Sequans Communications (NYSE:SQNS), a 4G chip maker, is announcing 2011 Q2 results at the end of July. With its announcements and the end of the IPO quiet period, I have closely considered the previous quarter press release and 2011 Q1 results. The facts are astonishing. The press release can be found here. The SEC filings and press release suggest SQNS suffers from one material weakness; dependency on cellular device maker HTC (OTC:HTCXF) for its revenues. According to the press release, SQNS derives 78% of revenues from HTC. SQNS does acknowledge this weakness in the discussion and says, it is "in the process of deriving other revenue streams.” That attempt at diversification is clear in that it has been becoming less dependent on HTC on a quarter-to-quarter basis since 2010 Q2. Currently SQNS chips power all HTC WiMax enabled devices.
SQNS has been experimenting outside WiMax technology as well. Currently 80% of R&D expenses are focusing in on an LTE chip as well as a dual mode WiMax & LTE chip. I believe if the dual mode chip is brought to market it will be an enormous success globally. Sprint (NYSE:S) is currently using WiMax technology but has openly stated it will eventually be switching to an LTE technology. Sprint already carries a multitude of HTC products. This transition will put consumers in a difficult place; previous consumers using 4G WiMax will not be 4G compatible when the LTE structure comes into effect. This puts SQNS in the perfect position to provide HTC with the technology that Sprint will likely be pushing to release. SQNS is also involved in all LTE trials in markets from the U.S. to India to China.
SQNS has been experiencing excellent growth over the last year with 2010 Q1 total revenue of $10.18M compared with 2011 Q1 total revenue of $25.39M. During 2010 Q1, 500K units were shipped compared with 2011 Q1 when 2.1M units were shipped. The average quarter-over-quarter revenue growth rate is 16.59%, which leads me to believe 2011 Q2 revenue will be around the $28.96M area. SQNS cost of revenue ranges between 41% and 52% over the last 5 quarters. At an average cost of revenue of 48.24% gross profit for 2011 Q2 should be near $14.99M. Fiscal 2010, was the first year SQNS has gone operating cash flow positive.
Improving sales and cash flow combined with a position, backed by Sprint and HTC, to be a primary distributer of dual mode chips, will have SQNS’s future looking bright. With this improved position in the 4G market and a new dual mode chip, SQNS will be well prepared to expand rapidly into the growing markets of both China and India.
Disclosure: I am long SQNS.