Sequans Communications' (SQNS) CEO Georges Karam on Q1 2016 Results - Earnings Call Transcript

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Sequans Communications S.A. (NYSE:SQNS)

Q1 2016 Earnings Conference Call

April 28, 2016, 8:00 ET

Executives

Georges Karam - President & CEO

Deborah Choate - CFO

Analysts

Jaeson Schmidt - Lake Street Capital

Quinn Bolton - Needham

Craig Ellis - B. Riley

Operator

Welcome to the Sequans First Quarter 2016 Results Conference Call. [Operator Instructions]. Before I turn the conference over to our host, Mr. Georges Karam, I would like to remind you of the following important information in behalf of

Sequans.

This call contains projections and 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 and plans, sources of funding, and our objectives for 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 these 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 with the Securities and Exchange Commission.

Please go ahead, sir.

Georges Karam

Thank you, Katie. Good morning, ladies and gentlemen. This is Georges Karam speaking. I am with Deborah Choate, our Chief Financial Officer, and we are pleased to welcome you to our first quarter 2016 results conference call. We are off to a very strong start for the year. Despite the lower-than expected product revenue, we made substantial progress on the business front during first quarter, showing greater than 90% revenue growth year-on-year, and we remain on track for a full-year of substantial growth.

The revenue issue we had in Q1 is related to a very specific situation regarding the JetPack business with no strategic or long-term implications. It resulted from a change in Verizon’s device pricing strategy, causing a change in the expected volume of sales and an inventory adjustment by our OEM customer building the device. As a result, we shipped less than expected in the first quarter and we are adjusting our volume expectations for the balance of the year as well. We estimate the revenue impact is approximately $1.5 million per quarter in 2016 although it was slightly less than that in first quarter. While it’s unfortunate, it should be kept in the proper perspective. The JetPack business remains a strong source of revenue for us this year and next year.

Our gross margin was quite good in first quarter, our expenses remained under control, and we achieved non-IFRS earnings per share in the middle of our guidance

range. As you know, we are navigating carefully with our cash, as we push ahead to capitalize on our IoT technology leadership by introducing new Cat M products, while simultaneously managing the initial ramp of Cat 1 design wins. We are gratified that we have longstanding and supportive shareholders who some time back invited us to contact them about providing financing in the event that we wanted to provide ourselves with some additional cash cushion. As you have seen from today’s announcement, we just closed a new convertible note arrangement on favorable terms bringing an additional $7 million, and Deborah will discuss that later on.

Looking at our current business, aside from some short term challenges, we are heading towards profitability and we ARE succeeding on the strategic front, competition front and in many other ways that are vital to long term value creation. Beside from the specific inventory adjustment issue, the first quarter of 2016 has been our best quarter ever in many respects. Allow me now to mention few facts that support this view.

Starting first with execution, we are executing very well on the design wins awarded last year and we remain on track to grow very significantly in 2016 as the ramp in IoT gathers momentum during the second half, followed by an even stronger year in 2017.

One key aspect of good execution is achieving certification for our own products and our customers’ product. Certification is expensive work so we have been calibrating our product certification activities to the pace of actual business, while also actively supporting customers’ device certification activities with multiple operators. In January we announced our Cat 4 chipset, Colibri, was certified for use on AT&T’s network in the U.S. and, in February, we certified our Cat 1 chipset, Calliope, on the NTT Docomo network in Japan demonstrating that we have traction with other Tier 1 operators in addition to Verizon. This week, we announced AT&T certification of our US60L Cat 4 modules, a key building block to address single-mode LTE opportunities on AT&T’s network. Also, yesterday we announced the voice over LTE certification of our Cat 1 technology on Verizon’s network and we are very close to complete the same certification on the Cat 4 chipset. This is a major milestone, as we are the first single mode LTE provider receiving certification for voice LTE. This technology is important for some home router applications and land line replacements where voice is required but it is also crucial for many IoT applications.

In fact, the majority of home security applications will require VoLTE and we believe that certified VoLTE support on our Calliope Cat 1 platform is a major differentiator. In fact, four of our existing design wins are asking for this feature, so this will accelerate our business. Finally, we have made excellent progress with Cat 1 certification with both AT&T and T-Mobile. Achieving these two remaining milestones will allow us to expand our M2M/IoT Cat 1 business across all US carriers deploying Cat 1. We believe we have more products either certified, or in the final stages of certification, with more operators than any other single-mode competitor.

If we look now to the design wins, we continue to add new design wins in all categories and we have more design wins in hand with better visibility than ever before. These design wins represent an increasingly diverse set of customers. Also, we are very pleased with the traction and design wins Gemalto has been gaining with modules based on our Cat 1 chipset. This supports our expectation that Gemalto will be converting a substantial portion of its 2G and 3G businesses to our LTE Cat 1 chipset over time. Note, that the new projects target numerous different operators’ LTE networks and, as such, we are adding another degree of diversity to our business. We already have excellent and close relationships with most of these operators. Notably, some of them are signing specific agreements with us so we can help them ensure that their own aggressive timelines are met. We are currently finalizing another one of these deals.

If we look to the design-In activity, we have a growing level of what we call design

in activity meaning active engagements at an advanced stage that have not yet become official design wins because they don’t yet have definite project kickoff dates or final contract terms. In fact, we have traction in all our businesses, a few in mobile computing and public safety, a decent number with some of them very large in the home & portable router business, and an extensive number of opportunities in the M2M/IoT business where we are leveraging our leadership position with the StreamLite LTE portfolio, specifically the Cat 1 Calliope platform. Also, since we introduced our Cat M solution at Mobile World Congress in February, our pipeline of potential opportunities in the M2M/IoT space is expanding more rapidly than we expected. We have been engaged in a non-stop series of meetings about new projects with both current and new customers and operators. I’m very excited when I look at the list of companies we are in active discussions with; it’s quite a long one and includes some of the best-known and most innovative technology companies.

The Cat M opportunities will fuel our revenue growth mainly in the second half of 2017 and beyond, but all the other Cat 1 and Cat 4/6 design-in opportunities will contribute to our growth in the first half of 2017 and perhaps get some upside in Q4 this year. To give you a little bit [indiscernible] about our position in the industry. Most of the companies with on Cat M are approaching us, and it is apparent that we are viewed as the de facto leader in single-mode LTE with a clear competitive

advantage. After the Mobile World Congress in 2015, this was last year; we attracted a lot of attention with our Cat 1 platform. The Cat 1 solution was unexpected and disrupted the industry by providing a competitive solution compatible with existing networks infrastructure that could be deployed immediately. This year the announcement of the Cat M platform at MWC was even more impressive. This time, the situation was much different, the entire industry was anticipating narrowband IoT announcements for Cat M1 and Cat M2, but in the form of slideware and roadmap discussions with vague timing. And again, we surprised the industry with a chip that would sample in Q2. So in Barcelona, we had over a hundred meetings, we experienced the mass media coverage for a single week in our entire history and Q1 set a record for the number of visitors to our website. Quite honestly, we expected at least one competitor would be very close behind us with a Cat M product launch.

However, the more conversations we have with customers and operators, the more sense we have that ours will be the only real Cat M chip available during 2016. While we expect to see one or two big competitors in the market next year and a few others focusing on China, the size of the opportunity is huge which means the market will be far from crowded. In addition to our time-to-market advantage, we expect our strengths in Cat M to include, cost leadership, small footprint, more important long battery life and a differentiation from Sequans, a global SKU capability. Our intention is to maintain our technology leadership and our team is already planning our next generation.

Finally few word about our strategic alliances, as you remember from our last call, we had already signed key commercial and strategic alliances during Q4. We also concluded additional agreements in first quarter and announced our collaboration with Skyworks in addition to Verizon, Foxconn, and Gemalto. I am pleased to report we already have an impressive roster of top OEMs and ODMs committed to working with us on Cat M. Some of them are new relationships, and others are already engaged with us on other platforms. We continue to make progress toward finalizing additional strategic alliances some of which could have a funding component. Some of these are quite far advanced with strong internal support within the potential partner’s organization. But, it’s difficult to predict how long it will take to conclude. This continues to be one of our priorities.

In the context of this overview of where we are, I’ll add some details about some of the developments in each of our business areas during first quarter. Since the large majority of our first quarter revenue is still coming from Home and Mobile Routers, we will begin with that business. During our last call, we highlighted our expectations for growth in demand from emerging markets with more OEMs launching Sequans-based products during 2016. In first quarter, we did see strong demand from emerging markets and emerging carriers, and we finalized a new design win. As expected, we are seeing the market shifting towards Cat 6 carrier aggregation solutions where we are well-positioned with our Cassiopeia platform. We see continued strong demand from emerging markets, although the ramp in India has not materialized yet. The commercial launch of Reliance Jio’s network is now planned to the second half of the year. We see this as a potential upside when it happens.

In the U.S., our relationship with Verizon continues to be very positive and we continue to work at full speed on the next generation of the JetPack portable router and other opportunities. Overall, and despite the change in the 2016 JetPack expectations, we continue to expect steady growth from the Home and Portable Router business. We have a few more design win projects under development and we expect our customers to launch them in the near future. Our progress in achieving certification with new carriers is a significant step forward because we are pursuing a number of opportunities targeting AT&T and other carriers outside the U.S. Some of these are in an advanced stage and we hope to close something soon, which will help continue the growth next year.

Turning to the main growth engine, the M2M and IoT business, current projects are moving along well. We have added several new design wins with our Cat 1 and Cat M chipsets during the first quarter, and continue to see the pipeline expand with new opportunities. On the last call, we referred to product launches using our Cat 1 module expected during 2016, with the largest ones addressing applications such as asset trackers and home security devices such as alarm panels. The alarm panel projects are expected to launch by mid-year, and the tracker device is scheduled to launch during the second half. In addition, we have several customer products, such as industrial routers, launching with relatively modest volumes. Our partnership with Gemalto is going great. They have excellent traction with their Verizon-certified module and they have secured several customers using our Calliope Cat 1 platform.

We expect to see a nice revenue stream from this next year, with a modest ramp beginning in the second half of 2016. In an exciting new development, during first quarter, we also won a major new opportunity outside Verizon which will contribute revenues mainly next year.

As you recall, Gemalto’s first module was certified by Verizon in February, and most of our Gemalto business this year will be Verizon related. Gemalto is in the process of achieving certification with additional carriers in both in the U.S. and outside. So, by next year, we expect Gemalto will be in full production for many markets. We are also moving full speed ahead on our Cat M collaboration with Gemalto, and we should be able to expand our business with them from hundreds of thousands of Cat 1 units this year to millions of Cat 1 and Cat M units over the next two years. As noted before, we have a huge traction on Cat M technology. We have a big pipe of opportunities with companies ranging from start-ups to big companies, covering a wide range of IoT applications smart city, smart home, eHealth, wearables etcetera.

We expect to select a few of them as alpha customers to support the early network launches we expect to see in 2017. So overall we are very excited about the development of our business in this M2M/IoT market segment as we hope to see it contribute to more than 50% of our business next year.

Finally, and as you know we are taking an opportunistic approach to Mobile Computing where we are addressing a few possible opportunities and we hope to materialize at least one of them soon. We also continue to work on Public Safety and Vertical Market projects. While these opportunities often represent relatively small volumes, they also usually include high margin service revenue and help us develop technology that we can market later in higher volume applications. It also affords us an 11 opportunity to work with some large, highly-respected multinational organizations and further enhance our reputation as technology leaders.

We currently have 5 public safety and vertical market projects after finalizing a deal with a major European OEM in Q4. We expect to be able to announce the identity of that OEM and the related application in the near future. To summarize, we had an unforeseen glitch with one customer product but we also made a lot of progress on several other fronts. I want to be clear that we are not suggesting that meeting forecasts is not important, it is and we emphasize this to the entire organization all the time. But, when dealing with large wireless operators, we have learned that there are some things you simply can’t forecast or plan for it. All you can do, as part of the ecosystem, is try to keep things in perspective, adapt and roll with it. This is what we are doing.

We are happy with the progress of our global router business, very pleased with the development of our Cat 1 design wins and design-in progress and we are really excited about the early traction in the narrowband LTE space, where we believe we will finalize some additional strategic alliances. If we continue to execute, we have a clear line of sight to several hundred million in annual revenue in the coming years, as we said last time. We continue to view 2016 as a transition year, with strong growth over 2015, with 2017 as the breakout year. So, our situation has never been as positive as it is today and we are very enthusiastic about our future.

Now, I will turn over the call to Deborah for a more detailed financial discussion. Deborah?

Deborah Choate

Thank you, Georges and good afternoon and good morning to everyone. I’d like to add some details about our Q1 financial results, and discuss the financial outlook, including our guidance for Q2. Revenues in the first quarter of 2016 were $9.3 million, a 15% sequential decrease from Q4, but a 93% increase compared to the first quarter of 2015. Georges explained the situation behind the inventory adjustment impact on revenue, but a secondary factor which also contributed to the lower-than-expected revenue was the impact of the Taiwan earthquake on TSMC. Although they worked very closely with us to prioritize orders, we were unable to ship everything we could have due to a shortage of our RF components. This also affected our cash flow because invoicing was back loaded when our shipments were delayed in March.

We expect to see some further impact in Q2, but also expect to return to normal by the end of Q2. We had three 10% customers in the quarter: one was 31.1%, and two others with 14.8%, and 13.3%, respectively. We realized an overall non-IFRS gross margin of 47.5%. The improvement from Q4 reflects the impact of the WiMAX inventory provision that we recorded in Q4, there was no inventory provision recorded in Q1 this year. Operating expenses were $9.6 million in Q1, down slightly from Q4. Our first quarter operating loss was $5.2 million, compared to an operating loss also of $5.2 million in the fourth quarter, but at that time which included a provision for WiMAX inventory and also compares to an operating loss of $8.2 million in the first quarter of 2015.

Net loss was $9.2 million in the first quarter, compared to net losses of $9.9 million in fourth quarter and $8 million in the first quarter of 2015. Basic and diluted loss per share was $0.16 in the first quarter of 2016 based on 59.2 million shares outstanding, compared to net losses of $0.17 in the fourth quarter, and $0.14 in the first quarter of 2015. To facilitate comparisons, we have also reported our results on a non-IFRS basis which excludes from net loss the non-cash items related to stock based compensation expense, the provision for WiMAX inventory, and the fair-value and effective interest adjustments related to the convertible debt and other financings.

Non-IFRS net loss was $5.5 million in fourth quarter 2016, compared to net losses of $4.3 million in fourth quarter of 2015 and $7.8 million in first quarter of 2015. Non-IFRS basic and diluted loss per share was $0.09 in the first quarter, compared with non-IFRS net loss of $0.07 in the fourth quarter, and $0.13 in the first quarter of 2015.

Cash generated by operations in first quarter was $3.9 million, compared to cash used in operations of $2.2 million in the fourth quarter of 2015. Our cash and short-term deposits at March 31, 2016 totaled $6.5 million, compared to $8.7 million at the end of Q4. This reflected lower usage of our accounts receivable financing facility which was only $1.6 million of which was outstanding at the end of March compared with $6.5 million at December 31, 2015 and this is consistent with the late invoicing due to late shipments, as I mentioned earlier.

As we discussed on our last call, additional sources of cash later this year will include collecting the research tax credit earned in 2015 and milestone payments related to governmental research grants that are in process. We are also engaged in strategic partnership discussions that could also provide additional funding. During Q1, in view of the pace of various strategic alliance discussions, we decided to respond to invitations from some of our longstanding shareholders to contact them in the event we considered increasing our cash cushion. The convertible notes we issued today, which bring approximately $7 million in additional cash, have very similar terms to the note placement we did a year ago, except the minimum exercise price is higher.

After the additional convertible notes, we are more comfortable with our cash cushion, while we also continue to focus on finalizing additional strategic alliances. Meanwhile, we continue to expect to approach cash flow breakeven on a quarterly basis by the end of the year, even though we may not be quite as close due to the revenue adjustment discussed by Georges.

Accounts receivable at March 31, 2016 were $8.7 million, reflecting DSOs of approximately 70 days, due again to invoicing substantial amounts late in the quarter and our inventories declined to $3.6 million.

Looking forward, we expect revenues for the second quarter of 2016 to be in the range of $10 to $12 million, reflecting the impact of the lower JetPack revenue and some remaining impact of the earthquake in Taiwan on shipments. In Q2, we expect non-IFRS gross margin to be above 40%, and non-IFRS net loss per diluted share to range between $0.08 and $0.10, based on approximately 59.2 million weighted average diluted shares. Our guidance for Q2 non-IFRS net loss per share excludes the impact of non-cash stock based compensation, fair-value and effective interest adjustments related to the convertible debt and other financings, and any other relevant non-cash or non-recurring expenses.

We are confident that we will achieve significant growth in 2016 as the M2M and IoT business begin to ramp, with a smaller loss compared to 2015. Barring further surprises or delays, we believe our cash is adequate to see us through the short term because we expect strong growth next year in as Sequans powered devices are running on more operators’ networks and we enjoy a full year of revenue from our M2M and IoT design wins and continue to win new business.

Today, for your convenience, at the conclusion of this call, we will post a written version of our formal remarks in the Investor Relations section of our website on the webcasts and presentations page, the same location where you will find the audio replay.

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

Georges Karam

Thanks, Deborah. So to conclude this call, just to keep in mind that our first quarter was really great quarter and the glitch we had was a glitch as we said on one product caused by caused by inventory adjustment and this has been caused originally by some changing in the pricing incentive of the carrier for this device.

Also to keep things in perspective this is not like you know we have a big problem on this for the future because the business of the JetPack remains a very solid one and this business started at the level where we are, where we’re thinking is going this year. It's accelerated at the end of the year almost doubling and after this change of the incentive plan of the carrier. We had to take this sometime back and adjust our number but we still believe in this business and it's a sound business for us. So it's very important -- and if add to this the design we have and a product that we will be launching in this space in the U.S. specifically on Verizon plus the emerging market would remain very positive on our home portable router business and the growth relate to the business.

Now obviously when you look to the quarter, we're seeing that we are still growing more than 90% year over year in Q1 and the plan is to grow faster and this is what we are planning for the second half of this year and beyond and this additional growth, the growth engine will be coming essentially from the Cat 1 in the M2M/IoT space and as I explained to you. We have design win in hand whether through partners like Gemalto or their design win that would be launching mid-year and in the second half of the year that will fuel this growth and the potential of design when we are collecting and keep moving on this -- add to this the strong position we have in the Cat M we're adding again another more design win for this, will be really the engine that will take us for exponentially growth in the following two years where we continue this fast growth and momentum beyond even 2017. And on top of this leadership position as I mentioned has positioned us to have extremely good relationship with Tier 1 partners and we believe some of them can conclude allow us to have additional strategic alliances that we can have there.

So this is really the key message here and I want to conclude by saying we’re really very, very positive. We believe we did a great quarter and we are very excited, more than ever about our future. Thank you.

So we can now turn it now to question, operator.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Jaeson Schmidt with Lake Street Capital Markets. Please go ahead.

Jaeson Schmidt

Georges just wanting to focus on the JetPack really quick and just wanted to make sure you guys feel confident about your share there, not only this year but more so in 2017. I know the inventory adjustments going to impact the near term but do you think -- are you pretty confident that you should remain in that socket [ph] going forward if it hasn’t changed anything?

Georges Karam

Absolutely, I mean there is no doubt about it. I don't want to -- they will get more about the future because this relates to the operator but I mentioned clearly that we don't feel any danger if you want for the business this year and next year.

Jaeson Schmidt

And then I know it sounds like India should kind of ramp in the second half this year. Are you guys baking in high expectations for India for the second half?

Georges Karam

No absolutely I mean for us India you know we adjusted this even last year where we’re planning on India as an upside where honestly we have some revenue there even each quarter and but it's not really in the 100 or 1000s we’re talking about the 10s of 1000s unit in the quarter and we’re still waiting for the big launch of Reliance was going to consumer and hope that we can surf on this and get extra business.

But it's not the factor then in our ramp up, we remain very cautious and very modest on the portion of India. So this will happen it will be an upside.

Jaeson Schmidt

And the last one for me and I'll jump back into you. Just wondering if you could comment a little bit about what you're seeing from a pricing standpoint?

Georges Karam

What do you know, I mean we are seeing the same regular pressure on pricing you can see it's sometimes essentially in some of the emerging when you had a competitor from China, you could have some aggressive pricing there and this is I'm talking about the home router, portable router space but still you know with the next generation that we have and soon we’re able to compete that we don’t real issue in terms of gross margin, we’re projecting there. We see obviously a pressure on the module gross margin because as you can imagine mainly for the CAT 1 business module because this is the operator that I would like to see really just under control and they are pushing all the eco-system to stay low so this is only this but other than this, I tend to say business as usual. We’re factoring in fast erosion and sometimes some deals they could be a little tweaked to under pressure more than others but in general our average ASP we’re planning --- we forecasted our in-line I would say in reality.

Operator

And our next question comes from the line of Quinn Bolton from Needham. Please go ahead.

Quinn Bolton

I just wanted to follow-up on the JetPack inventory issue and trying to see if you can give us a little bit more color on, it sounds like this was all driven by a change in pricing strategy by Verizon for the JetPack which seems like in response is driving or causing lower unit shipments of the JetPack router. So I guess first off just hoping you can provide a little bit more color on what exactly Verizon did and then second you lowered the forecast for that business by roughly 1.5 million a quarter. Sounds like you’ve probably got some inventory adjustments in the near term but it also sounds like the run rate on the unit basis that business maybe impacted and so just was wondering if you could comment on that as well.

Georges Karam

Essentially you know to more color, I mean when this project started and we won this skew I mean we planned let's say give a number per month that was the project planning and we moved on this very well. After six months of the launch this got accelerated and we doubled thereafter and we were [indiscernible] where we went from a normal position to [indiscernible] and this is how we ended in Q4 if you want and not only in Q4 the projection was to continue at the same speed. That's why our forecast if you want was kind of aggressive almost doubling what we thought we will be doing when we started the product a year back on this design.

But what happened essentially is that -- but I don't the -- change in pricing I mean that went up from $9 to $25 something like this, I mean this is publically can be checked and by doing so we saw an impact in revenue in a number of devices as you're saying not to be really negligible, I mean but we’re back almost to the nominal model that we had when we started the project and obviously this had an impact of inventory as well projection in the future. Now obviously we have no control and we have no information on what's the marketing plan and incentive, what Verizon will be doing on the Black Friday. But what we are doing here and the comment that I did about the revenue adjustment is taking an assumption that we will not see -- there is no upside that could happen where Verizon could change the price differently and then we can get an acceleration unit again. So we prefer to at the cautious side and make those adjustment and that’s what we did.

Quinn Bolton

Just moving to the IoT part of the business, you mentioned getting close to a certifications for Cat 1 on both T-Mobile an AT&T just wondering is that something you expect in the near term sort of by the end of the first half or based on you know the relatively high cost of completing those certifications where you’re going to stage those into second half and I guess perhaps most importantly does any of the business you're forecasting for Cat 1 come from T:Mobile or AT&T this year which would obviously require that certification before you can ramp the revenue?

Georges Karam

Yes, I mean obviously you’re right about the customer certification and in the past we mentioned that we were not too much in a hurry, I mean we’re staging this in the right order to avoid spending too much money in advance, too much in advance. But technically today we’re in the mindset and the process that all what you’re doing on both carriers are related to business. So we are not really kind of anticipating business but we have real deal in hand and people waiting for us to finish this certification on AT&T and T-Mobile, so this gives you, you know a kind off without giving final information when we obtain the stamp on both of them but they are really in the middle of the process and we should expect them in the coming all I will say between this quarter and next quarter this should be done because we have customer waiting for this and obviously some of those customers could be module makers and a partner waiting for this and we have some of them in direct business. So in terms of revenue will be generated from this year, obviously if there is some it will be more in Q4, not before because you have all the timing to get this and the process. So we will have a little bit of revenue maybe coming from those certification in Q4 but they are more for the next year just only because of the timing of this but again there is design win behind it and we need to deliver because the customer are waiting for this and we’re moving full speed on.

Quinn Bolton

And then just quick question for -- or two questions for Deborah, first the AR facility, obviously it sounds like that ticked down in the March quarter because of the late invoicing I assume as you get back to more normal invoicing especially PSMC [ph] ramps production of the transceivers. I expected that AR facility probably becomes larger and something that you can tap in Q2, Q3 going forward to help finance the near term business?

Deborah Choate

Yes, that’s correct. There has been no fundamental change in the facility, it's really tied to timing issues and when we can actually get the financing related to certain invoices.

Quinn Bolton

And then just lastly for you Deborah, it's a sense of maybe the chip versus module mix in the quarter and where you see that heading into the second half?

Deborah Choate

The mix in the first quarter was very similar to the fourth quarter, going forward we do have some module design wins launching, so we expect that it will represent a higher portion of the revenue mix particularly in the second half of the year.

Operator

[Operator Instructions]. Our next question comes from Craig Ellis with B. Riley. Please go ahead.

Craig Ellis

Georges, I was hoping that you could follow-up a little bit on some of the comments regarding mobile router agreements with partners other than Verizon and help give us a sense for when those would be ramping and their materiality.

Georges Karam

And obviously when you look to this business we have Verizon and we said in the past that we have others to come as well there in this space. We mentioned as well that we have another carriers as well in the U.S. where we expect them to have something second half and maybe something at the beginning of the next year. We are seeing as well some traction in MVNO to be honest, just wanted to mention about carriers sometimes it's not 100% accurate but we’re seeing some business going to MVNO and customers designing for MVNO, so the MVNO could be a kind of AT&T, T-Mobile, Verizon could be a mix of all this. So this is when you think about the U.S. what we have today, obviously the other component is emerging and emerging here it's very, very large in terms of number of carrier. We’re seeing traction in the emerging coming as well from consolidation happening in the market.

Sometime we saw a lot of the emerging market mainly in the portable routers positioned from Marvell to be honest and the fact that Marvell is [indiscernible] it's opening doors for us, we’re seeing some opportunity accelerating on the [indiscernible] as well. And more important the market itself when you think about home portable routers, so you’re thinking of the conventional device which are really portable routers and CPU to connect the home and so on. But we’re seeing few opportunity and they could be huge if this market will materialize where the setup box at home which is typically, the boxes at home connected through fiber or connected through cable or VSL some operator asking to add to this box a wireless connectivity and why this because you need to those boxes are turning to be to offer some security application and because if you’re -- security application at home you need to ensure that the securities that guarantee that someone will cut the cable and for this they add an extra redundant backward connectivity and they use 4G for this and we’re seeing some opportunity where we’re excited about them and it could be very big because you go here with all the countries and you can connect low cost LTE inside those boxes and we’re working on them.

Craig Ellis

And then moving to Gemalto sounds like you’re seeing some early design wins through them Gemalto business, I'm wondering if you can give us some color in terms of some of the applications specifics there and what do you expect does that province have in 2017?

Georges Karam

Gemalto obviously I do -- I can say that obviously is they have the Verizon module and on this they are launching this and pushing this and very honestly they have big pipe of opportunity and already handful number of one have been concluded and we’re already shipping for Gemalto by the way, you know we’re in shipment mode of few 10,000s of unit. This is where we’re today with Gemalto to address the early customer. On top of this as I said they are preparing other carriers and expect them at the end of the year to be ready at least in the three markets where their product is shipping in three markets and some customers are linked to this, I said as well in the call that we have one with them, one big one outside Verizon, really big one -- multi-year project and this is now secured.

So all this is really very promising you know that the projection and obviously on top of this we will have the Cat -- in the future, but just on the Cat 1 itself we should put is in a position where we talk about millions of unit next year even. So I don’t know if it's going to be 1 million, 2 million or 3 million is very hard to get today. I have some idea of a low end but it's again Gemalto they have close to 15 million unit modules they ship worldwide. So it's just on the question of how much of those unit will convert to Cat 1, some exciting customer and how much the new customer though will collect on this as Cat 1 from competition, [indiscernible] the leadership they have thanks to our platform so just give us big promise, that’s how we see.

Craig Ellis

And then on the last question on the TSMC issue, is that expected to be back to normalized volume to you in the second quarter or would that trail into the third quarter?

Georges Karam

On Gemalto, [ph] obviously it's just only about catching up the past. So yes definitely we had this problem, they help us a lot because otherwise we could have larger impact. [Indiscernible] they help us a lot in Q1 and we could do maybe below 0.5 million unit, $0.5 million more if we get all what we need but it was stretch but by doing this we help Q1 but you can imagine that when you start Q2 you’ve the whole in front of us, so first month we’re not able to ship you know and we’re accelerating so it's going to take them all the quarter to fix but we expect the 10th June will not have an impact on the quarter, so it will be just on the in-demand, I mean we have currently problem for customers waiting their product and we ship to them two weeks later or three weeks later but we’re catching up but we hope that on a global -- on a quarterly basis there is no impact.

Operator

And your next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

I was hoping you could just help me on a little background information, can you sort of characterize the pricing differential between Cat 1 and Cat M?

Georges Karam

Sure, I mean. I mean the most important way to look through this obviously is leading through the global solution and I know compare apple to apple. Essentially the module when you’re talking about Cat 1 we’re talking about modules that people like to see them at $15.15 practically maybe they are below $20, so it's between $20 and $15 depending on the volume and so on. And when you’re talking about Cat M definitely we’re below $10, so we start single digit even the first launch this is what people expect, I believe it's really doable. So you’re kind of dividing by factor of two the price between Cat 1 and Cat M.

Now there is also the projection of what we call the Cat M2 which is a kind of further cost optimization of the solution but obviously at the expense of limiting the speed here the industry is hoping to see this even go below six [ph] if you want the module level. We believe all this is achievable, thanks to integration and our piece when you go to Cat M, we’re doing more and more integration so essentially the big chunk of the ASPs is done by Sequans if you want or by the chip itself and so this is on the ASP there.

Unidentified Analyst

So the push for miR-122 is to displace sort of the 3G solution and still take advantage of LTE?

Georges Karam

I mean essentially for M1 and M2 by the way the push for Cat 1 and M1 and M2 is to displace 3G solution and have the solution replacing the 2G and not to go to the 3G, go directly to an LT solution because Cat 1, Cat 1M and Cat M2 all are LTE technology and all they sit on the same network and the carrier can offer this just only by software configuration on his base station. So it's not like building new network, and this is the beauty about this technology. Obviously it takes the carrier one year to validate the half tour before they push on the bottom to say okay, go it's nation-wide lunch but they will not put CapEx you know the CapEx doesn’t exist is obviously some softer maintenance that they have to pay to the Ericsson and the Nokia of the world to make the upgrade of the software for that.

So this is really and rather there essentially is obviously priced to open more application and so on. But there is also an important driver which is the power consumption to go further and lower power consumption, so you can have devices connected for life with the same battery. The dream about Cat M1 and Cat M2 is really you could have for example a tracker device and you will have some AA battery in this device and you will never charge it, use it for 10 years and you track the position of this device few times per day or whatever. Depending on the use case and also the difference between Cat M1 and Cat M2, that M1 will give you few 100 kilobits, so another words any application that require voice, that requires some screen, some operating system like we’re of all and so on, the best technology or it is really Cat M1 and the Cat M2 is really for application where there is very minimum interface with human if you want, so it will be pure machine to machine connection at very, very low speed, some kind of sensor reporting alarm signal once per day then it's better to be in Cat M2.

And as I mentioned you know we didn’t insist too much on this call but last time and insisted on our product support, Cat M1 and Cat M2 but the way we see the market today that the U.S. carriers all of them are heading first with Cat M1 that’s why we’re focusing on delivering the software and the application and the services for Cat M1 and we’re seeing push from China to go straight for Cat M2, while in the U.S. they would like to get Cat M1 first and then Cat M2 one year later. In China they are trying to go straight forward Cat M2, and we have the solution for both markets even if our focus remain on the U.S. first.

Unidentified Analyst

Understood. Okay, but neither are backward compatible on 3G?

Georges Karam

There is no need, it doesn’t make sense at all. I mean backward compatibility is really a mistake when you go to Cat M1 and Cat M2 because you’re losing everything, you lost all the beauty of the technology of M1 and M2, so the backward compatibility exists in a situation where we’re talking about other pack of connectivity but here on M1 and miR-122 no compatibility and you don’t need it because you need to keep in mind the coverage M1 and M2 they are fixing the price and the power consumption but one major advantage of mainly coming with M2, the coverage of Cat M2 will be better than 2G, in other words there is nothing to fall back, if you’re M2 and if that’s working, there is nothing better. If you go to 2G or 3G it doesn’t work. If there is a 3G network available it doesn’t work because coverage will be less good assuming obviously that the carrier has deployed LTE nation-wide.

Unidentified Analyst

So when looking at design wins could you quantify how you did in Q4 versus Q1 and the trends you’re seeing into Q2? Just on relative basis?

Georges Karam

To be honest with you -- if I take on the home router business and the regular business the Cat 1 is accelerating maybe more and we did more in Q1 and Q4 because more and more people realize that this is real and the certification with other carrier are opening. So home router for router business I tend to say is similar, even if you say I get more or one less doesn’t matter, just only of an accident [ph] but we’re seeing more or less the same speed. However we’re seeing the pipe of the home router getting bigger with the application I mentioned about setup box to connect with wireless in addition to fiber and DSL.

The Cat 1 is better because we’re opening to more carriers, we talk about Japan, we talk about Gemalto being ready for rest more carriers and so we saw maybe 50% more in Cat 1 than what we have done in Q1 versus Q4 and we have a lot of Cat M but the Cat M is new, so the comparison doesn’t mean anything because the Cat M, all the Cat M deals are new. So the IoT space is getting clearer because all this Cat 1, Cat M people are getting real now and we’re seeing a lot of demand where sometimes by the way the people that come with application and they propose to go Cat 1, we move them to Cat M because their application will be better on Cat M or timing wise and sometimes we go straight forward to Cat 1 with that.

Unidentified Analyst

And then last question for me, your Top 3 customers and the first quarter were just under 60% I was wondering if you might be able to characterize how you see that changing through the course of the year given I guess more of a module mix that Deborah alluded to?

Georges Karam

If I look today, first of all there is one element when we’re talking about customers. We’re talking about one customer which doesn’t mean one product. To give you an example, Gentech, emerging market, there is no one type product to that. They have four, five products shipping in the market for various frequency, various market and so on and if that ends maybe, if I take for example Gentech, which is a strong customer for us in the emerging market. You could say, okay, I mean obviously something happened to Gentech as a whole we have a problem but if you look to their business, their business [indiscernible] as well because it's multi-carrier and so on and if I look for example to the home router business I have more than 20 projects if you want globally in-hand with maybe less than a dozen of customer addressing those market.

So if you go to the entire IoT it's even completely diversified, it's completely, you know have so many diversification in the M2M, people that they have in application wise because even application you’re talking about application that could be at industrial routers connecting machine to alarm panel, to tracker, to metering and you know to health application to device payment, devices and so on. So you’ve so many of application there and then obviously you’ve some confirmation and you will see it in the future for example hopefully Gemalto will be a big customer for us and it will not be a pain because in the end of today it's a module maker and if he has factoring for me 20, 30, 40 customer this means I see diversity of 40 customers through Gemalto if they have a good partner like this, it's not really risky in a sense from this [indiscernible].

So we’re seeing this really diversifying, very honestly, I don’t see this at all an issue where even if today on a quarterly basis and the way we report this because we report this by customer you can see and say well okay you’ve three big customer, what if you lose them and the reality, it's nearly impossible to lose a customer at full there. You lose one business or one project behind it which will be a fraction of one big customer like this and it's going in the right direction because the diversification in customer and project and application between M2M, IoT and home router and add to this the carrier diversification from Verizon only emerging only and Verizon adding other carriers like T-Mobile and AT&T and Docomo this gives us really a large diversification. So I don’t see at all this a concern for the company.

Operator

And there are no further questions at this time. Please continue.

Georges Karam

Okay. So thanks for listening and being on the call all of you and thanks for your question. Hopefully we can meet you soon face to face. Take care.

Operator

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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