We have also developed some core technology around near-field communication (NFC), the short-range wireless communication standard that is at the heart of mobile payment, to enable secure payment applications in handsets.
 

There are several trials around the world today, and you will see mobile payment activity pickup in the United States and Canada this year.”

CEOCFO: One of your strengths is your dedicated service and support; as organizations grow bigger sometimes that gets lost.  How do you keep your focus on the customer?

Mr. Beverly: “We complement the efforts of our dedicated sales and marketing force with a biannual survey to better address their requirements. Once we collect that information, we have a very systematic approach to implementing all of their input into our business plans. We’ve instituted a very methodical process to ensure that we are listening to what our customers tell us.”

CEOCFO: What is the financial picture like at Gemalto?

Mr. Beverly: “We just reported our Q1 revenue, which was up 12% year-on-year at constant exchange rates. This was our third consecutive quarterly revenue increase, so now our business is growing at a double-digit rate. From a profitability and earnings point of view, we have provided outlook that by 2009, Gemalto would achieve a 10% operating income. In 2007 for the full year, we had an operating income of approximately 5%, so we’re on our way.”

CEOCFO: In closing, why should potential investors be interested in Gemalto?

Mr. Beverly: “If you think of the global trends surrounding all of us—digital security, border control, privacy, wireless communications, mobility, identity protection, regulatory compliance—Gemalto is finding opportunities right in the middle of all of them. Mobile communications are pervasive, and that sector is the core of Gemalto’s business, where we are continually bringing new levels of wireless convenience and services to consumers. Governments have an ever-increasing need for efficiency and security, and Gemalto is right there with e-passports, health cards, personal identity and other e-government applications. Corporations need to comply with regulations and better protect everything from credit card numbers to customers’ identities to their own intellectual property. Gemalto is helping solve these problems too, by working with other leaders like Microsoft to natively support our personal portable security devices in Windows Vista and Microsoft’s server architecture. Gemalto is now a totally different company from either Axalto or Gemplus. We’ve moved on from traditional smart cards to provide a wide range of personal security devices as well as value-added software and services to fuel our profitable growth into the future.”

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“Governments have an ever-increasing need for efficiency and security, and Gemalto is right there with e-passports, health cards, personal identity and other e-government applications. Corporations need to comply with regulations and better protect everything from credit card numbers to customers’ identities to their own intellectual property. Gemalto is helping solve these problems too.” - Paul Beverly