Gemplus International S.A.

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Gemplus International S.A.

Aerogolf Center, 1
Hohenhof
Senningerberg
L-2633
Luxembourg
Telephone: 352 26 34 61 00
Fax: 352 26 34 61 61
Web site: http://www.gemplus.com

Public Company
Incorporated: 1988
Employees: 5,000
Sales: EUR 749 million ($941.90 million) (2003)
Stock Exchanges: Euronext Paris NASDAQ
Ticker Symbol: GEMP
NAIC: 334413 Semiconductor and Related Device Manufacturing

Gemplus International S.A. is the world's leading manufacturer of smart cards—microchip-embedded cards used for a wide range of functions, including debit cards for the banking industry, SIM (Subscriber Identity Module) cards for mobile telephones and set-top television terminals, and a variety of other functions. Gemplus, one of the smart card industry's pioneers, holds an approximate one-third share of the global market, producing more than half a million cards per year. The company has shipped more than four billion cards since its formation in 1988. Gemplus is a truly international company—registered in Luxembourg, the group's corporate headquarters are in Geneva, its manufacturing headquarters are near Marseilles, and its information technology headquarters is located in the Silicon Valley. The company is led by American-born CEO Alex Mandl, listed on both the Euronext Paris and NASDAQ stock exchanges, and its largest shareholder, at 25 percent, is U.S.-based fund group Texas Pacific. In addition, Gemplus operates in 37 countries, with 11 production plants and four research and development centers, as well as 17 "personalization" plants enabling it to tailor its software and technology to specific customer needs. Hit hard by the slump in the telecommunications sector—which previously accounted for more than 70 percent of the company's revenues—Gemplus has been showing the first signs of a recovery, posting profits again at the beginning of 2004. The company is working to reduce its reliance on the telecommunications industry with a push to gain a strong share of the financial smart card market. In 2003, the company posted sales of EUR 749 million ($941 million).

Smart Card Pioneer in the 1980s

The first proposals for the creation of "smart cards"—that is, credit cards embedded with microchips that could be programmed for use in a variety of applications—appeared in the early 1980s, and a number of companies began developing their own version of the cards. Gemplus founder Marc Lassus became one of the early proponents of the new technology. Lassus, who had earned his PhD in solid-state physics at Lyons University, had been working at Motorola in the early 1980s when France's Bull approached that company about the idea of developing a smart card. Later in the 1980s, Lassus joined Thomson Microelectronics, then still controlled by the French government.

Lassus became the manager of Thomson's integrated circuits division, where he led a team of engineers in the development of a new smart card design. Yet Thomson's management remained skeptical about the potential of the smart card, and after an outside consultant hired to look into the feasibility of the project proclaimed that there was no future in the technology, the project was shelved.

Lassus's opportunity came in 1988, when Thomson was merged with SGS, forming STMicroelectonics. As part of the merger, Thomson prepared to lay off a number of its engineers. Lassus decided to leave Thomson to pursue the smart card idea, setting up Gemplus with seed money provided by Thomson. At the same time, the proposed layoffs at Thomson provided Lassus with a pool of highly trained engineers to back the Gemplus project—with Thomson underwriting each hire by Gemplus by as much as $10,000 per employee.

Gemplus found its first customer by the end of 1988, when France Telecom placed an order for one million microchip-embedded telephone cards. The use of the cards, which contained a fixed value encoded in the chip, enabled France Telecom to begin eliminating coin-based—and theft-prone—public telephones. The company then set up its first plant to manufacture the card, opening in Gemenos, near Marseilles. Gemplus already displayed confidence in its future, building a plant capable of producing ten times the amount of the France Telecom order.

Gemplus signed up a new major customer in 1989, when Sky TV contracted the company to produce smart cards for its set top-based pay-television system. That contract also helped demonstrate the flexibility of the new technology. The following year, another major customer signed on, as Deutsche Telekom placed an order for 16 million smart cards.

The company's relationship with both France Telecom and Deutsche Telekom placed it in a strong position for its next major development—that of winning the order to produce the SIM (Subscriber Identity Module) for the newly agreed-upon, European-wide GSM mobile telephone protocol. The company became the SIM supplier for the mobile telephone networks in France, Denmark, Norway, Finland, and Sweden. In support of those contracts, Gemplus built a new production facility, in La Ciotat, France, which provided the company with clean room technology for the production of the SIM modules. That plant opened in 1991.

The European market greeted the emergence of the smart card enthusiastically, and Gemplus began signing up more and more customers, with a wider array of applications. One example of the flexibility of the new technology was provided by the company's contract with British Gas in 1991 for a smart card for use with the utility's gas meters. The company also signed on its first bank customers, Cilme and Moneta/Cariplo in Italy, and FISC in Taiwan, which were followed by the award of a license to produce bank cards for the French banking system in 1992.

The U.S. market proved slower to accept the new technology, although the company had established an office in Washington, D.C. in 1989. In 1991, however, the company managed to sign on the state of Wyoming, which turned to Gemplus for the production of its WYO healthcare cards. Nonetheless, Gemplus's growth in the United States was hampered by the slow growth of the country's mobile telephone sector and the banking industry's reluctance to switch from magnetic strip-based credit card technology.

Industry Leader in the 1990s

Gemplus began to take off in the 1990s, as sales grew from the equivalent of just $89 million in 1992 to more than $300 million by 1995. The company supported its growth by opening new sales offices in Italy, the United Kingdom, Germany, and Italy by 1992, adding new sales offices in Spain and in Chile and Argentina in 1993, then entering Canada, Japan, Australia, China, and Venezuela in 1994. By 1996, the company had added sales offices in Hong Kong, Brazil, Russia, and Poland, among other markets. Gemplus also opened its first production facility outside of France, in Filderstadt, Germany, in 1992.

By 1995, Gemplus had produced more than half a million phone cards and more than 120 million mobile phone SIM cards, establishing itself as a clear leader in the bustling smart card market. In that year, Gemplus backed up its organic growth with its first acquisition, of the U.S. and European smart card production and personalization facilities of DataCard Corporation. The following year, the company set up a joint venture in Tianjin, China, where it launched production of telephone cards, as well as a new production plant in Mexico. In the meantime, the company had taken on a new financial backer, in the form of Germany's Quandt family, which acquired a significant stake in Gemplus in 1994.

Marc Lassus stepped down as Gemplus's CEO in 1997, taking on the chairman's role, and concentrating his own efforts on targeting new acquisitions, such as the purchase of Austria's SkiData in 1997. The company opened a new research and development facility for the North American market, in Montreal, that year, ahead of the transfer of its IT headquarters to Silicon Valley, specifically Redwood City, California, in 1998.

Gemplus rolled out a steady stream of new products and technologies into the late 1990s as well, such as its GemClub re-programmable loyalty program support cards; a dual mode SIM card compatible with both AMPS and GSM mobile telephone networks; the GemCore smart card reader; the GemSAFE network services security platform; as well as the company's participation in the creation of an open-platform, Java-based smart card in partnership with Visa International, Sun Microsystems, and others.

Gemplus's sales gained strongly at the end of the decade, rising from EUR 583 million in 1998 to nearly EUR 670 million in 1999—and topping the EUR 1 billion mark by 2000. Aiding the company's expansion was its acquisition of Euritis, which provided smart card security systems and software, and the opening of Gemplus's production plant in Singapore, both in 1999. The company also announced strategic partnerships that year with Microsoft and Dell to build smart card readers and software into computer systems.

With sales of more than EUR 1.3 billion at the end of 2000, Gemplus remained the global smart card leader, controlling more than one-third of the world market. In that year, the company launched its own venture capital fund, GemVentures, to provide investment capital for start-up companies working in the smart card field. Meanwhile, Gemplus itself took on a new major investor, when Texas Pacific Group, which paid in $500 million—then the largest private equity investment in Europe—to take a 26 percent share in Gemplus.

Company Perspectives:

Our Mission is to be the leading, innovative, and trusted enabler of solutions for secured identification, transactions and communication for the benefit of our customers, stakeholders and billions of individual users.

The Texas Pacific investment enabled Gemplus to go on a brief acquisition spree, in part for the company to make the transition from a reliance on smart card manufacturing to the development of new smart card technology, software, and related systems. The company bought up Celocom, which provided electronic transaction security systems; SLP Infoware, a software specialist; and ODS Landys & Gyr, which had been the smart card operations of Landys & Gyr Communications.

By the end of the year, Gemplus completed its initial public offering (IPO), listing on the Euronext Paris and NASDAQ exchanges, in large part to enable its initial investors, including Marc Lassus, to cash in on part of their investment. As part of the IPO process, Gemplus provided Lassus with some EUR 70 million to purchase stock options ahead of the public offering—a move that came back to haunt Lassus later.

Rebuilding for the 2000s

Gemplus entered the 2000s with high hopes—a number of observers began forecasting that the company's sales could reach as high as $10 billion before the end of the decade. Yet Gemplus, which saw 70 percent of its sales generated from the telecommunications market, and especially the market for mobile telephones, crashed headlong into the global telecoms slump in 2001. The company's sales began dropping, a trend worsened by the slowdown in mobile telephone purchases in an increasingly saturated market. Gemplus's concentration on growth, rather than developing mature corporate practices, during its first decade now came to haunt it, as its profits—and share price—fell.

Gemplus entered a period of revolving-door CEOs, going through four chief executives over as many years. The company's difficulties led main shareholder Texas Pacific into direct conflict with Marc Lassus. When the Quandt family sided with Texas Pacific, Lassus was finally forced to sell off his shareholding in the company and resign from its board of directors in 2002. Texas Pacific was then free to bring in its choice for chief executive, the American Alex Mandl. That appointment led to accusations that the company was attempting to shift its focus of operations to the United States, and was even accompanied by allegations of corporate espionage. In the meantime, Gemplus sales continued to collapse, dropping back to less than EUR 790 million—with net losses of more than EUR 320 million.

Mandl helped lead Gemplus through a restructuring, which dropped its worldwide headcount by more than 2,000 employees by the end of 2003. The company won a number of important contracts that year as well, including the supply of 15 million smart cards to Halifax Bank of Scotland, and ten million SIM cards for China Unicom. Gemplus also received certification that year to provide smart cards for the SCOSTA National Driving License and Vehicle Registration program in India, opening the company to that vast potential of the more than one-billion-strong population.

By the beginning of 2004, the tide appeared to be turning for Gemplus, as the company reported a return to quarterly profits. Sales, which had dropped down to below EUR 750 million in 2003, also were showing signs of renewed growth as the telecommunications sector, and the high technology market in general, began to rebound. Despite its difficulties at the beginning of the decade, Gemplus had managed to hold onto its global leadership position, and promised to remain a leading smart card player in the new century.

Principal Subsidiaries

Gemplus Corporation (United States); Gemplus S.C.A. (France); Gemplus GmbH (Germany): Gemplus Ltd. (United Kingdom); Gemplus Bank Note Ltda. (Brazil); Gemplus Industriales S.A. de C.V. (Mexico).

Principal Competitors

SchlumbergerSema SA; Axalto; Giesecke & Devrient GmbH; Oberthur Card Systems.

Key Dates:

1988:
Marc Lassus and other engineers from Thomson Microelectronics found Gemplus in order to develop smart card technology.: 1989:
Gemplus receives a contract for one million cards from France Telecom and builds its first factory in Gemenos, France; the company opens a sales office in the United States.: 1990:
The company receives a contract to produce SIM cards for GSM mobile telephone protocol.: 1991:
The company builds a new plant in France featuring clean room technology for SIM production.: 1992:
The company opens a production facility in Germany, its first outside of France.: 1995:
DataCard Corporation is acquired.: 1996:
The company opens a new plant in Mexico; a joint venture is formed in China to produce telephone cards.: 1997:
SkiData of Austria is acquired.: 1999:
The company acquires Euritis, a specialist in smart card security systems and software.: 2000:
Texas Pacific becomes a major shareholder with a $500 million investment; the company acquires ODS Landys & Gyr, SLP InfoWare, and Celocom; the company goes public on the Paris and NASDAQ exchanges.: 2002:
Marc Lassus is forced to resign from the board of directors; the company begins restructuring, shedding more than 2,000 jobs.: 2004:
Gemplus reports a return to profitability in the first quarter.