Sequans Communications' (SQNS) CEO Georges Karam on Q2 2016 Results - Earnings Call Transcript

| About: Sequans Communications (SQNS)

Sequans Communications SA (NYSE:SQNS)

Q2 2016 Earnings Conference Call

July 28, 2016 8:00 AM ET


Georges Karam - President & Chief Executive Officer

Deborah Choate - Chief Financial Officer


Michael Walkley - Canaccord Genuity

Quinn Bolton - Needham

Anthony Stoss - Craig-Hallum

Craig Ellis - B. Riley

Jaeson Schmidt - Lake Street Capital Markets

Tom Sepenzis - Northland


Welcome to the Sequans Second 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, Shannon. Good morning, ladies and gentlemen. This is Georges speaking. I am with Deborah Choate, our Chief Financial Officer, and we are pleased to welcome you to our second quarter 2016 results conference call. As you saw in our press release, product revenue increased nicely in the second quarter, up more than 40% sequentially. Unfortunately, some delays in a few Cat 1 projects caused us to be slightly below our guidance range at $9.9 million. Other metrics were in line with or better than our guidance.

We remain on a trajectory for significant growth in 2016 and we continue to expect our growth to accelerate in 2017. I’ll speak more about this in a moment. Regarding the Cat 1 project delays, does not indicate anything negative about the Cat 1 market as this market is building up for sure and we have zero doubts this. Very frankly, we’re more concerned about the perception created by these minor delays than the actual business impact.

With our current revenue trajectory we expect to become operating cash flow positive at mid next year to understand that the investors would have some discomfort on our short-term cash position. We ended the quarter with $7.5 million in cash and will be receiving an additional $3 million from the R&D tax credit and grant expected in the third quarter. Obviously, as cash remains tight, we are always looking carefully at the issue of funding and we’ll discuss our priorities for addressing this in the context of creating value for shareholders.

Before we get into details, I would like to highlight some of the key progress we made since our last earnings call. I’ll start first with the JetPack inventory issue that we spoke about at last quarter. This is behind us now and the router business is growing nicely in the U.S. obviously with Verizon, but also in the emerging markets. Equally significant, this business is becoming more diversified with less end market customer concentration.

Another point is that our partnership with Gemalto is going extremely well and gaining design wins. Also we began volume shipments of Cat 1 chips for various M2M/IoT application this quarter. We continue to enjoy more new interest in Cat 1 projects, mainly across the major carriers in the United States and in Japan. During the second quarter we sampled our Monarch chip, the first worldwide available Cat M and NB-IoT chip and we’re fully engaged with partners and customers to lead the LTE for IoT markets.

Our pipeline of design wins and new opportunities continues to grow rapidly. We are growing the pipeline across our entire product line, obviously, Cat 4 and Cat 6 for the router applications, but important the Cat 1 and Cat M for IoT, which indicates that we are on track for significant revenue growth in the coming years. Also, we are expanding our carrier relationships in the United States and elsewhere and some of these new relationships are becoming more strategic for us.

We are seeing opportunities to gain market share in the router market and take a significant share in interest of things as certain competitors’ exit the market and others lag behind on the technology side. And finally last but not least, I tend to say we have made significant progress towards finalizing additional strategic alliances, some of which could include the financing component. Some of these positives will help us manage and reduce the balance sheet risk as we continue to execute according to our priorities.

Moving to a discussion of specific developments in each of the market segment, we’ll begin with home and portable. As I said, we’re pleased to report that our JetPack business with Verizon is back on track and it’s now business as usual again. And we expect it to be contributing to our revenue at least through next year. On past calls we’ve spoken about our success in diversifying our customer base on the router segment. This will soon be reflected in our revenue because we are expecting new routers to be launched in the United States during the second half of 2016, resulting in major growth next year.

We also have more OEM and ODMs serving the emerging markets, and we just have two of them securing major router deals with the new carriers. This will help accelerate growth from the emerging markets next year, due to the recent consolidation in the market as an example, Marvell exiting the LTE business and Sony refocusing its small competitor. We have seen more and more opportunities opening to us in the router market, and we believe this will boost our market share in this segment.

The market in India remains a big upside for us. Despite the fact that we are well positioned and we have design wins shipping small volumes, we always treated this market segment as an upside potential to our near term base case, because we had always poor visibility on the natural launch date. But this market continues to be a significant opportunity for us over time because sooner or later the launch will happen.

As a conclusion around home and portable router, and if we look to the growing pipeline of new projects and at the growing number of operators network, we expect that the home and portable router business could exit 2017 at a run rate of well over $10 million in quarterly revenue, on the way to becoming $100 million per year business in the medium term. On another form and as you know we have design wins for Public Safety and Vertical Market segments in the United States, Japan and Europe.

During the second quarter, we don’t find Thales Avionics as our partner providing LTE connectivity for airplanes in Europe. A few points to keep in mind about this business segment, all of these projects tend to be small in terms of product revenue; we shouldn’t be too quick to discount them while looking at the value creation. The service revenue helps differ the cost of developing technology that can be reused for more mainstream applications, and through these projects we are developing a strong reputation as the collegial leader among a group of important global companies. By the way this is one of the themes of our call today, relationships have value.

As a result of our success so far in this niche market segment, we are currently discussing a few new opportunities that should turn to design wins before the end of the year, reinforcing further our position in the Public Safety and Vertical market.

Finally, let’s discuss now the M2M/IoT segment. Overall, we are very pleased with our progress and we are fully convinced that therefore we will generate an attractive long term ROI for the company. Even if the time from design win to revenue on these projects tend to be slower than what we wish, we are building a solid and stable business foundation that has major growth potential. Long before we reached a fraction of our revenue potential in IoT, I believe Sequans will have created tremendous value in the form of key relationships with operators, customers and various other partners as well as IPR and fundamental logo.

The scarcity factor is something I’ll speak more about in a moment. As you know M2M/IoT revenue will be driven by the Cat 1 design wins until Cat M begins to contribute in the middle of next year. Many projects are moving forward and some projects are facing some delay in launches on the Cat 1 space. But we continue to expect a few devices using our Cat 1 modules, such as the trackers we’ve mentioned on past calls to launch during the second half. Also we have recently secured another design win that we expect to launch by the end of the year or early next year.

Something to remember about M2M and other non-consumer IoT design is that they are very sticky. Being first to market and lending design win is important here because assuming you are performing well, you return the business for a long time because the cycle tends to be much longer. This in turn improved the visibility and reduces business risk. Our business with Gemalto is going extremely well. We began shipping Cat 1 chips to Gemalto in the second quarter. Beginning the initial lump in Verizon related business, which we continued during the second half and beyond. Also, Gemalto has launched its module addressing Japan, and announced the completion of certification with [indiscernible].

First, we expect an additional revenue stream complementing the Verizon related one. Next year we see substantial additional growth from Gemalto coming from additional design wins and expansion of their product line to address more operators’ networks in the U.S., Japan and perhaps other countries as well. Our visibility into next year for Gemalto business is improving and we see progressing according to plan. Our technology leadership particularly in M2M/IoT has led to new and closer relationships with various operators around, and certain of these relationships are becoming more strategic.

In fact, one operator has entered into a formal agreement with us to ensure that cost effective Cat 1 devices are for their network according to their required timing. Without getting into the terms of the agreement, this gives us some visibility on volume, and illustrates our point that relationships create value. We have also seen our early success in Cat 1 to oscillate and to more business with existing customers, where several current Cat 1 customers are approaching us to support versions of their products for other and new networks in addition to Verizon.

This is another example of the value of the customer relationship in the context of the future growth with us. Turning to Cat M, the response since we announced our Monarch chip has been nothing short of amazing. Our initial partnerships with Verizon, Gemalto, Skyworks and Foxconn Socle are all moving well, making steady progress. Note that the U.S. market is moving full speed with carrier pushing to deploy Cat M as soon as possible. In addition, in China and Europe there is a demand for the NB-IoT flavor that we support also with our Monarch platform.

With this pressure from the market, our leadership position creates a striation where we have been approached by an impressive list of OEMs and ODM interested in working with us, looking to address the various IoT applications from variable to industrial. We do not underestimate our competitors in the long run, but so far they seem to be positioning themselves with something like older chip designed originally for Cat 4 or maybe for Cat 1 that can be used for Cat M by software modification just only for testing purposes only, even though it’s not suitable for a commercial product. And meanwhile, we have our chip working, we have started interoperability testing with eNodeB vendors and we have initial design wins in hand.

In fact, in addition to Gemalto, we currently have one new OEM and three Tier 1 ODMs planning to use our Cat M solution. For a company of our size, one of our challenges is to abbreviate the vast array of opportunities and determine where we should focus our resources. On one hand, we need to make sure that we work with customers ready to move as quickly as possible to launch products, so that we generate revenue. On the other hand, we have to balance that objective with devoting enough attention to potential customers and partners who might be moving a little more slowly, but who represent a huge long range potential.

So we are fractioning our customer relationships in a way to help ensure that we work with early adopters who know what they want to do and we will move ahead as rapidly as possible. A lot of these early adopters tend to be smaller company that find it easier to be nimble and move quickly but not always. Recently, we are being engaging with the growing list of major Tier 1 global companies, I mean big ones. So even some of them among the largest company in the world. I wish I could share with you the list of those names and this help me not to go farther in this presentation here because you can’t read it easily if you give those names.

Of course, there can be no assurance that our discussions would result in business on translate into revenue, but we believe our investors would be encouraged as we are by the range of companies proactively expressing interest in our Cat M technology. With our size on a huge addressable market, with our technology leadership recognized and our solutions gaining traction, we continue to believe that the M2M/IoT business can generate $200 million in revenue in a few years. As an interim goal, even with Cat M shipping only in the second half of next year, we believe the M2M/IoT segment can ramp to a quarterly run rate that approach $10 million exiting 2017, with a strong acceleration in 2018 and beyond.

Last point, more on the technology development is really longer-term because even if we are in very strong lead in 4G and IoT now, as you know we are looking ahead to the next frontier. The industry is beginning to discuss 5G and our partnership with TCL for 5G is also going well. We have hit all the relevant milestones as the initial agreement was renewed by TCL for another year. Access to the IPR being developed through this alliance is another example of how we’re continuing to increase the value of Sequans.

By executing well and hitting all the relevant milestones with our initial group of strategic partners, we have won that confidence and have created opportunities to significantly expand the scope of our relationships with them. We’re also having active discussions with potential new partners. Combines, we are in active discussion on an about a dozen different strategic opportunities.

What’s really exciting is that there is almost no conflict between them. In theory, with the right terms and some careful coordination, we could participate in most of them at the same time. Of course that doesn’t mean we will be successful in obtaining these terms in all cases. Note that these partnerships could also contain a funding component that would help or even completely satisfy our near term cash requirements. A few of them also represent an opportunity to lay the groundwork for a more comprehensive business combination down the road.

As we think about these different discussions, we’re keenly aware that we represent one of the few concentrations of single mode 4G capabilities anywhere in the world. And we intend to leverage our leadership and work hard to reach terms that reflect our unique position. This is as much as I can see now about a very exciting area of possibility regarding strategic relationships. In the past, we have emphasized that we had no immediate plan to access equity market, believing we have sufficient cash to reach breakeven.

The reason we’ve been trying to avoid an equity raise for more than a year was because we believe strongly that by handling our short-term via strategic alliances and convertible debt, we could create more value that would be captured in an eventual transaction. Although, it may not be fully reflected in the current share price, we would argue that Sequans is a much more valuable company today than a year ago. We have better visibility in the router business. It’s growing and we have less customer concentration.

We have several more important partnerships in place and a good track record with these partners. Cat 1 is shipping in volume now. Our Cat M chip is done and we have a number of large companies eager to work with us in IoT in various ways. This was not the case a year ago.

Now, if we were to close even one or two of the strategic opportunities under discussion, we would have a significantly more valuable with or without the funding component to the deep.

Clearly, we prefer to conclude and announce these before tapping the equity market. By depending on timing consideration, accessing the capital markets first, could be the best way to create the most value in the long run by removing the time pressure and give us the flexibility to conclude agreements on the best possible terms. So no final decisions regarding our cash needs have been made as we are speaking now, but we’re in a good position with multiple paths forward and we must determine which one will create the most value for the company.

What I can say with confidence is that one way or another we’re going to be in the middle of the sweet spot of 4G, LTE and IoT growth and provided that we continue to lead and to execute we’ll be a much more valuable company in the future than where we’re today.

I’ll turn now the call over to Deborah for the financial discussion. Deborah?

Deborah Choate

Thank you, Georges and good morning everyone on the call. I’d like to add some details about our Q2 financial results, and discuss the financial outlook, including our guidance for Q3. Revenue in the second quarter of 2016 was $9.9 million, a 6.5% sequential increase from Q1 and 31.9% increase compared to the second quarter of 2015.

As we mentioned last quarter, our expectations for Q2 have been reduced by the inventory issue with JetPack and the earthquake in Taiwan and were factored into our guidance. And as Georges described, we were also affected by some delays in Cat 1 projects during the quarter. But we continue to expect several devices to launch during the second half of the year.

Project revenue increased over 40% compared to Q1 and over 20% compared to the second quarter of last year. Volume shifts increased more than 50% sequentially when compared to the prior year.

We had two 10% customers in the quarter, one with 28% and one with 24% and one of these was a distributor aggregating a few customers. We’ve realized an overall non-IFRS gross margin of 44.6%, compared to 47.5% in the prior quarter and 36.3% a year ago.

Operating expenses were $10.1 million in Q2, compared to 9.6 million in the first quarter and 8.8 million in the second quarter of 2015. The sequential increase was mainly result of higher research and development expense, as the numbers of projects increased as well as higher administrative cost, some of which were seasonal related to the annual shareholder meeting and related formalities in the quarter.

Our second quarter operating loss $5.7 million, compared to an operating loss of 5.2 million in the first quarter and 6 million in the second quarter of 2015. Net loss was 5.1 million in Q2, compared to net losses of 9.2 million in Q1 and 7.1 million in the second quarter of 2015.

And basic and diluted loss per share was $0.09 in the second quarter of 2016, based on 59.3 million shares outstanding, compared to net losses of $0.16 in the first quarter and $0.12 in the second quarter of 2015.

To facilitate comparisons we’ve also reported our results on a non-IFRS basis, which excludes net loss and non-cash items related to stock based compensation expense and the fair value and effective interest adjustments related to the convertible debt and other financing.

The fair value adjustments related to the embedded derivatives in our convertible debt had a net positive impact in Q2. As the conversation prices are now fully fixed for both convertible debt issues, the fair value is now fixed and so we will not have this item in future quarters.

Non-IFRS net loss was 5.8 million in Q2 2016, compared to net losses of 5.5 million in Q1 and 6.4 million in Q2 2015. Non-IFRS basic and diluted loss per share was $0.10 in the second quarter, compared with non-IFRS net loss of $0.09 and $0.11 in the second quarter of 2015.

Cash used in operations in Q2 was 4.2 million, compared to cash generated from operations of 3.9 million in the first quarter, with the difference due to changes in working capital items.

Our cash in short-term deposits at June 30, 2016 totaled $7.5 million, compared to 6.5 million at the end of Q1. And this reflected $7 million of convertible debt issued in April, which we discussed in our last call.

In the current quarter, we expect to collect research tax credit earned last year as well as milestone payments related to governmental research grants totaling around $3 million. As George discussed we are also engaged in strategic partnership discussions that could provide additional funding.

Accounts receivable at June 30, 2016 were $11 million reflecting DSOs of approximately 91 days, due to concentration of shipments at the very end of the quarter. Inventories increased slightly to 3.8 million, compared to the prior quarter but we are down from the prior year.

Short-term debt from financing receivables was $2.1 million at June 30, 2016, up from 1.6 million at the end of the prior quarter. Looking forward we expect revenues for the third quarter of 2016 to be in the range of $11.5 million to $13.5 million, reflecting the growth generated by the launch of new home and portable router devices and acceleration of Cat 1 shipments as explained by Georges.

In Q3, we expect non-IFRS gross margin to be about 40%, then non-IFRS net loss per diluted share to range between $0.08 and $0.10 based on approximately 59.3 million weighted average diluted shares.

Our guidance for Q3 non-IFRS net loss per share excludes the impact of non-cash stock based compensation expense, effective interest adjustments related to the convertible debt and other financings, and any other relevant non-cash or non-recurring expenses.

We continue to expect sequential quarterly revenue growth through the balance of this year followed by strong growth next year, as we enjoy a full-year revenues from a growing list of M2M /IoT design wins and our home and portable router business continues to ramp with more operators and more end customers around the world.

And 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, same location where you will find the audio replay of this call.

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

Georges Karam

Thanks, Deborah. So just to conclude, a few words before turning the call to questions, I hope with all the detailed explanation about the growth of the business, you all have the view clearly from the position where we stand today in terms of business, with the business in hand, the project to launch this year, the pipeline of opportunities, obviously it’s clearly that we are really on track to achieve profitability next year and hope you are able to see beyond this, a growth potential that we have for 2018 and 2019.

Equally important, I hope you understand that the scale of partnership we have built in the ecosystem has a tremendous value that reinforce and adds up to our technology leadership position and our business potential. Specifically, I want to stress that the strong market pressure for Cat M solution, where the people that needed SAP combined with our leadership put as in unique position.

I explained to you that this reflected or added lot of discussions with partners, the existing partner with whom we have relationship today looking to expand those relationship as well new partners and I can tell to you even the new partners are excellent one that they will add up on the names that you know already. So all in all, when you look to Sequans today, we can say easily that we are doing great and we are far much better than a year ago. This is clear in terms of market positioning, business visibility and growth potential. But honestly if you look around you, I am sure you don’t find easily too many small mid-cap companies that they have the potential to create the value that we can do here in this company.

All these challenges I see and I believe all of you see it is managing the balance sheet pressure for the coming two quarters. But keep in mind we are not looking for - we are not missing hundreds of million dollars, we are talking about to get a comfortable zone to be in a comfort zone item to stay on the balance sheet maybe extra $10 million. And obviously this pressure will disappear - completely this challenge will go there and no more over hang on our stock if we are able to get those this money over our balance sheet today. So it’s not too much money and I still believe that this would be very easy, I can find it in very different ways and very easy to do this job and I am not concerned about it.

The old question there is, how to do it in an optimized way and do it for the best interest of the shareholders in general and fix it. So as we said, going forward on this point, some strategic deals could have the funding component, and we are trying to avoid an equity deal as we want to be sure that the value of Sequans is fully understood by the market before we do any transaction. But obviously, we need to maintain the control of our negotiation with the strategic partners along to leverage our unique position to obtain acceptable term. So depending on timing and distribution, raising equity first may create more value in the long run by removing time pressure and enabling best possible deal terms.

As we are speaking there is no decision taken on this, and I confirm again that we have many options on the table and we are in good position to pick the right one. Trust me, I know how to do this and I will make the best decision that will create the most long-term value for our company Sequans.

Thank you very much for listening. I will open now the session for the questions. Operator?

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And we have a question from the line Mike Walkley with Canaccord Genuity. Please go ahead with your question.

Mike Walkley

Thank you. And Georges thanks for sharing some longer term targets for your router and IoT businesses. Just thinking about them all, how should we think about the cadence to approach or even exceed 10 million per quarter for these businesses exiting 2017, is the router business kind of more steady with your diversifying customer base, and then IoT more step functional with Cat M layering into model?

Georges Karam

Hi Mike, I mean obviously a decent portion of our business currently in the year, if I take the second quarter, is coming from the home router, portable router. So on the percentage perspective, it should project from where we are to above $10 million next year on a quarterly basis, obviously it’s less than the step function versus the M2M/IoT, where we are on the M2M/IoT today really maybe in the close to the 10%, 15% in the quarter, and this is obviously going to go to the level to the 10 million, so on a percentage, you are right. I mean the M2M/IoT, the Cat 1 business all these businesses are new, we are starting almost from zero and building up. Home router and portable router, we have a decent position building today by the way big chunk of our revenue but it’s not I’d say it’s not flat, it’s not really minor growth, because as I said we have from one side design win on increasing our market share and giving us more revenue on this, and on the other side, the natural opening for that and the emerging market the diversification is giving us another potential to increase the market share. So yes, I mean this is what I can comment on it.

Mike Walkley

Okay and then for some of the Cat 1 push outs, is this a lost business at all or are people pushing towards waiting for Cat M or just timing the ways that you still feel comfortable as the businesses come in, in the second half of the year?

Georges Karam

Yeah I mean it’s a very good question, and hope I was clear on this. It’s essentially not really to say that it is major one versus the other. We have by the way some of them moving on time, and we shipped in Q2m Cat 1 chips, we moved even to volume shipments, it’s really start to be meaningful in terms of unit shipment in the second quarter, the Cat 1 shipment, some going to Gemalto as I mentioned, and some to other projects as well. But the M2M operation, really the challenge about this that this is kind of slow because you go to the module, integrate the product, because fragmented business and all this comes in a slow way. So we have seen some delay on the projects, that’s impacted to say little bit our quarter, but we won’t see major challenges, it’s really something that will happen, and it will happen. And the beauty about it is that yes, if we are patient, once it’s done, this business as I said it’s really sticky, it will be there and it will be there for I don't want to say 10 years, but at least five years with good visibility. So this is more color I can do on this.

Mike Walkley

Okay thanks. I was actually at this IoT Evolution Conference just two weeks ago and there's a lot of talk about Cat M and several of the companies mentioned that you're the only company out there with a chip for them to look at. Can you just update us on the competitive environment, who do you see is maybe your competitor as Cat M becomes a bigger part of your business next year. Do you see anybody really coming to the market in the next year or so, and longer term who do you think is your biggest competitors in that market?

Georges Karam

I believe that if you look, by the way, which is interesting to market. First of all market is, all the market as I said is fully moving in full speed on call it the narrowband LTR, LTE for IoT whereas I said you have two flavors there, the Cat M and the NB-IoT. What's clear today that the United States like, all the carriers whether Verizon, AT&T and I expressed this publicly, they are moving at full speed to enable Cat M first because Cat M can give you wider spectrum of application because you can cover application that they need few hundred kilobit until application that they need few tens of kilobit. And later on that we would introduce NB-IoT as an evolution to Cat M, while you see in China and some carriers in Europe, in my opinion from political angle pushing more NB-IoT to happen first.

As a consequence of this you see one off for example our major competitor is Huawei because getting more working on NB-IoT and not doing anything on Cat M, because they are linked to China and Europe. So we will be competing with them on NB-IoT but we will not be competing with them as I see today on Cat M because they are not active at all on this space for the time being, and even advocating that NB-IoT is much better than Cat M. We are not playing this game because we have bulk technology and we have detailed opinion on the niche technology there depending on the used case. So it's very easy to simplify it, it's not that easy to simplify it. So now if you think to the U.S. where we see other active, there obviously I mean the two big guys that they are Cat M are Qualcomm and Intel, and we see some smaller guys I mean Sony today, as I talk about technology there. But other plans for me my understanding for next year to come with the chips and whatever we see this year, we saw for some people coming with a Cat 4 even one of the big names as I mentioned. They coupled that Cat 4 chip, they put the software best to make it Cat M comparable, which is good. This is good for testing, you can test your software, you can help the ecosystem, but it’s nowhere, it’s not all any step further to go to product and get the solution that gives you the power, the cost solution that you needed in your chip.

And we are really enjoying good position, we still believe that we have, if I mean I tend to say more to believe in 10 months before the closest competitor because our chip is best engaged in testing with IoT vendor and any guy who wants to have a product next year, even I can challenge if anyone can get their product even in the second half of next year not using Sequans technology. So I believe this is really giving us a big avenue of opportunity, and that’s why we have a lot of traction with even big names Tier 1 names that we never heard about them in the past when we were doing WiMAX or early 4G technology, and now they call us and sign NDA to discuss engagement on Cat M.

Mike Walkley

Okay, one last question from me. Deborah, can you help us just think about on the revenue maybe what's implied in Q3 guidance and how this business has trended for the rest of the year?

Deborah Choate

We're still in a process of working on a number of major projects. So it will still be a significant contributor in the third quarter, will contribute in the fourth quarter as well but I think over time we're expecting it will not be necessarily a growing part of the revenue mix that should remain stable and at some point probably next year start coming down.

Mike Walkley

Okay, thank you.


And the next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

Quinn Bolton

Can you hear me?

Georges Karam


Quinn Bolton

I just want to follow-up on the Cat 1, it sounds like from Mike’s question it’s more of a supply chain when we get into the modules, it’s sort of ready to go rather than delays at the actual in the applications. Just wondering if you could confirm that and can you give us any sense of what types of applications, I mean are they tracking devices or are they other types M2M applications?

Georges Karam

Yeah, hi Quinn. Obviously, the application we are talking about where we have variety of application, we mentioned tracker, we have in the alarm panel, we have in the router, we have different type of tracker by the way some ODB interfaces and so on for car. So today really we see, and this is I am talking about the right deals, and if I add as well the spectrum of Gemalto and the cursor behind Gemalto aggregate thing, we feel metering, we have a large set of customers already engaged in various application, and you know if I go back now on the delay what’s happening there, you know we have I tend to say kind of two of them, three maybe, two of them instead of moving to speed of the ramp of the revenue, we are expecting that they will move faster to kind of slow, they have some software release, so to update and they have software’s so they kind of push a little bit the launch for Q3 or major launch because we already shipped to them something.

And another guy he finished this application a little bit late and they are in the pre-deployment phase, and they need to finish the pre-deployment phase before they move to production. So they lost kind of one quarter in my opinion on the fast run there. So this is what’s happening. So it’s not really the supply chain, and that’s why we were not able to ship to them, even if when you are in module this can enter into the creation, because you need to anticipate the lead time can be a big little bit on the module, so you don’t want to advance too much. But this fusion was really, just on the some software stuff on the guys, they need to finish that product, they have some issues on their side, because it’s the whole product, this is not the piece of Sequans, piece of Sequans is certified for working, but to get their own product, their own product, they need to take a tour somehow, some of them they do pre-deployment even in the field with friendly customer, before they move to full production, so this is what’s happening.

Quinn Bolton

Got it, great. Thanks and then you talked about sort of the two major approach business, home and portable routers sort of approaching $10 million by the end of next year, and much deeper ramp on IoT, you know if you look into first quarter I’d think that there is probably some seasonality in the home and portable router business and just wondering if you look at the forecast, do you think that the ramp in the IoT business, might be able to help offset some of that seasonality or do you think from modeling purposes, industry should be thinking about some seasonal effect in the March quarter, and then I have got a final follow-up question.

Georges Karam

Yeah I mean we always have some seasonality in Q1, no matter what you’d do with existing business, even if when you look to Sequans business, we don’t have too much consumers stuff to justify this. But we see it because this is the Chinese New Year, we have many events coming in at the same time, also the big push that is happening in Q4, people that close the year, and we see it’s like kind of maybe people pulling some of the business, and then they see all in Q1 as with Sequans. What’s happening for us this year is that the home and portable router, we could have some of the existing business. For example let’s see the JetPack, if I compare to the last year, in Q1 we saw a little bit lost business in Q1 versus Q4 and Q3.

So I am expecting this will happen again but we have a new router coming into production even some shipment this quarter and then moving full speed in Q4, so this should be offsetting some, because it will be at the beginning of the ramp of our growth and definitely we can see that the Cat 1 business is I believe, it’s not that, it doesn’t follow the same, because maybe retail product like JetPack will follow little bit the decision ability that they have in the fact of Q1, but I tend to believe that the Cat 1 business and M2M which is more industrial and so on will have lesser impact on this, and the fact that our Cat 1 is moving, we will be adding more, we will have Gemalto ramping more product, I have the feeling like we should not see, we should compensate for this impact in Q1 this year.

Quinn Bolton

Great, thanks. And then just, wanted your thoughts on where as the competitive technology either Cat 1, Cat M or NB-IoT technology, looks like a few operators at least have started to announce LoRa based services and wondering if you have seen that have any competitive effect or does it come in to any of the discussions you’re having which your customers as they think about the IoT strategy whether they go with an LTE based service or LoRa base service? Thanks.

Georges Karam

Yeah. I mean we didn’t know we didn’t see an impact today of all I’ll see the attraction to the contract impact is more positive because this bookmark pressures on the career to get there Cat M network ready. Obviously the career they need to do good job there, by enabling us as soon as possible. Otherwise they lose footprint, they lose - LoRa is easy to deploy but it has a lot of issues because first of all you need to build a work, it’s your private network, you need to build it, you need to put base stations on and is unlicensed band, the security angel and so you have many, many other elements that goes against LoRa.

And my opinion on this is that LoRa is a good technology that kind of private network, where in a campus, you can put your LoRa and so on. But the more, by the way the carrier they do better job or good job on two things, deploying obviously making the Cat M available because you have some customer they want to move and if there is nothing to use LoRa. But if they get their Cat M ready and they get the good pricing on Cat M in terms of subscription plan and all what’s relative to the data service, they offer - I tend to say they can have the dominants there.

So in a brief, we see them the two opening, I believe some of the operator as well around the world and you see it is essentially outside the U.S. because they are late more than the U.S. in terms of LTE coverage. There LTE is not there, so it’s not the question about moving to Cat 1 and Cat M. First of all put towers, they need to get that towers in place and get the coverage of the LTE, because they need to move, they see some of them that adapting or using LoRa is good things.

We’re seeing some carrier talking about combination of this by saying, oh on this place I can use LoRa and in this place I’ll use Cat M and the LTE. And the - yes, it’s clear the carrier are really fully focused to get Cat M ready as soon as possible because - and I believe, I share this believe that the value proposition of the Cat M will be far much superior then what you can get with LoRa, if the carrier they do good job by pricing this properly.

Quinn Bolton

Great, thank you, George.


In the next question comes from the line of Anthony Stoss with Craig Hallum. Please proceed with a question.

Anthony Stoss

Georges, you’re very excited about kind of just connectivity and how the future looks for Sequans. Can you give us a sense on - you talked about gaining a number of designs with Gemalto? Can you help us out with perhaps ballpark number designs you have now versus maybe six months ago. Then also Deborah, if you can also try to help us understand your OpEx going forward. If you try to balance growing number of request for designs et cetera, how do you balance that what’s your current OpEx? Thanks.

Georges Karam

Yeah. Hi, Anthony, the - on the first question regarding Gemalto obviously, we have as I said excellent relationship and I tend to say I have full visibility at 100% on the design win. One by one and even share a lot when we work with the customer on this because the customer they have - some of the customer they have the choice by seeing the start, some of the customer talking to us and we take to Gemalto station. Because we believe that they could be better served with Gemalto than buying from Sequans the module directly, as we tend to believe that we should stay more and more chip set company and do at minimum module business.

So we - I do not know how I can qualify this, I’m thinking about it without really relegating too many things because obviously I’m under NDA with my customers. But if I can tell you on a target for next year for me, on a yearly basis we spoke many times about the potential that’s been got to Gemalto and I said, those guys they do 15 million units in a year and it will be a shame if I can get - if I will not get once on those 2G converting to Cat 1 because if needs to take time, maybe over three years, U.S. market maybe other market is not there, easily we should get 50% of this business over maybe three years. So maybe next year, I will be kind of 40% of this potential and I tend to say today I feel like I have 50% of this in terms of designing.

Deborah Choate

And I think in terms of OpEx, you’ve already seen I think the bulk of the impact reason in the short-term with the sequential increase we had from Q1 to Q2, we added some headcount. Obviously it remains –it’s always juggling out, but we done want to take the OpEx up too much ahead of the revenue around. So we expect that the OpEx should not increase in the second half of this year?

Anthony Stoss

Okay, great. Thank you.


And the next question is from the line of Craig Ellis with B. Riley. Please proceed with your question.

Craig Ellis

Yeah. Thanks for taking the question and congrats on the momentum that you have on the design side in the business. I wanted to ask a higher level of question and I apologize that’s already having asked. I popped on late, but last week we saw SoftBank a very large acquisition or proposed acquisition upon holdings with the justification that that was really all about IoT. And so my question Georges is with the interest in the IoT space coming in at that level and that significantly, where does Sequans fit in all of that?

Georges Karam

Thanks, Craig for the question. I mean, let me - I tend to say, we’re really in the heart of the IoT in some planarity as well, so I thought to see how the cloud base piece, which is Sequans is not in the cloud. But to get all the IoT service, you have the cloud and you need the device and on the device side for the technology, you need a communication technology which is essentially making the link there, you need a sensor, you need to some extent GPS to co-locate and that’s it. Once you have this you have all what you need to make an IoT, M2M and when you look to all this on the device side on those technology, obviously in terms of communication you can use LoRa, you can use Bluetooth for local connectivity and today the - it’s given and everybody agree on this, that the LTE, IoT whatever you call it, the Cat M and the IoT is the technology of choice to connect big portion of those devices that they’ll need carrier connectivity that will not be connected by local gateway through Bluetooth.

And now when you go there and you say whose there, you can find few big names and then maybe it’s very hard even to satisfy another smaller competitor that is closest to us. And then you find Sequans and on top of this you find Sequans leading even ahead of all the big guys, engaging with the Tier 1 partners and all of the ecosystem and the value chain and providing this technology and executing extremely well because people believe - people rely on us to make this happen, I can tell you and I can claim this. If Cat M will happen in the world, this will be thanks to Sequans. I mean, maybe someone else could do it, but because we have done it and we are the only guys, this will happen on time next year as the people planning to launch this will be because of Sequans doing the job property.

So obviously this creates a kind of scarcity for this technology and for the position of Sequans and creates value for Sequans, which is not perceived by the way, when you look to the stock value because you have dollar hang on the balance sheet and people see us like still losing money, even if it’s not - we’re not that far from profitability, but still. So all this I - my key message - I know I believe this is an important item and for the shareholder to say, hey guys we have a great company here, we have a great technology, it’s unique, no one has it, it has a huge value. So, we need just only to be a little bit patient, give it that chance because there is - the market is happening, carriers will deploy Cat M, obviously today that is - it’s not there. But believe me in the six months you’ll hear a lot about it and you’ll see it in 2017. And then if anyone needs to do something there, Sequans will be best to go there, at least 50% chance not to say we’re the only guy, but we will have 50% chance to be selected on all those projects. So this is how we see ourselves and we are very, very excited about it.

Craig Ellis

That’s a very good summary and the follow up to the question would be, can you just into our recap were Sequans says either qualified or has gained interoperability capability in key regions globally U.S., Europe, Asia etcetera.

Georges Karam

Yeah, I mean obviously in the Cat 1 technology we are everywhere. I mean there is - we are everywhere there is Cat 1we are ahead. We announced the three carriers in the U.S. by the way Verizon, T-Mobile and AT&T in terms of certification and so on. We were less versatile [ph] about the design win and most of the design win were focused on Verizon in our public announcement, but obviously you can imagine if there is certification this means we have band the ground something going on the other networks as well, we announced Docomo in Japan, Cat 1 is great. Cat M which is the new technology, it’s happening. The first guy moving their part the U.S. carrier and Sequans is on the frontline finishing the interoperability with the Ericson and Nokia eNodeB to be specific on the partners and I tend to say we are making their eNodeB the working and they are making our chip sets working if you want end to end. Because it will be the first guys making this happening in the world and we are in the pipe here in Q2, because we shuffled the product and we started this and its moving well and we hope that at the end of the year we’ll be –in the coming Q3, Q4, we should have certification pass finished and would be opening the gateway for certification on the carriers.

Craig Ellis

Very helpful, thank you, Georges.


The next question comes from the line of Jaeson Schmidt with Lake Street Capital Markets.

Jaeson Schmidt

Hi, guys. Thanks for taking my questions. Just a couple quick ones from me, Georges, I know you talked about India. But wondering if you’re baking in high expectations for India into that outlook for your portable and home router segment?

Georges Karam

Hi, Jaeson, I mean obviously we believe in India, otherwise you could stop on our activity. We had design win and we’re shipping there. So we do on a quarter basis hundred kits out of here, hundred kits out of there in India because it’s initial launch. I still believe that this will happen sooner or later, because there is no reason. Broadband is going to happen in the world everywhere even in the far, far corner out of the world, people needs to be connected. So this will happen and it’s a question of being patient and stay there because you’re going to participate to this market. Now, in terms of revenue projection and I can give you the answer on this by saying. okay, we are projecting to exit above $10 million. We are not putting there a number for India, which is $5 million per quarter obviously. So we remain very cautious in our number next year. My first target in India really is to do $1 million per quarter on India. This is a really very, very easy target and I’m putting this to my team as first thing to happen next year. But we give an indication that will be well about $10 million, which is - explain that the sensitivity to India who will be very small.

Jaeson Schmidt

Okay, great. And then Deborah has modules to become an increasing proportion of overall with revenue going forward. How should we think about kind of your long-term gross margin?

Deborah Choate

Long-term we remain still with the same targets were on chips, we’re still targeting 45% to 50% and modules more in the 20%, 25% range. And we continue to target being a chip company and not a module company. That from time to time especially in the short-term modules can be a great art of revenue. So I would say in the short-term we’ve said greater than 40% for Q3 and, which is taking into consideration that there are still fair amount of models and that’s probably a baseline used the next few quarters.

Georges Karam

And Jaeson, if you’re looking on which is projected I was just on a quarterly basis, so this could have a little bit, it’s very hard the mainly of the beginning. But if you put it in on 2017 number to figure I give it to you in terms of indication each business unit. By the way, if you look to this home router and portable router we’re talking about the business, the trends at between 45 and 50. And then you go to the other piece, which is the M2M IoT, we already know the big chunk of this would be chip because this would be Gemalto. Cat 1. The Cat M is going to be mainly chip I don’t seek out them going to module business. Because our strategy there is really to enable the people with more chips integrated, the chip can do things easily. So the module level becomes irrelevant if you want except if you are someone like Gemalto was adding more on the module like security another angle like this. So this is our strategy and I wanted to say we don’t see a major change in our model where ‘17 what I’m giving you’re going to be 30% of our business’s module. So module hopefully we remain - worst source case we see a 20% of our business and even there this means it was big in my opinion. We should be maybe in the 15%. So the impact of the margin should keep us on the yearly basis targeting to 45% on average assuming full year 2017.

Jaeson Schmidt

All right, thanks a lot.


The next question comes from the line of Tom Sepenzis with Northland. Please go ahead with your question.

Tom Sepenzis

Yeah. Hi, George to everyone. I am just curious and so as I got implemented looking a Cat 1 Qualcomm’s announced a chip there and they’ve announced that they’ve got about 80 IoT wins so far this year. So I’m just wondering how you’re - if you’re seeing them comparatively if that’s part of the headwind in Cat 1 and above this year or is that still a separate market because they’re supporting other 3G technologies on those markets?

Georges Karam

Hi, Tom. I mean Qualcomm obviously refer to Cat 1, but you need to keep in mind, this is a multi-model chips or nothing different than Cat 4 chip that they have except maybe little bit squeeze or a little bit priced or marketed. I doubt maybe that this is really completely new chip. So it has the 2G, 3G inside, it has an impact component there and even the number of design win this means all of my existing customers are design win. Because some people are taking benefits of a low cost chip to go to some market and serve of the market to the local chip. You see even I’m seeing application where on your phone you could require a Cat 1 why not if it’s cheaper you go to chip Cat 1 instead of Cat 4 because you want to have feature form and soft.

So the way we saw is that it’s not really a straight forward position against our product and this doesn’t change in nature our competitor, if you want landscape and position. We always felt pressure if you want from the legacy, where the people are used to get the relationship with the big guys and they have their technology there and so on. And for them when the Cat 1 was happening they felt like okay, is going to big step for me to change, I’m not going to change and accepted to suffer on pricing or take risk in competitive landscape versus someone like Gemalto who decided to move and say it’s a new platform, single modality Cat 1. So we saw this and Cat M completely irrelevant by the way, I mean because this cannot work at all the study of Cat M to use the older chip. But we didn’t see a really a major impacts from the announcement of Qualcomm there - as really on our position with the carriers and our position with the customers.

Tom Sepenzis

Great, thank you. And then just given the slide popped out here in terms of getting back to profitability, is that impacted potential customers at all in terms of engaging with you or are they looking past that given the relationships that you already have and the expectation of potentially strategic -

Georges Karam

No, frankly, we cannot ignore the customers want to this, look to this we have some discussions sometimes, we have some competitors leveraging this saying, those guys will die tomorrow blah, blah, blah. I mean, I heard of this and many meetings, but so far I sold to Japanese customer, I can tell you how much is complicated, but they would convenience that Sequans has the right technology. And it’s essentially comes of two things, first of all we are leading in technology and we have the support of our big partners, I mean when Verizon is betting on a Sequans, when Gemalto is betting on Sequans and you list to them all the other names. People could better say all those guys are idiots and I’m the smart guy who sold it because Sequans is was going to die tomorrow. I mean intend to say this can be the reverse. So it’s a challenge, we’re managing it and we’re not losing business because of this.

Tom Sepenzis

Great, thanks very much.


[Operator Instructions] There are no further questions please continue.

Georges Karam

Okay, so thanks Shannon for handing this. Thanks everybody staying on the call and for all your questions. I’m looking forward to meet you in the future. Take care.


Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

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