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Turmoil Continues at Gemplus

The world's largest smart card maker reported dismal 2Q earnings and its interim chief executive, Ron Mackintosh, has resigned.
Aug 02, 2002Aug. 2, 2002 -- Gemplus International SA, the world's largest manufacturer of smart cards, continues to stumble. The company this week reported dismal second-quarter earnings and its interim chief executive, Ron Mackintosh, quit because of infighting among key shareholders.

The smart card industry has suffered a sharp downturn, and Gemplus has been hit hard like everyone else in the industry. The company's revenue for the second quarter fell to EUR209.8 million (US$206.4 million), from EUR252.3 million (US$248.2 million) for the year ago period.

Gemplus reported a second-quarter net loss of EUR123.1 million (US$121 million), compared to a loss of EUR39.8 million (US$39.1 million) in the second quarter of last year. Analysts were expecting the company to lose about EUR64 million ($63 million).

The company recorded a EUR43.1 million (US$42.4 million) restructuring charge in the second quarter and partial write-down for a EUR77 million ($75.8 million) loan to its founder and former chairman Marc Lassus. Gemplus said the EUR67 million ($65.9 million) provision for the loan "has no impact either on the operating income or on the cash position of the company." It expects Lassus to pay back the full amount.

Mackintosh will step down as CEO on Aug. 15, but will remain a nonexecutive director. He acknowledged in a conference call with analysts that disagreements between major investors about strategy and management were hurting the company.

One group, led by former chairman Marc Lassus has been feuding with representatives of Texas Pacific Group, Gemplus's largest investor, according to news reports. The two factions could not agree on whether Mackintosh should be named permanent CEO. That led to a delay in filling top posts at the company, including chief financial officer.

Gemplus accounted for 33.6 percent of unit shipments of smart cards in 2001, according to research and consulting company Frost & Sullivan. But 2001 was a difficult year for the smart card industry. The slowdown in mobile phone sales reduced demand for subscriber identity modules (SIM), smart cards that are used in mobile phones in Europe and Asia.

Gemplus began a restructuring last year to try to focus more on specific markets. It also began a concerted effort to improve relationships with customers by working to help operators realize the security and customer relationship benefits that smart cards offer.

Analysts were fairly upbeat despite the poor performance and the resignation of Mackintosh. The restructuring appears to be working. Operating losses in the second quarter were half of those in the first quarter, and the company expects to return to profitability in the second quarter.

Gemplus shares have fallen from a 52-week high of $6.90 on the NASDAQ to a low of 1.62, but by late Thursday they had rebounded to $1.85. An improving market for smart cards should give Gemplus a lift. Frost forecasts that the total smart card market will grow from 1.76 billion units in 2001 to 2.41 billion units in 2004.
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