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Edited Transcript of GTO.AS earnings conference call or presentation 3-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Gemalto NV Earnings Call

Montrouge B.P.620-12 Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Gemalto NV earnings conference call or presentation Friday, March 3, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Philippe Vallee

Gemalto NV - CEO

* Jacques Tierny

Gemalto NV - EVP, CFO

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Conference Call Participants

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* Alex Duval

Goldman Sachs - Analyst

* Stephane Houri

Natixis - Analyst

* Josh Levin

Citigroup - Analyst

* Sebastien Sztabowicz

Kepler Cheuvreux - Analyst

* Achal Sultania

Credit Suisse - Analyst

* David Mulholland

UBS - Analyst

* Kevin Woringer

CM-CIC - Analyst

* Andrew Humphrey

Morgan Stanley - Analyst

* Gianmarco Bonacina

Equita SIM - Analyst

* Antonin Baudry

HSBC - Analyst

* Johannes Schaller

Deutsche Bank - Analyst

* Christophe Quarante

Societe Generale - Analyst

* Hannes Leitner

JPMorgan - Analyst

* Adithya Metuku

BofA Merrill Lynch - Analyst

* Neil Steer

Redburn Partners - Analyst

* Alexandre Faure

Exane BNP Paribas - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Gemalto's full-year 2016 results conference call. I will now hand over to Philippe Vallee, CEO of Gemalto, and Jacques Tierny, CFO of Gemalto. Mr. Vallee, you may begin.

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Philippe Vallee, Gemalto NV - CEO [2]

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Thank you Pauline. Thank you all for joining. I'm Philippe Vallee, the CEO of Gemalto. Welcome to our full-year 2016 earnings call. I'm here with Jacques Tierny, our CFO, and Winston Yeo and Sebastien Liagre of our Investor Relations team. Together, we will be commenting the presentation that you can download from our website. We will begin with the key elements of the release and then we will take your questions.

So after having read the information on Page 2 and on Page 3, I invite you to go to Page 5 to the highlights of 2016.

Gemalto's performance in 2016 demonstrates the strength of its business model and ability to adapt in a very adverse mobile environment. With revenue at EUR3.1 billion, the Company recorded a plus 1% increase in its business with, as planned, an acceleration in its fourth-quarter revenue growth.

During the year, the payment activity grew slightly. Machine-to-machine and enterprise posted double-digit revenue growth, and government programs recorded another strong performance.

The structural transformation of the Company continued with Platforms & Services surpassing its annual revenue objective of EUR1 billion, a year ahead of the current multi-year development plan. In addition, optimization efforts paid off in the Mobile and Payment & Identity segments, resulting in the Company's gross margin exceeding 40% for the first time in its history, and leading to an improvement in both Gemalto's profitability and cash generation.

As we turn to 2017, we will be focusing our effort on growing sales through cross-selling between businesses, and we will be presenting our new multi-year development plan toward the end of the year.

On Slide 6, we have here our condensed P&L for the year. As I pointed out, our 2016 revenue came in at EUR3.1 billion. Gross profit was up to EUR1.26 billion with gross margin up by 155 basis points on last year's figure, achieving what we have set for ourselves as part of our 2016 outlook. The provision was achieved through a marked improvement in our two main segments.

Operating expenses were up by 61 basis points to 26% of revenue. The increase came mainly from investments made in the enterprise business. As a result, profit from operation was at EUR453 million. Profit margin was 14.5%, a plus 94 basis point improvement on 2015. Finally, basic earnings per share was EUR3.00 with IFRS earnings per share growing pus 34% to EUR2.09.

On Slide 7, we have mapped out Gemalto's gross margin improvements since its creation in 2006. You can clearly see the steady progress this Company has recorded since 2006 with gross margin progressing from 29% at the onset of Gemalto to over 40% of its revenue last year. This was achieved through strong teamwork, good discipline, and commitment on the part of everyone in the Company.

I will now hand over to Jacques. Jacques?

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Jacques Tierny, Gemalto NV - EVP, CFO [3]

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Thank you Philippe. Let me begin with Slide 9, where you have a bridge between the profit from operations and the IFRS operating profit. The main difference between the two income statements this year when compared to last year was the fair value adjustments. These are related mainly to the non-cash amortization of the IFRS revaluation of SafeNet pre-acquisition deferred revenue that accounted for EUR3 million in 2016 compared to EUR71 million for the same period last year. Amortization and depreciation of intangibles resulting from acquisitions decreased by EUR3 million year-on-year to EUR58 million. The equity-based compensation charge was markedly lower to EUR9 million versus EUR39 million for the same period last year. This mainly reflects the lower estimated number of restricted share units to be delivered upon vesting based on the 2017 profits from operation outlook.

Restructuring and acquisition related expenses decreased by EUR13 million to EUR36 million, and they essentially came from IT and facilities integration first of acquired companies, implementation of a new ERP to harmonize finance and reporting systems, and optimization in the running of data centers. As a result, Gemalto recorded an increase of EUR144 million in its IFRS operating profit, the EBIT at EUR347 million in 2016 compared to EUR203 million a year ago.

I now invite you to turn to Slide 10 to review the key items of the cash flow statement. For the full year of 2016, operating activities generated a cash flow of EUR468 million before changes in working capital. The net change in working capital reduced the cash flow generation by EUR23 million in 2016 compared to a positive EUR65 million impact in 2015. Net trade and other payables were lower due to advanced payments received from customers in 2015, and net trade receivables increased towards the end of the year with growth in government programs, machine-to-machine, and enterprise. Net cash generated by operating activities was EUR458 million, up from EUR355 million last year.

Capital expenditure and acquisition of intangibles amounted to EUR140 million with property, plant, and equipment lower by EUR35 million compared to the high level of 2015 that was related to initial investments which were made to support the strong start in the payment business in the United States. As a result, in 2016, Gemalto generated strong free cash flow of EUR318 million, increasing by 87% compared to EUR170 million the previous year. Acquisitions used EUR3 million in 2016 versus EUR897 million in 2015, which had seen the closing of both the SafeNet and the Trueb acquisitions.

On May 26, 2016, Gemalto paid a cash dividend of EUR0.47 per share in respect of the fiscal year of 2015, which is up 12% on the dividend which was paid in 2015. This distribution used EUR42 million in cash.

All in all, Gemalto's net debt position was reduced to EUR67 million compared to a net debt position of EUR335 million at the end of 2015. This significant positive variation is due to the strong free cash flow generated by the Company over the last 12 months. The Company's net debt currently represents 0.1 times its adjusted EBITDA.

I now invite you to turn to the segment information beginning on Slide 12 with the breakdown in our revenue. On the left, you have Gemalto's total revenue by segment. You can see that Payment & Identity represents 62% of total Company revenue compared to 58% last year. This is essentially the result of the plus 9% revenue growth posted in 2016 by the Payment & Identity segment. This figure contrasts with the 8% year-on-year revenue decrease in Mobile.

If you move to the right, we have mapped out for you our revenue growth in platform and services since 2013. As you know, a key objective of the current plan was reaching EUR1 billion in revenue in this activity by 2017. We have reached that milestone a year early, and you can see in the graph the successive annual growth rates that led to this achievement.

A key element to bear in mind, and one that many often overlook, is how much Platforms & Services has now become an integral part of each of our businesses. That's why we say that Platforms & Services is contributing to a profound structural transformation of the Company, and it's a trend that should continue over the next few years.

I now invite you to go to Slide 13 to review our main segments where my comments on revenue will be at constant exchange rates. Payment & Identity's first-semester revenue came in at EUR1.95 billion, increasing by 9%. The segment's embedded software and product sales were up by 3%, and its Platforms & Services sales were up by 19%. The payment revenue came in at EUR998 million, up by 2%. In 2016, performance was contrasted between the semesters with the second-semester revenue lower year-on-year due to the high comparison basis in the United States, which was related to the 2015 EMV liability shift deadline. Revenue from the enterprise business came in at EUR462 million, up 10%. The trend in revenue mix within the authentication business line continues to move towards a higher proportion of software and services. Revenue from the Government Programs business came in at EUR488 million, which is up 26%.

There was an outstanding fourth-quarter revenue performance with the completion of a large-scale project and increased deliveries from the finalized transformation of a production site.

Overall, the Payment & Identity segment's gross margin improved to 40.7%, which is up 2.3 percentage points, and this with the optimization of a payment business and the expansion of the enterprise business.

Profit from operations came in at EUR290 million, up 22%, leading to a 14.9% profit margin from operation, which is up 1.8 percentage points.

Please turn to Slide 14 now for comments on the Mobile segment. The Mobile segment recorded annual revenue of EUR1.2 billion, 8% lower year-on-year. Embedded software & Products revenue for the segment came in at EUR924 million, which is 11% lower, with same sales decreasing by 19% to account for 19% of total revenue. Conversely, the machine-to-machine business continued to grow by 11% year-on-year at EUR390 million on the back of expanding global demand of connected devices and embedded secure elements for the Internet of Things. Platform and services revenue for this segment came in at EUR251 million, up by 3%.

In 2016, Gemalto's mobile subscriber services business reached important milestones with more than 20 references on embedded SIM remote activation and management. As device manufacturers and mobile network operators adopt the latest GSMA related specification for the consumer device market which was published in Q4 of 2016, Gemalto remains actively involved in aligning and setting up the ecosystem.

Overall, gross margin for the Mobile segment was 40.1% in 2016, up by 1.4 percentage points. Profit from operations came in at EUR171 million, a 14.6% profit margin from operations, which is up 1.1 percentage points on 2015.

Thank you very much ladies and gentlemen. I now hand back over to Philippe.

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Philippe Vallee, Gemalto NV - CEO [4]

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Thank you Jacques. So before moving on to the market trends that we expect to see shape 2017, I would like to focus for a moment on Slide 16 on the set of examples that illustrate how we leverage our unique combination of assets.

Today, consumers expect digital technology to help them in every single aspect of their lives. As a result, a new set of behaviors are requiring ever authentication, data protection, key management or secure issuance, or a combination of these. That's why our businesses are increasingly working together to create compelling user experiences.

For example, we are developing a smartphone-based drivers license in the United States which will enhance the security and convenience of a document that plays such a key role in the life of many Americans. Turning your smartphone into a secure key -- a secure car key, sorry, together with Valeo is another example of a solution designed to meet new consumer expectation. This secure and simple authentication system is helping to serve emerging use cases, such as car sharing.

In a way, Gemalto has put in place an easy-to-use solution to verify IDs, which is also a system that will scale and become the cornerstone of a growing set of innovative secure digital services that Posten Norge aims to develop for its clients. This is a way for the Norwegian Post to monetize its branches by assisting banks and financial enterprise concerning the identity of customers picking up new payment cards for example.

We have a unique mix of convenience and security with our milestones solutions for our clients and for consumers. We are paving the way to the Gemalto of tomorrow where cross-selling between businesses will be increasingly prevalent.

On Slide 17, you have the key trends that we expect to see shape 2017. First, we expect a slight improvement in the mobile environment. A key element in this segment will be the start of the equipment phase for on-demand connectivity platforms based on the latest GSMA specification published at the end of 2016. We will be seeing continued expansion in the Internet of Things and expect solid demand in Government Programs.

And in payments, the year will be marked by slower migration of payment cards in the United States. Overall, we see another year of contrasted semesters with a pickup in activity in the second semester of this year. Finally, we should see increasing demand for data protection, software monetization and cyber security solutions.

On Slide 18, you have our outlook for 2017, so I will read it to you. For 2017, Gemalto expects its profit from operations to be between EUR500 million and EUR520 million supported by positive trends in Government Programs, machine-to-machine, enterprise and taking into account the adverse mobile environment and a slower migration of payment cards in the United States. The Company expects to finalize the 3M Identity Management business acquisition in the first semester of 2017 and will update its 2017 outlook after the closing.

So, this concludes today's preliminary remarks. Pauline, could you explain to us the procedure for taking questions please?

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Questions and Answers

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Operator [1]

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Yes. (Operator Instructions). Alex Duval, Goldman Sachs.

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Alex Duval, Goldman Sachs - Analyst [2]

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Yes, hello everyone. Many thanks for the questions. The first one for me please would just be on the payment segment. I just wanted to clarify what the rate of decline was that you saw in the fourth quarter, and how we should think about the cadence through the year. Specifically, will the first quarter decline and how should we think about the growth rate as we go through the year for first semester and second semester?

Second of all, on enterprise, you've talked about some nice dynamics there going forward. Just again wanted to understand what kind of growth rates we should be looking at. Is it more sort of more single-digit given the transition that's ongoing between different parts of your business? Many thanks.

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Philippe Vallee, Gemalto NV - CEO [3]

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Okay. So as far as the payment question is concerned, first of all, and we stated our visibility on Q1 tells us that we see a slow start in the payment business in the US, which will probably lead to contrasted semesters in 2017 with a lower first semester and progressively picking up towards the end of the year. This being said, and outside or beyond the US, this is I should say business as usual, because we still have the consummation of the migration to chip card in countries which remain to be equipped. And on top of that, we know that the dual interface cards is possibly taking over the single interface card in Europe and in some parts of Asia. So, we see -- this is our current view as far as payment is concerned.

Now, for the enterprise business, let's forget -- let's not forget first that our business we do with the enterprise and cyber security segment is made of three different business lines with different dynamics and pace at work. We have first the data encryption offer, which is to really protect the enterprise against cybercrime, and this is going very well, going nicely. We have a second piece of business which is linked to authentication, and this is a piece where our offers are moving from hardware-based physical token to a more software client into the mobile, and therefore with the conversion here of business profile at work. And the third part is what we call software monetization where we see a rather flattish evolution. So, overall, this all together combined should grow mid single digits in the first semester.

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Alex Duval, Goldman Sachs - Analyst [4]

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That's very clear. And just a quick follow-up on your government business, that obviously had very strong growth and there was a project completion. Just wanted to get your view on sort of sustainability of growth there. I think, historically, you've talked about sort of midteens trend if we go back the last sort of five to seven years. How should we be thinking about 2017 growth rates relative to obviously what's a sort of tougher comp level?

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Philippe Vallee, Gemalto NV - CEO [5]

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Yes, really concern historically, we've seen midteens growth in this business, but bear in mind, be aware that you have always a quarter-to-quarter volatility which is we start and we complete a new project every quarter. So, this is a big project we are on a delivering path. For the next six months, we see a low teens growth on this segment, and this is what we can say today.

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Alex Duval, Goldman Sachs - Analyst [6]

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Very helpful. Many thanks.

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Operator [7]

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Stephane Houri, Natixis.

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Stephane Houri, Natixis - Analyst [8]

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Good afternoon. I have two questions in fact. The first one is on your comment on the SIM market, if you could give us some more colors on what's going to happen in this market and also if you could give us some hints from a geographic standpoint.

And the second question is about the 2017 guidance, if you could elaborate a bit on how you are going to get to the EUR500 million to EUR520 million of profit from operation. Is it coming from sales growth? Is it coming from gross margin improvements, and OpEx compression? What is your view on your different scenarios there? Thank you.

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Philippe Vallee, Gemalto NV - CEO [9]

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Thank you. So first, on the SIM side, so what we see today in terms of visibility of H1 2017, we see the SIM evolving around negative mid single digits, so it's an improving situation compared to what we had in the second part of 2016. And we see also -- and this was clearly the atmosphere and the mood that the world -- the Mobile World Congress, more ammo projects taking shape around the eSIM and the software and platform going with eSIM since we have now that specification and we can really start implementing a larger scale program with device makers and mobile network operators.

Now, for the outlook for 2017, it's a different element in your question, a different element of response. First of all, for the gross margin, you should not expect the same improvement as of 2016. However, we are still working on a slight improvement, modest increase, on that front. We have also -- I mean throughout the Company a good discipline at managing OpEx and my take and my drive is really to have OpEx not grow, definitely not higher than the revenue growth in 2017, so we will manage our OpEx. And we have definitely to take into account a slower Q1 for payment, which means that we need to follow closely the evolution of these segments to get a better visibility for the second part of the year. So these are the different elements contributing to what could make us reach our outlook.

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Stephane Houri, Natixis - Analyst [10]

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Okay. Thank you very much.

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Operator [11]

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Josh Levin, Citi.

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Josh Levin, Citigroup - Analyst [12]

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Thank you. Good afternoon. It looks like you changed the timing of when you will announce your multi-year development plan. I think in the last call, you talked about doing it towards the middle of the year. Now you're talking about doing it at the end of the year. So I guess why, or maybe asked differently, what information are you waiting for between now and year-end in being able to update the multi-year plan?

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Philippe Vallee, Gemalto NV - CEO [13]

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There is no specific underlying information that I'm waiting for. Last time, we announced our long-range plan it was toward the end of September, and today we said that it will be towards the end of the year, meaning either it's end of September, mid October, early November, but this is more a planning question than anything else. So there is nothing else to say about it.

Second, we are currently working on the planning and the preparation of the integration of 3M IMB. We still focus on the closing and a priority going forward is we need to have a smooth and efficient integration of the 3M businesses. So this is what I am focusing these days while obviously working with the different teams within Gemalto on the assumptions for the next long-range plan.

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Josh Levin, Citigroup - Analyst [14]

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Okay. And a separate question. Between now and 2020, Japan is going to undergo an EMV upgrade cycle. Without -- to what extent does that materially benefit Gemalto?

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Philippe Vallee, Gemalto NV - CEO [15]

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For Japan, to be very specific, it's not a cycle which is mag stripe to ones that are chip-based cards. This is just let's say a product improvement in the sense that credit cards are already equipped with chips, but we are having let's say more international features so (inaudible) gains visitors coming to Japan will be able to use our Visa or MasterCard products. But today the local schemes and the local debit cards are already on the chip functionality.

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Josh Levin, Citigroup - Analyst [16]

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Thank you.

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Philippe Vallee, Gemalto NV - CEO [17]

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This is not a big impact I should say in terms of the next plan.

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Josh Levin, Citigroup - Analyst [18]

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Thank you.

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Operator [19]

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Sebastien Sztabowicz, Kepler Cheuvreux.

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Sebastien Sztabowicz, Kepler Cheuvreux - Analyst [20]

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Yes, hello. I've got one question regarding the US EMV market because, following Mobile World Congress in Buffalo, now it seems that some of your competitors are expecting some large whizbang to accelerate the move to contactless shortly. Have you seen any pickup or intention of pickup in the contactless card market in the US? That would be my first question.

A second one is on the competitive landscape on on-demand connectivity platform, because, once again, one of your competitors is claiming I think 80% market share in connectivity platform, which looks a little bit too high based on what you already announced in terms of this. I would be interested to have your view on the different players in the connectivity platform in the market right now. Thank you.

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Jacques Tierny, Gemalto NV - EVP, CFO [21]

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Thank you Sebastien. Two elements of answer. First, on the contactless interest in the US, clearly we have interest. And banks are and banks and merchants are interested because it's clearly an improvement on the user experience, but we don't see any massive issuance of contactless card in H1 and a good part of H2. This being said, it's also for us and for me it is a bank question. We all know that, and so we keep pushing hard on this one.

Now, when it comes to the eSIM specification, you have to take into account those references which are based on the Phase II interoperable standard and today Gemalto is working on these references and on these type of contracts. For sure this industry has started much earlier, but all these preliminary implementation are not really compliant with the future. So today what we are referring to are those references and those contracts fully up-to-date with the latest GSMA specification.

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Sebastien Sztabowicz, Kepler Cheuvreux - Analyst [22]

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Okay, thank you.

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Operator [23]

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Achal Sultania, Credit Suisse.

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Achal Sultania, Credit Suisse - Analyst [24]

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Hi, good afternoon. Thanks for my question. So, the first one is on the -- it's a clarification on the government business. So, Philippe, you said we should expect government business to grow low teens in the first half of this year and then basically it should be a midteens growth over time. But I'm just slightly confused, that if it grows only low teens in H1 and then as we go into H2 the year-on-year comps become more difficult because you had a very strong Q4 just now. So, is it fair to assume that the growth will be less than 10% this year in the government business for the full year?

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Philippe Vallee, Gemalto NV - CEO [25]

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No. What I said is effectively historically that growth has been midteens, but remember we had a fairly difficult and changing year in 2014 on that business for some issues we had with the revolution in the North African countries and around in the Middle East. Now what we say is that for the next six months, we see a low teens growth because we are still working on delivering our backlog and we have fairly good visibility over the next six months.

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Achal Sultania, Credit Suisse - Analyst [26]

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And then -- okay. But then basically like second-half comps would be more challenging, right, for government business?

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Philippe Vallee, Gemalto NV - CEO [27]

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At least for the fourth quarter, you are right. Yes.

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Achal Sultania, Credit Suisse - Analyst [28]

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Okay. And one on the Mobile business gross margin. So gross margins were very strong in the second half of this year, so it was 42%, which is like 300, 400 basis points higher than what typically we have seen over the last few half-year results. Can you just help us understand how much of that improvement in H2 was driven by product mix, how much was about cost efficiency or how much was more about improvement within the individual segments? I'm just trying to understand how much is mix-driven and how much is margins improving in individual businesses.

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Philippe Vallee, Gemalto NV - CEO [29]

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We don't disclose the detail of the gross margin element. This is really good discipline within our different geographies. We have improved the way we have -- we are developing and we are producing also this product. We are more and more using also subcontracting plans to get more flexibility with the ups and downs that we are facing in this market. So, overall, it's a good discipline in terms of pricing our customers and manufacturing with the right level of set-up and manufacturing footprint.

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Achal Sultania, Credit Suisse - Analyst [30]

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Let me ask it another way. Like is it fair to assume that gross margins in SIM card in Platforms & Services and M2M are all increasing or if you can --

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Philippe Vallee, Gemalto NV - CEO [31]

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This business is a combination of what we do in SIM and what we do in machine-to-machine and IoT. And basically, you have the competence of our improvement linked to the product mix with services really mixed with other elements, like I said good discipline on manufacturing and cost optimization.

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Achal Sultania, Credit Suisse - Analyst [32]

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Okay. Thank you.

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Operator [33]

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David Mulholland, UBS.

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David Mulholland, UBS - Analyst [34]

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Thanks for taking the question. Just, firstly, on on-demand connectivity, because you are obviously talking and expecting to see a ramp up in deals around this year, I wonder if you can just clarify on the business model because, if I remember from a prior call, you said that we shouldn't be expecting as much upfront revenue with these deals as you had in the TSM deals. Is that still the case, or as these contracts run through this year, can we expect that to be a tailwind to the business in terms of from a revenue perspective in 2017?

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Philippe Vallee, Gemalto NV - CEO [35]

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This business is a combination of hosted managed services, which doesn't bring so much upfront revenues, as you said, but this is also a business where we deliver on-premise configuration with some of our customers. I would say it's a combination of both depending on where you look at consumer or the industrial side of the business. But we are still -- and clearly the (inaudible) or the annual subscription kind of (inaudible) device is something that we are quoting, in particular on the consumer side of this business. So we'd say it's a combination of both. But again, don't expect I mean too much traction, but more effectively a tailwind effect toward the end of the year on that specific portion of the business.

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David Mulholland, UBS - Analyst [36]

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That's great. Thanks. Then just to follow up on the 3M acquisition, whenever you announced it, you obviously had a few ideas of where you could drive synergies on that. And obviously, I'm sure you're a few more months in in terms of planning. But at least on the revenue side, is there any kind of updated view on how much benefit you think you can get from the revenue perspective on 3M?

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Philippe Vallee, Gemalto NV - CEO [37]

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The commercial synergies remain unchanged. We will first internalize this activity, which is, again, a pure-play acquisition, so very, very easy to integrate into our government program activities, so that's -- we can really have biometric expertise integrated as our strategy, which is we are a one-stop shop solution with governments and we will progressively roll out to our other customers the biometric functions. We are very pleased to do e-banking to secure more e-banking or remote connectivity in the Internet of Things. So today we see that as a second step for commercial development for this post-acquisition of Cogent.

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David Mulholland, UBS - Analyst [38]

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Maybe just one final quick one. Obviously there's been a few deals in the US that have struggled to get approval through the CFIUS process. I'm sure that's something you're still working on. But is there anything you've seen today that gives you concern or kind of confident you'll get through all the regulatory processes?

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Philippe Vallee, Gemalto NV - CEO [39]

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No, we are aiming at closing that acquisition in the course of the first semester. We have let's say the -- we have already done this appproval sequence at least four times with the US administration, and we don't see any reasons to be worried.

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David Mulholland, UBS - Analyst [40]

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That's great. Thanks very much.

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Operator [41]

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Kevin Woringer, CM-CIC.

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Kevin Woringer, CM-CIC - Analyst [42]

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Yes, good morning gentlemen. Just a quick follow-up on the Mobile business. Based on what you've said about the GSMA specification and your own connectivity demand platforms, do you expect any acceleration in the platform services business in 2017, or it will take time to accelerate?

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Philippe Vallee, Gemalto NV - CEO [43]

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The Mobile platform and services business is as we speak and short-term-wise is a fairly volatile business because we are in the equipment phase. We are delivering projects, so it's a bit like the situation we have in Government Program. It really depends on the project funnel and as they can mature and as we can close them with our customers. So I don't see any acceleration per se, more kind of volatile evolution of our business short-term linked to that specific space of the market where we are in today.

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Kevin Woringer, CM-CIC - Analyst [44]

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Okay. That's very clear. And just a quick one on the payment side, in Asia, specifically in India. Could you maybe elaborate on the perspective you've seen on that market, maybe if you have seen an acceleration in Q4 based on the demonetization process that is ongoing right now. How do you see maybe 2017 in that specific region?

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Philippe Vallee, Gemalto NV - CEO [45]

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Here we have not seen any major traction from India like we have seen in China, and this is due to the fact that I would say this is my personal interpretation, the Indian market is much more fragmented, decentralized. And therefore, it always takes much fairly longer to deploy contrary to what we have in China where things are much more centralized. So this would explain the main differences between goes-to-market as far as payments are concerned.

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Kevin Woringer, CM-CIC - Analyst [46]

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Okay, which country helps to offset the Chinese performance in Asia?

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Philippe Vallee, Gemalto NV - CEO [47]

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Sorry, I'm not sure I got your question.

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Kevin Woringer, CM-CIC - Analyst [48]

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You are talking about some countries in Asia that helps offsetting the performance in the China market. So --

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Philippe Vallee, Gemalto NV - CEO [49]

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It's several. It's not one specific country. It's several countries across Southeast Asia and the Pacific area so it's not explained by a single country, more across the area.

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Kevin Woringer, CM-CIC - Analyst [50]

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Okay, that's very clear. Thank you.

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Operator [51]

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Andrew Humphrey, Morgan Stanley.

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Andrew Humphrey, Morgan Stanley - Analyst [52]

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Thank you. I wanted to follow up first off on a couple of the mix issues. On payments, you've highlighted slower migration in the US for EMV. I Just want to ask, can you be specific and say does slower migration in the US effectively mean we are looking at a year-on-year decline for payments revenue overall in 2017?

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Philippe Vallee, Gemalto NV - CEO [53]

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What we say is we see contrasted semesters in 2017, which means that a lower first semester and possibly a pickup in the second semester because bear in mind that this is a market which is posing because of the sort of overheat that we faced in the late part of 2016 with some overstock and not enough capacity to satisfy the payment terminals, difficulty to explain the user experience at the point-of-sale. Merchants being reluctant because they don't really understand if the transaction is happening or not. Those kind of kissing issues which make that market quite boiling in 2016, including (inaudible). We think that this will progressively ease in the second semester, but the visibility we have which is Q1 is that we see a slower business still at the same kind of patterns compared to late 2016.

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Andrew Humphrey, Morgan Stanley - Analyst [54]

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So it sounds like it could be after things come back more strongly in the second half or it could be down if they don't but visibility is pretty low at this point.

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Philippe Vallee, Gemalto NV - CEO [55]

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Let's not forget as well that this market is yet to be fully equipped, so we still have credit card and debit cards to switch to chip-based payment card. So I'm convinced there will be a form of pickup in the second part of the year, but our visibility today is limited to Q1 on the specific US payment business.

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Andrew Humphrey, Morgan Stanley - Analyst [56]

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And on government, can you give us a number for what growth in the year would have been excluding the large project completion that you recognized in Q4?

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Philippe Vallee, Gemalto NV - CEO [57]

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Well, it's not obvious to answer that question because a government program, the Gemalto government program is not made of one big project, and then a list of tiny stuff. We will have other major program to be delivered. We announced for example that we won Norway in H2 2016, which is a significant program, again which means that, again, what I'm saying is that we've seen a sort of midteens growth of that business. With that kind of volatility which will happen again, we have significant upsides and downsides quarter-on-quarter, but for the next six months, our view is that it will be a low-teens growth.

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Andrew Humphrey, Morgan Stanley - Analyst [58]

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If I look at the Q4 performance, the revenue delivered in Q4 was extremely strong. I mean it was EUR40 million higher than the next biggest quarter if I look back over the period you've been disclosing that period. So, it's 30% higher than your best quarter to date since you've been disclosing that government business separately. So, it does seem like there was one unusually large contract in Q4, and I'm just trying to get to the impact that would've had.

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Philippe Vallee, Gemalto NV - CEO [59]

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The growth in Q4 is not only due to the cash contract. The growth in Q4 is also driven by the fact that we increased our delivery output program in Poland due to a converted production site which was from Q4 onwards fully up and running to serve our customers, and therefore we had the possibility to catch up our backlog deliveries in Q3 to Q4. So let's take into account let's say an overspill effect between those two quarters.

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Andrew Humphrey, Morgan Stanley - Analyst [60]

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But it sounds like you don't want to split those two effects out separately. Okay. And maybe a more general question finally. You've highlighted you are aiming for more cross-selling over the next year or two. And I'd love it if you could talk a little bit more about the SafeNet business specifically. When you completed that acquisition, a lot of the discussion was around bringing Gemalto's flavor of client-side security to enterprise customers that might have been taking HSMs from SafeNet previously or perhaps some other services. Are those the sort of cross-selling opportunities you're talking about and can you give us an idea of the sort of size of the pipeline there?

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Philippe Vallee, Gemalto NV - CEO [61]

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This was clear on that front. One of the category of players delivering card services are not mobile but telecom operators. Not all of them, but the big names in this industry are not only offering telecom services but also cloud services. And today we are winning deals with those major carriers to help them securing the access to the cloud for their customers. So that's a typical example of cross-selling between our teleco business and our encryption business. And this fight is going nicely because we have the good fortune to have a sales force dedicated to telecom operators, and therefore we can cross-sell what our enterprise and cybersecurity can develop.

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Andrew Humphrey, Morgan Stanley - Analyst [62]

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Okay, so it sounds more like selling SafeNet services into existing Gemalto telco customers rather than penetrating the enterprise more deeply at this stage.

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Philippe Vallee, Gemalto NV - CEO [63]

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So well, this is not penetrating more the enterprise business. It is not a cross-selling opportunity. This is more having our current division integrating the SafeNet offer into more geographies, and a better way to address their businesses. For example, that team is very efficient in Europe on the indirect channel businesses, and we know that we can make some improvement in the US when it comes to indirect channels. So typically here the way to cover, a wider span of clients in the enterprise business is to be very, very efficient on channels to address the small and medium businesses. And that's not really what I call cross-selling because this is really about having a better way to sell, let's say a more efficient way to sell using your system integrators, using distributors in order to catch as many clients as possible in the enterprise business.

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Andrew Humphrey, Morgan Stanley - Analyst [64]

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Okay, that's great. Thank you.

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Operator [65]

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Gianmarco Bonacina, Equita.

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Gianmarco Bonacina, Equita SIM - Analyst [66]

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Good afternoon. So basically trying to put into context what you said about the different sub segments. I see that basically the Payment & Identity and the Mobile segments seems that they will have a similar topline growth for the probably low single-digit. So can you say you should expect the gross margin in the two divisions to perform differently? And given that the topline overall would not be very strong this year, what are the main drivers behind the improvement that you expect even if you said it will not be big, but just to give some more color here.

Then another question on the FX, given the strengthening of the dollar, if the euro/dollar will remain at this level can, we expect that you will have some tailwind during the course of the year?

And then the last one about the financial charges because I see that you had quite a high amount of financial charges, I guess you had some one-offs in there. Can you give us some guidance for 2017 here? Thank you.

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Philippe Vallee, Gemalto NV - CEO [67]

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Can you take the question on Vital?

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Jacques Tierny, Gemalto NV - EVP, CFO [68]

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Yes, sure, I can take it now. First, I will begin, if you will allow me, with a financial charge. The financial charge, you know the IFRS P&L does not include only the cost of financing the assets of a company. It also includes some treaty computations, for instance the swap points. When you hedge over a few years, or even over a year, you have to revalue them, either by the end of the year, so it can be positive, it can be negative. And it accounts for quite a big difference. So, overall, the cost of funding has not changed very much because it is fixed, and we have, as usual, this revaluation of swap points, revaluation of pension, liabilities and so on, which are a long list which we can discuss together if you prefer.

Now, in respect of the dollar, indeed we have hedging which is not very far away because it is up to 2018. And this hedging is at rates which are between $1.21 and $1.25, and so if the dollar goes down suddenly, we won't be impacted, and if it goes up, we will be a little impacted in respect of a plan.

Then you had another question which I believe is for Philippe which is about the gross margin.

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Philippe Vallee, Gemalto NV - CEO [69]

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Yes, sure. I'm not sure I captured really your first question, but let me give you some more colors about the gross margin. First of all, you know you can't expect and you don't have to expect the same improvements that we achieved as of 2016, so we plan for a more modest increase in the gross margin for 2017. It's always I would say the same recipe, being more efficient in our operations, but also have a better contribution of higher gross margin business into the mix. And let's say, on the overall PFO, we plan for OpEx growth, which is definitely not -- definitely not higher than the revenue growth. This is really good discipline into the way we allocate the cash to our OpEx signs.

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Gianmarco Bonacina, Equita SIM - Analyst [70]

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Okay. Just a follow-up on the FX, assuming that the euro/dollar will remain at $1.05, given that you said you have hedges at $1.20, little bit more than $1.20, I guess so you should have quite a significant tailwind going into next year or no? I didn't understand.

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Philippe Vallee, Gemalto NV - CEO [71]

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We will have the same impact on next year not quite because everything was not hedged over next year, but let's say 80% of the impact.

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Gianmarco Bonacina, Equita SIM - Analyst [72]

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Okay, okay. Thank you.

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Operator [73]

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Antonin Baudry, HSBC.

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Antonin Baudry, HSBC - Analyst [74]

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Yes, good afternoon everyone. Thank you very much. Some little questions. First of all, if I am good in my estimates, I see that machine-to-machine slowed down a bit in Q4. Is there a particular explanation on that? This is my first question.

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Philippe Vallee, Gemalto NV - CEO [75]

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No, the growth in Q4 was plus 13%. This is what you can see in the press release.

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Antonin Baudry, HSBC - Analyst [76]

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Okay. Just on the free cash flow generation, what should we expect in 2017 on the year after taking into account the 2018 impact? Should we expect improvements year after year of the free cash flow generation?

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Philippe Vallee, Gemalto NV - CEO [77]

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So it is interesting to go back to 2015, because, in 2015, we had a good cash flow generation, but it didn't look so good. In fact, if we took the impact of the derivatives, we could see that, operationally speaking, the generation was very good. And if you look at 2016, indeed we have a good free cash flow generation, and we deleveraged by more than EUR250 million. And if we made no acquisition, we could expect the same kind of deleveraging over next year and the following years. Of course, we would have to adopt the impact of new acquisitions.

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Antonin Baudry, HSBC - Analyst [78]

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Of course, but in terms of free cash flow, so we can take this level of 2016, onto that perhaps the improvement of the results at the top of that?

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Philippe Vallee, Gemalto NV - CEO [79]

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So definitely we never give specific guidance unless when we present our plans sometimes. But really I feel confident with the cash flow and I see it improving.

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Antonin Baudry, HSBC - Analyst [80]

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Just two quick questions. The tax rate in 2016 has been quite high compared to the usual level. What should we expect in 2017? Is the 2016 impact really a one-off and we will come back to 20% 2017 or will it be above that?

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Philippe Vallee, Gemalto NV - CEO [81]

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Yes. It is like in the P&L of the IFRS financial results. We have to explain it (inaudible). And here what we have is that the 2016 increase mainly reflects the estimated non-cash deferred tax asset reduction, which follows Gemalto profit from operation outlook in 2017. So the deferred tax asset was reevaluating. And if we exclude this nonrecurring impact, we have an effective tax rate for the Company which would be very close to 20%. So, this exceptional charge in 2016 has no impact. This is very important to understand that. It has no impact on the expected normative effective tax rate that we have going forward. And you remember we have mentioned that, over the next four or five years, the tax rate would have to rise to 25% due to the fact that more of our business is in the United States and due to the general evolution of the Company. So we do not change that forecast and without this exceptional element, we would be at around 20%.

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Antonin Baudry, HSBC - Analyst [82]

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Okay. Last quick question, share-based compensation reached EUR9 million in 2016. What should we expect in 2017 or 2018 on this side?

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Jacques Tierny, Gemalto NV - EVP, CFO [83]

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2017 is very simple because you know our restricted share unit plans are aligned on the metrics of the plan. So we are talking of a 2017 plan. Of course each time we do a new plan it is amortized over the period of acquisition of the rights. And so if the Board decides that there will be a new plan, which I don't know about in advance, then that part will be amortized over several years. Otherwise, here we had a normal appraisal based on the outlook of 2017.

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Antonin Baudry, HSBC - Analyst [84]

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What is the normal level we should expect for 2017?

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Jacques Tierny, Gemalto NV - EVP, CFO [85]

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So if you -- 2017, it is too early to say. It will depend on how 2017 develops. But normally, in general, you can look backward how it worked the years before. And this is what I said in my speech. We have of course a big reduction because there was an expectation which was changed over 2017, so the metrics being aligned on the plan, this is mechanical.

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Antonin Baudry, HSBC - Analyst [86]

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Excuse me, Jacques, but should we expect something like EUR10 million per year or will it come back to EUR40 million for 2017?

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Jacques Tierny, Gemalto NV - EVP, CFO [87]

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I am sorry not to be specific and I tell you why. It is very candid. The plan, the next plan, is there a next plan? I don't know. Is it four years, is a two years, if it happens? I don't know. So for me it's impossible.

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Philippe Vallee, Gemalto NV - CEO [88]

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(multiple speakers) guidance to put on this one.

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Antonin Baudry, HSBC - Analyst [89]

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Thank you.

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Operator [90]

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Johannes Schaller, Deutsche Bank.

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Johannes Schaller, Deutsche Bank - Analyst [91]

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Maybe the first one on the upcoming strategic plan. You will clearly show us a lot of new growth drivers and growth initiatives, but I was just wondering if you're also currently, say, reconsidering some of the businesses you are in? So if there is maybe something that you're considering that is up for sale or that you want to close -- obviously without getting too specific, but are you happy with all the businesses that you are in at the moment?

And then the second question would be just on embedded secure elements. If you could give us a little bit of an update just where you stand here, how much business you did in 2016 in smartphones only, embedded secure elements in smartphones. And also going forward in the context of embedded SIM, if you think that this will be a standalone product or if we will see implementations in combination with embedded secure elements in the market. Thanks.

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Philippe Vallee, Gemalto NV - CEO [92]

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Okay. So the question on the plan, I will be asking you to wait when we talk about it, because we see where we're going to explain how we intend to deploy, develop and invest on our different segments, and this is clearly what we are working on today. Now, when it comes to the SIM as well as the embedded secure elements, I hope you have noted that Gemalto is more and more involved with device makers. This is something that we have pushed. And for example we have been able to develop good with Samsung, the Samsung pay service in Europe. We are getting up to work with Samsung on their Gear [Ice] 2. We announced this before the Mobile World Congress a deal with Microsoft and so on.

So meaning that Gemalto today is clearly in action calling at mobile device makers and we -- to offer them a one-stop shop solution, which is the e-SIM, the embedded secure element, the security which goes with that, and the mobile connectivity platform, the On Demand Connectivity platform. Now, we don't disclose any specific numbers on those businesses; these are emerging businesses. We have some nice business wins, and as we progress we will explain and detail more what we will launch with those very important players.

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Johannes Schaller, Deutsche Bank - Analyst [93]

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And on the future of e-SIM implementations, do you see that as a standalone chip mostly in the first e-SIM implementations in smartphones? Or do you actually think we will see combined solutions of embedded secure elements and embedded SIM maybe either on the same chip when this is being rolled out? Thanks.

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Philippe Vallee, Gemalto NV - CEO [94]

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So, two elements of answer here. First, we have been working for the past three, four years on the e-SIM specification. Now that we have won we can work on project, and this is the [final] plan. So today the implementation we're working on are on standalone e-SIM solution. And like always at Gemalto, we contribute to standard, we contribute to specification, and we are engaged in this virtual discussion. But the window of opportunity, I should say, for now and the next 2 to 3 years are clearly on deploying the standard e-SIM solution. You can think about having let's say a device maker changing their minded every quarter about how should be the architecture. So this is what we are doing today is really the current specification, technical implementation of what has been frozen, agreed upon last year with the GSMA.

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Johannes Schaller, Deutsche Bank - Analyst [95]

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Okay, thank you.

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Operator [96]

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Christophe Quarante, Societe Generale.

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Christophe Quarante, Societe Generale - Analyst [97]

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Three quick questions, if I may ask. First one about M2M on IOT trends during 2017. And second question, could you give us your view about the CapEx evolution more particularly in 2017, taking into account what could be the need for the 3M business that you should acquire -- that you should complete in first half? Thanks.

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Philippe Vallee, Gemalto NV - CEO [98]

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Well, as well as machine [commission] trends, we see high single digits going forward. This is the visibility we have today. We still have business wins and design wins with customers. And on this market, line titles are also fairly long. I'm not sure -- I'm sorry, I'm not sure picked exactly your second question. You want to (multiple speakers)

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Jacques Tierny, Gemalto NV - EVP, CFO [99]

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If I may, Philippe, I can address it. Your question about CapEx evolution. It depends on where you are in the plan. You may remember that we, in the last time, said overall we want to keep below 5% of the revenue for CapEx and acquisition of intangibles. And last year in 2015, that was higher. And it was because we had to capture the growth in America due to the payment you remember. The migration began at end of 2014 in the United States of payment (technical difficulty). And we took fairly good market share from scratch. And for that we had to invest, which we did, and now we are of course delivering on this investment. So the CapEx evolution should remain below the 50% together with the acquisition of intangibles next year. And the following year would be the beginning of the plan and we'll be more specific when we announce the plan.

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Christophe Quarante, Societe Generale - Analyst [100]

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Okay. Just to be sure that I understood, does it mean that you will give us more color on the CapEx trend more particularly related to the 3M acquisition, if there is any?

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Jacques Tierny, Gemalto NV - EVP, CFO [101]

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In the last plan we have given colors to stick with 5% and in the next plan we'll see what we do.

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Christophe Quarante, Societe Generale - Analyst [102]

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Okay. Just coming to the first question, if I may, you talked about M2M. Just to give more color on the difference maybe between H1 and H2 as the comparison basis is not exactly the same. About IOT, could you give us a full-year view about the trend in 2017, please?

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Philippe Vallee, Gemalto NV - CEO [103]

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So to be very clear on what I say about the machine to machine trends, so this high single-digit growth was on H1. And just (multiple speakers) this is the H1 (multiple speakers) we have. And beware that we combine machine to machine and Internet of Things (multiple speakers) same segment for us.

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Christophe Quarante, Societe Generale - Analyst [104]

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Okay, then the same kind of trend?

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Philippe Vallee, Gemalto NV - CEO [105]

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Yes.

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Christophe Quarante, Societe Generale - Analyst [106]

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Okay, thanks.

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Operator [107]

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Hannes Leitner, JPMorgan.

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Hannes Leitner, JPMorgan - Analyst [108]

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Just a quick follow-up on the contactless card rollout in the US. How do you see the risk that some issuers might just skip contactless in favor of Apple Pay? Because [you just] mentioned that this year you might not ship that many contactless. And I could see it -- Apple moving further down with the Apple Pay solution, and also Android phones having a [decrypt]. Thank you.

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Philippe Vallee, Gemalto NV - CEO [109]

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Thanks. So there is also [mature] competition of one solution versus the other. You need to look at -- there is different options -- these are the different options to pay. Today things are very [obvious]. People needs time to be trained on using a new mechanism of payment. And we know that the plastic card, the banking card that will always be used and will be still used a lot in the US for, let's say an ease-of-use, I should say. What we think about the contactless is that this is a good evolution in order to improve the user experience. Because tapping a contactless card is almost the equivalent of swiping, previously swiping a plastic mag swipe card. And that's the reason why we think that in the overall volume of cards that will be shipped again and again over the next several years, contactless should be taking a bigger share for this user experience question.

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Hannes Leitner, JPMorgan - Analyst [110]

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Okay. (multiple speakers) does this mean that the ASP will come down in [frontal] interface and then the issuers will adopt it? Because I can really see the high risk that I just skip the contactless. If I have both options, I would go with probably Apple Pay just as a user experience. I have my phone with me all the time.

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Philippe Vallee, Gemalto NV - CEO [111]

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Well, you need to distinguish your own personal wish versus the overall market behavior. And here we are talking about huge markets and very different consumer experience from country to country. If you get Australia, for example, which is a country which is very, very mobile savvy, you can really tell that the contactless cards are today used a lot to pay at merchants. And therefore people are using every systems, either one or the other or both, depending on where they pay, for what they pay and what they want to use. So it's -- for us it still are different elements -- let's say different use cases which will pay better together going forward.

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Hannes Leitner, JPMorgan - Analyst [112]

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Thank you.

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Operator [113]

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Adithya Metuku, Bank of America Merrill Lynch.

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Adithya Metuku, BofA Merrill Lynch - Analyst [114]

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I've got half a dozen questions, if that's okay -- sorry, just kidding. I just have one question, it's to do with services. You saw a very strong increase in services on a sequential basis in both the payments and ID businesses, and mobile businesses, and mobile business. You gave some color and government was a strong driver. You've also talked about on the finishing off one of the projects in Q4. But I was just wondering if you could give us a bit more granularity on the one-off spikes that you saw in Q4? And what we need to keep in mind when we model revenues for Q1 in terms of the sequential growth that we should expect? Thank you.

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Philippe Vallee, Gemalto NV - CEO [115]

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So I guess you are specifically referring to government programs. So here this is a segment where we've seen historically a midteens growth of our business. But again, we have this quarter-to-quarter volatility. And that specific program that we are referring to Q4 is not a one-off per se, because that business is made of many different programs that we are winning over time and we are delivering. And therefore we have a project delivery center. So these creates a kind of volatility. And the second element of Q4 for the one program, like I said earlier, is that we had finally completed the transformation of one of our plants to deliver our full speed and [go on program poll it] to our customers.

And therefore we had a kind of spillover effect between Q3 and Q4 when it comes to public themselves being the ID cards or the passports. So that's the way it is. This is a business where we have a better visibility because when we win a project we did -- we deliver it over several years. And the second is that we know that in that business you still -- we still face underpenetrated markets. It means that a lot of countries still have to change and secure better their documents. So this is a trend in this market and this is the way it goes.

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Adithya Metuku, BofA Merrill Lynch - Analyst [116]

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Sure. My question wasn't just do with government programs. So if you look at payments and ID, the revenues went up nearly a third on a sequential basis. And when you look at mobile, revenues went up nearly a quarter on a sequential basis. So again, when I think about modeling Q1 revenues, are there any one-offs in the Q4 revenues that I should keep in mind that might not come through in Q1?

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Philippe Vallee, Gemalto NV - CEO [117]

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No. Because unfortunately you can't really replicate the same modeling quarter-to-quarter. Because, first of all, our businesses are five segment businesses, are a combination of different trends. And for example we have a very backlog -- back-ended effect on the enterprise business with the closure of the IT budget at the end of the year. So people are spending more typically at the end of the year, which is not the case, for example for government, which is more impacted by our delivery center and so on and so forth. So we used to have, for example for Christmas time and for Black Friday time, some more deliveries on mobile. So that makes our business a combination of different trends of our different market segments we deliver. So you cannot really model Q1 with Q4.

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Adithya Metuku, BofA Merrill Lynch - Analyst [118]

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Okay, thank you.

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Operator [119]

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Neil Steer, Redburn.

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Neil Steer, Redburn Partners - Analyst [120]

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Just a very quick one. Based on your comments about revenues and your 2017 target for profit from operations, it looks as though you're looking at overall margin -- operating margin to be up 120 to 130 basis points, something of that order. Is it -- taking also into consideration your comments about gross margin obviously up this year but not up by quite the same magnitude as it was last year -- should we look at the overall operating margin gain in 2017? Your target is half coming from gross margin improvements, half coming from OpEx; how should we think about that dynamic?

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Philippe Vallee, Gemalto NV - CEO [121]

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Well, I can't say this is [our house]. Again, two elements in the mobile; second, mobile that's increased, but still an increase on gross margin and the good discipline, strong discipline on the OpEx. So this is where we think -- and plus, we will let's say growth on our businesses contributing going into the mix with higher gross margin. So all of that means that we should be aiming at our current outlook, taking into account that we have this slower Q1 for payment. And that's an area where we need to continue to follow closely on the evolution on these segments.

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Neil Steer, Redburn Partners - Analyst [122]

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Okay, thank you.

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Operator [123]

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Alexandre Faure, Exane BNP.

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Alexandre Faure, Exane BNP Paribas - Analyst [124]

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I've got two. One is on the enterprise, where you had a strong year and you end up growing 10%-ish. But yet you guided us, I think, for more like high single-digit growth at the start of 2016. So what actually drove the outperformance in 2016? And would you expect the same sort of factors impacting 2017? Maybe because it's a slightly newer business for you, maybe you don't have the same visibility or the same understanding as with the rest of your businesses, and how that's reflected in the guidance. And my second question would be on the subscription management platform. So you mentioned that you are seeing two business model: one hosted mode, one on premise. Do you see maybe some customers M&Os going mostly on premise whereas the IOT player would be going essentially hosted? Is there a pattern there already or it's too early to say?

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Philippe Vallee, Gemalto NV - CEO [125]

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So [of course here] on the second question, no, there is no such patterns. I would say even given the telecom industry you can see both patterns. This is depending on the size and the capability of the (inaudible) to do it and to run it in-house. Now, as far as the enterprise business is concerned, we had in 2016 a very nice development in software monetization, but we don't foresee again for 2017. But for the rest, again, the two elements. A key, important element to take into account; the [tie-in] encryption, which is going very well. It gives more and more need to protect let's say the better of any given enterprise with better encryption solutions. And also an appetite for authentication. But here a segment which is moving towards software. So means less hardware-based tuck-ins and more software client into the mobile phone. So overall, if you compute let's say this three components, we are aiming at the mid-single-digit for the first semester. This is the visibility we have today.

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Alexandre Faure, Exane BNP Paribas - Analyst [126]

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And maybe just a quick follow-up on that on the gross margins side of things. Would you expect gross margin to expand slightly more in (technical difficulty) TTV's share compared to what it could achieve in mobile? Because I think mobile you've done a lot of work already and a very good progression there in 2016. And based on the mix you just discussed on enterprise, it sounds like maybe there's a more supportive mix going forward in payment and identity?

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Jacques Tierny, Gemalto NV - EVP, CFO [127]

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Well, I don't want to give any precise guidance here, but I mean the difference mechanism, which are at work -- our [selling them]. The first one is that our business and enterprise is going towards more software, and therefore leading to a gross margin. We have let's say another element that we -- but this will replay in the second part of the year. The fact that we are internalizing a [biometry integral] program. And therefore let's say let's be the first to improve the gross margin there. And we need to keep -- we need to be the vigilant on the expenses and the way we administer through our banking card, and there's probably here still some way to improve. So overall we are, thanks to that and thanks to the different element of actions here and there, we should modestly improve our gross margin in 2017.

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Alexandre Faure, Exane BNP Paribas - Analyst [128]

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Okay, got it. Thank you very much, Philippe.

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Operator [129]

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We have no further questions. So gentlemen, back to you for the conclusion.

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Philippe Vallee, Gemalto NV - CEO [130]

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So thank you, Pauline, and thank you all your time today. So our next call is set for April 28, 2017, when we publish our first-quarter revenue figures. So thank you for your interest in Gemalto, and have a nice day and a nice weakened. Bye-bye.

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Operator [131]

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Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.