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Sequans Communications SA ADR (NYSE:SQNS)

Q4 2012 Earnings Call

February 07, 2013 08:00 AM ET

Executives

George Karam - President and CEO

Deborah Choate - CFO

Analysts

Daniel K. Marquardt - Baird

Quinn Bolton - Needham and Company

Jay Srivatsa - Chardan Capital Markets

Operator

Ladies and gentlemen welcome to Sequans’ Fourth Quarter and Full Year 2012 Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

Before I turn the conference over to our host, Mr. George Karam, I would like to remind you of the following important information on behalf of Sequans. This call may contain projections or other forward-looking statements regarding future events or our future financial performance. All statements other than present and historical facts and conditions discussed in this call, including any statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for our future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given the risks and uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made within the Securities and Exchange Commission. Please go ahead sir.

George Karam

Good morning ladies and gentlemen. This is George speaking. I’m with Deborah Choate, our CFO and we are pleased to welcome you to our fourth quarter 2012 results conference call. Let me start by highlighting the fact that we achieved the sequential increase in LTE revenue during Q4, although the holiday interfered with our ability to finalize one agreement, causing us to revise our guidance. Still during the quarter we made significant progress that’s not apparent from the financial results. We will start by recapping our publicly announced milestone.

As you know we had the Verizon Certification, we also announced a successful testing with SoftBank of our interference rejection technology, and another milestone, very important one, we win a major share in the First China Mobile bid for the expanded field trials and last but not least we introduced a new value family of products optimized for connected devices.

In addition, we added new customers during Q4 and expanded the number of projects with existing customers. As a result our confidence in our LTE position is growing with each of these milestones and recent developments increased our conviction that our LTE revenue will ramp in the second half of the year.

We want to share some of the specific reason for our optimism with you. So I will do this as usual in the context of an update of each of our four market segments driving our go-to-market strategy. I'll start with the first segment which is we name it emerging market broadband wireless access or also you can find Greenfield Carrier there. We are quite advanced in the emerging market and BWA segment.

As you know, India here is one of our main focus. In India we've been participating in testing and trials for several quarters, working with a half a dozen device customers, Taiwanese, Korean and local Indian customers. The main objective there is to address Reliance obviously, which has the most aggressive roll out with its nationwide license. Reliance intends to launch service in Mumbai and Delhi midyear with a plan to reach full coverage in those area by September, but we are also engaged with other testing projects with the other two LTE carries namely Bharti and Tikona.

The important takeaway here are three, first we have already been selected by several device manufacturers targeting the market in India with multiple data devices. Second our product and more specifically our customers' products are ready and used in the trial and they are performing extremely well.

So what remains here is to be determined is the exact volume and timing of shipment based on the outcome of our customers' negotiation with the operators particularly Reliance. Based on these facts we continue to see revenue related to India picking up in the second half.

Outside of India, as you know, we have some initial deployment that started last year in Australia and Brazil. Those should continue to grow this year. Also a number of emerging market operator are testing our dual mode WiMAX LTE data devices, primarily they are Customer Premise Equipment coming from two Sequans customers. Our technology is helping them to leverage their existing deployed WiMAX asset and a smooth transition to LTE.

We are the partner of choice for them as we are the unique vendor who is able to support bus (ph) 4G technologies. The test results are very positive and we should start seeing orders to serve this market to produce revenue for us during the second half as well this year.

Before we leave the emerging market category, I would like to give you a word about the outlook of the pure WiMAX business in 2013. We do not see WiMAX revenue declining to zero. I’m absolutely sure that we will continue to see WiMAX networks live even in 2014 and 2015.

Based on the existing installed base we expect to continue to see an average of $1 million to $2 million dollar in WiMAX revenue per quarter, although it will likely continue to be lumpy from one quarter to the next. Note that we are not counting here on further HTC revenue related to WiMAX in developed markets. In fact, there are many WiMAX operators in emerging market countries who are not in hurry to transition to LTE because of the infrastructure investment required.

Also as we know, several formal capacitors have made end-of-life announcements for their WiMAX chips, while we have maintained our commitment via a roadmap that includes our dual mode WiMAX LTE device. This provides customers and operators with the confidence that they can rely on us, which in turn may provide us with potential upside from greater share of the available WiMAX business from emerging markets.

So this is on the emerging market. The second market to talk about is as you know China. This is a major area of focus to us and where we made a longstanding commitment, working with China Mobile on LTE since 2009. In Q3 we were among a small group of companies that received MIIT certification and during Q4 we landed a significant portion of China Mobiles first bit for 50,000 devices to expand the trial with our customers Nationz and Primemobi.

During the coming months, we expect to see new business from China Mobile to serve the expansion of their trial. We are working to repeat our success in future bids and this would result in revenue during the second half of the year as well. The official free-cell (ph) location is currently expected midyear and this paves the way for full scale deployment to begin toward the end of the year or early 2014. Note that the other Chinese operators are expected to receive frequency band for LTE as well. And this will expand the opportunity in China over the long term.

On the third segment which is the CDMA operator, here obviously mainly we count on Verizon, Sprint in the U.S. and KDDI in Japan. Our relationship with Verizon is important for the simple reason that the Verizon has been the most aggressive operator to deploy 4G. Verizon LTE coverage is expected to reach parity with 3G by mid-year. In addition, they have implemented shared data plans that have proven to be popular with subscribers.

These two factors are enabling single mode LTE for traditional mobile data devices as well as for a variety of consumer electronic device applications such as cameras and mobile gaming consoles, as well as devices for a variety of vertical markets. This validates our strategy of focusing on delivering the best 4G technology in order to position the company to lead as the market shifts in our direction.

I want to stress here that single mode LTE devices will be a reality sooner than expected with carriers like Verizon aggressive in LTE deployment. Verizon has certified our premium high-performance chip, which is part of the Streamrich family. This is significant because it gives our current and prospective customers confidence that our chip will meet all the stringent requirements of Verizon and that their own device certification will go smoothly. Some of you who attended CES recently may have noticed our display in the Verizon booth which showcased both our product families.

During Q4, we also introduced the first product in a new value family of solution called Streamlight. This new family is called Value because the chips are for consumer electronic devices such as camera and mobile gaming platforms, as well as connected devices for end-to-end application such as digital signature and in vehicle application which don’t have the same requirement as traditional mobiles phones and tablet. With this new family, we are leading the market to enable the so-called interwrap of things.

To conclude on Verizon, although we haven’t been able to identify them publically, we are closely working with several customers to address various device opportunity for Verizon and we believe will begin to see revenue in the second half of the year.

Few words on our progress with other CDMA carriers. We continue to work closely with Sprint and Clearwire where we are engaged in testing and trial with the devices supportive handover between TDD, LTE, and FDD-LTE, and we see very good traction with KDDI and UQC in Japan. As you know UQC is backed by KDDI, has a WiMAX network that will be maintained and used in conjunction with the KDDI LTE network. This creates a promising opportunity for us to leverage our dual mode WiMAX LTE chip and generate revenue late 2013.

The last segment we are working on is the UMTS operators. Generally speaking, the UMTS operator segment is least likely to produce near term revenue because they are moving more slowly with their LTE coverage and therefore are almost interested in multimode devices with integrated 2G, 3G, 4G chips for smartphone. However, there are few exceptions. As you remember we recently announced the successful demonstration of our advanced interference reduction technology with SoftBank in Japan.

This technology is particularly valuable in dense urban networks, such as those in Tokyo. We are making very good progress with SoftBank and our customers are providing devices to them for testing. This can generate revenue for us in 2013 as well. In addition, we are beginning to see interest in single mode LTE devices from various operator in the U.S. and Europe developing a bit sooner than expected. These would be for LTE based CPE for fixed wireless broadband service.

Carriers use them. We used them outside the whole network where they don’t own their copper or to address rural areas. We’re engaging with several of these Tier 1 operators and we are in the process of developing customer relationship and channels to address those opportunities.

So this concludes my detailed description of our progress and each of those four segments, but let me make a summary here from a little different perspective. We see a strong basis for assuming our LTE revenue will ramp during the second half of the year based on several maturing opportunities.

Data devices from Reliance in India, dual mode more solution for emerging markets, expanding field trials with China Mobile, single mode and dual mode opportunities in Japan, various types of single mode devices for Verizon and perhaps some European carrier.

In addition we expect a base level of ongoing WiMAX business where we may benefit from fewer competitors in 2013, than we have faced in the past. From this update you can see that we are not simply hoping that LTE revenue will continue to increase. We are working closely with both existing and new customers who have selected our chip to power a variety of different devices aimed at specific carrier opportunities that are expected to continue in tests and trials during the first half, followed by a ramp in revenue during the second half.

Now I'll turn the call to Deborah to discuss the details of the financial and our guidance for Q1. Deborah.

Deborah Choate

Hello everyone. I'd like to add some details about our fourth quarter financial results and the outlook. Revenues in the fourth quarter were $3.1 million for the quarter. This was a sequential decrease of 61% quarter-on-quarter and a 73% decrease compared to the fourth quarter of 2011. We shipped nearly 300,000 units compared to about 700,000 units in the third quarter.

Our two largest customers continue to be HTC and Huawei. Revenues from HTC represented 18% for the quarter and 30% for the year, compared to a 78% last year. Revenues from Huawei represented 16% for the quarter and 17% for the year, compared with 9% last year and we had two other customers above 10% in the quarter, both were around 15% but will be less than 10% for the year. We realized an overall IFRS gross margin of 9.4%. This is below the 48% we reported in Q3, as well as the 52% gross margin in Q4 of 2011.

This is primarily due to a provision for excess WiMAX inventory of $854,000, as well as the impact of fixed costs on a lower revenue base. Excluding the inventory provision, gross margin would have been at 36.6%. Gross margin was 1.8% in the fourth quarter, compared to 44.9% in the third quarter and 50.4% in the fourth quarter of last year. The decrease in gross margin reflected continued low absorption fixed cost and in the fourth quarter of 2012 the inventory provision.

This inventory provision was primarily related to an excess of the number of units of memory over the number of equivalent dies for our WiMAX SQN 1210 and 1220 products. We are still confident that we will sell the remaining stock of equivalent finished goods. Lastly I would note that we have not seen any significant pressure on ASPs.

Operating expenses were $10.1 million in Q4, compared to $9.8 million in Q3 and $11 million a year ago. Our fourth quarter operating expenses included a provision for doubtful accounts receivable of $450,000 and additional certification costs in R&D of approximately $400,000. Operating loss in the fourth quarter, which includes stock-based compensation expense was $9.8 million, compared to an operating loss of $6 million in the third quarter and an operating loss of $5 million dollars in the fourth quarter of 2011.

To facilitate comparisons we have also reported our results on an non-IFRS basis which excludes stock-based compensation expense from operating profit or loss. Non-IFRS operating loss was $9.6 million in the fourth quarter of 2012, compared to operating losses of $5.2 million in the third quarter and $3.7 million in the fourth quarter of 2011.

Basic and diluted loss per share was $0.29 in the fourth quarter, compared to basic and diluted loss per share of $0.17 in the third quarter and $0.16 in the fourth quarter of 2011. Non-IFRS diluted loss per share was $0.28 in the fourth quarter, compared to a diluted loss of $0.15 in the third quarter and $0.12 in the fourth quarter of 2011.

Cash used by operations in the fourth quarter was $6.8 million, compared to $3.3 million in the third quarter primarily due to the timing of invoicing of revenues in the two quarters. We also used $900,000 for CapEx investments in the fourth quarter. Our cash position at December 31, 2012 was $28.8 million, compared to $36.4 million at the end of Q3.

Accounts receivable at December 31, 2012 increased to $5.5 million from $4.8 million at September 30th, and reflected DSOs of approximately 120 days, compared to 62 days at the end of Q3. The significant increase in DSO reflected a concentration of revenues at the end of the quarter. Inventory decreased slightly in the quarter to $7.4 million at the end of December from $8.4 million at the end of September.

Now looking forward we expect revenues for the first quarter 2013 to be in the range of $2.5 million to $3.5 million, with non-IFRS gross margin around 48%. We expect non-IFRS net loss per diluted share to range between $0.23 and $0.25 for the first quarter of 2013 and that’s based on approximately 34.7 million weighted average diluted shares.

Our guidance for non-IFRS net loss per share excludes stock-based compensation expense, which we expect to be higher than in Q4 due to a large grant of stock options in December 2012. We expect stock-based compensation expense in the first quarter 2013 to be around $600,000.

We continue to expect the ramp up in our LTE revenues to accelerate mainly during the second half of 2013. We are encouraged by our progress in adding new customers and as LTE revenues accelerate, we expect less customer concentration. We will continue to keep our expenses under tight control while signing critical development projects and we believe we have adequate financial resources to reach cash flow breakeven.

Having said that there are clear benefits to strengthening balance sheet, particularly so that there is no issue to finance additional working capital needs associated with the ramp up in volumes. So in addition to the obvious possibilities such as a strategic investment or tapping of public markets we have been looking into other opportunities. For example we have been exploring the idea of monetizing a small portion of IP to a French State sponsored fund dedicated to patent promotion and monetization in Europe. We know you are interested and are thinking on this, so at this point we will just note that we have been evaluating an array of potential options, either discretely or in combination, as well as the best timing.

And now I’ll turn the call back to George.

George Karam

Let me just conclude with a few words here and stress again that there is the disconnect between short term revenue and degree of future opportunities somehow normal. Keep in mind that the company is in a transition phase and ramping revenue in a new market; and this in general is a long process. As you know you have to design the chip, you need to win customers, you need to have your customers designing product with your chip, get those product in trial and testing with carriers, and have those carrier launching and expanding their networks, then you start seeing orders to sell chips and generate revenue.

Obviously it looks a little bit scary when I go over this list but you need to keep in mind that we are not anymore in the beginning of the process and we are very close to the end. In the past we have achieved much higher revenue with a fewer customers and a smaller market. I am referring to the WiMAX. I know very well how this happened. Now we have much more customers and a much bigger market.

Positioning the company to win in LTE has been our goal for several years since 2009, and we made enormous progress during 2012, even though it is not yet apparent in the financials. What is important to keep in mind are two points. Our addressable market with single mode LTE is a real opportunity and has a big potential and the second point that the effort made by our team developing products, wining customers and engaging with carrier has positioned the company to win. As such, this will translate sooner or later in my opinion to revenue and this will have much bigger growth potential than what we have seen in the past with our WiMAX business.

Many thanks for listening. We’ll turn the call now to operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll go to Tristan Gerra with Baird, please go ahead.

Daniel Marquardt - Baird

This is Daniel Marquardt on Tristan’s behalf. We are entering 2013 and you went through your four markets. I was hoping that you might be able to give us an idea of how you guys are thinking about the size of these markets in the second half or 2013 in total and kind of potentially the share range that you guys either hope or expect to win in those markets.

George Karam

Okay. So I believe, going on the two questions you are raising here regarding the size, I mean the challenge, first of all what I want really to stress and this is not obvious, I understand, when you talk, when you position to company Sequans and obviously we are playing in single mode LTE and while the people in the beginning of the LTE deployment, majority of the carrier, they didn’t re-shift the loss coverage at least for the big carrier well established in the market and the other guys who are more in a Greenfield and emerging who are deploying and coming with a new network, still they are in the early phase of their deployment.

And from this position, we face difficulties somehow not to participate in the big chunk of the market at the beginning because the first piece of the market will be requesting 2G, 3G, 4G because of the coverage is not there and obviously the guys will be asking multi-mode to get the full coverage.

So, I what I want to express here that if you take into account those new potential, whether the emerging market as well the people like Verizon who are getting the full coverage of LTE, for single mode LTE opportunity, we strongly believe that this should be maybe 25% to 30% of the total addressable market of LTE. So this a really, we’re talking about more than 300 million unit over three - four years down the road. So the potential is big and no doubt that if Sequans is able to play there even with the descent market share in this not really huge one, Sequans can go to big number in terms of revenue over the coming years.

The challenge they have from question is that how big is this in 2013 and as I am explaining, in this emerging market where things are, it’s the slope of the curve and slope of the curve is little bit hard to predict because if you shift one quarter or so you can have different perspective.

However, still we see today, for example if you take China I believe that China with just only their expected expanded trials for many to test, to test their networks now for the coming year, this could an addressable market that can be as close to 1 million unit in 2013.

If you take the emerging market like India and so you can see there as well few million units that they can come in this year as well and obviously the other one which is much more complicated when you take about Verizon single mode opportunity, this could be huge because this is really about new devices to come with single mode and when this will come to market, definitely this will be big addressable market to get there.

So, I feel very comfortable about the size of the market. I agree that it could be challenged to say how big it’s in 2013 because you have some pieces ramping up in 2013 and if you miss one quarter your number will be wrong there; however, we feel as I said quite comfortable to start generating revenue in the second half of 2013 and then move forward for the next step next year for full market establishment.

And now our market share now they are very comfortable with the emerging market, with the presence in China, in all those market where we have really unique differentiation and presence already and I’m very pleased with the progress we are building with the Verizon and other opportunity for single mode because we are unique in single mode. If you look to the competitors, all the competitors are addressing the multimode and obviously they are looking for the biggest part of the market, which is you know to handset multimode Smartphone and I agree if I am them I will do the same thing.

The only thing note there this is not the whole market and you still have 25% - 30% remaining of the market that can go single mode, which is going single mode because you need to have low cost device, you need to have low cost IPR and more important, the cost of the service a carrier deploying, sending one gigabyte per month on a 3G network versus on 4G, you could have significant saving of the cost of the service if you run your data on the 4G network, all this is driving obviously adoption of future devices to be connected only with single mode.

Obviously I'm not talking about high end smartphone but I'm talking more about nomadic devices such as dongle and so on plus consumer devices and tablet instead of having WiFi you can have WiFi and 4G, and for this we have no reason not to have decent market share there because we are quite unique with very advanced chip in terms of die size and power consumption cost.

Daniel Marquardt - Baird

All right, that's great, and as far as the China and India markets this year, do you have any reason to believe that you could have potentially greater than 10% market share in those markets or is this going to be, something that's going to be a little lower than 10%.

George Karam

If I take India, I have no reason to think why I will not have much more than 10%, because I don’t see. I have currently, many I believe, I don't know if we give the number but we have more than six vendors there with our products and I can tell you we have the best product in testing. We are beating everybody; people like to ship a lot, the devices and delivered by our customers.

So in India I have no reason to believe that we have anything special as a challenge. You can argue obviously about China, because China is much more competitive, much larger a market and you'll have many people attacking there but so far if I look for the first bid we've been there, Sequans came almost with the same level as the two major guy, one Chinese guy and one non-Chinese guy that you know from the big competitor and Sequans has come almost equivalent in market share, for two reasons, simply, I will say engagement and a product maturity but there's also another reason, which is finding the right partner in China to play with, where themselves they can win as well market share with China Mobile, they are very close to China Mobile and so on.

So, it could be challenging over time. In the short time I believe we should be able to do more than 10%, maybe down over the coming two-three years, maybe we'll do less but the market will be much bigger. So even 10% in China will be a huge market for Sequans.

Operator

Next question is from Quinn Bolton with Needham and Company. Please go ahead.

Quinn Bolton - Needham and Company

Just wanted to follow up on the last question. Obviously I guess we're all trying to sort of figure out, not only what the rate of the ramp is for revenue in the second half of 2013 and in into 2014 there also sort of - what the cash burn implied is. Obviously any delays in the ramp probably increased cash burn in the near term. So I guess if there is anything you can do to help us frame how you are looking at the revenue ramp in the second half of the year, I guess just to put some real rough numbers around it, so if you’re doing 0.5 million units at $20, that gets you to $10 million. Is that the kind of ballpark you are thinking about in the second half of ’13? Could it be better? Is that too optimistic and how do you see, are we sort of at the peak level of cash burn. I assume we are given the revenue level, but how do you see the cash burn over the next couple of quarters?

George Karam

Well, one which is obviously giving you the number where we see a bit and so on and obviously we are very cautious in our prediction, because as I said, any shift in any deployment, we know for example Reliance was a little bit disappointing in terms of timing. Originally there were, but today for example that’s very official. The launch is happening in July two major cities and so on, and so we see them really moving in Q3. So depending on those network in the emerging market, I don’t believe they have any reason now to delay anymore but this should happen, and obviously all this will add up and take us to, we are not predicting really to reach breakeven points in Q3.

I believe we are - our target if you want is to as close as possible to this at the end of the year, which is, if you do the math, the number you are talking about, maybe this is on the low end, I will say what will be there. And obviously if you make all this and you say okay there is cash burn and this is an important remark and it does that we ignore it on our side.

But I would like to stress two things there. What’s first of all important to for us to know that our spending, we made some optimization of our OpEx last year and we maintained descent level of spending, not really to support existing product that you are selling. It’s much more to come with a new product, new devices. We announced a new product, a new family which is the Streamlight and if look at all the competition and from what I’m hearing many people are very, very impressed with this move from Sequans on this angle. I am referring to big competitor, which is seeing really an interest in the market and coming with the new product optimized and so on. So the company continue investing whether on the Streamrich portfolio or on the Streamlight, the family that you created to come there, and this is where we were putting lot of money obviously.

So we have flexibility on this, if you want, very honestly if really we are challenged in cash, we can play with this by delaying one of those program which are more for the future and not for the short term. But this is not my preferred way. So far I want to maintain my commitment for this and keep the company in the best position, I would say, to win market share.

On the other side obviously as Deborah mentioned, we are looking for all our options because sooner, we can say okay, balance sheet need to be restructured somehow. We are not really in a rush saying okay we are out of cash next month, so. We are not there; we don’t have the back on the wall. We have many options, we’re exploring them and we will do what makes sense for the company to restructure the balance sheet to be in good shape at the end of this year. So we will attack next year with good revenue level and good balance sheet as well.

Quinn Bolton - Needham and Company

Okay I appreciate the additional color there, George. Just wanted to come back to the breakeven. It looks like the, at least on a non-IFRS basis. OpEx is around that $10 million per quarter level. Is that a good level to think about as recommended in 2013 and I guess, if that’s the right level and assuming an approximate gross margin of 50%; it seems like your revenue breakeven would be right around $20 million. Is that the right level to be thinking about to go for revenue breakeven for the company?

George Karam

Yes, I believe, this is what I will call the stronger numbers are coming here, Quinn. Obviously in the early phase we could do a little bit better in gross margin. We could have some services and something with this number; but from spending, you are right, we around the $10 million. So you saw a little bit in the recent quarter. This is where we will be fluctuating over to 2013. And this is for a fully loaded, I will say program in 2013. In other words, we are not making, we will be coming with a new product to be announced this year and this is supported in this spending. And obviously when you make the math with the gross margin, you will come to numbers at breakeven.

Quinn Bolton - Needham and Company

And you did, I hate to keep harping on potential negatives, but if the revenue ramp slips because carriers continue to see delays in the launch of their networks, and you look at some of the spending on the longer term product development that you might be able to postpone, is there any range of spending, is that $1 million or $2 million per quarter that you might be able to postpone, to the extent that the ramp does, for reasons outside of your control get delayed again by the carriers?

George Karam

Yes, absolutely. I mean this is an order of magnitude which will be not major restructuring, I tend to say.

Quinn Bolton - Needham and Company

Okay, and then just for, I guess, Deborah, any sense can you give us on the split between WiMAX and LTE in the December quarter. It sounds like it might have been fairly close to 50/50 but I wasn’t sure, if you could provide more color.

Deborah Choate

Yes, WiMAX was still a little bit more than half. We have expected LTE to be more than half and if we had signed the last deal and we had been working on it, it would have been more than half.

Quinn Bolton - Needham and Company

And the revenue for Q1, it sounds like again something around a 50/50 split, is probably the right ballpark since, you said that WiMAX is probably likely to continue at a rough range of $1 million to $2 million a quarter?

Deborah Choate

Yes.

Operator

Next question is from Jay Srivatsa with Chardan Capital Markets. Please go ahead.

Jay Srivatsa - Chardan Capital Markets

I just wanted to know about entering these new markets and your competition that you have, how strong is that competition and do you think that you would be offering your competitive edge with your new services?

George Karam

In terms of competition, I mean this is your question on entering. First of all we are not entering in new markets. We have worked on those markets as I said, whether China, emerging market, we are there in the CDMA carrier since the beginning. We have some big move happening on the CDMA carrier to say with the Verizon and some even good move with the China, where we have the bid. So the competition again in terms of, I mean people I believe I am hearing that may be all those big guys playing on the multi-mode chip, that would be coming this year, somehow end of this year some of them the following year.

So we are still didn’t see major change since the last quarter in terms of competitive landscape. Obviously we still have the big San Diego company leading in the multi-mode devices and Sequans, again our play there is not really to compete with those big guys because those guys are all addressing what I will call it the multi-mode 2G, 3G, 4G high-end smartphone, which is absolutely big market and it makes sense to make a big fight for it.

But Sequans, our choice was from the beginning to say okay we are going to lead with 4G because we have a super 4G architecture, much better optimized than the big guys and it will be always much better optimized we don’t have the legacy to deal with and this enabled us to give us very low cost which will be very sensitive for emerging market, for China so on.

This give us as well very high performance and the same time and the small footprint to address the single mode opportunity in a market like Verizon where you need to connect consumer devices and so on and in this case only is the space, power consumption, and performance as well cost are important and if you have the 4G only you can do it. So this is what I can comment on it.

Jay Srivatsa - Chardan Capital Markets

And can elaborate on the implementation of your new segment?

George Karam

I believe your referring to the segment which we’re addressing with Streamlight, right?

Jay Srivatsa - Chardan Capital Markets

Yes.

George Karam

I mean, this Streamlight again the point is what, if you look the vision, we have, the company and I believe that the world is moving, it’s not moving from 3G to 4G. The world moving from circuit switched network to an IP wireless network. It’s a completely different story. It’s not only about throughput. People only think 3G, 4G is more speed and everybody is happy about this, which is normal and its absolutely more speed, but more important we’re going to an IP network where even the carrier will have much lower cost to provide the same service and they will have the ability to provide integrated services on the LTE, not only to give data but as well to provide multi with rich communication suite with as well video service such as eMBMS that runs on LTE. So from this angle the carrier will have more and more to offer single mode LTE. On top of this the device will be cheaper and easier to build.

So this is the vision there and obviously when you go there you can expect that all the device, if you’re able to bring the cost down of the LTE only solution to something very close to the cost of the WiFi, why will you have a tablet with only WiFi inside, why not having WiFi and LTE? You may have, obviously you can see the high and smartphone will have all these 2G and 3G because they need to have phones, they need to have roaming and so on, but today the biggest chunk of the tablet in the world, they have WiFi and the game devices they have even nothing, the camera, they have nothing. So if you’re able to bring down the cost equation to have an LTE solution that fits with the cost equation to address this market and if the carrier, they have the coverage for LTE then it’s absolutely a way to go on, and this is where the world will be moving.

And this is not something a vision that we have on our side. We share this with, it’s like a joint vision, I will say with many aggressive carriers. We are discussing with them in terms of deployment. And they see this is the way how the world is moving.

So definitely it’s a challenge somehow for Sequans’ in the short term because we don’t have 2G, 3G, 4G, and that people this is what they are buying today, because the market of single mode LTE is not there. But if Sequans is moving with the 4G technology to get the best 4G technology, we will be ready for this market and we will lead there with the architecture we have.

Jay Srivatsa - Chardan Capital Markets

Okay, just a follow-up. In terms of customer retention, do you think you would be able to retain your current geographic footprint while expanding with these new services?

George Karam

Obviously we could ask much more, if you look to the market in LTE, it’s is huge. That’s why, by the way we are really selecting. In geography, in a sense, Sequans is a globally company and all our life we played everywhere in Asia, U.S., Europe. So we are always present. This is not really challenge. This is I believe, it’s more a style of, a culture somehow as a global company. But more important, which is, you are right is how many customers, how many big customer we are able to address. And the size of Sequans today, we cannot address the same way that big company can do. That’s why by the way we are selecting our battles in terms of market segment, in terms of even carrier by carrier.

We are, for example, focusing in the U.S. on Verizon. This is where we are putting our focus because we believe there is a matching there and we can win there, and obviously selecting few other carriers upon and from there we can expand obviously, if we are successful and also we elaborate a lot, the partnership when this make sense. For example, the presence in China, we had a strong presence in China. But this is not enough. That’s why we have the partnership with Nationz and Primemobi, where those guys help us complementing our resources to provide all what’s needed to get the testing, the bid acceptance, and all this with China Mobile while Sequans is limiting the effort somehow to avoid burning much more energy on this account.

Operator

Thank you, we have no further questions.

George Karam

Thanks very much for all of your questions and for the listening and hope to see you soon, face-to-face. Thank you guys.

Operator

Thank you ladies and gentlemen, this conference is available for replay after 9 a.m. today through midnight of March 7, 2013. You may access the replay system anytime by dialing 1-800-475-6701 and entering the access code 276747. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 and enter the access code 276747. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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Source: Sequans Communications SA ADR CEO discusses Q4 2012 Results - Earnings Call Transcript

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