1 Annual Report 2010 Extending the boundaries of Digital Security
2 Our vision Gemalto Annual Report 2010 Our vision In an increasingly connected society, Gemalto is the leader in making digital interactions secure and easy Performance highlights ( * ) Revenue 1,906m +19% (2009: 1,602m) Profit from operations ( ** ) 216m +19% (2009: 181m) Profit margin from operations ( ** ) 11.3% (2009: 11.3%) Net cash 255m -33% (2009: 381m) Cash generated by operating activities 174m -13% (2009: 200m) Cash returned to shareholders (share buy-back plus dividend) 60m -8% (2009: 65m) IFRS net profit 167m +42% (2009: 118m) Adjusted basic earnings per share ( ** ) % (2009: 1.91) Return on Capital Employed (ROCE) ( ** ) 16.0% +70 basis points (2009: 15.3%) Further information Links to further information are illustrated with the following markers: For more information visit For more information see pages XX-XX ( * ) The Company business in point of sales terminals was disposed of on December 31, As per IFRS, the contribution of this activity to the Company IFRS income statement is reclassified for both 2009 and 2010 reporting periods, and its net contribution is presented as a single amount on the line item Profit (loss) from discontinued operations (net of income tax). As a result, financial information for the 2009 reporting period differs from previously reported figures. ( ** ) Adjusted financial information. For more information see pages
3 01 02 Our business profile 04 Our segments 06 Our global presence 08 Chairman s statement 09 Chief Executive s review 12 Our strategy 14 The digital security market 20 Mobile communication 24 Machine-to-Machine 26 Secure transactions 30 Security 35 Others Our vision Segmental review Gemalto delivered a strong performance in 2010, posting a new revenue record of more than one billion euros in the second semester. Secure Transactions and Security reached their profit margin objective one year ahead of schedule. Their significant profit expansion strengthens and diversifies our sources of profit as anticipated in our plan. We continued to invest in the development of our software and services offers in Mobile Communication, doubling revenue and delivering on several flagship customer projects. The good performance of the Machine-to-Machine business also contributed to our profit in the Telecom space. On this solid basis, and in particular leveraging the acquisitions we ve made, we intend to continue to grow our revenue and profit in 2011, and are bolstered in our ability to deliver on the 300 million profit from operations target in Olivier Piou Chief Executive Officer The Board report comprises the following sections: Our vision, Segmental review, Group financial and operating review, and Governance. Gemalto N.V. is a public company incorporated in the Netherlands. It is headquartered in Amsterdam and has subsidiaries around the world. Unless otherwise specified, we refer to them as Gemalto. 38 Financial review 42 Principal risks 44 Our approach to sustainability 48 Governance at a glance 50 Corporate governance 56 Internal risk management and control systems 59 Board compliance statement 60 The Board and the management 64 Report of the Non-executive Board members 66 Remuneration 76 Consolidated financial statements and notes 129 Company financial statements and notes 144 Auditor s report 145 Appropriation of profit 146 Post-closing events 147 Adjusted measures 150 Investor information 152 Glossary of digital security terms Group financial and operating review Governance Financial statements Other information
4 02 Our vision Gemalto Annual Report 2010 Our business profile Gemalto s expertise spans the entire process for creating digital security solutions. We develop operating systems and software, and produce and personalize secure devices of which we have already delivered over 12 billion worldwide. We continue to innovate with new forms and architectures, and to expand our software and services portfolio for clients who want to provide secure, convenient applications to their end-users. Innovation Solutions, software and services Digital scientists 1,400 Gemalto s internationally renowned team of security and cryptography experts leads the way in the invention, design and development of new products, solutions and applications certified to the highest standards. 4,200 Patents and patent applications in our patent portfolio, representing about 1,300 patent families. 103 New inventions first filed in Value-added services 252m value of services sold 2010 Personalization facilities 30 Software and services: Gemalto s know-how and field experience mean we are uniquely placed to offer a range of software and services that support our clients in the delivery of digital security solutions to end-users. We also offer our clients a wide range of training, consulting, integration and managed services. Secure remote management: to ensure that end-users always enjoy up-to-date information and services, our secure server software can connect with our devices when they are in the field and connected to digital networks. For cellphones this is done via Over-the-Air (OTA) platforms. ID badges, banking cards and USB tokens can be updated when they are connected to a computer, often via a smart card reader. Personalized devices: Gemalto is the trusted partner for the individual personalization of millions of secure personal devices daily, effected under various security certification schemes. These include SIMs, banking cards, epassports, eid cards and so on. Particularly in the financial services sector, the outsourcing of personalization is gaining momentum as the worldwide deployment of cards increases and issuers look to outsource this activity. R&D centers 13 Production sites 18 A complete range of SIMs, MIMs and UICC cards. Smart cards and banking cards. Electronic passports, identity documents, health cards, etc. USB dongles and other devices. Licensing of intellectual property With the aim of promoting digital security and convenience, we have developed a number of licensing programs based on our patent portfolio, including our latest innovations. Partner network Technology partners: develop products (hardware and/or software) for the same ecosystem as Gemalto s. The combination of our offers increases the value delivered to the end-user. Technology partners and Gemalto commit to making their products interoperable and engage in co-marketing activities. Original Equipment Manufacturers: embed and resell Gemalto technologies in their own products with their own branding. Channel partners: resell and market Gemalto products and services as distributors, value-added resellers or system integrators. They belong to the Gemalto Certified Partner community.
5 Our business profile 03 Our vision Markets Consumers Telecommunications Machine-to-Machine Financial services and retail Transport Pay TV 1 billion+ EMV cards in circulation (source: EMVco). 670 million 3G subscribers worldwide 2010 (source: Informa WCIS). 20 million Online banking customers use our solutions (source: Gemalto). Machines PASSPORT Government programs Online authentication ebanking and ecommerce 30 million M2M modules shipped 2010, 30% year-on-year growth (source: Gartner). 106 million+ M2M modules to be shipped 2015 (estimated number; source: Gartner). For more information visit
6 04 Our vision Gemalto Annual Report 2010 Our segments Gemalto is at the heart of our evolving digital society. The freedom to communicate, travel, shop, bank, entertain and work anytime, anywhere, and in ways that are convenient, enjoyable and secure has become an integral part of what people want and expect. Gemalto meets these growing demands from billions of people worldwide by offering our services to the following segments: Segments Solutions Markets Mobile communication A unique portfolio of solutions for Mobile Network Operators (MNOs) to help serve their subscribers. For more information see pages Telecommunications: the world s leading supplier of SIM and UICC cards to the mobile industry, as well as client-server software and services. We deliver a vast range of solutions including roaming, mobile payment and data management to billions of customers via hundreds of operators. Machine-to-Machine (M2M) Powering the internet of things with fully certified, high-quality M2M modules and terminals. For more information see pages Highly durable Machine Identity Modules (MIMs) as well as support for integration, software and services. M2M: the world s leading supplier of modules that connect machines to improve operations, productivity and efficiency. MIM: the leading supplier of MIMs, we provide three families of secure, durable and long-lasting modules. We also provide integration support for a broad range of industries worldwide, such as utilities and automotive. Secure transactions Innovative and secure payment solutions for financial institutions and retailers. For more information see pages Rapid, convenient, contactless electronic ticketing (eticketing) solutions for public transport. Pay TV subscriber authentication and rights management solutions. Financial services and retail: the leading player in this sector, we deliver a wide range of chip and contactless payment solutions and services to banks and other issuers with hundreds of millions of end-users. We also offer a range of mobile financial solutions. Transport: we provide eticketing solutions to mass transit authorities. Pay TV: we offer a range of Pay TV solutions to secure access service providers. Security Highly secure, durable identity products, solutions and services for governments. For more information see pages Identity and Access Management (IAM) solutions including online authentication for many large public and private organizations, plus security solutions, including multi-factor authentication and transaction verification, for ebanking and ecommerce. Licensing of our intellectual property rights. Government programs: the world s leading supplier of epassports, we also provide secure electronic documents for eid, ehealth, edriving license and other egovernment initiatives, as well as services such as enrollment and issuance. Online authentication: we provide strong authentication solutions such as ID badges and their management for enterprises, governments, banks and other organizations, enabling them to better control access to their digital and physical resources. ebanking & ecommerce: our solutions let people bank and shop online and conduct transactions conveniently, with their privacy respected and secure from fraud. Others Phone cards for public telephony operators. For more information see pages 35 Point-of-Sale (POS) terminals and services for retailers. We sell a vast range of pre-paid cards and solutions for public telephony. At the end of 2010, our POS terminals business was sold to VeriFone (see page 35).
7 Our segments 05 Everyone knows what a SIM is but do you know what a MIM is? Our vision If a SIM (Subscriber Identity Module) identifies a person using a mobile phone, a MIM (Machine Identification Module) identifies a machine when it s calling another machine. MIMs are used in the Machine-to-Machine (M2M) market, of which Gemalto is now the world leader. Want to know more? See a more detailed explanation on page 25. Revenue ( * ) Profit from operations ( * ) Highlights 981m (2009: 888m) 118m 53% 57% (2009: 151m) Growth driven by software and services revenue doubling to 152 million. Promising developments in new form factor products. Profit margin profile of traditional SIM card unchanged. Profit variation essentially resulting from operating expenses investment in fast growing software and services areas, consolidation effects of acquired businesses and exceptional items. 81m 7m 4% 3% Integration of Cinterion now essentially complete. Solid 15% revenue growth (pro forma) driven by the increasing use of cellular connectivity by multiple industrial sectors. Profit from operations doubled (pro forma), directly benefiting from the increased volume of sales, and customer confidence. 462m (2009: 411m) 41m 25% 20% (2009: 12m) Growth driven by worldwide migration to EMV and dual-interface contactless products. The drag on growth, caused both by the UK triennial trough and the shift to standard mailing, faded in the second half as anticipated. Significant improvement of gross margin as a result of better product mix and high personalization service activity. Operating expenses increase in line with revenue after accounting for the impact of acquisitions. The strong growth in the second half had excellent fall through to profit. 318m (2009: 236m) 39m 17% 19% (2009: 4m) 16% growth in Government Programs. 50% growth in IAM due to strong activity in ebanking. Patent licensing revenue above Company plan at 33 million, productivity gains and scale effect lead to 450 basis points gross margin improvement. Operating expenses down 620 basis points to 28% of revenue. The operational leverage combining strong growth, gross margin performance and operating expenses control lifts profit margin from operations margin 12.4% in 2010, and to 6.8% when excluding the patent contribution. 19m (2009: 24m) 2m 1% 1% (2009: 4m) ( * ) Our segments financial information and highlights are based on adjusted financial information for ongoing operations. For more information see pages
8 06 Our vision Gemalto Annual Report 2010 Our global presence Gemalto s global presence is key to the way we serve our clients, with our sites and facilities strategically spread across every continent. Beyond this, it s our worldwide network of partners and our employees of some 90 nationalities who make the difference. So wherever our clients are based, we re not far away and we speak their language. Key figures Nationalities of our customers 190+ North and South America Headcount 21% Nationalities of our employees 90 Countries worldwide with a site in operation 45 Employees worldwide 10,000+ Revenue 26% Argentina Brazil Canada Columbia Mexico USA Buenos Aires Curitiba Rio de Janeiro São Paulo Burlington Montreal Bogota Cuernavaca Iztapalapa Mexico City Arlington Austin Bellevue Montgomeryville New York North Wales Key Research & Development centers 13 Production sites 18 Personalization facilities 30 Sales and Marketing offices 87
9 07 Our global presence Our vision Europe, CIS, Middle East and Africa Asia Pacific Headcount Headcount 49% 30% Revenue Revenue 53% 21% Europe Belgium Brussels Czech Republic Prague Denmark Ballerup Copenhagen Finland Vantaa France Boulogne-Billancourt Gemenos/ La Ciotat Meudon Pont-Audemer Sophia-Antipolis Tours Germany Berlin Bocholt Filderstadt Ismaning Cologne Leipzig Munich Overath Hungary Budapest Italy Agrate Brianza Milan Rome Israel Netanya Tel Aviv Netherlands Amsterdam Norway Oslo Poland Tczew Warsaw Slovenia Sencur Spain Barcelona Madrid Sweden Gothenburg Sollentuna Stockholm Turkey Istanbul UK Fareham Ferndown Havant London St Helens Warrington Australia Sydney Melbourne Bangladesh Dhaka China Beijing Changsha Guangzhou Hong Kong Qingdao Shanghai Taipei, Taiwan Tianjin Zuhai India Bangalore Gurgaon Mumbai New Delhi Noida Indonesia Jakarta Japan Tokyo Korea Seoul Malaysia Kuala Lumpur New Zealand Auckland Philippines Manila Singapore Singapore Thailand Bangkok Vietnam Hanoi CIS, Middle East and Africa Egypt Cairo Kazakhstan Almaty Oman Muscat Pakistan Lahore Russia Moscow Saudi Arabia Riyad Senegal Dakar South Africa Cape Town Johannesburg UAE Dubai For more information visit
10 08 Our vision Gemalto Annual Report 2010 Chairman s statement Commendable progress towards ambitious goals Stock price at December 31, % (2009: 30.50) Cash dividend paid in 2010 per share 0.25 Our business has the culture, leadership and market positions to thrive as the global economy gets moving again. Astute planning around a clear strategy is delivering well for our shareholders. A global identity Gemalto delivered superior results in 2010, in line with our plans for both organic and non-organic growth. Given the economic backdrop, this was a commendable performance. Despite later signs of recovery, both Western Europe and North America were struggling last year. However, with Gemalto s global footprint, we were able to offset this sluggishness with strong results in Africa, Asia and South America. Acting with authority Gemalto can deliver in this way partly because its management team has the ability and ambition to exploit emerging opportunities in new regions, markets and technologies. During 2010 the Board backed management in the acquisition of five companies. Thanks to some carefully considered and timely deals, we ve broadened the base for serving our customers, by targeting companies which add specific technologies, routes to market or new growth areas such as M2M. These new capabilities are critical building blocks for the future. Secure for the long term Another key factor in strengthening the company is sound corporate governance. As a Board, we devote time ensuring that we re well informed about the latest legislation and best practice in this area. This translates into clear action plans for our Board responsibilities. In 2010 we published our first stand-alone sustainability report. This is important to a company like Gemalto, which helps its customers build and protect mission-critical infrastructure. In this environment, we are proud to have a long-term, long-lasting vision. A positive performance That we are making progress is clearly supported by our 2010 figures. Growing revenues, rising EBITDA, improving margins and strong cash generation all point to a business that s successful and well managed though this positive performance hasn t yet been reflected in our share price. Nevertheless, our results allowed us to pay a dividend in 2010 the first in our history. This demonstrates that Gemalto has the scale, the market positions and the confidence to generate reliable cash flows. Ambitious goals In the light of these outcomes, I am optimistic about the future. Our widening portfolio means we re in the right position to make the most of the growth that s re-emerging. Better still, we sit at the heart of some exciting sectors where demand for our solutions can only increase. Shareholders rightly expect the company to perform consistently and to hit the demanding milestones we have set for ourselves. I m confident that they will see the inherent value of this business as we work towards those ambitious goals. Alex Mandl Chairman
11 Chief executive s review 09 Chief Executive s review Our vision On track towards our bold objective When we announced our Development Plan in November 2009 we set ourselves a very bold objective: 300m in profits in 2013, up more than 50% from an already record And we were convinced it was achievable, thanks to the sound platform for growth we ve been laying since Gemalto s creation in The market developments and our performance in 2010 show that we got our strategy right, and that we re capable of hitting our targets. We have significantly expanded our revenue, in particular in software and services, and once again grown our profit from operations. In addition, we have further increased our customers satisfaction and loyalty, and kept our employees motivated and happy. Gemalto is a leading player in markets brimming with opportunities: mobile financial services, contactless payment, trusted service management, mobile money, strong authentication for cloud computing applications, egovernment enrollment and issuance services, machine-to-machine technology, the internet-of-things and so on. In each area we ve delivered significant progress, through a combination of in-house innovations, organic investments and judicious acquisitions. An appetite for innovation Significantly, we did well in very contrasting economies and regions. After a long pause, many of our developed markets progressively showed a revitalized appetite for innovation. For the quickly developing nations, which now account for about half of our business, this enthusiasm had never gone away. Not only have they continued to grow in volume of products delivered over the past couple of years, they re also eagerly willing to adopt our latest technologies and they haven t got any embedded infrastructure to hold them back. That s why, for example, mobile money was pioneered with such success in Africa. Our global reach, our long-standing commitment to diversity with over 90 nationalities working in Gemalto and our strong, long-term presence in many of these markets clearly benefit us. A developing digital security market 2010 saw significant developments in our digital security eco-system. For example, this year the mobile internet went really mass market, and we quickly detected the rapid acceleration in demand for mobile commerce. We know from experience that when markets go mobile, they get big, fast. Add our expertise in Near-Field Communication (NFC) solutions for proximity interactions and many opportunities come to life. Another of the biggest shifts has been the escalating importance of cloud computing. We ll soon be seeing plenty of private clouds for large corporations as well as specific offerings for smaller businesses and individuals. These will require new security and identity management solutions to make sure these high-value data are accessible online only to the right users all of which is creating a significant potential market for us. After the first full year of our Development Plan, two things are increasingly clear: we have put together an excellent suite of products, software and services for many rapidly expanding markets, and we re capable of achieving the ambitious targets we ve set for ourselves.
12 10 Our vision Gemalto Annual Report 2010 Added value is the key As we described in the Development Plan, our strategy is about extending our role and the boundaries of digital security, and that s what we re doing. Our software and services increasingly touch people s daily lives in convenient and positive ways, and we are constantly adding value to the diversifying range of secure devices through which they re delivered to end-users: smart cards, passports, SIMs, modules, USB keys, microsds and so on. Our mobile communication business is a good example. The advanced fourth generation Long Term Evolution (LTE) system of mobile telephony uses UICC ( * ). It s like having a full PC on a single chip, dedicated to security, privacy and convenience, with all the potential that offers. Yet the real value is in our software and services management that enables it to run a host of applications, only one of which is called voice. Our Digital Life Management suite is likewise helping operators strengthen their customer relationships, while offering end-users more freedom and convenience. And we re leading the way in the move to introduce new sources of revenue from mobile devices with our unique, interactive solutions for mobile marketing. New opportunities in payment In the financial services sector, the migration of old technology magnetic stripe bank cards to those with the more secure and intelligent EMV chip is moving ahead worldwide, and this continues to create considerable business opportunities. In Asia, the People s Bank of China issued specific instructions in 2010 with the aim of migrating the country to microprocessorbased payment cards compatible with EMV over the medium term. At the same time, in the massive US market, Americans who go abroad are getting increasingly tired of having their old technology cards declined at retailers and ATM s in more and more countries. This is partly why the United Nations Credit Union moved to EMV chip cards in 2010; and with the US Federal Reserve now accountable by law for fraud management in payments systems, the argument for EMV and convenient contactless payment cards is increasingly being heard there. Meanwhile, we re also seeing an accelerating drive globally to have financial services derive more benefit from the online and mobile channels. Rapidly increasing use of smartphones, combined with the banks desire to offer customers convenience and security while improving their own efficiency, mean our electronic and mobile banking activity is reaching new record levels. Modernizing state services In the public sector, our epassport business also continued to prosper in Protecting air travel and securing borders the principal drivers of early adoption are only the start. Increasingly Governments deploying epassport programs are becoming convinced that issuing digital credentials (eid) is more feasible and popular than they thought. They ve realized that they can safely entrust this technically complex operation to an experienced company like Gemalto and thereby enjoy the benefits of reduced cost and strong voter support with low execution risks. As a result, they ve begun to call on us for new projects such as helping facilitate enrollment in their election processes, and to reduce inefficiency and fraud in the delivery of healthcare and social benefits. For their citizens, it s satisfying to see that their state services are becoming more modern and convenient. People in early-adopter countries frequently say they re proud their governments now exist in the same 24/7 digital world that they ve become used to in their daily lives. A culture of innovation We couldn t perform well in these rapidly evolving markets without a strong culture of innovation. It s a cornerstone of our enterprise: last year our investment in R&D was again more than twice that of our physical equipment capex. And it s borne fruit. Amongst many developments, 2010 saw us announcing E-Go, a technology which is poised to radically simplify digital interactions. With E-Go, you ll be able to authorize a transaction simply by touching a digital device. If you ve got banking cards in your pocket and you decide to buy something, you ll simply touch a payment terminal and E-Go will make it ask which account you want to debit. If you re wearing your company ID pass and touch a computer mouse, you ll be able to automatically log on with your own preferences and environment. And when you walk away, you ll be automatically disconnected. ( * ) UICC: Universal Integrated Circuit Card
13 Chief executive s review 11 If you ve got a SIM card, you ll touch a phone and immediately make it yours, with your own number and all your data. And all this will be done anonymously, without leaving unnecessary remnants while still being genuine. It will be a couple of years before it goes mainstream but it ll be nothing short of a revolution when it happens. Smart M&A So we place a high value on innovation. Yet knowing well that we won t invent everything ourselves, we constantly look around for smart ideas and great technologies that can complement our own. And where we ve been able to do a friendly, mutually beneficial deal, we ve been propelling our growth by making acquisitions. At the start of the year we took a controlling stake in Netsize, with its under-utilized mobile commerce and mobile marketing platform. This makes Gemalto a key player in mobile application sales, and rounds out the services we provide to operators to bolster their subscriber revenues. Soon after, we acquired Valimo, the world leader in mobile PKI authentication, aiming at growing usage of legally-binding mobile digital signature. In April we acquired Todos, making us the only truly global ebanking vendor with such a comprehensive range of authentication solutions for internet banking and ecommerce. During the summer, Cinterion, the leading provider of Machine-to-Machine (M2M) communications, suddenly became available. Since we d already got a well considered plan in place, ratified with our Board and explained in our Development Plan, we were able to seize the opportunity. Finally, we acquired Trivnet, one of the top technology providers in mobile money and mobile financial services. We started this campaign of acquisitions ahead of the field, so we concluded them on far more favourable terms than if we d waited. Our Board was challenging and supportive in assessing our targets and our integration processes, and I thank them for their encouragement. In each case the deal has reinforced our position in a high-growth market where we re already a recognized player. And now, in order to get the best from these technologies and business additions, we re focused on integrating these new talents into our existing teams. Satisfying our clients In fact, when I look back on 2010, it s what our people have achieved that excites me most. They ve shown their capacity for customer service, quality and innovation, winning contracts and awards in so many different markets and regions. They ve demonstrated their ability to accelerate the pace of growth and profit, yet they never forgot about caring for and satisfying our customers. Every year we commission an independent survey of clients, representing around half our global revenues. For the third year in a row we ve increased their satisfaction levels, and maintained our ranking among the very best companies in the world in this respect. And since one key to customer satisfaction is happy, talented and motivated people, I was also pleased to see that our employee survey results were again very positive in A host of opportunities The companies that do best coming out of a downturn are usually those that have been willing and able to invest through it. Gemalto is one of those companies. We ve worked hard at enriching our portfolio and serving our customers in the tough times they ve been through. We will dedicate 2011 to leveraging our new acquisitions, and further developing our portfolio of products, software and services. We strongly believe, as ever, that these efforts will bear fruit through to 2013 and beyond. Our ambitions are bold and our results in 2010 demonstrate our potential. Olivier Piou Chief Executive Officer Our vision We couldn t perform well in these rapidly evolving markets without a strong culture of innovation. It s a cornerstone of our enterprise.
14 12 Our vision Gemalto Annual Report 2010 Our strategy: extending the boundaries In November 2009 we announced our Development Plan. At its core is our objective to increase our profit from operations to 300 million in 2013 through a strategy of profitable growth. In 2010 we made a promising start in this direction. Objective Through revenue growth and margin expansion, our objective is to expand our profit from operations ( * ) by more than 50% to 300 million in 2013 We will achieve this objective through: Growth in all business segments, with a double-digit revenue increase in security Growth will be generated by: developments in wireless offers, with new devices and remote services; steady worldwide expansion of payment cards; and global spread of new government projects and authentication solutions. Double-digit revenue increase in software and services across all business segments Further margin improvements driven by Secure Transactions and Security Tight management of capital employed, with further ambition to increase our return on capital employed (ROCE) Our strategic priorities: Actively replicate successful models across geographies Capture more value with remote services Speed up commercialization of innovations Leverage our unique position to serve customers with converging needs Leverage our efficient base and expand through bolt-on acquisitions We plan to generate strong levels of operating cash flows, and to: Re-invest our cash to fuel organic growth and fund bolt-on acquisitions Enhance return to shareholders, via a combination of share buy-back and dividend distribution
15 Our strategy 13 Did you know that by 2015 the market will expand to: 3.8 billion mobile users 2.6 billion internet users 15 billion connected machines Our vision Progress Profit from operations ( * ) m Target: 300 ( * ) Profit from operations is a non-gaap measure defined as the IFRS operating result adjusted for all equity-based compensation charges and associated costs, amortization and depreciation of intangibles resulting from acquisitions, and restructuring and acquisition-related expenses For more information see pages : another year of expansion The Company targets for 2011 another increase in revenue and profit from its ongoing operations. In Mobile Communication the Company is looking at substantial commercial deployments of mobile contactless services and LTE fourth generation networks. Software & Services and acquired companies will increase their contribution to profit and the Company will maintain its organic investments toward strategic growth areas. In Machine-to-Machine, the Company anticipates strong activity in the automotive and metering sectors. With the expected development of the internet of things, the company intends to increase its investments in research and development in this M2M segment. In Secure Transactions, the Company should continue to benefit from the widespread migration to EMV and higher-end contactless products. In Security, the Company aims at delivering another year of revenue growth in 2011, on the back of continued deployment of secure electronic document programs and substantial growth in ebanking. Starting January 1st, 2011 the contribution from the patent licensing activity, currently reported in the Security segment, will be reported in a new Patents segment. The Company does not anticipate significant patent licensing revenue in 2011 due to the public patent litigation initiated by Gemalto in the US. The Company reiterates its expectation to have Secure Transactions delivering a high single-digit profit margin from operations in 2011, and upgrades its view on the Security segment which is now expected to deliver a high single-digit profit margin from operations even without a patent licensing contribution in Slide 14 of Gemalto Investment Conference 2009 presentation sets out the key assumptions and potential growth accelerators underpinning our plan. For more information visit
16 14 Our vision Gemalto Annual Report 2010 The digital security market Evolving end-user expectations, new business opportunities, technological advances and changing threats are driving significant growth in the variety, scope and value of digital security services. Growth potential in mobile 3G Current subscribers Growth potential US 3G subscribers 136.6m Penetration 48% Growth y/y 31% UK 3G subscribers 29.5m Penetration 38% Growth y/y 34% Russia 3G subscribers 9.6m Penetration 5% Growth y/y 81% China 3G subscribers 14.5m Penetration 2% Growth y/y 941% Brazil 3G subscribers 13.3m Penetration 8% Growth y/y 148% Indonesia 3G subscribers 19.2m Penetration 12% Growth y/y 57% Source: Morgan Stanley Digital dynamics Virtually every human activity can now be expressed as digital data whether it s the simplest conversation or the most complex financial transaction. We can communicate, monitor, view, access and enable a vast range of information in the digital realm. Convergence creates convenience At the same time, technologies are converging. Until recently, devices had fixed roles a cellphone to make a call, a computer to manipulate data. Those distinctions have blurred. Now, we expect the digital world to revolve around us as individuals, regardless of the device we re using. We re starting to make payments and access our with our cellphones, and using our bank cards as a travel pass. Telecommunications Smartphone adoption has created new markets for wireless services, on top of continued organic growth in areas such as voice and messaging. These ongoing revenue opportunities are supported by a more pervasive digital lifestyle and businesses that now integrate mobile communications into their products and marketing. High-speed mobile data and multi-function smartphones, for example, are creating demand for more advanced SIM cards allowing users secure access to a host of new applications in sensitive areas such as banking and retail. For mobile users, value no longer resides purely in their handset. They expect to be able to access upgrades, applications and content Over-the-Air (OTA), regardless of the device. They also want to protect their digital lives, safeguarding their contacts, their identities and their contents. The SIM card is the only universal and secured application platform working with 100% of handsets. Machine-to-Machine (M2M) In a growing world of smart applications and things, M2M is the key enabling technology for the Internet of Things. M2M is used to optimize business processes by connecting machines to one another. It s used in an astonishing array of vertical markets and industries such as remote maintenance and control; metering; payment systems; routers and gateways; security systems; healthcare; automotive and etoll; tracking and tracing; environmental monitoring and more.
17 The digital security market 15 Companies around the world are discovering the power of M2M technology to save money, increase revenue or generate new sources of income by leveraging new channels to their customers. Further growth comes from governments that are forced to save money, increase income and meet carbon emission targets. Legislation favoring the implementation of M2M in ecall, smart metering for smart grids, stolen vehicle tracking and intelligent traffic systems is increasing. Furthermore, the aging population wishing to live an independent and healthy lifestyle is driving growth in mobile healthcare applications. With increasing penetration of M2M into all aspects of business and life, security of the network and data privacy will be increasing in relevance for M2M adopters. Financial services and retail There are already around one billion EMV ( * ) cards in circulation. Some of the fastestdeveloping economies in the world (such as Brazil, South Africa and Turkey) already have EMV in place. But potentially huge markets such as China, India and much of the Americas remain largely untapped. There are signs that US issuers with a base of more than 700 million credit cards and 460 million debit cards are being won over by the anti-fraud and user benefits of chip payment cards. In February 2009, American Express became the fourth member of the EMV consortium, massively expanding its reach. And even in the more mature European market, the Single Euro Payments Area (SEPA) initiative could also drive higher uptake. Aside from enhanced security, convenience is a key driver for EMV. Contactless cards and faster, more reliable authentication are delivering in-store efficiencies that create real competitive advantage for retailers. Government programs Governments need systems that offer efficient interactions with their citizens, who in turn demand security and convenience from their authorities. That s why nations around the world are investing in digital identity. Regulatory pressures for instance, the visa waiver scheme to gain entry to the US, which now mandates biometric passports are also driving growth in this market, such that more than 100 countries already have an epassport program in place. Electronic ID schemes go one stage further, since they require every citizen to carry an eid card. Many governments are already deploying them for access to health and social security services, Mobile voice has already been surpassed by mobile data traffic worldwide, driven by the rapid adoption of smartphones. By 2012, their shipments are predicted to exceed those of both Desktop and Notebook PCs combined. Global Unit Shipments (MM) Desktop PC s Notebook PC s Smartphones E 2011E 2012E 2013E Source: Morgan Stanley E: estimate SIM shipments worldwide billion+ (source: Eurosmart) Microcontroller payment cards to be shipped billion ( * ) (*estimate; source: Gemalto) Microcontroller cards sold for all Government eid projects million ( * ) (*estimate; source: Gemalto) Our vision ( * ) EMV: EuroPay, MasterCard, Visa: the industry standard for international debit/credit cards
18 16 Our vision Gemalto Annual Report 2010 Top internet markets percentage of penetration USA 76% Brazil Russia China India 18% 29% 39% 42% IDC has forecast the identity and access management market to reach over $5 billion by Gemalto is positioning itself to capitalize on market and convergence opportunities. It has expanded beyond its traditional smart card roots to create end-to-end solutions for digital security. (IDC, Gemalto: Secure authentication for Securing the Cloud, June 2010) and as drivers licenses. In a growing number of cases, they are also combining functions to derive even more efficiency and convenience for users. The potential here is immense. For example, India, with a population of 1.2 billion, has initiated a scheme to provide multipurpose national identity cards (MNIC) to every citizen by Beyond such card schemes, there is a widespread move towards egovernment. Ministers from the EU and EFTA recently approved a declaration recognizing that this increases efficiency and effectiveness...to constantly improve public services and set priorities in this area to be achieved by Online authentication Cloud computing services data and applications that are accessed via the internet or virtual private networks are going mainstream. IDC expects spending on IT cloud services to reach $42 billion in By then, it will represent 25% of IT spending growth and nearly a third of growth the following year. ( * ) Shipments of secure egovernment documents year-on-year growth 20%+ (source: Eurosmart) Value of US mobile payment transactions 2009 $5.2 billion ( * ) ( * ) Estimate; source: But freedom of access places a huge additional burden on security. It s essential to verify the identity of authorized users without hampering the convenience and efficiency of cloud computing. At the same time, complex software tends to have more security vulnerabilities, not fewer. This is increasing demand for strong (two- or even three-factor) authentication. For example, a user might need a password as well as a physical component like a fingerprint; or an ultra-secure one-time password generated by a smart card and reader. The need to meet compliance regulations is by far the greatest market driver. According to IDC this accounted for approximately 85% of all online authentication sales in Other factors contributing to market growth in this area are: Continued issuance and enforcement of regulatory requirements worldwide; Steadily increasing need for secure, scalable identity-driven cloud models for both private and public cloud deployments; Increased demand for strong authentication for both enterprise and consumer interactions. ( * ) Source: IDC
19 The digital security market 17 Today some 21 countries worldwide issue eid cards to their citizens, and over 60 countries issue epassports. Securing the cloud Our vision ebanking and ecommerce Secure online banking comes with the potential for increased revenue and new business opportunities. Switching focus from low-value transactions, such as cash withdrawals and check deposits, to high-value sales, such as loans and ecommerce, as well as financial and business advice, is the future in this domain. The business case for ebanking rests on four pillars: Cost control: when customers do more online, they can cut the cost of a transaction by up to 80%. Increased utilization: spending increases when people prefer a particular provider s services and cards the top of wallet effect. Similarly, people will do more online with a provider they trust. Competition: banks are facing increased competition from online payment providers such as PayPal, and from mobile operators offering payment services. Non-traditional businesses, such as supermarkets, are also promoting a growing range of banking services. By improving their ebanking offer, banks can differentiate themselves and increase loyalty. Security: increased security makes each customer more valuable and more profitable by enabling greater uptake of online services. It lets branches and call centers focus on high-value relationship banking and high-touch services. It also enables new services such as electronic invoicing, for example, by utility companies. Cloud computing simply means internet-based computing. Your data and applications aren t stored on your PC, but on servers located elsewhere (in the cloud ) which provide resources, software and so on, on demand. Users benefit from greater convenience and lower cost. They can consume computing resources as a service and only pay for what they use; access data, applications and services from any location; and employ greater computing power than they might otherwise be able to afford. The global market for enterprise cloud-based services will grow from US $12.1 billion ( 9.4 billion) in 2010 to US $35.6 billion ( 27.5 billion) by 2015 ( * ). Yet while many enterprises are embracing cloud computing, others are resisting, held back by security concerns. In the old days, security meant putting a firewall around the physical network in your office and giving people a password to access it. But it s in the nature of cloud services that you can access them from anywhere, so there s been a shift from border security to identitybased security. And the simplest way of strengthening this is to deploy a two-factor Single Sign On (SSO) solution. This requires both a password and a physical token, such as a smart card or encrypted USB key, before the user can be logged in. Even if the password is discovered, access is denied if the unique hardware token is not present. Two-factor authentication greatly enhances network security and allows enterprises to ensure that employees can securely access company information and networks, both locally and remotely. This text is based on a full-length article in the Autumn 2010 edition of The Review, Gemalto s corporate magazine: ( * ) Source: Analysis Mason
20 Added security for ebanking in Mexico Financial institutions increasingly want to add ebanking services to their portfolio. They also want them to be trusted by their customers and scalable to future developments. During 2010 one Mexican bank achieved this by selecting Gemalto s Ezio strong authentication server and One-Time Password tokens, which combine to create a more secure environment for ebanking. The extra security provides enhanced protection for users while they re accessing their accounts and performing transactions online. The solution can also be expanded to other authentication devices, including EMV payment cards, connected readers and mobile phones. For more information see page 34 For more information visit