Sequans Communications' (SQNS) CEO Georges Karam on Q4 2016 Results - Earnings Call Transcript

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Sequans Communications S.A. (NYSE:SQNS) Q4 2016 Results Earnings Conference Call February 14, 2017 8:00 AM ET

Executives

Georges Karam - President and CEO

Deborah Choate - CFO

Analysts

Quinn Bolton - Needham

Mike Walkley - Canaccord Genuity

Craig Ellis - B. Riley Financial

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Sequans Fourth Quarter and Full Year 2016 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 call 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.

Please go ahead, sir.

Georges Karam

Thanks. Good morning, ladies and gentlemen. This is Georges speaking. I am with Deborah Choate, our Chief Financial Officer. And both of us welcome you to our fourth quarter and full year 2016 results conference call.

The fourth quarter was a strong finish to the year. Total revenue of $14 million was at the midpoint of our guidance. We were particularly pleased with the growth in our product revenue, which reached $12 million in the fourth quarter, up 25% sequentially and 82% higher than the fourth quarter of 2015.

For the full year, we reported a 40% increase in total revenue to $45.6 million. We have excellent momentum heading into 2017 and we expect our year-over-year revenue growth rate to be higher than the 40% growth this year, and to accelerate even more in 2018.

Before giving a detailed status report for each market segment, I’d like to give you some highlights of our accomplishments during the past year.

Unit shipments grew 50% in 2016, as you see, it’s even faster growth than revenue. By the fourth quarter, we were shipping close to 1 million units per quarter; this was a combination of chips and modules. Even more significant is the diversification of our customer base during the past year. In 2015, our broadband device revenue came primarily from only a few customers, although one of them Gemtek sold through to several different operators. We also had two customers in the public safety space and kicked off a handful of new IoT projects. Our customer base grew from this concentrated base to more than 40 active customers by the end of 2016, about half of them related to Internet of Things.

Bear in mind that this group of customers does not take into account the number of end customers that are behind the emerging markets OEMs and the M2M module-makers. Also, it understates the total number of separate device projects, since several customers have more than one project at the same time. What’s more, this number doesn’t capture at least a dozen active engagements that have not set official kick-off dates or timetables that would qualify them as design wins. If I had to guess at the total number of devices projects we are currently involved in, either directly or indirectly, it’s probably close to a 100. This gives you a sense of the level of interest in 4G LTE solutions and how dramatically it has increased during the past year.

We also made great progress with many different operators worldwide during the past year. In 2015, in addition to the carriers in emerging markets, we had our solutions certified on one network in the U.S. Today, we are serving even more emerging market carriers, and we have our products certified by three major operators in the U.S. and one in Japan, with devices launching this year. Meanwhile, we are actively engaging with additional carriers in Europe, Australia, Japan, and Korea. As one example, today, we announced that working with Telefonica, in Europe, we completed the first live Cat M1 data call in Europe.

In terms of technical accomplishments, 2016 was certainly an important year. After essentially inventing the Cat 1 market in 2015, we began shipping in 2016 and we became the first and remain the only vendor supporting VoLTE on a single-mode Cat 1 chip. In addition to our long-standing relationship with Verizon, we also formed a strategic relationship with T-Mobile to encourage the adoption of Cat 1 solutions. AT&T certified out Cat 1 platform last year as well.

During 2016, we moved as fast as possible on our roadmap, having recognized the advantages of narrow-band LTE to displace 2G and 3G in the traditional M2M markets and to fuel the growth of new IoT applications. We knew that solutions fully-optimized for these applications would be LTE-only by definition.

Seizing the first-mover advantage, we introduced, certified and shipped the first Cat M1/NB1 platform. This attracted a lot of attention, enabling us to quickly expand our pipeline of opportunities and our relationships within the LTE ecosystem.

While we are discussing relationships, I want to stress the importance of the carriers. Without spending literally years cultivating a strong relationship with the relevant wireless carriers, a cellular technology vendor cannot expect to sell their products to anyone. This is because carrier-grade technology is complex and requires significant testing and evaluation. Operators must develop a certain level of confidence in a vendor before they will allow your product to even enter their labs. On the other hand, once you have earned the confidence of an operator, they can be very influential with OEMs and ODMs. Therefore, a strong relationship with a carrier can be a real asset in winning business as well as a barrier to entry for potential competitors.

So, today, we have a broadband access market that’s well-established and still growing, and where we enjoy a major share of the market. We have a vertical markets business that has been transformed from a few one-off projects to an area with ongoing opportunities. And last but certainly not least, we have an IoT-related business that is rapidly evolving from a handful of initial customers addressing traditional M2M applications to a much broader list of customers and operators. Many of them are coming up with new applications and use cases, and view us as the go-to company in LTE for IoT.

Finally, 2016 was also a year in which we began new collaborations with a variety of technology partners including Foxconn and Skyworks, in addition to continuing our partnership with TCL. These technology partnerships are important to maintaining our leadership and bringing the most highly-optimized solutions to market as quickly as possible.

So, it’s not an exaggeration to say that Sequans is a different company today than it was just one year ago, and a much more valuable one as well. I am pleased to say we accomplished all that I just described with only about $1 million more in R&D spending and also only $1 million increase in sales and marketing expenses in 2016 compared to the previous year.

I want to take this opportunity to say that I am proud of our entire team for what we have been able to accomplish together during the past year, and I am excited about achieving even more this year. Our ability to continue our strong execution will be the key to our continued success.

Now, I’ll move ahead to discuss some of the most important recent developments in each major market segment, beginning with Broadband Access, which continued to account for a large portion of our total revenue in fourth quarter.

We are seeing strong demand from emerging markets with an expanding list of carriers in the Asia Pacific region, as well as Africa, the Middle East and Latin America. We recently added two new Taiwanese ODM customers, one of them we can name, this is Askey Computer Corporation. Askey will use our Cassiopeia platform in a variety of broadband data devices, with the first ones to be launched this year. The other one will be targeting broadband data devices in certain developed countries.

In the U.S., our Jetpack mobile router business with Verizon is going full-speed, and we are continuing our work on a refresh of this product. The new broadband devices for the Verizon networks that we’ve mentioned previously are completing certification. They are expected to launch at the end of first quarter, and we are looking forward to those announcements. In addition, we have a number of engagements for potential new products for multiple U.S. carriers.

Based on the strong momentum we are seeing, we continue to believe the Broadband Data Device business will exceed $10 million quarterly run rate by the end of this year, and could even reach $12 million per quarter by year-end, if the new devices ramp quickly. Also, this target assumes revenue from India or China would be considered as potential upside.

In the Vertical Markets area, our projects with Motorola and Thales Avionics, and our public safety project in Japan, continue to make nice progress, and we are looking at additional business this year with each of them. In addition, we have completed a feasibility study with a major U.S. company and we are now discussing the kick-off of the product phase. We have established a leadership position in this vertical market space and we see this area as one with the potential to provide substantial high-margin NRE revenue, even though the potential number of units is small.

Turning to the Internet of Things market, our momentum continues to build, and our list of engagements with both carriers and customers continues to grow rapidly. After accumulating design wins at both, the device and module level all last year, Cat 1 products will fuel our growth in 2017 and will continue to grow even after Cat M1 and NB1 networks are available.

Currently, we have solutions shipping for customers like D-Link and Encore. Meanwhile, previously announced Cat 1 customers such as Geotab, Autonet, and two more, all completed the device certification process in the fourth quarter and are starting field trials. We have several more Cat 1 devices expected to launch this year, including some targeting the T-Mobile network in response to their incentive rebate program, which was announced at the beginning of the year. In case you didn’t see the announcement, T-Mobile will cover the cost of a Sequans Cat 1 module up to $16 per module, for Cat 1 devices being connected to their network under one of the available data plans. With our Cat 1 platform certified by Verizon, AT&T, T-Mobile and DoCoMo in Japan, we expect to see our customers moving forward with devices for all of these networks.

With regard to module partners, Gemalto has started shipping to their customers and we expect their Cat 1 business to constitute an important aspect of our M2M growth this year and beyond. As you recall, we have also announced a new module partner, SIMComm, whose Cat 1 module has been certified by Verizon. Recently, u-blox announced an agreement to purchase the assets of SIMCom. We still feel positive about this relationship because u-blox doesn’t have a Cat 1 module certified by Verizon. Once the acquisition closes, we expect to have more clarity on the long-range opportunity.

In terms of timing, the ramp in Cat 1 business has been slower than we’d hoped, but it is moving well. In addition to the length of time required for product design and device certification, the process includes a carefully planned transition from 2G-based devices to 4G-based devices, preceded by field trials. This cautious approach is designed to ensure the security of the business and to avoid any problems during the transition.

Now, let’s turn to recent developments related to our leadership in Cat M1 and NB1. We worked closely with Verizon and several early-adopter device-makers to be sure that devices would be ready for the soft launch of Verizon’s network. The process went smoothly; our Cat M1 platform was certified by Verizon in December, quickly followed by several devices powered by Sequans. As far as we know, we are still the only vendor to have their Cat M1 solution certified by Verizon. Currently, we are continuing to work closely with Verizon to prepare for the final release related to the full network launch expected at the end of first quarter.

In addition to Verizon, we are very actively engaged on Cat M1 with AT&T and T-Mobile. Cat M1 and NB1 is also evolving worldwide. We are actively engaged with operators in Europe, Japan and Korea, and we also see opportunities in Australia and China.

We have a very big pipeline of new Cat M1 engagements. We are approached by at least one potential new customer on almost a daily basis. Our strategy to qualify and capitalize on these opportunities is to work with partners, our OEM module partners and our ODMs. In addition to Gemalto and SIMCom, our module partners include Fibocom and another unnamed Cat M1 module partner. We also have a strong group of ODMs including Foxconn, Wistron, USI and several more.

Also, we see potential projects getting larger. In addition to projects representing a few hundred thousand units per year, we are beginning to see projects in the millions of units. As we’ve mentioned, the Cat M-related engagements are expected to contribute significant revenue beginning next year, although we may see the beginning of the ramp during the second half of this year. Based on our customers’ Cat1 launch plans, we continue to believe the IoT business will produce a run rate approaching $10 million per quarter by the end of this year.

One further comment about our technology leadership. Our live Cat M1 demo at CES attracted a great deal of attention and we have a large following within the industry. We have some very exciting plans for Mobile World Congress coming up at the end of February, where we plan to showcase our work with more operators, more ODM and OEM customers, and more technology partners as well as announce some of our newest innovations.

Our LTE leadership has been attracting a steady stream of potential technology partners, and some of these discussions have included strategic elements. Whether partners or customers, the decision to work with us is often influenced by our vision for the future and our aggressive development plans. For competitive reasons, I can’t go into details about our roadmap in this forum, but our strategy is to continue improving our core technology in terms of cost and performance, and to continue to expand at the application level to address more functionality. We are also exploring ways to expand our footprint and create more value by adding other functions around our core technology.

While we are looking ahead, let me offer a brief word about 5G, since there is so much in the media about it these days. The vision of 5G relates to three main areas: One, enhanced mobile broadband with very high throughput, something on the order of 1 gigabit per second, using millimeter wave frequency bands; two, mission-critical networks such as vehicle-to-vehicle communication enabling self-driving cars; and three, IoT on a massive scale with tens of billions of connections presenting unique challenges of security and network management.

Most of the work on the infrastructure side is currently focused on enhanced mobile broadband, with real commercial deployments expected to begin in the 2020 to 2022 timeframe. Our work in 4G over the next several years will serve as the foundation for 5G, and will be essential steps that can’t be avoided or skipped over. As you know, we have entered the third year of a strategic partnership with TCL involving 5G research, which will enable us to have some influence over what’s ultimately in the 5G standard, as well as access to valuable intellectual property.

So, to summarize our message today, we are very pleased with our execution and believe our track record is leading to a very strong position in each of our market segments. As we have said before, we believe Sequans has a scarcity factor that’s related two things: One, market-leading technology; and two, a multi-year investment in gaining carriers’ and customers’ confidence as a viable choice and an attractive alternative to depending on incumbents. Neither of these characteristics is easily replicated. We believe this scarcity factor is not yet fully recognized by the market. And if we continue to invest in the right places and continue to execute well, the value of Sequans will continue to increase as this scarcity factor becomes more obvious.

Now, I’d like to turn the call over to Deborah to provide more financial details. Deborah?

Deborah Choate

Thank you, Georges, and hello everyone. I’ll go over some details about our Q4 and annual financial results and discuss the outlook, including our guidance for Q1 of 2017.

Revenue grew 40.1% to $45.6 million for the full year in 2016. This was the third consecutive year of revenue growth of 40% or more. Gross margin in 2016 increased to 43.8% from 40.2% in 2015. We reduced our net loss to $24.8 million, or $0.39 per diluted share per ADS, compared to a net loss of $27.4 million, or $0.46 per diluted share in 2015. 2016 was also the third consecutive year in which we reduced our net loss.

On a non-IFRS basis, our net loss for 2016 was $19.9 million, or $0.31 per diluted share, compared to a full year non-IFRS net loss of $23.3 million or $0.39 per diluted share in 2015. Our non-IFRS net loss, excludes non-cash items related to stock-based compensation expense, the non-cash fair-value and effective interest adjustments related to convertible debt and other financings, and in 2015, a provision for WiMAX inventory.

Revenue in the fourth quarter of 2016 was $14 million, a 12% sequential increase from Q3, and a 28.4% increase compared to the fourth quarter of 2015. The sequential improvement represented across-the-board strength on all platforms.

We had three 10% customers in the quarter, two were distributors serving a total of nine Asian OEMs and ODMs, each representing themselves multiple operators, and the third one is related to a strategic agreement.

Non-IFRS gross margin was 38.4% in Q4. Our gross margin was affected by the revenue mix in the quarter, specifically licenses that were scheduled to be signed in Q4 were delayed until Q1, which caused high-margin other revenue to be lower than expected. One of the licenses has already been signed, and we expect to return to more normal gross margin of at least 40% this quarter.

Operating expenses were $10.2 million in Q4, up from $9.8 million in Q3, which was a seasonally low quarter due to a concentrated vacation period. Q4 reflected the full impact of hiring done during Q3 and higher stock-based compensation expense.

Our fourth quarter operating loss was $4.9 million, compared to an operating loss of $4 million in the third quarter, and $5.2 million in the fourth quarter of 2015. Net loss was $5.4 million in Q4, up slightly from Q3, but significantly improved compared to $9.9 million in the fourth quarter of 2015, which had included the non-cash effect from the change in the fair value of the convertible debt embedded derivative. Basic and diluted loss per share was $0.07 in the fourth quarter of 2016, based on 74.5 million average shares outstanding, compared to net losses of $0.08 in the third quarter based on 61.6 million shares, and $0.17 in the fourth quarter of 2015 based on 59.1 million shares. The increase in weighted average shares outstanding reflected the equity offering in September of 2016.

To facilitate comparisons, we have also reported our results on a non-IFRS basis, which excludes from net loss the non-cash items related to stock-based compensation expense, and the non-cash fair-value and effective interest adjustments related to the convertible debt and other financings. As the conversion prices are now fully fixed for both convertible debt issues, the fair value is now fixed and so beginning in Q3 of 2016, we no longer revalue the convertible debt embedded derivative.

Non-IFRS net loss was $4.2 million in Q4 2016, compared to net losses of $4.3 million in both Q3 2016 and $4.5 million in Q4 2015. Non-IFRS basic and diluted loss per share was $0.06 in the fourth quarter, compared to a non-IFRS net loss of $0.07 in the third quarter of 2016 and $0.08 in the fourth quarter of 2015.

Cash used in operations in Q4 was $5.7 million, compared $9.5 million in the third quarter of 2016. And our cash and short-term deposits at the end of the year, totaled $20.5 million, compared to $24.7 million at the end of Q3.

Accounts receivable at December 31, 2016 totaled $15.3 million, reflecting a DSO of approximately 96 days due to a concentration of shipments at the end of the quarter in Q4. Inventories increased slightly to $8.7 million. And short-term debt from financing receivables increased by $2.1 million in the quarter to $7.7 million at the end of the year. December.

Looking forward, we expect revenues for the first quarter of 2017 to be in the range of $11.5 million to $13.5 million, reflecting typical seasonality. Two of our customers had planned to launch new devices at the beginning of Q1, which would have compensated for some of the usual seasonality, making Q1 more or less flat versus Q4. However, these customers are now planning to launch at the end of Q1 instead.

We expect non-IFRS gross margin in Q1 to be above 40%, and non-IFRS net loss per diluted share to range between $0.07 and $0.09, based on approximately 75 million weighted average diluted shares. Our guidance for Q4 non-IFRS net loss per share excludes the impact of non-cash stock-based compensation, effective interest adjustments related to the convertible debt and other financings, and any other relevant non-cash or non-recurring expenses.

Although a small amount of revenue related to the ramp of two devices is being pushed out, we have not changed our view of 2017 as a whole, because we see offsetting strength during the second half of the year. We continue to expect our overall revenue growth to accelerate in 2017 as the broadband data device business continues to grow and our Cat 1 platform for IoT continues to ramp with some possible contribution from Cat M1 and NB1 toward the end of the year. Based on the target quarterly run rates we’ve discussed for each business, we believe we can achieve operating breakeven on a quarterly basis by the end of this year. Since operating profit is a fairly accurate proxy for cash flow, this means that we also expect to be close to cash flow breakeven by year-end as well.

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; that’s the same location where you will find the audio replay.

And now, I’ll turn the call back over to Georges to sum-up before we move to questions.

Georges Karam

Thanks, Deborah. So to conclude this with few words from me, just to recall, and I wanted to go with the three bullets, if I have to mention them. One, which is obviously we are very pleased with our accomplishments last year, and this is across the board. If I look to the future, it’s very promising and as we have created a very strong position in each of our market segment. We have now very solid broadband business and very exciting and a promising IoT business. And last but not least, when you think about LTE for IoT, Sequans is now a thought leader in this space. We see in this segment a duopoly developing as it’s very difficult to new entrant to come in. This creates a scarcity factor that will have a huge value for our shareholders. Thanks for taking the time and let’s move now to questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from the line of Quinn Bolton, Needham. Please go ahead.

Quinn Bolton

Hey, Georges and Deborah. I apologize, Georges, I missed some of your prepared comments but I wanted to start just with the comments that were made about the acceleration of revenue into the second half of the year and targets for achieving breakeven. If I run some rough math with roughly $10 million of quarterly OpEx and a greater than 40% gross margin, it sounds like your revenue breakeven is still probably in the low $20 million range. And so, I just want to make sure thinking about that revenue ramp as we look into second half of the year that it probably would envision getting into the low $20 million range to hit your operating breakeven target?

Deborah Choate

Hi, Quinn. Yes. Those -- what you just said is pretty accurate representation, yes.

Quinn Bolton

Okay. And then, the mix, sounds like -- and again apologize, if Georges, you addressed this. It sounds like in 2017, the ramp of revenue sort of through the year was driven both by broadband and the Cat 1 business. Just wondering if you can kind of give us where do you see the mix between sort of the broadband home routers, portable routers versus Cat 1 devices but exiting 2017?

Deborah Choate

Quinn this was actually in part of George’s prepared remarks. On the broadband business, we’re seeing this to go to at least $10 million and could go as high as $12 million, and we see the IoT business approaching the $10 million as we exit the year.

Quinn Bolton

Okay, great. Thank you.

Operator

Thank you. Our next question is from the line of Mike Walkley, Canaccord Genuity. Please go ahead.

Mike Walkley

Thank you. Georges, I was at the IoT Evolution conference last week in Florida, and it was great to see Verizon’s live Cat M demonstration with Nimble, Inc.’s module, which had your solution inside of it, clearly a growing excitement for the industry about Cat M1 and the opportunity. And my question’s really building off your last point about the market becoming duopoly. Can you update us on the competitive dynamics you’re seeing in the market for Cat M1?

Georges Karam

Hi, Mike. Yes, sure. I mean, we’re really seeing -- today, if you need something real in your hand, you have only two solutions, whether it’s Sequans or Big Brother. [Ph] As I said, as I mentioned, their product is kind of using an known silicon with the new software to run on the Cat M, and this put us in a good leading position. All the other guys, I see them really still coming later 2017 at best with something serious in one and they still have to execute, go through the certification phase and so on. So, very frankly, from the level of the pipe we have, the engagement with the customer, we’re always feeling ourselves like really the debate is between us and another solution. So, it’s choose one between two. And with our solution fully optimized for Cat M and power in cost, really it’s a kind of next generation technology, it’s not an old technology. We see even a leadership in this. And as we are speaking in terms of certification, we remain the guy who has this certification already on Verizon and quite ahead -- few months ahead of the other guys in terms of software.

Mike Walkley

And then, just building on that, as you look at the leading module suppliers, you are with Gemalto and then you bought a company, SIMComm that you’re working with. How do you see kind of the major module competitors in the market, given the two solutions, how do you see your chances maybe cracking in some other module suppliers over time?

Georges Karam

Yes. I believe, I mean, if it’s -- the module partners, OEM, I would say, are key the part of our go-to-market strategy and key element for our success. And on this business, as you mentioned we have today Gemalto, we have SIMComm, we’ll see how this will develop with u-blox, but I’m positive about it. And we have Fibocom that we named. And we have a fourth one that I indicated without name, hopefully we’ll be announcing this in the near future, and other major one. So, we have OEM, we have four today in hand. For whatever reason, some of the other yards or whatever, maybe we’ll not win them all, and each one has its own strategy and some people, they have some historical, some legacies, some stuff pushing them to stay with other solution, which is fine. But I believe with four guys I named, three I named and the other one, which is another big name as well, we are in very, very good position from OEM point of view.

But you should not neglect as well the ODM angle, because all this IoT application is not only about M2M segmented small market, you have huge projects. And for those projects, people will not afford to pay to an OEM module, and they would like to go straight forward to an ODM to get the solution completely optimizing task and maybe put part for their products with ODM. And this is I believe, we are well-ahead here on all the competition, because as I mentioned we have three tier 1 ODM I named, which is Foxconn, Wistron and USI, and we have few others that I didn’t name, but in Asia they are preparing the solution to move with us.

So, we feel good on all those fronts. And we still have, as I said, few guys discussing with us to engage.

Mike Walkley

One more on the industry just with the Telefonica announcing here today and some other news out of Europe. It seems like Europe is going to be little more, and more than maybe we first imagined. How do you see that market shaping up and how do you see some more carrier partnerships potentially for Sequans?

Georges Karam

No, this is -- for the first time, I start feeling a little bit more optimistic about Europe in the 4G, because so far they were little bit lagging in the Cat 4, Cat 6 4G to enable single model-mode LTE. But moving to the IoT space, they I think have changed completely. And we are seeing today Telefonica obviously I mentioned, but you can see Orange, you see Vodafone, you see even T-Mobile in Europe and so on, many other guys active, even some Nordic carriers. All of them are really would like to move and initiating trials. This year is going to be about trials and positioning and get their network ready. I see as early as maybe some of them launching something Q4 this year, but definitely this is 2018 business the network will be there. So, this is in terms of timing.

It remains the timing today more aggressive in the U.S. for many reasons. Obviously, on one side, there is no more 2G, so they want to move fast and also because the coverage of the 4G is large and there is some competitive dynamic there playing in this favor. So, we have Verizon, AT&T and T-Mobile, I see them moving fast in the U.S., followed by the Korean and then Japanese and European, if you want. This is all I see a little bit the dynamic, and maybe some development in Australia and China.

Mike Walkley

Thanks. Last question for me and I’ll pass it on. Deborah, just as we think about as you invest for growth of all the different opportunities that Georges is highlighting on the call, how should we think about kind of operating expense levels throughout 2017 and then cash management, how should we think about that as you get to kind of cash flow breakeven, exiting the year?

Deborah Choate

So, this year, we -- I mean, our objective is to get to operating cash flow breakeven as soon as possible. So, we will continue to try to control our operating expenses and not let those grow much over the course of the year. We have added a little bit in terms of headcount because we are addressing an increasing number of operators and customers. But I don’t -- we’re not expecting to see OpEx go up that much over the course of the year, so having that just in check a little bit. And we’re still working in terms of the biggest challenge, as we get to cash flow breakeven, will be continuing to fund the working capital needs as we continue to grow. We have -- and we are very pleased with how the factoring line that we have in place is working and that’s been helping us a lot in terms of managing that and recent terms of -- in the short-term, I expect that that will we be our main short-term financing facility.

Mike Walkley

Thank you.

Operator

Next question is from the line of Craig Ellis, B. Riley Financial. Please go ahead.

Craig Ellis

Thanks for taking the question, and congratulations on the third year of very strong revenue growth. Georges, I wanted to follow up on one of your prepared comments. You noted that inbound inquiries have been coming in much more frequently, almost daily. Can you profile a little bit, where you are seeing those; is that predominantly from a particular region or regions or a particular customer type?

Georges Karam

The fact, very frankly, if I think a little bit about it, I see it worldwide. So, we have orders coming obviously from the U.S., Europe, Asia in general, specifically Korea, Japan. Obviously, we are talking here about devices. We are in a global economy and most of the customers, they want to address different region of the world. And this is one of the beauty by the way about 4G, when you compare this to technology like Laura or CFOX, [ph] which is a little bit limited generation or some places. So the beauty about 4G and one angle of this Sequans technology by the way is that we offer a single SKU worldwide. Most of the products, they we want to go in different regions. But still, the main focus really to start to the U.S. carrier because all of them, they know that the market is big in the U.S. and obviously they carriers are going to move fast. So, the project remains focusing on the U.S. first but interesting enough that we are seeing the guys as well at the same time preferring the second wave after the U.S., so they are going to Europe or some other regions in Asia.

Craig Ellis

That’s helpful. And then, the follow-up is related to the point that the Company will be adding some other functions around its core technology, acknowledging that for now and maybe over the intermediate term, this is more of a duopolistic market. Do you see your competitor doing the same thing or does this just further extend your competitive mode with your technology leadership relative to that competitor?

Georges Karam

Well, this is a very important element and part of our roadmap and how we take it further because our leadership in the LTE is here today. Obviously one of the angle of executing during 2017 is to maintain this leadership and continuing to improving this technology. But on the other angle is well expanded for other function that you need on the device to make the global device efficient and cost competitive and so on.

So, part of those technologies were developing them ourselves, and this is part of our roadmap that we’ll be talking about in the future. And part of this is through partnership. Some of them that as we mentioned, for example when we go to the frontend, we’re playing with Skyworks. But we work as well with other partners on other function, I’d say digital function to make complete solution. For example, if you need a GPS, we have a partner on GPS. And we manage to integrate the software and the solution, and this is what matters for the customer to give them something fully integrated. And the beauty about this is the partners in the IoT space are -- we have many partners in the IoT space that you can play with them to get some complementary technology going with LTE if we needed and we have many choices I tend to say. And the reverse [ph] is not too. In other words, for them, there is not too much for them as they need the Cat M, they need to work with Sequans while Sequans has a choice to play with few of them.

Craig Ellis

That’s very helpful. And then the final question is to Deborah. Deborah, there’s been some helpful color provided around operating expenses as we go through the year. I’m wondering if you could just identify some of the major gives and takes with respect to gross margin as we look through 2017. Thank you.

Deborah Choate

The biggest impact on our gross margin is really the revenue mix. And in 2017 we, expect we’ll continue to sell modules. So, this obviously has an impact on the overall gross margin. And we continue to have the other revenue line. I think Georges mentioned in his prepared remarks that in the past, a lot of these sort of vertical markets, applications, opportunities were taken really on that basis, as an opportunity. And we’re now seeing this develop as more of an ongoing business where we’re the preferred partner for this kind of activity. And we tend to have good margins on this kind of revenue. The problem is that that can be a little bit lumpy in terms of -- from one quarter to the next. So, I’d say when we look at the individual elements, we continue to see the target gross margins on chips to be very healthy in a 45% to 50% range and a nice margin on the services, and the biggest I’d say, volatility factor is the contribution of module revenue in any particular quarter.

Craig Ellis

That’s very helpful. Thank you.

Operator

[Operator Instructions] Okay. With no further questions in queue, back to Mr. Karam for closing remarks.

Georges Karam

Thanks, Mike. Thanks, everybody for taking the time, and looking forward to have you on the call, our first quarter next time. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining, while using AT&T Executive Teleconference. You may now disconnect.

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