Sequans Communications SA (SQNS) 2011 Q3 法說會逐字稿

Welcome to the Sequans Third Quarter Results Conference Call.

At this time, all participants are in 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 on behalf of Sequans.

This call may contain may contain projections or other forward-looking statements regarding future events or 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 operations and financial positions, business strategy plans and 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 current beliefs and expectations with respect to future events, and are based on assumptions and subject to risks 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 and forward-looking statements.

Some of the factors that could cause actual results to differ materially from forward-looking statements made in the call include without limitation; the contraction or lack of growth of markets in which we compete and which our products are sold, including WiMAX and LTE markets; unexpected increases in our expenses including manufacturing expenses; inability to adjust spending, quickly enough to offset any unexpected revenue shortfall; delays or cancellations in spending by our customers; unexpected average selling price reductions.

The significant fluctuation in which our quarterly revenue and operating results are subject due to cyclicality in the wireless communications industry and transitions to new process technologies; our ability to anticipate the future market demands and future needs of our customers; our inability to achieve design wins, and other factors detailed in documents we file from time-to-time with the Securities and 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 host Mr.

Georges Karam.

Please go ahead, sir.

Thank you, Ralph.

Good morning, ladies and gentlemen.

This is Georges Karam speaking.

I'm with Deborah Choate, my CFO, and we are pleased to welcome you to our third quarter results conference call.

As announced this afternoon, Q3 results are in line with or better than our guidance.

Despite the decline in US WiMAX demand, we are extremely optimistic about long-term future and view this as a temporary setback, and not significant from a strategic perspective.

Since our last conference call, we have achieved several important milestones, and we are particularly excited about the launch of our new LTE platforms.

Let's talk about WiMAX first.

Subsequent developments at Sprint shed more light on the unexpected supply chain adjustments in the first week of July, which affected HTC and had an immediate impact on our Q3 and Q4 revenues.

On the results call in July, Sprint [amounted] higher than normal device inventory at the end of Q2 and said they would be reducing inventories over coming quarters.

This month, Sprint announced that the iPhone would be available on its 3G networks in Q4.

Sprint also announced an accelerated rollout of its LTE networks, and plans to introduce LTE devices in the second half of 2012.

Although Sprint has maintained its commitment to selling WiMAX devices through 2012, we believe that these developments will affect the size of the WiMAX market in 2012, versus our earlier assumptions, because Sprint is one of the largest sources of demand for WiMAX devices.

To be clear here, we have not lost share with HTC and they continue to introduce new devices.

And as you know, outside the US, HTC has been supplying WiMAX for the devices in Japan since April and in Korea since July.

More recently, KDDI in Japan announced the availability of a new device from HTC.

This is the EVO 3D.

And yesterday, Sprint launched the HTC EVO Design 4G, which is the fifth edition to the EVO family in the US all powered by Sequans.

For your information the EVO Design 4G is the (inaudible) phone with mobile hotspot capabilities and Sprint is pricing it below $100 with a contract.

So, HTC continues to work with Sequans to launch 4G WiMAX phones for the global market.

In addition to HTC, we have also won business in both Korea and Japan with other WiMAX device vendors.

Last quarter, we announced the world's smallest WiMAX hotspot with IGI, and we expect new WiMAX devices to be launching in Q4.

Finally, we continue to sell chips to our other partners providing devices for emerging markets.

So as you see, we've been making progress on diversifying our customer base.

To summarize on WiMAX, we expect that the WiMAX market outside the US will continue to grow particularly in Japan and Korea.

But due to the decline in the US market, we believe that next year the overall WiMAX chip demand will be down compared to 2011.

Even though we expect to retain a high share of the available market, it's clear that we need our LTE revenue to ramp in order to return to a pattern of growth.

I want to emphasize that there is no change in our strategy or long term prospects.

Most of our R&D resources had already been shifted to LTE, and we are maintaining the phase of new LTE product development efforts in order to fully capitalize on our time-to-market advantage.

Let me give you now some update on LTE.

During Q3, we achieved several important milestones that represents important progress toward becoming one of the leading suppliers or LTE chips for relevant brands are on the globe.

As you know, our strategy has been to focus initially on the early adopters of LTE with TDD spectrum, where we have enjoyed a clear time-to-market advantage, derived from having delivered four generations of OFDMA chips to carriers.

In China, we've been working with China Mobile for well over two years, and have been involved in interoperability and other testing with China Mobiles infrastructure vendors for months.

We recently announced that we have received our certification from MIIT, which is required to participate in the large-scale trials and which is the key to being included in the selection process for commercial deployment.

We also announced that we are participating with Huawei in our first large-scale trial in Shenzhen.

China Mobile has indicted that the large-scale trials are expected to continue through the first half of 2012.

We are also continuing our trial activity in India, where we are engaged with operators infrastructure and potential partners.

We expect network deployments by several carriers to begin in late Q4 and during the first half of next year.

As you recall, we have already announced a design win with Gemtek for this market.

During Q3, we announced another design win NetComm which was selected to provide devices for a national LTE network in Australia.

And we expect to announce soon additional LTE design wins, and other operators using our LTE technology.

As you saw in our announcement a few days ago, we'll begin sampling Andromeda and Mont Blanc LTE platforms during the fourth quarter.

We are very excited about these new chips covering both FDD and TDD LTE networks.

The Andromeda platform is designed for the smallest of LTE device such as smartphones and tablets.

And the Mont Blanc is designed for mobile routers CPE and USB dongles.

Both these platforms are based on an ultra efficient modern design enabling superior performance, very low power consumption, and an extremely small footprint.

An outstanding customer experience is achieved by combining our best-of-breed 4G platform with the customers' choice of 2G, 3G solutions, using our proven dual-standby architecture for moving between networks.

We also announced our dual 4G chip for devices supporting both WiMAX and LTE, which will benefit WiMAX operators planning a gradual transition to LTE.

Obviously, time does not permit me to go into all the details here, but I hope you will visit our website to read more about our three new baseband chips and the companion RF chip.

We also want to highlight our agreement with Fujitsu to integrated its RF solution as a complement to our own RFIC to ensure a global solution for all LTE frequency bands.

We are very proud about this comprehensive family of LTE solution for all relevant brands worldwide and believe they represent major improvements over those currently available from other players in the market.

So to conclude, several OEM and ODMs are preparing to ship products in 2012 using our new LTE platforms serving operators in the US, Asia, Europe, Latin America, and the Middle East.

We expect the pace of design wins to accelerate in Q1 after customers have an opportunity to fully evaluate these new platforms and we remain confident of our strong position as a best of breed 4G chip supplier in a very dynamic and exciting market.

Let me now turn the conference to Deborah to take you over the details of our financial results.

Deborah?

Good afternoon, everyone.

I'd like to add some details about our Q3 financial results and the outlook.

Revenues in the third quarter were within the range of our guidance at $26.2 million, this is a decrease of 14% quarter-on-quarter and an increase of 39% compared to the third quarter of 2010.

We shipped over 2 million units in the quarter, compared to nearly 3 million units in Q2.

HTC, our largest customer accounted for 73% of revenues in Q3, compared to 84% in Q2.

We continued to make progress during Q3 in diversifying our customer base and our non-HTC revenues grew over 49% sequentially from Q2.

Product gross margin was 53.2% in the third quarter compared to 45.7% in the second quarter, and 46.1% in the third quarter of 2010.

As expected, our product gross margin improved in Q3, mainly reflecting the full effect of product cost reductions, including the replacement of the memory component which had been delayed by one quarter.

The improvement in gross margin also reflected a shift in customer mix.

Our year-to-date gross margin of 50.3% is consistent with our three to five year gross margin target of at least 50%.

Operating expenses were $12.2 million in Q3, compared to $12.4 million in Q2, and $7.6 million a year ago.

As we've indicated previously, we intend to maintain our strategic spending on LTE, because we believe we are well positioned as one of the most advanced suppliers of 4G chips, and continue to have confidence in our long-term future.

During the next several quarters, we will continue to disciplined to limit the increase in operating expenses.

However in anticipation of your question, we are not planning significant expense reductions in any operating expense category.

Operating profit in Q3, which increased stock-based compensation expense, was $1.9 million, basically flat with the second quarter, and up from $1.4 million in the third quarter of 2010.

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

Non-IFRS operating profit was $3.1 million in Q3 of 2011, up slightly from $3 million in Q2 and compares to non-IFRS operating profit in the third quarter of 2010 of $1.6 million.

Financial income in Q3 was $1.5 million, which represented a $1.7 million gain from change in the fair value of the option component of the bank convertible notes which will mature this month, partially offset by $172,000 of foreign exchange loss and $26,000 of net interest expense.

To remind you the notes which are convertible at $10 per share will be repaid this month, so there will be no further impact on the P&L in Q4.

Basic and diluted earnings per share were $0.09 in the third quarter, compared to breakeven in the second quarter.

Non-IFRS diluted EPS was $0.08 in the third quarter the same as in Q2, and up from $0.04 in the third quarter of 2010.

Non-IFRS results exceeded the high end of our guidance, as we were quite successful in delivering product cost reduction and controlling operating expenses during the quarter.

Cash flow from operations in Q3 was $5.9 million, and our cash position at September 30 2011 was $65.5 million, compared to $61.9 million at the end of Q2.

Accounts receivable at September 30 declined to $10.2 million reflecting DSOs of approximately 43 days, compared to 55 days in Q2 of 2011.

Inventory increased as expected by $2 million to $13.1 million.

We expect to continue to have some impact on inventory levels from the lower demand from WiMAX chips in the US.

For the fourth quarter of 2011, we expect revenues to be in the range of $20 million to $23 million with gross margin around 50%.

Based on this revenue range and gross margin, we expect non-IFRS net loss per diluted share to range between a $0.01 loss and a $0.05 loss for the fourth quarter of 2011, based on approximately $34.6 million weighted average diluted shares.

Our guidance for non-IFRS net loss per share, excludes stock-based compensation expense.

Also when you model the year-end balance sheet, please remember that it will reflect a $3.3 million repayment of the convertible bank notes during the fourth quarter.

As you heard from Georges, we are excited about our initial traction in LTE.

With our new LTE chips sampling shortly, we expect design wins to accelerate.

However, given the length of the typical sales cycle, we continue to expect that LTE revenues in the first half of 2012 will be quite modest and won't offset where we expect will be a sequential decline in WiMAX.

This first half weakness is likely to be more significant in Q1, because it will also be affected by typical seasonality factors in the semiconductor industry.

We continue to expect the LTE revenue to begin ramping during the second half of 2012.

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

(Operator Instructions)

And we go to the line of Uche Orji.

Please, go ahead.

Sure, thank you very much.

So, Georges, can I start up by asking you to provide some color on the ramp in China in terms of what really constitutes a large-scale trial for LTE and how you envision that?

And while you are commenting on that also -- perhaps also on the silence of Reliance in India.

I know recently the CEO talked about a possible Q1 ramp.

And if any comments you can make both on China and India will be helpful to start.

Sure, Orji.

In China Mobile, just to recall, it's such a different phases that they are moving there, so you have the phase of the lab testing and this is the MIIT certification that we have passed.

And after this you enter a large-scale trial.

As you know we have seven cities in China where different vendors, and we started this in Shenzhen working with a Huawei.

And we expect as well to do expansion with other guys in large-scale sales in other cities in the near future.

The way we see it -- because what obviously what I can talk about is what China Mobile is announcing -- is that they expect to continue to this stepping in the field which is what they call large scale file, which is still -- the city is completely covered.

The number of devices are limited and to do extensive testing, and from there to move to real network deployment which is, I mean, if we want -- the plan today is to happen in the second half of 2012 or to ramp in 2012.

We are talking -- I will say there is a convergence by talking about availability of phones for China Mobile end of 2012 to give you an idea about what the people are expecting.

The issue in China, I mean in general is obviously that this is -- there is some political decision there that can happen and can delay this by six months.

So my feeling today, if I look in practice what's happening in China Mobile, I'm seeing more positive news coming from China that let me feel like things at least are going as expected, and there is no major delay there happening.

But we are still cautious in terms of revenue for China Mobile in 2012 -- much more thinking that this will happen really in 2013, and 2012 will be phase of initial launch.

Maybe we can see some quantity going in the second phase of 2012, but it will not be big volume.

They will leverage this period to launch the network, launch new devices and 2013 will be the real year in China.

So -- and obviously we are playing there and we plan to take benefit of -- participate, I will say, of the launch in China.

In India, things are little bit more different and I intend to say obviously because there is no political decision there.

So, we are seeing private operator to launch their networks.

Airtel is moving aggressively.

I believe you heard the announcement at least about (inaudible) Huawei that they got the portion of the business.

I believe others will be announced soon.

And it's expected to start launching the first phase in November/December timeframe.

So, we'll see some initial deployments in India happening even in Q4.

Again, it will not be big volume in terms of devices, because it's the first phase where you see few thousands, ten thousands unit going here and there.

But this is a good sign, because this means it's moving seriously for the next year deployment with Airtel.

I believe Oger and Reliance -- Reliance which is the big one.

Reliance is really expanding the testing today.

They are still in the phase of testing.

Still talking committing to some deployment that we expect to see mid-Q1 or beginning of Q2.

And I believe Oger is in the same situation.

So, if you ask me my feeling on India that this will happen definitely next year.

So, we will see volume coming from India next year.

We will see less in the proportion, I will say, in China -- I will say that China Mobile, obviously it is a big market, a huge market, but we will see something more at the end of 2012 happening there and much more in 2013.

And outside those two big networks -- obviously here we are focusing about the TD LTE markets.

You are seeing a lot.

I mean, we announced the business we have in Australia.

But I'm seeing a lot of activity happening as well in Latin America, in Middle East in Europe, by the way.

So you see some BWA activity that all this will happen next year, and you add to this obviously all the launch of Sprint and Verizon and AT&T in the US that will be big parts of the business next year as well.

Sure.

Let me just follow-up on that, so if you look at Sprint as they planned a transition through LTE, which I guess has been the announcement made.

Two questions here; one is, to what extent you think you can leverage the WiMAX position now in helping that transition?

And that's one.

And then, two, as you compare your products both Mont Blanc and Andromeda, particularly Andromeda, how do you see yourself against more entrenched player in FDD?

What are your technical advantages that you are able to discuss in an open call like this.

Thanks

Yes, I believe on the Sprint case -- definitely Sprint we know them very well.

We are providing them device.

They trust us.

We are a good partner of them and we believe that we delivered good quality and good support during the WiMAX phase.

So obviously, we continue to support them and supporting them in WiMAX.

And I believe it will not be a surprise to say that we can help them as well in their LTE launch with our product that we have.

Obviously, I cannot talk on anything more specific there, but definitely, if you consider Sequans to Sprint, we have the full solution that they are looking for.

With our existing WiMAX, we have the LTE that they are looking for that we can help them there.

And, on top of this, we have the dual board WiMAX LTE if they go through -- they need some devise to support the two networks.

So, I'm quite positive on this and I believe this is one of our key targets obviously in the FDD market.

Now back on the technology, as you see we have two platforms there.

The difference between the two platforms by the way -- the two chips -- is essentially more interface optimization some horsepower indicates when you are providing chips for a dongle a portable routers and CPE, and different optimization when you go to a phone that distinguish the two platforms.

But the reality the two technologies are using, I will say, the same optimization to deliver a very optimized die size leading at the end of the day to footprint advantage and more important power consumption advantage.

So today, we believe Sequans, the technology we have in comparison to what we have seen in the market from all the competitors, we believe we have a big differentiation in power consumption and die size that we believe makes our platform very attractive to all the customers or potential customers we are talking to.

And maybe just one last question, and I'll hand it off.

I apologize for going too long.

Deborah, can you talk about these non-HTC customers and specifically what drove growth there?

Any names we can mention would be helpful to us.

We didn't have any other customers that were above 10%, so we haven't announced specific names.

But this is completely in line with what we've been saying that -- that other vendors for the Japanese and Korean markets in particular have been ramping up as well as to the emerging markets.

So, there hasn't been any one significant customer that that account for the increase.

It's been a number of different customers across markets and across device types.

Great.

Thank you very much.

And next we go to the line of Quinn Bolton of Needham and Company.

Please, go ahead.

Hi, Georges.

Hi, Deborah.

I was wondering -- you gave us some sort of qualitative description of the WiMAX revenue, and obviously with Sprint's announcement, it looks like the US market declines next year.

But can you sort of walk us through if you can sort of today -- what's the mix between the US WiMAX and say revenues for emerging markets KDDI and Korea Telecom?

It's -- it isn't that complicated because on our side obviously mainly when we talk about HTC revenue, which is as you know big customer for Sequans, HTC serving all the markets and was serving only US.

So, all what we can get there is obviously all our market analysis to compare the number of subscribers of KDDI and UPC versus Sprint.

If you look in terms of size potential there, obviously Sprint is bigger than the two than here and more important I believe the US market the demand was there in terms of competitive landscape and so on positions Sprint really to leverage all the 4G potential there.

If really -- not to make it too big -- if you look to the WiMAX market now globally -- if you add emerging market -- and, again, this is really my estimation.

I believe US should be maybe around half of the total markets versus the rest of the world including Korea, Japan and the emerging market.

If we want to -- to give a number there, I tend to say the market is at least in 2011, was kind of 50/50 between US versus the rest of the world.

Okay.

So based on your comments it sounds like we should for modeling look at the non-US WiMAX markets KDDI, Korea Telecom, the emerging markets, that that continues to be growth business in 2012.

But would you expect that the US WiMAX revenue -- does that effectively go to zero by first quarter of 2013, or do you expect some residual business in WiMAX in the US market beyond 2012?

It's very good question.

I mean -- and reality -- decision -- I believe we should see -- we should have more visibility hopefully in Q4.

But when you look to the events, what's happening there, obviously in addition to the inventory which is the inventory is something can be absorbed, so you don't need -- I mean you need to model it on the short term, but essentially is two major events and the first one is really the major one which is the iPhone.

Because when you look there if you say, for example, Sprint they use to sell -- pick a number, let's say 10 million smartphones on a yearly basis, there is no iPhone there.

And the question mark -- how much the iPhone will be taking from those smartphones -- keeping in mind by the way, and this is the complexity that iPhone is not supporting 4G.

So if I am a subscriber of Sprint and I have a 4G EVO phone, am I going to replace this phone with a iPhone, while I need 4G network?

I don't know and a question mark.

Maybe -- obviously Sprint will [get] some new subscribers that they will be maybe picking from AT&T or Verizon, and those guys they will be straightforward for the iPhone brand.

So it's really -- the question is complex on this to see how much HTC will be losing in terms of market share on the 4G devices for Sprint.

This is one element.

The second element is really related to the strategy of Sprint.

The strategy of Sprint to transitioning to LTE, which is to some extent obviously we -- I don't believe for Sequans it's really a big -- in itself it's a big problem because the LTE this is what we are hoping to go there and hopefully we'll benefit from this acceleration as well on Sprint.

But, if we go back to the WiMAX, this today if I remember what Sprint was announcing, they were announcing that end of 2012 they still have, they will have more than 100 million POP LTE.

And they will have more than 100 million POP WiMAX with some overlap, but not total overlap of WiMAX.

In other words, end of 2012, at least they execute on what they are announcing and they go fast and so on, without taking into account any delay, they should still have subscribers using WiMAX that they are not able to switch to LTE because the coverage of LTE is not taking over WiMAX.

The show on their presentation that end of 2013, the coverage will be 100% and LTE will be completely above WiMAX taking over.

So I tend to say from a model point of view, you should say if they execute that end of 2013 they should not anymore introduce any WiMAX, they should not sell any WiMAX.

But you need to factor in as well the relationship, or how they will be handling the relationship with Clearwire as well because for the time being the compact that they have with Clearwire will take us through end of 2012.

There is no indication, what they will be doing in 2013.

So, I don't know if I give you -- I give some elements here for the modeling, but obviously we are missing the visibility here.

And maybe hopefully in the coming few months when we see the impact of iPhone and how Sprint will be executing on their LTE and their relationship with Clearwire we'll get better visibility to evaluate or watch this impact.

Okay.

Just one quick follow-on, and then I had one more question about the LTE market.

Deborah, you mentioned that you would see some uptick in inventory in the fourth quarter, is that a significant jump in inventory?

And do you see any obsolescence for us?

My guess is that you probably don't, but just I was wondering if you could give us little bit more detail on the increase in inventory you expect for Q4.

Yes, I am not expecting a major increase, but I think there could be some inventory build in the quarter.

And, in terms of obsolescence, no we are not expecting any issues there.

And just for information we did -- we had announced at the end of June to our customers end of life on an older product, and we were able to manage that to be able to know a particular issue.

So, I'm not expecting any obsolescence issue by the end of the year.

Okay.

Great.

And then, just back on the question for the Indian market, Georges, you sort gave a very good overview for each of the major private operators.

But, if you were to look out for next year, any sense you have as to how many units in aggregate the Indian market may represent?

I mean, is this sort of 4 million to 6 million in total [LTE] units.

Is that sort of a good range, or you think the number is less or more than that?

You are saying 4 million to 6 million units for India?

Yes for the total India market between, Airtel, Reliance, Tikona, in aggregate is sort of a range or say 4 million to 6 million, is that a realistic range based on RFPs or anything sort of to-date?

Any sense how many units could ship next year?

I believe -- and obviously India is huge.

I mean, well -- and this will go to the right level.

And I believe Reliance is very, very aggressive with their launch, and Airtel as well.

So at least -- the way look to it, I mean, you need to factor one thing that in 2012, if you assume Reliance -- there is the ramp up that you need -- if you look for 2012 as a year, or you should not factor in one year deployment because Reliance will go through their launch in Q2, and Airtel will start in Q4.

So they will accelerate in Q1 and it will go to Q2.

But at least if I refer, for example, to the RFP of Airtel, they have open RFP where they were talking about 1.5 million devices for 12 months [running] forecast.

So, this is one big operator Airtel.

Reliance -- they should be the same order of magnitude at the beginning.

And then you will -- Oger is smaller because they don't have -- they have two circles I believe, so it's much smaller.

And the other one as well -- Tikona is small as well.

So this is can you give you an idea about -- I believe, 4 million, 6 million this will be more to expect to say in 2013.

I see it as a high number for 2012 personally because if we factor in, 1.5 for the two carriers, so this is three -- and for the other guys let's say 0.5 million.

So this 3.5 to run it on 12 months.

You need to reduce this by -- take the impact of the launch of Reliance midyear and the beginning of the ramp, so to factor this in.

So, this should take us, I believe, a little bit below around maybe 2.5 million for next year.

Okay, great.

Thank you very much.

And next we go to the line of Tristan Gerra of Baird.

Please, go ahead.

Daniel Marquardt on behalf of Tristan.

I just wanted to see -- can you talk about how the single mode LTE environment is shaping up for 2012, and kind of where the strongest opportunities are for you?

I mean, Tristan, this is -- I mean, first of all the initial deployment -- majority of the initial deployment, I mean you have everything where the people are launching -- so it's Daniel -- so Daniel, the initial deployment in Indian phone is all going single mode.

All the -- what I will qualified as BWA in Australia and Latin America and so on -- all those guys at the beginning they are going dual mode.

When it goes to mobile devices this is where you start seeing, dual mode opportunity.

But having said this, Sequans is not only playing in single mode, I mean we are playing as well in dual mode, even if we don't provide the 2G, 3G platform.

So, I mean, I cannot mention the names here what we are doing, but we have design win or we can have design wins with the guys where they selected the best 2G, 3G solution they have and they take Sequans for the LTE.

China -- China is going to be -- whether single mode LTE or CDMA LTE, this is how you see it.

There is big debate on if CDMA will stay as a must have or not, because from practical point of view, you don't need it.

India -- single mode will be dominant there.

Obviously, US it will be multi-mode.

This is how we see it.

All right.

And then, I guess just a follow-up on that.

The WiMAX LTE combo chip market, how is that developing and what kind of traction you think that chip is going to get in the US given the Sprint announcement?

I mean -- yes, it's good point.

In the US I mean the question on the US, Sequans the way we introduce this product and the way we go on this, because for us it's really an opportunity kind of an upside because we can differentiate a lot on this.

And we are seeing some interest -- serious interest from many operators outside the US, where they are deploying WiMAX and they need really -- they are not really in a hurry to switch to LTE because they will continue on WiMAX maybe two years before going there.

Then when you go to the big carrier there, obviously you have the US Sprint, Clearwire, KDDI, Japan and Korea definitely it's a major interest for KDDI.

We are seeing good posture there.

Sprint they went through, in their announcement they said, they don't want to have dual mode on the phone.

One of the problems Sprint essentially -- when you change frequency because they are using the LTE on 1.9 GHz and they keep their WiMAX on 2.5 GHz.

So it creates a little bit too antenna problem more than really to baseband, if you want.

And this is why they elected at least for the time being that on the phone to stay with a pure LTE or pure WiMAX phone -- not to mix them.

However on portable routers and maybe downloads -- essentially portable router -- they can go with dual mode and they said this already.

All right.

And then, just for Deborah, you've been giving the unit shipments every quarter, could you give us what 3Q unit shipments were?

Yes.

We were just about 2 million in the third quarter.

Thank you.

And next we go to the line of (inaudible).

Please, go ahead.

Thanks for taking my questions.

Maybe a little bit of clarity on inventory.

Could you tell us what portion of inventory is the Sprint part?

Well, our inventory is not a customized inventory.

I mean, that's not a customized chip.

So, all the chips can go into any operator -- any customer.

So, there is nothing that is specific to the US market.

Okay.

In terms of gross margins, it appears you had the nice jump up in the current quarter, but you are guiding sequentially low to 50% for Q4.

Can you help us understand why the margin decline there?

Well, it's really a question of our overall target.

Our overall target is and continues to be at 50% or better on an annual basis.

And we've always said there is some volatility from one quarter to the next as the timing of cost reductions come in and as a function of customer mix.

So, what we are expecting in Q4 is really related to customer mix.

Okay.

What is your expectation on cash flow for Q4 now?

Well, given that we've guided to an operating loss we are expecting to have some use of cash from operations, and I also mentioned the repayment of $3.3 million in debt.

So, we would expect cash to come down somewhat in the quarter.

Last question on breakeven, given the shift in your strategy to LTE, is there any change in your breakeven revenue number and, if so, what would it be?

Well, we said there is no change in our strategy or our long term prospects of the Company.

We said that we continue to maintain the investments in LTE.

So, we are not expecting operating expenses to go down.

So I think no -- I mean, really no changes from what we've talked about previously.

I mean, we did, there is no shift in strategy, just to be clear on this.

I mean, our strategy we didn't change an iota, I will say, in our strategy.

It is just only we suffer, I will say, from the acceleration or [base] that we have in the US on the WiMAX market on the revenue side.

But as -- we always said that we were investing a lot in the LTE and shifting all our resources to the LTE since a while.

By the way, I mean, our WiMAX resources we don't have much.

We are supporting existing businesses.

And obviously, this is for the benefit of taking advantage of the huge market coming from the LTE.

So what is your breakeven expectation there as you look at fiscal '12?

Well, I mean, we are still targeting gross margin of around 50% and we talked about at least in the near term operating expenses trying to limit the increases.

Okay.

Georges, can you give me a little bit more clarity on China Mobile?

It looks like, there seems to be a lot of discussion about Apple getting into LTE with China Mobile.

And, what gives you the confidence that when you are out with your chips in mass volume that something similar to what has happened currently with WiMAX it won't happen in the LTE side?

Can you paint the landscape of how you see yourself playing if such a situation were to arise?

Yes, I mean, just one clarity on the WiMAX, we are not talking about competition or we lost to something versus other guys.

I want to be clear on this.

What's happening on the WiMAX really today was predicted and that is going to happen over time.

When we were saying that 2000 -- WiMAX we were hoping that will continue in 2012 and the decline will not happen before 2013.

The introduction of the iPhone in Sprint change a little bit the situation on the Sprint Networks.

And because WiMAX is limited as a market because you don't have many carriers so it's very limited than the impact is straight forward.

In the LTE, the equation is probably different.

So, we are not talking about one carrier.

Just in the US, as you know, I mean you have three big carriers -- not to name all the other small guys that they are all planning to launch LTE.

China Mobile is a huge carrier.

I mean, if you think about China Mobile today we are talking about, they have more than 600 million subscribers.

So definitely they can introduce the iPhone.

And even lets assume that the iPhone is not choosing Sequan's technology.

Even with this, I still believe that in China you have -- China it's a game of low end smartphone, you have a lot of room for many players to participate in China and make significant revenue from this.

So, but again, the LTE is really big, because not only China Mobile, the US, another big market -- India, we talked about all the emerging market.

And Europe is happening because the frequency auction is happening in Europe and Germany and France, so things will be moving one year later.

And it's not at all comparable to what happens in the WiMAX.

I mean, the WiMAX is -- the market is small and it's shrinking.

The LTE -- the market is big and expanding.

So as far as we are able to participate in this market, no matter what we can deliver on our goal here and to grow the Company.

Thank you very much.

Good luck.

Thank you.

(Operator Instructions)

And no one is in queue, sir.

Please continue.

Okay.

Thank you very much.

Appreciate your time, guys, and the interest in Sequans, and talk to you in the next quarter.

That does conclude our conference for today.

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