1st take: Profit warning on U.S. chip card
The €60m downgrade to the 2017 PFO target (at the midpoint) is largely due to US chip card inventory build. We think
new guidance implies a 30%+ decline in U.S. Payments business. There may be some additional caution built in to this revision ahead of the next multi-year plan.
Gemalto has warned on its 2017 PFO target, largely citing U.S. chip card inventory build, as part of the migration to EMV.
This has been an issue for several peers (CPI Card, Oberthur) during 2016 given a strong ramp in 2015, and
had also been cited by Infineon. Gemalto had until recently said that exposure to different customers - and strength in the debit card portfolio - meant they had not seen the same issues, though that situation now appears to have reversed.
According to our conversation with the company this morning, the vast majority of the €100m revenue downgrade is due to U.S. EMV.
Why such a big profit downgrade?
Revised guidance for PFO in line with 2016 implies €450m vs previous guidance of €500-520m, or a €60m operating profit downgrade at the mid-point. Gemalto indicates a drop-through margin of 50-60% on incremental revenue, which is high but possible in our view. Total payments revenue in 2016 was ~€1bn, and we think Americas (including Latin
America and Canada) was ~40% of this. Gemalto indicates the U.S. is the only change to previous assumptions, and we think the implication is that the U.S. payments business will decline at least 30% y/y in 2017. Revised guidance for a 7-
9% revenue decline in 1Q is a ~€55m delta from our previous estimates, which could represent a halving of the U.S. business short-term.
Our main unanswered question is how management can have visibility on the U.S. at such an early stage in the year, given the volatility in the market.
We think this should represent the last reset of guidance, following the downgrade of PFO targets from €660m to €500-520m in late 2016. Certainly the magnitude of the downgrade to the U.S. business suggests the company is taking a cautious view. We are also conscious that 2017 will for the basis for the next multi-year plan announced later this year, so management has an incentive to be cautious. However, visibility is extremely low for the time being given the situation in the U.S.