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Gemalto CEO Predicts Substantial TSM Revenue in 2014; Agrees Mobile Payments Will Take Time

Gemalto CEO Olivier Piou predicted the France-based vendor would begin to see substantial recurring revenue from its trusted service management business starting in 2014 as mobile payment starts to roll out globally over the next three to five years.

Piou, speaking to financial analysts today following release of the France-based smart card and software provider’s third quarter results, said the vendor’s TSM business was already contributing to revenue, but mobile payments would not be “massive” until after 2013.

He agreed that it would take three to five years before mobile payments at the physical point of sale goes mainstream.

“Next year, we will continue to deploy,” Piou said of the vendor's TSM business, which manages secure elements and payment and other secure applications on NFC phones. “We have all of those programs to do, and we’ll try to cover as many–the largest bases in terms of consumers. Yes, it will take three to five years to be global. It’s simply the way it is.”

Piou was responding to a question from an analyst about estimates attributed recently to Google’s wallet chief, Osama Bedier, that mainstream adoption of NFC mobile payments is still three to five years out.

“I think the Google Wallet team is going through the usual pattern of technology introduction that we know very well at Gemalto,” said Piou. “You have a first phase of hype, then you have a trough of reality check, and then it takes off, and when you do this at a bigger scale than California, it takes time.”

Google has said transactions have doubled since it introduced its new version of the Google Wallet in early August, which enables consumers to load their credit and debit cards onto Google’s servers. These cloud-based cards fund transactions conducted with a prepaid Google NFC application stored on an embedded chip in the Google Wallet phones. But the company has declined to release actual transaction numbers, which were said to be small to begin with.

The new cloud-based wallet, known as Google Wallet 1.5, reduces the need for TSM services. Gemalto, in any case, is not serving as TSM for Google.

Pitch to Telcos and Banks
Piou, as he has in the past when talking to financial analysts on conference calls, directed his TSM pitch mainly at telcos and banks seeking to launch NFC mobile payment. 

“When you are a bank, you don’t want to be restricted only to the Google Wallet or the Apple wallet,” he said. “The last thing you want to worry about is what is the telephone brand of your customer. Their work is to serve the customer independently of their brand. So if this bank buys a TSM service from Gemalto, it can address everybody independently of their brand.”

Gemalto also sells high-end SIM cards to store NFC payment applications, and Piou said that since 2010, telcos in developed markets have been asking the vendor for SIMs loaded with more software, including NFC. He estimated that the fully loaded SIMs fetch a premium price of a couple of euros compared with less feature-rich cards.

Piou indicated that Gemalto was profiting from the threat mobile operators and banks feel from Internet and other over-the-top players such as Google and Apple, which is causing telcos to “reinvest in their asset of the SIM card,” and the TSM services needed to manage applications on the cards.

“They were lucky that, for example, Apple did not launch NFC in the iPhone 5,” Piou said, in response to another question from an analyst. “It gives them another year to just capture that field. And I’m sure the competitors of the device manufacturer will also try to capture that field, but there is a boulevard here for the banks, for the telcos and for the Android guys to try to capture that space, and it’s going to be a battle. And when there is that momentum, it’s very helpful for Gemalto.”

Betting on Mobile Payment
Gemalto has placed a big bet on the market for securing mobile payment, not only with its TSM and NFC SIM businesses, but network-based payment, as well.

The company disclosed in its revenue report today that it spent €46 million (US$59.5 million) in the third quarter on acquisitions, most of it for Ericsson IPX, a 100-employee mobile-payment platform unit of Swedish telecoms equipment maker Ericsson. Gemalto announced the acquisition Oct. 1.

The platform enables subscribers to pay on their phone bills to buy games, ringtones and other digital content, as well as do mobile voting and to receive other services via SMS, MMS, WAP or the Web.

Gemalto is combining IPX with its Netsize unit, of which Gemalto acquired a majority stake two years ago. Piou indicated Netsize generated €40 million in revenue, though it wasn't clear which year.

The IPX and Netsize platforms were each serving 100 or more mobile operators at the time of the acquisitions. Piou said the platforms will be used for both mobile payment and advertising.

“So, we have a very good (ability) to bill and invoice on the telcos phone bill, all these low-value items,” Piou said. “And Ericsson had a good technology because they come from the network side in order to organize the routing of all those payments. You have to be able to bill across (the) roaming platform.”

IPX had a small TSM offer, but Gemalto didn’t buy the unit for that. It already has a TSM that serves telcos, banks and other service providers, in competition mainly with other smart card vendors, Giesecke & Devrient, Oberthur Technologies and Safran Morpho-Cassis.

TSM Projects in the Pipeline
Piou said Gemalto has 50 TSM projects in the pipeline, several of which are entering their “operational  phase.” But the vendor has announced few of them. Piou mentioned previously announced contracts in Singapore for a commercial rollout driven by the government, as well as the Isis telco joint venture, which this week launched a large two-city trial. Other TSM contracts Gemalto hasn’t announced include Germany-based Deutsche Telekom and certain branches of UK-based Vodafone group.

But Piou is also apparently including non-NFC mobile payment projects in the 50-project total. He mentioned Gemalto’s work as the technology platform provider for a joint venture rolling out the Transfer service in Mexico. The joint venture is made up of telco América Móvil, Citibank's Mexican unit Banamex and Banco Inbursa, which plans to enable customers to transfer funds and top up their airtime on their phones. Gemalto announced the contract in April.

Piou said Gemalto would activate at least 10 TSM projects per year.

Gemalto is hoping TSM and other software platform and services revenue will account for a larger share of its total revenue.

The vendor announced today an impressive 16% increase in third quarter revenue for its largest division, mobile communication, which mainly produces SIM cards. Revenue in the unit was €283.4 million.

Part of that is revenue from TSM projects and “record levels of remote activation” of 4G-LTE services for telcos. This platform and services revenue increased by 23% at constant exchange rates compared with 2011. The vendor, however, did not release the actual revenue for the TSM and LTE services.

Financial analyst firm Crédit Agricole Cheuvreux last summer estimated Gemalto had €16.1 million (US$20.2 million) in TSM revenue in 2011 and projected that the TSM take would grow to €55 million in 2013 from licensing and service fees.

For the third quarter of 2012, Gemalto said revenue for embedded software and products grew by 15%, also at constant exchange rates, supported by a “surge” in demand for LTE and the new nano-SIM, used by Apple. Gemalto also said deployment of NFC SIMs in Asia and Europe contributed to the increased growth.

All told, Gemalto reported total revenue, including from its banking and ID units, increased by 11% to €575 million for the quarter at constant exchange rates.

Gemalto’s share price has more than doubled over the past year, in large part due to prospects for growth in the TSM and high-end SIM businesses and plans by U.S. banks to roll out EMV payment cards, as well as the vendor hitting its profit goals ahead of schedule.

 

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