* Q3 revenues weaker than expected due to weakness in Mobile
Gemalto reported weaker than expected Q3 revs of €626m compared to UBSe/Cons of
€659m/€648m. Within the divisions, Payment & Identity revenues of €289m, growing
at 12% y-o-y in constant currency due to the benefit of US/Asia EMV card roll-outs was
in-line with expectations but Mobile revenues of €331m were below both UBSe/Cons
of €362m/€352m. The company has reiterated its full year guidance for double digit
PFO growth in '14E (consensus +11%, UBSe +9%) but we would expect consensus
'14E PFO to come down slightly towards us (cons €387m vs. UBSe €378m).
* Mobile: Growth in new areas overshadowed by declines elsewhere
Within mobile, despite embedded secure elements having grown +57% and its highend
4G and multi-tenant SIMs growing +19%, products revenue declined 5% y-o-y in
constant currency. Indeed, we estimate that Mobile Comms product revenues were
down 8-9% y-o-y in Q3 despite multi-tenant SIM cards now accounting for 7% of
shipments (and we believe significantly more of revenues).
* Focus on the conference call around recent news flow
As can be seen from the presentation for the call, we expect the focus on Gemalto's
conference call (3pm CET) will be around the recent newsflow that has been impacting
the shares, particularly Apple's entrance into payments (which we believe Gemalto is
not benefiting from) and the 'Apple SIM' launched with the iPad Air 2. In our view,
while we recognise that Gemalto's TSM Hub solution does break down some of the
barriers to adoption for mobile payments using a SIM, we believe service providers will
likely still prefer either Apple Pay type approaches or HCE approaches (if they can get
comfortable with the security/pricing model). On the Apple SIM launch, we believe this
is initially relatively benign and we remain sceptical on the likelihood of operators
wanting to push this solution into handsets anyway.
* Valuation: €65 DCF-based price target (WACC 9%, g 2%)
Gemalto currently trades on 16x '15E P/E.