Sequans Communications' (SQNS) CEO Georges Karam on Q4 2015 Results - Earnings Call Transcript

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Sequans Communications S.A. (NYSE:SQNS) Q4 2015 Results Earnings Conference Call February 4, 2015 8:00 AM ET


Georges Karam - President and Chief Executive Officer

Deborah Choate - Chief Financial Officer


Anthony Stoss - Craig-Hallum Capital Group

Jaeson Schmidt - Lake Street Capital

Quinn Bolton - Needham & Company

Aaron Martin - AIG Investments


Welcome to the Sequans Fourth Quarter and Full Year 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.

Before I turn the conference over to our host, Mr. 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.

Georges Karam

Thank you, Telisa. 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 fourth quarter and full-year 2015 results conference call.

I’ll start by saying that things are going extremely well, and we are looking forward to strong growth as the single-mode market continues to develop. After saying a few words about the fourth quarter, I’d like to put a more strategic focus on the business discussion.

Our Q4 revenue was up 18% sequentially and 68% compared to the fourth quarter of 2014. Contributing to the improvement in Q4 was strong growth from the JetPack mobile router at Verizon as well as growth in demand from emerging markets, augmented by NRE revenues from a new public safety design win and projects with strategic partners.

Disappointing sales of the Nextbook tablets caused product revenue to be a little lower, putting us at the midpoint of our guidance range. Nevertheless, it was a strong finish to the year. Revenue ramped from $4.8 million in the first quarter to $11 million in the fourth quarter 2015. Revenue for 2015 as a whole was up 45% from 2014.

In the quarter, we saw new Sequans-powered products launched included the first CAT 6 CPE supporting 2-carrier aggregation from Gemtek and a CAT 4 vehicle telematics product from Zubie.

Gemalto’s first CAT 1 module has been certified by Verizon and is now ready for shipping. Other M2M and IoT customers made excellent progress toward certification during the fourth quarter and remain on track to launch products during the next few months.

Our new design wins during the fourth quarter were mainly in the M2M and IoT market, including several tracking devices. We also expanded our pipeline of potential new business with new opportunities in each of our markets during the fourth quarter.

Another important element, during the last quarter, we completed the ADAPT certification for our CAT 4 Colibri platform, as well as moving forward toward certification of our CAT 1 Calliope platform with AT&T, T-Mobile and other carriers outside the United States.

Finalizing several key commercial and strategic partnerships was probably our most important achievement of the fourth quarter. Some have been announced and others will be disclosed soon.

Today, we announced a strategic partnership with Verizon for CAT M. We will work closely with Verizon to accelerate the availability of CAT M-capable chipsets and earlier this year we announced a different type of strategic partnership with Foxconn’s subsidiary, Socle, for specific products aimed at the IoT market also based on CAT M technology.

A third strategic partnership agreement, again related to CAT M, has been signed and we are waiting for our partner’s approval to announce it. In addition to the new strategic deals we’ve signed, we expect to renew our agreement with TCL for 5G development in the first quarter. The combined impact of recently signed or renewed deals on the company is above $10 million, not counting at least $2 million of expenses that our partners will absorb that we would otherwise incur.

We ended the year with $8.7 million in cash and equivalents on our balance sheet and we expect over $7 million to be added to our balance sheet in the first quarter from new partnerships signed in the fourth quarter and the TCL renewal. These long-term win-win relationships validate our technology leadership and demonstrate confidence in our future.

By the way, we still have other strategic partnership deals under discussion complementing the signed ones and we are optimistic about closing some of them. We believe this approach is the best possible alternative for closing any potential short term funding gap from the perspective of the company and shareholders.

I’ll speak more about the substance of the partnerships later, but for now, I’d like to recap some of our most important strategic initiatives during the past year and explain how we see them evolving during 2016 and beyond.

Let’s focus first on the M2M/IoT market. This is our most strategic market since it offers the highest potential growth over the next decade or more. A year ago, we announced an addition to our StreamliteLTE family, a CAT 1 solution, designed to be well-suited to both traditional M2M applications and new IoT devices capable of running on the existing 4G networks.

We were confident that there would be demand for CAT 1 solutions, but it was impossible to know in advance how quickly this new market would develop. We initially cooperated closely with Verizon on the whole CAT 1 concept and, during the past year, AT&T and T-Mobile, as well as operators in Europe, Japan, China and Australia have embraced CAT 1 technology.

This growing interest from operators attracted the attention of the major module makers because their M2M customers are evaluating their options as the shutdown of some major 2G networks is becoming imminent.

Gemalto, one of the top module makers, was an early adopter of our CAT 1 technology, and the relationship has been an outstanding one. Gemalto is moving as rapidly as possible to introduce a whole family of CAT 1 modules for various operators around the world. Their first module, recently certified by Verizon, was designated the Most Innovative LTE Application and Service at the recent LTE North America Awards.

The M2M market is very fragmented and Gemalto’s historical large global market share, with customers in 180 countries, enables us to address the market worldwide. We expect that Gemalto’s CAT 1 design wins will be an important source of revenue growth for us, with the ramp beginning this year. This M2M business tends to be very sticky and, unlike consumer applications, the business you win typically remains in place for several years.

Our CAT 1 solution was selected by a second well-known module maker in the second quarter of 2015. This customer is focusing initially on home security applications and we expect to be able to identify them when their first product launches mid-year. During the fourth quarter, we continued our ongoing discussions with other module makers and we are pleased with the progress of these discussions.

Our own CAT 1 chip and related module have also prompted interest from OEMs and ODMs considering new types of devices and applications. During 2015, we accumulated a good list of design wins that tend to be related to three types of applications: industrial routers, home security devices such as alarm panels, and various types of tracking devices.

Industrial routers from Encore and Netcomm have been launched, but the other devices are still in the design phase and a few of them are currently in certification and will launch at various times this year, mostly in the second quarter and onward. Some of these devices could be in the range of 50k units/year, while others are larger and could exceed a 0.5 million units on an annual basis.

During the second half of 2015, the market for CAT 1 solutions was further validated as certain competitors, both large and small, announced CAT 1 solutions. We have not seen any certification announcements and as of today we remain the only vendor actually shipping certified CAT 1 solutions.

Keep in mind, during 2015 we spoke a lot about CAT 1, but our ramp in revenue during 2015 reflected almost no CAT 1 product revenue. All the progress we’ve been discussing regarding CAT 1, plus new deals we are working on, will translate to revenue beginning in 2016.

We are continuing to expand the size of the available market as we add new products to our StreamliteLTE platform. CAT 4 Colibri-based products have enjoyed excellent success for use cases that require very high throughput. For example, telematics combined with hotspot or industrial routers. We expect this demand to continue.

Similarly, we expect ongoing demand for CAT 1 solutions addressing applications requiring mid-tier speed up to 10 megabit/second. Some CAT 1 applications such as home security require VoLTE to provide voice and we believe this capability differentiates our CAT 1 solution from other competing single-mode LTE solutions.

Now, the 4G ecosystem is recognizing the need for narrowband LTE technology, reducing the peak throughput below 1 megabit/second, but further optimizing the power consumption and cost. As you know, both of these are key requirements for IoT.

The first standard called CAT M has 1.4 megahertz bandwidth instead of 20 for the CAT 4 and is optimized for applications requiring a few hundred of kilobit/second. It will complement CAT 1 technology in the M2M segment as well as open the market for wearables and other consumer-type IoT applications, where cost and power consumption are very critical.

The second narrowband technology currently under discussion is called NB-IoT. It has 200 kilohertz bandwidth instead of 1.4 and is optimized to support speed around 10 kilobit/second to better address the need for ultra-low throughput and ultra-long battery life for applications such as simple sensors and low data rate metering. By the way, the standards group seems to be converging on some different naming and CAT M-1 is the new name for CAT M, and NB-IoT will be called CAT M-2 going forward.

The important point is that all the chipset that make up our StreamliteLTE product family, from CAT 4 to CAT M1 and 2, will be used to address in an optimum way the various types of M2M and IoT applications and use cases and this will explode our addressable market.

Note that in order to implement CAT M-1 and CAT M-2 devices, modifications to the network infrastructure will be required. Therefore, during the next year or so, some device makers who want to move forward with solutions that can operate on today’s 4G networks may use our CAT 1 products to achieve time to market goals, although CAT M will have a better fit and eventually migrate to CAT M-1 and CAT M-2 technology when the network will be ready in the future.

In the same way we led the development of the CAT 1 market, we are determined to extend our time-to-market leadership to the new narrow-band LTE technologies CAT M-1 and M-2. Recognizing our technology leadership and the work we’ve already done on CAT M, we have been approached by a variety of potential strategic partners, including operators, OEMs, ODMs, and various companies with complementary technology.

Looking at the two strategic partnerships we’ve announced, Verizon and Foxconn, we see that these two partners are complementary to our strategy and are helpful to us in different ways. Verizon intends to lead the market by being first with network ready to support CAT M devices and we are engaged in joint activities to accelerate commercial realization of CAT M technology and devices.

Similarly, with Foxconn’s Socle subsidiary, we will co-develop solutions that take advantage of our CAT M technology and Socle’s SoC integration capabilities and extended IP for products that target various IoT applications. We have a third unannounced strategic partner for CAT M that will reinforce further our position in the M2M and IoT space. We hope to announce this partner’s identity soon.

In addition, as I said previously, we are pursuing ongoing discussions with other potential partners, both commercial and strategic, related all of them maybe to CAT M. Some of these discussions are quite advanced. We think our ability to define mutually beneficial relationships with multiple partners to exploit different CAT M opportunities will have huge benefit for Sequans over the long term. Specifically, we should be able to achieve both geographic reach and scale, and benefit from the complementary strengths of leading companies in several areas.

The key for us is to remain the cellular connectivity leader that other companies are eager to partner with. As an example, we have the ongoing partnership with TCL where we are working together on 5G technology. Although product revenue is years away, this relationship is one way for us to remain at the forefront of the technology as it evolves and to overcome the budget limitations of a smaller company.

Turning now to the home and mobile router market, this is our traditional business which has accounted for most of our LTE revenue through 2015 and has shown steady growth. As an established market, we are looking for continued steady growth over the next several years.

During 2015, the ramp of the Verizon Jetpack mobile router business was an important contributor to our growth. This business is going quite well and we are working on the next version of the device and we remain confident that we will retain this business. It will be an important part of the foundation on which to build our growth for 2016 and beyond.

Additional router design wins in the United States during 2015 are gearing up for launch in 2016 and will contribute to our revenue growth this year. We are pursuing an expanding list of new opportunities as a result of more carriers enabling single mode LTE in the US and Europe. Also, we are seeing new router applications where LTE is used in conjunction with other access technology and consequently expanding our addressable market.

During 2015, we broadened our customer base in emerging markets and we will have more OEMs launching Sequans-based products during 2016. This will improve our chances of being selected by carriers for new design wins in various regions of the world.

We are also continuing our technology leadership in the established router market with our StreamrichLTE platform. After launching our Cassiopeia LTE-Advanced product last year, we are still the only company with a single-mode CAT 6 LTE-Advanced carrier aggregation solution shipping.

The transition to CAT 6 LTE-advanced by some of our customers may have tempered our emerging markets growth to some extent in 2015, but we are expecting better growth in 2016 with a significant portion of it coming from CAT 6. We believe we are well-positioned to retain and even gain market share with our leading technology and expanding list of OEMs.

In our outlook for 2016, we are assuming only moderate growth from both China and India. And if it accelerates at a faster pace than we expect, this can be upside. Both regions continue to represent significant long-term opportunities for us and we are still committed to those regions.

Finally, after those two main market segments, we have been successful in landing several design wins in mobile computing, mainly tablets. And we have also experienced good success with public safety applications and other vertical niche markets.

In 2015, we executed very well on modules for two tablets for Wal-Mart. However, sales for these mid-range tablets have been disappointing relative to expectations for reasons unrelated to Sequans. After our experience with the unpredictability of demand for these mid-range tablets, we consider mobile computing a market we will approach on an opportunistic basis, without building high expectations into our forecasts for this segment.

We are continuing to pursue opportunities in mobile computing with potentially larger volumes than we’ve had so far. However, since we have little visibility other than customers’ forecasts, we are looking at these opportunities as upside potential.

In public safety and vertical projects, we have finalized another deal with a major European OEM in the fourth quarter, so we have three major customers in this segment. These projects tend to be low volume, but high margin deals and include NRE. They also allow us to benefit from the know-how we gain and that we can apply to other market segments. We have a few more projects in the pipeline in this category, but we consider them as potential upside to the revenue growth we are targeting from our two main markets, M2M/IoT and home/portable routers.

To summarize, we have a clear line of sight to several hundred million in annual revenue in the coming years, as we augment the steady growth of the home and mobile router segment with more IoT applications and use cases supported by an expanding portfolio of single-mode LTE solutions.

2017 should be a breakout year because it will be the first year that will benefit from both a full year of IoT business and a full year of sales of products certified on multiple networks worldwide. We view 2016 as an important transition year, with strong growth over 2015, but more important, the year we will reinforce our 4G leadership through collaboration with a group of strong committed strategic partners.

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

Deborah Choate

Thank you, Georges, and hello to everyone on the line. I’d like to add some details about our Q4 financial results and discuss the financial outlook, including our guidance for Q1 2016.

Revenues in the fourth quarter of 2015 were $11 million, an 18% sequential increase from the third quarter and a 68% increase compared to the fourth quarter of 2014. We had four 10% customers in the quarter: a Taiwanese ODM with 28.1%, an operator with 18.7%, a Taiwanese OEM with 16%, and a European OEM with 10.4%.

We realized an overall non-IFRS gross margin of 51.8%, which excludes a provision for writing down the remaining WiMAX inventory. The improvement from Q3 was due mainly to a more favorable revenue mix.

Operating expenses were $9.9 million in the fourth quarter, an increase from a seasonally low level in the third quarter of 2015. Our fourth quarter operating loss, which included stock based compensation expense and the WiMAX inventory provision, was $5.1 million, compared to an operating loss of $4.2 million in the third quarter, and an operating loss of $9.2 million in the fourth quarter of 2014.

Net loss was $9.7 million in the fourth quarter, which reflected the negative impact of re-measuring the embedded derivative in our convertible debt. This compared to losses of $2.4 million in the third quarter and $9 million in the fourth quarter of 2014.

Basic and diluted loss per share was $0.16 in the fourth quarter of 2015, based on 59.2 million shares outstanding and compared to net losses of $0.04 in the third quarter, and $0.15 in the fourth quarter of 2014.

To facilitate comparisons, we have also reported our results on a non-IFRS basis, which excludes from net loss the provision for WiMAX inventory, the non-cash fair-value and effective interest adjustments related to the convertible debt and its embedded derivative issued in April 2015, the impact of the revaluation of the interest-free government loan issued in September 2015 and, as usual, the stock based compensation expense.

Non-IFRS net loss was $4.2 million in the fourth quarter of 2015, compared to non-IFRS net losses of $4.6 million in the third quarter and $7 million in the fourth quarter of 2014. Non-IFRS basic and diluted loss per share was $0.07 in the fourth quarter, compared with non-IFRS net loss of $0.08 in the third quarter, and $0.12 in the fourth quarter of 2014.

Cash used by operations in the fourth quarter was $2.2 million, compared to $2.4 million in the third quarter. Our cash and short-term deposits at December 31, 2015 totaled $8.7 million, compared to $11.6 million at the end of Q3.

As we have indicated previously, we expect to approach cash flow breakeven on a quarterly basis in late 2016. As Georges noted, we expect to add over $7 million to our balance sheet in the first quarter related to the strategic partnerships signed during Q4. Over $5 million of the $7 million has already been collected in January.

Additional sources of cash this year will include collecting the research tax credit earned in 2015 from the French government and additional research grants also from the French government that are currently in process. We continue to discuss additional strategic partnerships and those could also have additional funding source as well.

Accounts receivable at December 31, 2015 were $16.7 million, reflecting DSOs of 116 days, due to invoicing substantial amounts late in the quarter. Inventories declined to $4.1 million.

Looking forward, we expect revenues for the first quarter of 2016 to be in the range of $9.5 million to $11.5 million, reflecting the impact of typical seasonality. In Q1, 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 Q1 non-IFRS net loss per share excludes the impact of stock based compensation, the non-cash fair-value and effective interest adjustments related to the convertible debt, the embedded derivative and the interest-free government loans, 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 begins to ramp, with a much smaller loss for the year. We expect an even better year in 2017 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.

Now I’ll turn the call back to Georges.

Georges Karam

Thanks, Deborah. So before turning the call to questions, essentially as we’re standing at the beginning of 2016 and looking a little bit backward for 2015, I can summarize 2015 by saying it was a good year from revenue point of view, but it was an excellent year when we look to all what we have done by implementing the IoT strategy and position the company where we stand in the IoT space.

So now, as we are looking forward to start – started already 2016, so our objective really is to monetize the IoT strategy that we have implemented last year to move forward and faster growth during 2016 and accelerate this growth in preparation to 2017 where we expect to have a huge year in my opinion, because there we will be able to benefit from full year business in the IoT space and also the adoption, the large adoption of carriers worldwide of single-mode LTE.

So the mission for me and my team is really clear. We intend to keep execution and maintain our product leadership, specifically in the narrow-band LTE technology required for the IoT market and we’re working on now, but also to keep executing expanding our strategic partnership for more scale and better access to market.

With this, I conclude the presentation from our side and I’ll turn it to questions. Many thanks for listening. Telisa?

Question-and-Answer Session


[Operator Instructions] We have a question from the line of Anthony Stoss with Craig-Hallum.

Anthony Stoss

Georges, maybe you can talk about design activity either on CAT 1 or if you’re seeing increasing interest on the CAT M side, just to try to help us quantify maybe second half of 2016 number of design wins versus where you might sit right now. And then secondly, the fact that Sony has bought Altair, I’m curious if you can share your views on how that might help you of either some of Altair’s existing customers already showing up at your doorstep? And I have two follow-ups.

Georges Karam

On the first point in terms of design activity, obviously I didn’t go through details because honestly the pipe is big and what we have in hand is really large and I tend to confuse the people when I start to list them. But mainly the CAT 1 activity, as I said, where the revenue, that will support revenue on 2016 and going forward, obviously one, you can qualify it aggregating a big chunk of them to our markets through Gemalto where they are already with the Verizon version, but also expanding for other carriers. So this is one big angle.

We mentioned as well another module maker in hand that should enter into production as well this year and we will announce about them later on. But to mention as well that we have direct customers, so far some of them got launched in last year, the most important one other than – really we have a bunch, more than four, five tracker design win and we have a couple of home security alarm panels and so on. And we have other industrial routers to come, our connecting machine of your own devices.

And we are seeing this really continuing. We still work on new deals to come. There is really a strong traction on this and obviously all this driven in the US by the reforming of the 2G on AT&T, because no 2G network will be on January 2017. So all the guys need to move forward for something else and something else today is definitely clear, there is no question mark in the mind of anyone in the market this will be CAT 1 solution.

And this is obviously helping us and we’re seeing the same traction as well with, for example, the customer of Gemalto adopting designs as well. So this is really the main IoT, the main CAT 1 business. And we should not forget as well the home router, portable router where we have some router even in the US design win that we secured last year and they are in the pipe to come to revenue this year. So those as well will contribute to our growth this year.

And on the CAT M, obviously we are in different phase, so I’m not expecting what I will call product revenue of CAT M this year obviously because network is not ready and we expect this to see in 2017, because 2017 in the IoT space will have a full year of CAT 1 design delivering revenue, plus the introduction of CAT M accelerating design win for M2M as well IoT type wearable or even consumer oriented device on the CAT M. So this is how we see it.

And for now, for us, the CAT M is really executing to make this happen with the partnership we announced, as you’ve seen we said we signed three deals really related to our leadership on CAT M and two announced and one which is now clear for you related to Verizon, essentially with the intention to lead the world with CAT M the same way we did on the CAT 1.

Back to the question on the acquisition of Sony Altair, all I can say that this really has all the good news for Sequans. I mean, it was really very good for us. I was even dreaming about it, if you will, from my angle. On one side, we see them defocusing in the home router, portable router space because this is not really the business of Sony, so this open for us an avenue to capture more design win and collect from others.

And on the IoT space, honestly I see it’s more going to vertical space where maybe the competition should be less aggressive than dealing directly with Altair. But in any case, this doesn’t change the leadership we have because as we said before without really naming any special competitor here, we remain the only guy shipping CAT 1 and leading with this. And I’m sure on CAT M we’re going to have a minimum similar leadership. So acquisition or not, this will not help catching up with our execution.

Anthony Stoss

And then as a follow-up more for Deborah, your accounts receivable being at $16.6 million, I know you talked about the billing cycle occurred late in the December quarter. And if I heard you correctly, $5 million of the potential $7 million in strategic [indiscernible] if you take a look at what you would expect cash collection cycle-wise in March, you include the $5 million of the $7 million, where do you think your cash balance ends say March 31 or a range of where you think your cash balance will be?

And then the follow-up also, Georges, if you don’t mind give us a bit more on the Foxconn partnership, when you think that to generate revenue?

Deborah Choate

We don’t give projections on the cash range, but I can say that with the dollar sources that we talked about, we’re expecting to not burn much cash at all in the first quarter.

Georges Karam

On the Foxconn revenue, obviously, Foxconn is related to the CAT M and I’d like really maybe to stress a little bit the relationship here, Sequans, we’re coming with our first product CAT M to market alone, on our own, with our own technology, but this is attractive to Foxconn to partner with us to make derivative of this product to address other application in the IoT space where we add more IT, more SoC function and so on that can address wearable or other devices in more optimized way.

And so this helps us to bring faster to market derivative of this product and have a portfolio which is expanding [very optimally] and this will help us to stand in front of big guys who could have a large portfolio, larger than what Sequans is able to execute on its own. But also give us access, privilege access to some extent to the market that will be driven by Foxconn directly because they will have privileged relationship on this.

And in terms of revenue, we see it not happening obviously in 2016. All this should be coming in 2017.


We now have a question from the line of Jaeson Schmidt with Lake Street Capital Markets.

Jaeson Schmidt

Georges, just wondering with the M2M IoT business becoming an increasing part of the overall business this year, do you have a sense of what portion of overall revenue you think the M2M IoT segment will make up exiting this year?

Georges Karam

The complexity is really on the ramp. So in other words, I hope that in Q4, if you want this year, at the end of the year, if I look on a quarterly basis that to have maybe IoT doing at least 40% of the total business. So this is what I see. Now, on a yearly basis, it’s a little bit complicated as you understand, because we are adding new devices, Gemalto is ramping and all this, so this makes it a little bit – increase quarter-to-quarter and hopefully in Q4 be around 40%.

And maybe depending – even if you project this in 2017, again, we’re talking about a market where for us we can go and do couple of hundred million dollar easily in this space in two or three years down the road and we expect down the road that IoT markets will be bigger than the home router, portable router. So if you look today, obviously our revenues are coming from the traditional home router, portable router and it’s doing well and it will continue and it will grow. And we’re happy about it.

But today, based on what we saw, the adoption of CAT 1, the narrow band technology coming to market, I’m convinced that this market on the IoT will be much larger than our home portable router and we should execute – get nice market share coming to – become much bigger business for us than the home router down the road.

Jaeson Schmidt

And then looking at the Gemalto opportunity, how should we think about the scale and timing of that ramp throughout this year?

Georges Karam

As I said, Gemalto, they have another product on Verizon, so it’s certified. And again, thanks to our leadership, they are the first guys to certify and we have things going extremely well with them. We saw a lot of design win they got, some of them are big deals and so on. So obviously they secured a deal and the deals they turned to production with their customers and so on. So it takes time to ramp, but they have really nice stories of design in hand already and few others that they are well positioned to turn to design win on their side.

And in addition, all this using, I tend to say, the Verizon network. In addition to this, they have other few going to market for other carriers without being too specific, but few others chose other carriers around the world. And again, they will be happening this year and turning to mass production. So if you look potentially down the road, Gemalto do 5 million units on a yearly basis and big chunk of this is 2G.

When you [indiscernible] they use 2G and we expect maybe minimum 50% of those 2G to disappear and be replaced by CAT 1. So if we looked at all those math, definitely I see Gemalto being a strong market for us, a strong partner and customer for us next year with CAT 1, with few million units at least converting from the 15 they have from 2G to CAT 1 and they will be with us. And they are really in a good shape and things are going in this direction.

Obviously the ramp during 2016, we remain and they remain and altogether coaches, because we’re adding all the cycles you need from design win on their side, certification of the end customer on their side and so on, so it’s ramping up slowly quarter-to-quarter. We should see significant number in Q4 this year as well, even on a yearly basis maybe could look not the – from the top, I will say three customers, maybe [indiscernible] because this will be ramping slowly. But I see it on Q4 a good number.

Jaeson Schmidt

And last one from me, Deborah, how should we look at OpEx ramping this year? And is the breakeven revenue levels still kind of in that $17 million to $19 million depending on mix?

Deborah Choate

Currently we are expecting that we’ll be able to keep OpEx fairly flat, so we’re not expecting to see a big increase or actually any significant increase compared to the fourth quarter. So that means that the breakeven level stays at about that same rate, assuming that the overall gross margin – depending on the revenue mix. If we stay at around the 40%, then yes, we’d be in that $18 million, $19 million range.


We’ll now go to the line of Quinn Bolton with Needham & Company.

Quinn Bolton

Just wanted to come back to the announcement this morning that you signed a strategic collaboration with Verizon around CAT M. I guess, the first question is, is that around both CAT M-1 and CAT M-2 or is it going to focus first on CAT M-1? And then second, it did look like the OpEx ticked up in the fourth quarter relative to the third quarter and I’m just wondering is that higher OpEx in Q4 and projected to be flat Q1, does that reflect some of the acceleration in your CAT M development? And then I got a couple of follow-on questions.

Georges Karam

On the Verizon CAT M, obviously, I don’t want to be too specific [indiscernible] of the information we have and so on. But it’s clear that Verizon is pushing – and to some extent, all the carriers in the US, the information today that CAT M-1 is happening before M-2, so the – and M-1 allow you not only to address, if you want, sensor, because you can do sensor with M-1, but you can do as well a smart watch and you can do other wearable where we need a few hundred kilobit/second.

If you go to CAT M-2, it’s going to be really pure sensor. You cannot do mass, because it’s 10 kilobit/second, 20 kilobit/second, 30 kilobit/second, that’s all what you can get in terms of speed. So on this basis, because the maturity of the CAT M-1 is before the CAT M-2, without getting anything special here, the work – the first focus is really on CAT M-1.

And as a company, what I could say from our angle, we are focusing on the 2. In terms of product portfolio, we are not really ignoring M-2, I’m just only saying we’ll do M-1 and we’ll see what will happen on M-2 later on. We are preparing ourselves to be ready for M-1 on time and ahead of everybody and M-2 on time and ahead of everybody as well.

Deborah Choate

And in terms of the OpEx, first [indiscernible] third quarter was usually low because we had the seasonally low time and also we had some unusual items coming into our R&D tax credit that brought down OpEx in the third quarter. On top of that, the fourth quarter, yes, we did have some additional spend related to the different projects we’re working on. We also had a one-time provision for risk related to some tax items in the tax credit in the UK that affected the R&D line. So that’s a one-time item. So we’re expecting that Q1 should not continue to grow, be probably slightly – either flat or slightly down.

Quinn Bolton

And then just as a follow-up on the CAT M-1, M-2 discussion, is there a significant change to the architecture of your chip that you would need to make to be able to support CAT M-2 or is it a fairly easy migration from CAT M-1 to CAT M-2? I just don’t know if there is a major overhaul that you need to do to your architecture to be able to get all the way down to the CAT M-2 within very low power spect?

Georges Karam

We are able to support essentially M-1 and M-2 with [change of] software only. This is how our designing is. Now, obviously, if you – in other words, first generation we’re addressing the tool. We believe that overtime depending on the size of the market, depending on what the carrier will be adopting, it’s not clear yet, once the carrier – if a carrier has made a deployment with CAT M-1, how fast he will move on CAT M-2, the real value of moving it to CAT M-2, because the delta between the two in terms of power and cost is not major.

There is some incremental gain always you can get, but it’s the stuff like – you’re changing the equation of what you can do with this device or not. So today, the focus as I said is really on CAT M-1 because the maturity is related to this and M-1 offered extended application set some wearable to sensor. And down the road, depending on the size of the market of the sensor and so on, we could imagine a dedicated chip just only to address M-2 to save $0.50 more, that’s what we’re talking about. It’s not really a major change like it’s happening between CAT 1 and CAT M, if you want.

Quinn Bolton

And then just lastly, you mentioned work with AT&T, you had the ADAPT certification for CAT 4. If you look at over 2016, can you give us any sense on timing when you think you might get these additional CAT 1 certifications, will they come in over the year, or will it tend to be a little bit more back half loaded, any thoughts on those additional CAT 1 certifications?

Georges Karam

We are moving, in other words, we didn’t talk to some of the process. Again, ADAPT certification last year we delayed intentionally. I mean, we could do it much faster, but we delayed because we were looking more to optimize spending versus opportunity and timing, the right timing of our spending. But now, we’re not stopping, we’re going full speed. We are committed to CAT 1 AT&T and T-Mobile and the process is moving. So without being too specific, just only in terms of months and so on, I can tell you that this will happen in the first half of the year.


We’ll now go to the line of Aaron Martin, AIG Investments.

Aaron Martin

A question for Deborah. This quarter there was a lot of, call it, other non-product revenue, are you going to break that down between licensing or NRE? I’m trying to get a better feel for how much of that revenue is individual projects or some licensing that might be going forward. How should we think about that?

Deborah Choate

There was some licensing revenue in there, but most of it was NRE from both the initial strategic work we’re talking about as well as other new design wins. For example, Georges mentioned public safety which typically has an important NRE component related to it.

Aaron Martin

On the strategic, as you’re getting paid up front, are you then recognizing the revenue on a percentage of completion, what’s going on there or is it truly as the money come in you recognize it, how is the strategic money going through the P&L?

Deborah Choate

For the most part, the NRE is recognized on percentage of completion. In terms of the cash, most of the times there is an upfront payment, so we usually have cash even before we recognize the revenue to some extent. But yes, it’s on a PSE basis.

Aaron Martin

So at the end of the year, how much revenue, how much cash you’d taken in in advance of recognizing the revenue?

Deborah Choate

You can see actually we have the deferred revenue portion on our balance sheet, let me just confirm the exact number, it’s $3 million at the end of December.

Aaron Martin

And lastly, in terms of the money that’s going to come in in the first quarter and the $5 million that’s come already, is any of that already accounted as receivable or not yet?

Deborah Choate

Yes, it was signed in the fourth quarter, so it was accounted as a receivable.

Aaron Martin

So that’s included in the $16 million trade receivable?

Deborah Choate

It is, yes.

Aaron Martin

Can you quantify a little bit, you talked about after the first quarter in terms of cash coming in from – for the collection of 2015 tax credit [indiscernible] balance sheet and then hopefully on the 2016 credit, can you quantify the amount of cash coming in after Q1 from those items?

Deborah Choate

Yes. The tax credit which is on our balance sheet, we’re showing $2.8 million, the French tax credit is collected typically in the third quarter. That’s when we received it in 2015. We also have a number of French and European Union funded R&D projects that contribute typically at least a few hundred thousand dollars per quarter and in some cases we have much higher – larger ones coming in that are closer to $1 million. So we expect between $1 million and $2 million from that during the year.


There are no more participants queued up for Q&A.

Georges Karam

Thanks, Telisa. Thanks everybody for listening and for all your questions. Again, looking forward to stay in touch and [indiscernible] that we’ll be doing good job as well in 2016. Thank you very much.


Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. This conference will be made available for replay after 9 AM today until March 4, 2016 at midnight. You may access the AT&T executive playback service at anytime by dialing 1800-475-6701 and entering access code of 382913. International participants may dial 1-320-365-3844. Again those numbers are 800-475-6701 and 320-365-3844. Thank you.

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