Sequans Communications SA (SQNS) 2011 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, we'd like to thank you for standing by and welcome to the Sequans Second Quarter Results Conference Call.

  • At this time, all participants are in a listen only mode.

  • Later we will conduct a question and answer session, with instructions being given at that time.

  • As a reminder, this conference call will be recorded today.

  • But before I turn the conference over to your host, Mr.

  • Georges Karam, I would like to remind you of the following important information on behalf of Sequans.

  • This call may contain projections or other forward looking statements regarding future events and future financial performance.

  • All statements other than present and historical facts and conditions contained in this call including any statements regarding our future results of operation and financial positions, business strategy, plans and objectives for future operations are forward looking statements within the meaning of the private security 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 current belief and expectations within respect of 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 and results may differ materially from those contained in the projections or forward looking statements.

  • Some of those factors that could cause the actual results to differ materially from the forward looking statements contained in the call included without limitation, one, the contraction or lack of growth of markets in which we complete and which our products are sold, including WiMAX and LTE markets.

  • Two, unexpected increases in our expenses, including manufacturing expenses.

  • Three, inability to adjust spending quickly enough to offset any unexpected revenue shortfalls.

  • Four, delays or cancellations and spending by our customers.

  • Five, unexpected average selling price reductions.

  • Six, the significant fluctuation of which our quarterly revenue and operating results are subject due to [cynically] in this wireless communication industry and transition to new process technologies.

  • Seven, our inability to anticipate the future market demands and future needs of our customers.

  • Eight, our inability to achieve new designs, wins, and nine the factors detailed in documents we file from time to time with the Securities & Exchange Commission.

  • Forward looking statements in this call are made pursuant to the safe harbor provisions contained in the private securities litigation reform act of 1995.

  • I would now like to turn the conference over to your host and facilitator as well as CEO, Mr.

  • Georges Karam.

  • Please go ahead, sir.

  • Georges Karam - President, CEO

  • Thank you.

  • Good morning, ladies and gentlemen.

  • So this is Georges Karam speaking.

  • Welcome to our second quarter results conference call.

  • We are pleased to report that Q2 was another quarter of strong growth with record revenue and adjusted profits.

  • The increase in volume was the result of expanding our highly successful penetration of our largest customer which is HTC.

  • During the first half, HTC launched several new 4G devices to several carriers.

  • For those of you who may be new to our story, I'll provide a quick recap of the HTC relationship.

  • A year ago, HTC launched the first 4G smart phone called the EVO in the US with Sprint.

  • In addition to being the first 4G smart phone, it has been the most successful smart phone in Sprint's line up, setting various sales records.

  • We have been sole suppliers for the EVO.

  • In January this year, Sprint launched a second HTC phone which is the EVO Shift.

  • In April this year, KDDI in Japan launched their own version of the EVO, which is Japanese version of the US phone and recently, just at the end of the second quarter HTC launched to additional 4G devices in the US for Sprint networks a smart phone, the EVO 3D and a tablet, the EVO View.

  • And again, very recently, HTC expanded this to another carrier, which is Korea Telecom, the second mobile carrier in Korea where they have launched two new devices, and EVO 4G plus and [flyer] 4G tablet, a tablet and a smart phone.

  • And here the difference between this EVO 4G plus and the US version is really the 2G, 3G function which is more [UNTS] based.

  • So our progress from one phone at Sprint to seven devices with three carriers in three different countries within a 12 months timeframe is very gratifying and we continue to work with HTC on new products for future.

  • The relationship with them is really excellent.

  • Outside of HTC we are happy to report that we are making good progress towards our objective of diversifying our customer base.

  • Recently we announced that we are powering the IGI Mobile's mini egg pocket routers with our WiMAX chip.

  • IGI is a Korean device maker supplying the pocket router to Korea Telecom.

  • We are also working with IGI to expand the success for other markets outside Korea.

  • In addition, we have been working with various device manufacturers in Japan targeting KDDI's WiMAX network and we expect to see some devices enter the Japanese market in the second half of 2011 and some of them in the first half of 2012.

  • However, against this backdrop of success in the WiMAX market, allowing us to have the rapid growth in the first two quarters of the year, we saw recently a drop in the demand for the WiMAX US market, limiting our H2 growth as LTE revenue won't materialize before 2012.

  • We believe this is driven essentially by some supply chain adjustment and the introduction of our ideal smart phone models that might limit our market share on the WiMAX smart phones in the US We do not see this happening with other WiMAX operators around the world, but we have to recognize that the WiMAX US market remains the largest one.

  • This change comes during a particular dynamic phase in the evolution of the 4G market from WiMAX to LTE.

  • But no matter what, I believe strategically we are well positioned.

  • We are on schedule with our road map and our new chips position us to participate in any 4G strategy that carriers choose to implement.

  • Whether its LTE smart phones and TDD or FDD spectrum, migration from WiMAX to LTE or deploying LTE alongside WiMAX.

  • We are very focused on LTE as you can imagine and we are gaining good traction there.

  • We are in various stages of discussions with around a dozen different potential device customers for LTE as well as many carriers around the globe.

  • Many operators planning to deploy 4G are considering LTE based networks because they are expecting a larger, more robust device ecosystem to develop for LTE due to early support from large carriers such as Verizon and China Mobile.

  • Due to the technical similarities between WiMAX and LTE we are in a strong position to leverage our years of know how to become one of the leading chip makers for LTE.

  • Our strategy has been to focus initially on the early adopters of LTE with [end per] spectrum called TDD spectrum where we have enjoyed a clear [panto] market advantage derived from having delivered four generations of WiMAX chips to carriers with TDD spectrum.

  • I'm pleased to say that we have achieved two new LTE design wins in addition to GenTech that we have already announced.

  • Also, we are expanding our trial participation to a few new smaller markets as we continue moving through the testing and trial phase in markets with a huge loan potential, I mean China and India.

  • In fact, TDD spectrum it has by operators all over the world, including the US, China, India, Russia, Japan, Southeast Asia, Australia, Brazil and elsewhere.

  • With so much media attention focused on Verizon and AT&T in the US it may not be widely understood that operators with TDD spectrum could account for a third of the total LTE market.

  • In China we expect to complete MMIT certification very soon, allowing us to participate in the large scale commercial trials with China Mobile in seven cities in China.

  • We have been working closely on interoperability testing with all the infrastructure vendors chosen by their LTE rollout.

  • Our best estimate is that deployment could begin in mid 2012.

  • In India, we still expect at least one operator to begin deploying by year end with one or two others following closely after all.

  • During Q2, we announced our collaboration with Gentech on development of LTE devices for India.

  • It's important to remember that during the first year of LTE deployment in most markets the majority of the devices will be dongles and CPEs.

  • The other type of spectrum designated for 4G is [spurred] spectrum, called FDD, which is typically, though not always, owned by incumbent 2G, 3G operators in developed countries.

  • Our chip architectures support, [busburd] and [endburd] spectrum.

  • And we expect to introduce our second generation LTE chip in Q4 to market.

  • The new LTE chip will be optimized for phones, including a small form factor with low power consumption and we believe this will be a strong differentiator compared to other competitors targeting FDD operator.

  • Based on the typical sales cycle, we would expect to see LTE phones using our advanced LTE technology in the market in early 2013.

  • To augment our LTE strategy this phone -- we will also introduce a real mode WiMAX LTE chip, enabling WiMAX operators to seamlessly migrate to LTE or to deploy both WiMAX and LTE.

  • We believe the availability of dual mode 4G devices in 2012 will be a very attractive proposition to the installed base of WiMAX operators and will be another growth drivers for Sequans.

  • Recently we announced the collaboration with the Greenpacket and its subsidiary Packet One in Malaysia as part of our four side initiatives.

  • Greenpacket has adopted Sequans technology to develop a dual mode 4G reference design for Packet One and other mobile operators outside Malaysia.

  • Packet One is planning to launch LTE alongside WiMAX and our dual mode 4G device will enable such strategy.

  • So in summary, after a rapid growth over the past year, developments so far in Q3 seems to indicate that we may level off temporarily in the second half and could even see some decline at revenues versus our blistering space of growth in the first six months.

  • Although its necessarily to adjust new term volume expectation, we continue to have confidence in our ability to reach our target financial model, grow drivers are remain intact and all indications point to the fact that we will continue to enjoy a significant time to market advantage on the 4G, WiMAX and LTE technology.

  • Allow me now to introduce Deborah Choate, my CFO, to take you through the financial picture.

  • Deborah Choate - CFO

  • Hello, everyone.

  • I'd like to make a few comments on our Q2 financial results and provide a few more details about the outlook.

  • Revenues in the second quarter totaled $30.6 million, this is an increase of 21% quarter on quarter and an increase of 84% compared to the second quarter of 2010.

  • We shipped a record 2.9 million units in the quarter compared to 2.1 million units in Q1.

  • As Georges discussed, we expanded our penetration at HTC with several new devices launched in the quarter.

  • As a result, HTC accounted for 84% of our revenues in Q2, up from 78% in Q1.

  • As expected, a previously negotiated sales price reduction came into effect in Q2.

  • Product gross margin was 45.7% in the second quarter compared to 50.5% in the first quarter and compared to 48.6% in the second quarter of 2010.

  • In addition to the impact of the anticipated price decrease, we had the unexpected impact of a delay in achieving cost reductions from certain improvements of the product.

  • In particular, the replacement of the memory component.

  • These delays pushed significant cost savings from Q2 to Q3.

  • We continue to believe that gross margin of at least 50% is the right level to target for the medium turn and we expect gross margin improvement during the second half as lower product costs are reflected in our results.

  • Operating expenses were $12.4 million in Q2, compared to $10.7 million in Q1 and $8.7 million a year ago.

  • The increase includes a $623,000 increase in non cash stock based compensation expense compared to Q1.In view of expected changes in WiMAX shipment volume in the second half we will of course pay even closer attention to controlling our operating expenses.

  • But we intend to maintain our planned strategic spending.

  • As we've mentioned in the past, we have already shifted substantial resources from WiMAX to LTE, therefore we anticipate only moderate increases in operating expenses will be necessary to adequately support our LTE initiatives.

  • Operating profit in Q2, which includes stock based compensation expense was $1.9 million, compared to $2.3 million in the first quarter and compared to an operating loss of $200,000 in the second quarter of 2010.

  • To facilitate comparisons, we have also reported our results on a non IFRS basis, which excludes stock based compensation expense from operating profit and excludes the change in the fair value of the option component of our convertible notes from net income.

  • Non IFRS operating profit was $3 million in Q2 of 2011, up 9% from 2.8 million in Q1.

  • Non IFRS operating profit in the second quarter of 2010 was $36,000.

  • Financial expenses in Q2 total $1.7 million, which is almost entirely related to a non cash item representing the change in the fair value of the option component of convertible notes which will mature in October.

  • Just to remind you, in October these notes, which are convertible at $10 per share, will either be converted or repaid at the option of the bank.

  • Basic and diluted earnings per share were break even in the second quarter compared to earnings per share of $0.07 in the first quarter.

  • Bear in mind, however, that the diluted share count increased 21% from Q1 to Q2 due to our IPO in April.

  • Non IFRS diluted earnings per share was $0.08 in the second quarter, the same as in Q1 on 21% more shares outstanding and up from $0.03 per share in the second quarter of 2010.

  • Cash at June 30th was $61.9 million, which included the net proceeds from our IPO.

  • Accounts receivable at June 30th, 2011 totaled $16.7 million, reflecting DSOs of approximately 55 days compared to 38 days at the end of Q1, 2011.

  • This is due to the timing of shipments in the quarter.

  • Inventory totaled $11.1 million, down slightly from Q1.

  • Looking forward, Georges referred to a more dynamic environment for our WiMAX business in US market and while we have a lot of designing activity going on, we feel a cautious posture is appropriate, given our current level of visibility.

  • For the third quarter of 2011, we expect revenues to be in the range of $25 million to 28 million.

  • As I mentioned earlier, we are expecting to see gross margin recover in Q3, improving to close to 50%.

  • Based on this revenue range and gross margin, we expect non IFRS net profit per diluted share to range between break even and $0.05 for the third quarter of 2011 based on approximately 36.7 million weighted average diluted shares.

  • Our guidance for non IFRS net profit per share excludes stock based compensation expense and any gain or loss from the option component for convertible notes as this will be depended on the share price of Sequans at the end of the third quarter.

  • Our current expectation is that revenue for the second half as a whole is likely to be down compared to the first six months of the year, probably below $50 million.

  • On the other hand, with our new chips sampling at the end of Q3 and early Q4 we continue to expect LTE revenues to ramp beginning mid 2012, assuming no change in the timing of large network projects.

  • We are focusing our efforts on the vast opportunity ahead of us in 4G and leveraging our time to market advantage rather than focusing on short term uncertainties over which we have little control.

  • And now we would be happy to take your questions.

  • Operator

  • (Operator instructions)

  • Our first question will come from the line of Quinn Bolton of Needham and Company.

  • Please go ahead.

  • Quinn Bolton - Analyst

  • Hi, Georges and Deborah.

  • Just wanted to get a little bit more color on sort of the order patterns you were seeing for the US WiMAX market.

  • It sounds like that's a reflection certainly of reduced demand that I think you talked about, but I think your largest customer talks about sort of over ordering post the Japan earthquake.

  • I'm just wondering if their actions to correct inventory are also at play here in your second half guidance.

  • Georges Karam - President, CEO

  • Well, hi, Quinn.

  • It's very, very hard to position this how this plays between the three markets, obviously our largest customer is playing in the markets between US, Japan and Korea.

  • The obviously they could be some play there, how much this is really related to the earthquake impact it's not really tangible, at least we didn't see it exposed this much from this angle.

  • The way we see it as I said, essentially in the US you have many devices coming into these networks, its year end as well adjustment and some change in the plan of the US operator forcing them a little bit to readjust I'll say the outlook for the second half.

  • And we still, as we are speaking have some uncertainty in the sense I can say we could have some plusses and minuses there.

  • So we are taking a little bit more cautious approach there looking to the -- what we get form our largest customer's information.

  • Quinn Bolton - Analyst

  • Okay, great.

  • And then you had mentioned Greenpacket was developing a dual mode devices for Packet One, I was just wondering with Sprint, it looks like they formally announced the Life Square partnership this morning.

  • Certainly with like Sprint will have both WiMAX and LTE.

  • Is there any development or anything you can say about your work and developing devices that could support dual mode, WiMAX LTE forward the Sprint Life Square network as planned?

  • Georges Karam - President, CEO

  • I mean obviously this is a good point here you know.

  • We, without really divulging any detailed plan, as you know I cannot comment much on any projects in the process or in discussion and so on, obviously its well known that WiMAX -- that Sprint is planning to have an LTE play as well in addition to their WiMAX and by definition you expect to have (inaudible) there and we have a percent of (inaudible) mode.

  • And this is by the way, a leverage that Sequans is using not only with the Sprint, I mean definitely with Sprint, but also on the worldwide basis because WiMAX networks is not going to switch off and we are, I tend to say, the unique vendor today pushing this integrated solution where we believe WiMAX LTE dual mode device can be provided to market at very low costs, in other words the second mode will not impact too much the device price.

  • And from this, obviously this position us in a good position to leverage in the future, without really saying exactly when this will happen for a given carrier, but obviously Sprint is one of the key target for this kind of competition for us.

  • Quinn Bolton - Analyst

  • In the prepared comments you mentioned the FDD volume revenue given sampling in the fourth quarter of '11 probably wouldn't commence until early 2013, given your sale position in WiMAX, can you bring dual mode WiMAX LTE devices to market faster, maybe could we see dual mode devices in the market say second half of 2012 or is that also sort of an early 2013 time frame for that dual mode devices?

  • Georges Karam - President, CEO

  • Yes, I mean its - obviously it all depends on the schedule the operator really.

  • We tried -- and I tend to say in the early 2013 or late 2012 this is a position where we are taking a cautious approach for a handset, in a sense, if you have real handset application, we believe design cycle for a handset can take up to 12 months, depending on the platform where you're getting that.

  • You can do it in nine months, sometimes shorter if it's mature technology.

  • But we need -- and having in mind that we will be taking to market out FDD solution in the next generation chip in Q4, we are taking the assumption that we can at best ship large volume, decent volume late 2012 or beginning 2013 if it's a phone.

  • Now obviously, when you talk about dual mode approach, here you can have different kind of devices as well, not only smart phone because you can have dongles or portable routers and you can have as well the operator launching those devices, operating in WiMAX mode only at the beginning and then becoming LTE and definitely for those kind of devices we could have one quarter be -- be in the market, one quarter before the other version.

  • But still I tend to see its second half of 2012, not the first half in any case, because you still need kind of six months design cycle on those kind of products.

  • Quinn Bolton - Analyst

  • Great.

  • And then just the last question for me, obviously the second half outlook you sort of talked about some of the factors behind the reduced expectations for revenue in the second half.

  • Just wondering if you looking 2012, is it possible to sort of tell us when you think you might begin to grow again sequentially?

  • Would that be sort of spurred by the LTE ramp or do you think that the WiMAX marker, are there opportunities with WiMAX to begin growing before you see the volume revenue on TDLTE.

  • Deborah Choate - CFO

  • As Georges mentioned, HTC aside, we have other design wins that are expected to launch end of the year early next year.

  • We also have other things that are in process that are scheduled for early next year.

  • But at this point we don't have firm forecast from our customers.

  • So it's -- we can't really speak specifically to your question.

  • But we do have a number of projects that are ongoing, expecting to be launched and we continue to have obviously small amounts of LTE revenue that come in as well as we're in very early stages, but we have no changes in the LTE assumptions at this point, which it will be really beginning to ramp, not before middle of 2012.

  • Quinn Bolton - Analyst

  • Okay, thank you.

  • Operator

  • Our next question will come from the line of Uche Orji of UBS.

  • Please go ahead.

  • Uche Orji - Analyst

  • Good morning, thank you very much.

  • Let me just start by asking you about the delay in cost reduction related to the memory components, Georges, any color you can give us on what happened there and how much obviously kind of seems like that is responsible for a large bulk of the gross margin rebound in Q3.

  • Maybe you can just provide some color on that.

  • That would be helpful.

  • Georges Karam - President, CEO

  • (spoken in foreign language) Uche.

  • Obviously, I mean we were expecting - I mean in our plan we have -- we explained this a few times where we are saying price typically you take the hit on the price as soon as you agree with the customer on the new price level but while the cost reduction plan which is on one side you are -- you have different component improving your cost structure that's coming not all in one shot, and on top of this you have some inventory level which will get all the price, so the cost reduction is always not a step function, it's really linear decrease while the price is really step function decrease.

  • So there is, we were expecting this and it was part of our expectation to have lower gross margin in Q2.

  • We get a little bit more hit from this as we said related to the memory component and related to one major construction we had there was second source the memory component that we stack in the chip and ultimately the supplier of this memory component we didn't have the yield that they have there was not good enough in the first ramp up so we get a little bit scared on our side not to meet the volume demand.

  • So we decided to source the original memory, even at higher price, to be sure that we'll not suffer from -- shipment limitation.

  • So this is really that main reason.

  • So we continue shipping in this quarter -- in Q2 old memory big portion of this -- of memory.

  • But now as we are speaking and at the end, this is completely behind us, so it was really a remap up problem in our supplier and we have full visibility on this and the memory is -- we are sourcing this without any problem in yield and so on and we are 100% on the new memory side.

  • So it's really I tend to say an issue of delay in execution there which is kind of one months, two months, this is give us a hit in our Q2 number.

  • Uche Orji - Analyst

  • Sure.

  • Okay.

  • Just a little bit on the volume discount.

  • Are you now at the end of that?

  • I mean is there a point where you -- the volume doesn't trigger any more discounts because I think we've had a couple of that now, so any comments you can make as to how that structure -- whatever, thanks for giving us details, we just kind of get a sense for how much more of this we can see in the future.

  • Georges Karam - President, CEO

  • I mean yes.

  • I mean what I will say, prenegotiated volume discount yes, because this has been negotiated related to volume and [sound].

  • It's very aggressive by the way, I mean so we don't expect same level of a major discount in the future because as you know the policy of the curve, I mean you reach some plateau -- at some level you continue year to year decrease but not at the same level we did with the exponential growth we had between last year and this year.

  • And so the answer is yes.

  • Uche Orji - Analyst

  • Okay, and just on the trials on the FDD, LTE, DTLTE and just in a sense as to I know you have a chip that is weighted.

  • But just in a sense as to how you are in terms of the qualification process now against some of the more established suppliers in the US for example.

  • Are there any milestones that you can point to to give us some ideas as to where you really stand?

  • And at the same time, also, if you can talk about China, you said you almost close to getting the [MAIA] approval, just let us know what the final milestones are for those two markets, thank you.

  • Georges Karam - President, CEO

  • Yes.

  • I mean obviously -- and this is on the DTLTE trial we are engaged with our existing chip and in many market, but with all that I can say in general, we are very, very pealed with all the execution during the second quarter because we are scaling more and more.

  • I mean we are ending by being involved in few other markets outside the major one, India and China where to some extent we find ourself in a kind of good unique position.

  • I don't want to say we were the only provider there.

  • But we were always selected in all those testing by a few carriers naming us to be on the top two or sometimes in the top three if they are selecting three guys and delivering the right performance expected.

  • And I can give you even number of volume.

  • I mean we have shipped to those trial we have seen not necessarily ourselves directly shipping this, but sometimes shipping silicon through to our GenTech because we provide solution via GenTech our partner on the [TDSE] solution to the right of market.

  • So we are talking about few thousands of devices in many networks across the world.

  • And there we are really in good shape, progressing well.

  • Our software release, we made it -- we made GE availability of the -- what we call the first official software release after all this testing.

  • As you know we are working with the set of [innovative] and all of them closed relationship testing ongoing.

  • The last one was Ericsson, but excellent work as well with Nokia's [Zimas] with Alcatel Lucent of [Hallways NZT].

  • So all in all really, we're in very good shape.

  • I tend to say we are delivering on the promise to leverage our time to market presence there and we should take benefit of the first deployment that would be happing in all those markets beginning of the next year.

  • Now, on China specifically, that's a little bit complicated because you go to MMIT testing and there you have variety of set of testing, essentially you can classify them in three set of testing, one RF, one they call it terminal and the functional stuff and then you have some kind of testing outdoor offering which is the last phase.

  • So you enter through three phases if you want, and you need to pass with many (inaudible) vendors so it's not only do testing with one guy and its Okay, you need to do it to another guy with another guy.

  • So we need to pair your product with the (inaudible) vendors so obviously we are playing with the five guys there.

  • Sometimes even we have its challenge I will say to make the right mapping with those kind of testing.

  • So it's a lot of intense activity.

  • What we can say today we finish everything all data testing of the indoor and we are really in the last phase and the preparation for the last phase, what they call outdoor is done.

  • At least with the first (inaudible) vendor, completely done and very successful from our point of view and we're now this week -- I will say next week the team will launch their official last phase with MMIT.

  • So we are really progressing, we should conclude this in August -- this is our expectation with MMIT, all those three set of testing as I said, we are done with two and the third one should be done in August, should be finished in August.

  • Uche Orji - Analyst

  • All right, thank you very much for that.

  • Deborah, just for you quickly.

  • The way it look -- obviously the implied Q4 revenues will be at most $20 million, $24 million.

  • On that revenue level, is there any possibility you can give us as to how the rest of the P&L will walk with the value of the gross margin front, given the decline relative to what was expected by the street.

  • And also, any comments that you can make as to what - how your long term business model changes now or not based on the reduced expectations for the second half of the year.

  • Deborah Choate - CFO

  • We -- in terms of Q4 all I can say at this point is that because we're having some temporary issues with respect to the WiMAX market, does not mean that we're going to slow down our LTE development.

  • So in terms of -- at least the view as for today.

  • We're not expecting to see reductions in the level of operating expenses.

  • Obviously we will try to adjust the WiMAX supports as appropriate, given the revenue stream, but really the development for LTE is very strategic, very important for us.

  • So if -- if we have a decline in revenues and remaining -- we don't expect operating expenses to decline as well.

  • So I can't really say more than that at this point.

  • In terms of the medium term targets that we've previously talked about, those remain unchanged.

  • We still feel very comfortable that there's very good growth opportunities that are greater than 50% gross margin target is achievable in the medium term, and obviously the medium term profitability for some -- for the company.

  • Uche Orji - Analyst

  • All right, thank you very much.

  • I'll get back in the queue.

  • Operator

  • Our last question in queue at this time comes from the line of Lee Simpson of Jefferies.

  • Please go ahead.

  • Lee Simpson - Analyst

  • Hi, good morning everyone.

  • I was wondering if I could maybe once again ask a question about TDLTE into China.

  • I was curious maybe just to test your confidence in the appetite for TDLTE roll out in China by barriers into 2012.

  • I mean given some of the slow uptake we saw with TD-SCDMA city made before.

  • Should we be thinking that there is still scope for delay or government intervention that pushes this story back and instead we should be looking at India as perhaps there're the prime growth story for LTE in the short term?

  • Georges Karam - President, CEO

  • I mean, Lee, this is very, very good point.

  • I mean it's obviously it's always hard to predict the future and mainly in China.

  • I mean what I can say obviously that there is a real demand n deed by China mobile and they are really pushing very hard to get TDLTE because if not they will be losing customer to the other carries, as you know, that they have much better 3G technology in China, while their TD-SCDMA technology is not really at the level of expectation.

  • On the other side, as you know there is in China and the China government will be the guy who's pushing on the button saying go.

  • The way today it looks very honestly they still aggressive -- aggressively pushing this and to some extent we may see dual mode devices going between TD-SCDMA and LTE even if you can argue why you need TD-SCDMA with TDLTE in your phone because it's enough to have maybe in China 2G and TDLTE and save the cost of TD-SCDMA.

  • But this could be way for them, in my opinion to save the face and let things go in parallel to the TD-SCDMA.

  • So today our expectation is still that this is -- can be going seriously the second half of 2012.

  • I believe in this plan there is a six months risk there.

  • Now there was the slope of how they will grow fast.

  • They w ill never announce that they are not going, they are not moving, but I tend to say the speed of the ramp up here we could be different I would say on from this angle.

  • Having said this, obviously you're right, India is much more I will say there is no government, there is no such kind of political cost variation, it's just pure business stuff and then in India we are seeing at least the phone carriers that they have TDLTE seriously engaging plan where one of them we still see him starting this year, in Q4.

  • They didn't make their final selection yet about the (inaudible) vendor and so on, but they are very serious and I believe they will be -- if they have a delay it will be question of months or two but it will not be really longer than this, in my opinion.

  • And we are seeing another carrier which is [reliance] who is absolutely committed to this.

  • They have maybe a little bit more challenge in the start time because they have to build everything from scratch, they don't have back bone, they don't have fiber and so all this they need to fix much more -- I will say they need to have bigger build for their network versus the other guy (inaudible) but definitely those guys will go as well in 2012.

  • Worst case could be Q2 2012, this is my expectation.

  • So having said this, you're right, I mean we could start seeing India moving before China in terms of volume and you could see as well, which is -- I didn't mention this much I will say previously but we are seeing in this quarter a lot of interesting market outside China India, say Brazil, Australia is some country in Middle East where those carrier -- they are more [BWA] carrier, it's not the say I would say level of the opportunity like India and China in terms of size, but it still sizeable deployment that could be interesting for Sequans and this is seems to be moving fast to be ready beginning of 2012 in the first half even start deploying.

  • So this is this how we see the market.

  • Lee Simpson - Analyst

  • That's great, that's very clear.

  • And maybe if you look at some of the other Asian players who are looking to harden up solutions for LTE, talking in particular about Samsung, MediaTech, [Spreadtrum] all making moves in the last couple of months to just firm up that IP base.

  • I was wondering how you now see yourself as a competitive play especially into TDLTE against some of these other guys.

  • Georges Karam - President, CEO

  • I don't know if I catch exactly you're question regarding Samsung and MediaTech, its IP -- can you just give me (inaudible) the question --

  • Lee Simpson - Analyst

  • Sorry.

  • We're just seeing that a lot of these guys are hardening up their LTE chip sets, a lot more development work being done there.

  • They've made some acquisitions as well.

  • I just wondered how that might have changed the game in the meantime.

  • Georges Karam - President, CEO

  • I mean you know very honestly you -- obviously the competitive landscape, we're seeing obviously continuous change there.

  • Obviously LTE is a huge opportunity.

  • We are fully convinced about it and I don't believe anyone can have a doubt about this opportunity.

  • And all the silicon players they are going to try to make a play there.

  • And in practice, I tend to say the -- I still confirm that only few guys they have solution today and even the solution they have, I mean if I exclude the big US company, I believe which is really seriously they have something, even if they have a next generation to come and so on, but if I compare the other guys, they are almost in demochip you know?

  • Even not to qualify it maybe production but really not at the level what I would consider competitive chip and Sequans, with our product, the first generation and the new one, which is going to happen soon with the 40 nanometer, we still believe we have at least one generation ahead of many, many players that will give us nice time to market advantage.

  • In addition, we believe as well that our solution is very, very optimized and right sized delivering power and cost and footprint, so MediaTech, very honestly without commenting specifically on those guys, I mean they have their plan, I don't see them -- I would be surprised if they have something before one year.

  • At Samsung they build their own chip, but if you look to this chip is kind of 110 square millimeter [dye] size so it's really kind of an early chip to go to market quickly, but I don't believe this chip is sustainable to compete as a smart phone vendor.

  • So definitely Samsung will be going with other chip from the outside market and why not having Sequans playing with them as using them as a customer as well.

  • Lee Simpson - Analyst

  • Very interesting, I wanted to maybe ask one quick follow up question for Deborah, there's quite a high change in the fair value of the convertible notes option component.

  • How should we now think of that going forward?

  • Deborah Choate - CFO

  • Yes, basically we've just done a very basic option pricing model on the -- it's EUR2.5 million in debt convertible and it's a $10 IPO price and we -- so we value that basically that option using [Black and Scholl].

  • So -- and it was based on the -- so we went from basically a zero value at the end of Q3 when it was out of the money and IPO hadn't happened and we think we were at 14.2 market value at the end of March, giving us that value.

  • So obviously its -- if the stock price goes up again we have a further expense, if it goes down, then we should recover and then basically if the -- if the share -- if the debt is converted, we have whatever the difference between $10 and the market price is as a charge in Q4 and if we reimburse the debt then it all sort of zeros out and on the year there's no effect.

  • Lee Simpson - Analyst

  • That's very clear.

  • Thank you.

  • Operator

  • And our net question is a follow up from the line of Uche Orji of UBS.

  • Please go ahead.

  • Uche Orji - Analyst

  • Deborah, just very quickly, so it was in the current ASPs we have, so by Q4 you need to probably adjust over [2 million], [2.2 million] for the current ASP, do you reckon that you'll have -- I'm not sure how much the channel inventory will -- how low the current inventory will be at that run rate of units.

  • so I'm just trying to gauge whether it's a case of as soon as people make up your mind and if that's where we fuel the channel again we will see a snap back in Q1.

  • Just to kind of get a sense -- so maybe way to answer that will be to tell me, based on the current number of (inaudible) of 2.9 last quarter, where our [push] channel inventory set out, that way we can actually calculate by ourselves what that means for the channel by the end of the year.

  • Deborah Choate - CFO

  • I'm not quite sure I understand the question but I mean we -- in terms of the pattern of shipments in Q2, we did have a higher volume in the third month of the quarter.

  • That also explains why our accounts receivable is higher at the end of the quarter

  • Uche Orji - Analyst

  • Okay.

  • Deborah Choate - CFO

  • That said, we continued to ship in July.

  • So I think the events that we've been talking about were quite recently discussed with us by our customers but I'm not sure what other -- at this point what other color I can give you in terms of channel inventories.

  • Uche Orji - Analyst

  • Sure, what I mean is what is the typical level of inventory that people carry in China for your product is it four or five weeks?

  • Because the reason I'm asking is if your [mates] are going to be drawn that significantly in Q4 then obviously the inventory channel will be down a lot as well and does that set up for what could be an interesting snap back sometime in 2012?

  • Deborah Choate - CFO

  • I mean I don't have -- I don't have full insight on our customer's inventory levels, but typically I don't think they're carrying that much inventory because if we don't ship on time they tend to screen because they can't produce.

  • So I don't think they have huge levels of inventory.

  • Georges Karam - President, CEO

  • Well, I believe it's below four weeks, 100% sure of it.

  • Uche Orji - Analyst

  • Okay.

  • Very good.

  • Thank you very much.

  • Georges Karam - President, CEO

  • And we tend you know in general not to push our customers with inventory.

  • We really -- we are not only with our major one, but it's a policy in the company not really to push and have tons of inventory because you pay later on in the problem.

  • Uche Orji - Analyst

  • Thank you very much.

  • Operator

  • (Operator Instructions)

  • And Mr.

  • Karam and panel, there are non further questions in queue at this time.

  • Georges Karam - President, CEO

  • Okay, guys, thank you very much for your time and hope to see you on the second call or maybe between the two calls if we meet face to face with some of you.

  • Thank you very much.

  • Operator

  • Ladies and gentlemen, that will conclude our conference call for today.

  • On behalf of today's panel, I'd like to thank you for your participation and thank you for using AT&T.

  • Have a wonderful day, you may now disconnect.