Sequans Communications SA (SQNS) 2017 Q1 法說會逐字稿

Good morning.

Welcome to the Sequans First Quarter 2017 Results Conference Call.

(Operator Instructions) 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 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 our future events and are based on assumptions and are subject to risks and uncertainties and subject to change at any time.

We operate in a very competitive and rapidly changing environments.

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.

Thank you, Tony.

Good morning, ladies and gentlemen.

This is George speaking.

I'm with Deborah Choate, our Chief Financial Officer.

Many thanks for joining the call, and welcome to our First Quarter 2017 Results Conference Call.

I'm pleased to report that 2017 is off to a very good start.

We made significant progress in all areas during the quarter.

On the financial side, total revenue was in the middle of our guidance range, with product revenue impacted by seasonality as expected.

Gross margin was 47.1%, and we managed to hold the OpEx to $10.1 million, which enabled us to exceed expectations for earning per share in the first quarter.

If we assume the midpoint of our guidance for the second quarter, the first half of 2017 will be up 40% over the first half of 2016.

We feel good about the second half of the year, so we continue to believe we are on track to grow more than 40% in 2017, with further acceleration in 2018.

On the customer side, we added a new OEM/ODM customers in both our broadband and IoT businesses.

The CAT 1 revenue ramp is beginning, and we are especially pleased with the design wins and overall traction our LTE CAT M platform is gaining in the market.

More about this in a moment.

We have a new product, with a very high profile customer in our vertical markets business.

This new customer is Lockheed Martin, a major global security and aerospace company.

For the time being, we can say only that it's a multimillion dollar project that will occur over the next 18 to 20 months.

On the technology front, we continued to demonstrate our leadership by making available the most advanced and optimized LTE solutions, including the first ever carrier-certified CAT M solution with our Monarch chip.

We also introduced a new variant, the CAT M SoC, Monarch SX, which is getting great traction.

And we announced a partnership with STMicro to collaborate on a design kit featuring their microcontroller and our Monarch chip.

In addition, we have been involved in 5G research for several years already, and we have a road map that we believe will fuel continuous growth in applications for both broadband and IoT beyond the growth that will come from 4G.

In terms of our position in the ecosystem, we continue to be sought out by a variety of potential partners, and I can say that the number and scope of these opportunities continues to expand.

It's also apparent that our expertise is something that's highly valued by these potential partners, largely because there are very few alternatives for access to the knowhow and carrier relationships we have accumulated.

Now I'll move on to discuss each major market segment, beginning with broadband.

This market continues to account for about 3/4 of our total revenue in the first quarter.

We are making great progress in all regions.

As you know from our announcement, Verizon is now selling the new Ellipsis Jetpack MHS900L, which we refer to informally as Jetpack 3. We are gratified that our strong relationship with Verizon and our consistent performance has enabled us to continue to participate in new versions of this popular device.

In the first quarter, we begun to receive orders related to the new broadband design win we've mentioned previously for the Verizon network.

The quarter -- this quarter, we'll be in volume production, working with a major OEM, and we hope to be able to make an announcement soon.

The broadband business outside the U.S. is progressing quite well also.

After adding 2 new ODM customers in Q4, we added 2 new OEMs in the first quarter to further diversify our business.

Through these customers, we'll serve even more types of networks and more regions.

We continue to see strong demand in the Asia Pacific region, particularly in Southeast Asia as well as the Middle East, Australia and Latin America.

In addition, alternative operators in some developed countries, for example, Europe, are increasing their deployment rate.

So the broadband area is doing very well on a global basis.

We shouldn't ignore the broadband business as a potential long-term growth driver for Sequans.

The global market for customer premises equipment, such as home gateways and outdoors, is expected to grow well into the next decade.

And more important, the proportion of single-mode CPEs is expected to increase at an even faster rate as the LTE network build-out continues in the emerging markets.

Then several years out, we expect another wave of growth coming from 5G, mainly in developed countries.

Operator will be densifying their networks and taking advantage of new spectrum to enable applications for the home such as high-definition video, virtual reality and online gaming.

These applications will require a new generation of devices, powered by chips that are optimized for higher speed and throughput.

Therefore, we are continuing our investment in our broadband business, and our road map includes next-generation solutions that will enable us to be leader in 5G as well as in 4G LTE.

Turning to the vertical markets.

In addition to our successful projects for Motorola, Teleavionics and our customer in Japan, we now have an important new project, as I said previously, with Lockheed Martin, a well-known company engaged in advanced technology.

They have selected us after completing a feasibility study with them to develop a new product and system using our LTE technology.

Having established a very strong position in this vertical market space, we are no longer viewing this business as a one-off opportunistic area only.

We have other important deals under discussion, and we see our vertical market business becoming a significant revenue stream with nice margins.

Finally, we continue to build momentum in the Internet of Things market.

We have received orders from our CAT 1 customers, and we are moving to full production.

Also, we are seeing several customers choosing to run their CAT 1 products on more than one carrier's network, although not necessarily at exactly the same pace.

We are pleased to note that we are beginning to build the backlog of orders that's providing better visibility than we've had in the past.

And we see our CAT 1 business growing during the remainder of the year as planned.

We are engaging with more and more promising end customers through our module partners all the time.

Speaking of module partners, we have built a set of key relationships, specifically for CAT M technology, with various OEMs and ODMs all over the world.

You've seen the recent announcement of 2 new module partners, Huawei and Wisol.

You know, obviously, Huawei.

About Wisol, Wisol is a public company listed in their home country of Korea.

Historically, they have been strong in RF modules.

These are major module partners and are now part of a long list that includes Gemalto, Fibocom, SIMCom, Foxconn, Wistron, USI and others we haven't named.

We have a few more in the pipeline that are very advanced.

So we expect we'll have more than a dozen model partners helping to reinforce our go-to-market capabilities, positioning us as the leading supplier and #1 choice for all types of IoT applications.

We are gaining excellent traction with end customers for many different types of applications, from asset tracking to metering, automotive aftermarket products, wearables and health monitoring, whether directly or through our module partners.

As you know, the U.S. market is the first to move on CAT M. And both Verizon and AT&T are on track for full launch on the network side.

We are completely engaged with both of them, as are our module partners.

We see Canada, Japan and Korea coming along by year-end followed by Europe and China.

We are busy engaging with operators in all these regions, and we'll soon begin IoT testing for NB-IoT with some of them.

So with our growing list of module partners, expanding our reach and providing many choices to their customers, we are on track to move to full production on CAT M in 2018.

With things moving so quickly, we are continuing to invest in our road map for the IoT business to maintain our leadership.

For example, our Monarch SX, which was announced at the Mobile World Congress in the first quarter, is gaining a lot of attention.

This is a highly integrated SoC that has an ultrasmall footprint for space-constrained applications such as wearables.

At the same time, we continue to invest in R&D for the next-generation solutions, which will be even more optimized for low-power and low-cost IoT applications.

Since the last call, our inbound inquiries have continued at the high level, and we haven't seen any surprises on the competitive front.

So we continue to see things shaping up as a duopoly in this space.

Our major competitor seems more focused on 5G and high-power, high-throughput site.

As you take in all the discussion over 5G, it's important to remember that CAT M1 and NB1 are the foundation of 5G for IoT applications.

We are very engaged in the 3GPP Release 15, which will be the baseline for 5G, and we intend to remain at the forefront of the standard as it evolves.

Although the technology is challenging and complex, obviously, much more than other technologies such as WiFi or Bluetooth, we are very pleased with our current position, and we have a lot of confidence in our road map and our ability to continue to execute.

Now I'd like to turn the call over to Deborah for a more detailed financial discussion.

Deborah?

Thanks, George, and hello to everyone on the call.

I'd like to add some more details about our Q1 results and discuss the outlook, including our guidance for Q2 of 2017.

Reflecting a typical seasonal pattern, revenue declined sequentially from Q4, but increased 34% compared to the first quarter of 2016.

During -- in the quarter, we had 4 10% customers ranging from 11% to 19% each, but 2 of them are distributors serving a total of 10 Asian OEM and ODM customers.

Gross margin increased to 47.1%, reflecting higher product risk margin due to a more favorable mix and a sequential increase in other revenues, which included a license slip from Q4.

Operating expenses were $10.1 million in the quarter, down from $10.2 million in Q4.

Our first quarter operating loss was $4.2 million compared to an operating loss of $4.9 million in the fourth quarter and $5.2 million in the first quarter of 2016.

Net loss was $5.6 million in Q1 compared to $5.4 million in Q4 and significantly improved compared to $9.2 million loss in the first quarter of 2016, which had included the noncash 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 first quarter of 2017 based on 75 million average shares outstanding compared to net losses of $0.07 in the fourth quarter based on 74.5 million shares and $0.16 in the first quarter of 2016 based on 59.2 million shares.

The increase in weighted average shares outstanding reflected the equity offering in September of 2016 as well as some stock option exercises.

To facilitate comparisons, we have also reported our results on a non-IFRS basis, which excludes from net loss the noncash items related to stock-based compensation expense and the noncash 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 2016, we no longer revalue the convertible debt embedded derivative.

Non-IFRS net loss was $4.7 million in Q1 2017 compared to net losses of $4.2 million in Q4 2016 and $5.5 million in Q1 2016.

Non-IFRS basic and diluted loss per share was $0.06 in the first quarter, which was better than our guidance.

Non-IFRS net loss was also $0.06 in the fourth quarter of 2016, and we reported a non-IFRS net loss of $0.09 in the first quarter of 2016.

Cash used in operations in Q1 was $9.9 million compared to $5.7 million in the fourth quarter of 2016, reflecting primarily faster payments on inventory build and increased accounts receivable.

Our cash and short-term deposits at March 31, 2017, totaled $14.5 million compared to $20.5 million at the end of Q4.

Accounts receivable at March 31, 2017, was $17.2 million, reflecting DSOs of approximately 104 days due to a concentration of shipments at the end of the quarter again in Q1.

Inventories decreased slightly to $8.2 million.

Short-term debt from financing receivables increased by $4.2 million in the quarter to $11.9 million as of March 31, 2017.

Now looking forward, we expect revenues for the second quarter of 2017 to be in the range of $13.5 million to $15.5 million.

We expect non-IFRS gross margin in Q2 to be above 40% and non-IFRS net loss per diluted share to range between $0.05 and $0.07 based on approximately 75.1 million weighted average diluted shares.

Our guidance for Q2 non-IFRS net loss per share excludes the impact of noncash stock-based compensation, effective interest adjustments related to the convertible debt and other financings and any other relevant noncash or nonrecurring expenses.

Our 2017 revenue target and related run rates for each business exiting the year remain in line with our previous statements, and we continue to expect our revenue growth to accelerate in 2018.

The overall revenue growth we're expecting in 2017 will be driven by continued expansion in the broadband data device equipment as well as ramping sales by CAT 1 platform for IoT, with some possible contribution from CAT M1, NB1 toward the end of the year.

Based on the target quarterly run rates we've discussed for each business, we continue to believe that we can certainly approach and perhaps achieve operating breakeven on a quarterly basis by the end of this year.

And this means that we expect to be close to cash flow breakeven by year-end as well.

Based on all this, and as I've said before, our path to cash flow breakeven is fully funded, particularly when you consider that we expect to receive cash related to the French R&D tax credit and other government grant funding in the third quarter.

Lastly, based on our expectation of accelerating growth, we are planning to put a credit line in place to be available to handle peaks in working capital requirements.

Before I turn the call back to George to sum up before we move to questions, I'd like to remind you that 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 Webcast and Presentations page.

That's the same location where you will find the audio replay of today's call.

Georges?

Thanks, Deborah.

So to sum it up, let me highlight a few things.

First, the business is moving very well, as planned for both broadband and IoT businesses, and the news as well that vertical markets business is becoming significant, as I explained previously.

The other important fact is that we remain the leader of CAT M LTE for IoT with our Monarch CAT M platform, establishing, as I mentioned before, this duopoly.

It's easy to get this when you look to the long list of design wins we have and the type of engagement we are working with.

Going with this at the same time, what's interesting to note that the market for CAT M is developing as expected and moving fast, with Verizon and AT&T launching this quarter, or end of this quarter for AT&T, and then going forward -- going beyond the U.S. on a worldwide basis to all the country obviously and all carriers.

The other important element to keep in mind is that, thanks to this leading position, this is attracting a lot of partner for us, and we are developing new areas, I will say, for this kind of collaboration.

So all this let me feel like we are -- feel very, very positive about our future and let me feel like we will be able to create and generate value that we'll return to our shareholders.

Thank you.

We can take it now for questions.

Operator?

(Operator Instructions) First question will come from Mike Walkley with Canaccord Genuity.

Great to see you guys keep your guidance and run rates.

Maybe just starting with the broadband business.

Can you just talk about maybe the puts and takes that would get you to north of that $10 million run rate?

And I think you said it could reach as high as $12 million.

And I think that excluded China and India, so maybe you could discuss the ramp in that business and what you're seeing, if there's any improvement for China and India contributing to revenue this year.

Yes, Mike.

So the broadband business, I mean, as I said, it's going as expected.

We saw that we have the -- if we consider Verizon, it's -- the momentum continued, because we renewed the design on the Jetpack, so it is moving forward.

And as I mentioned, without naming (inaudible) product, but I mentioned about another product almost similar in terms of revenue for the company, where we are moving full production now, we received order, we have backlogs.

So everything is done.

Just only I'm not able to give you more detail about it, waiting for the announcement that will be done by Verizon and our major OEMs selecting this product.

So you see, this is one foundation.

The other component is obviously, as I mentioned, the vertical market -- not the vertical, the emerging market going well with many carriers.

So with the established we have, as I said, for active customer and full shipment mode for this market, and this is moving well, and we are adding -- we added a few ODM/OEM in Q4 and Q1 that they launch project, and they should turn to mass production the second half of this year.

So this will boost out our emerging market and all this, without China and India.

More important to note here that we are -- that there are other businesses there coming from the -- from even developed carriers, where inside set-top box or inside devices that they are turning to be at home like a security box.

So you want to back up even fiber or cable with wireless, and we have few projects like this, they are not even factored in, on which we are quite advanced as well.

So all in all, things let me feel like we are really heading towards this $10 million to exceed it beyond -- at the end of Q4.

Great.

And just switching to the IoT business.

I know a lot of investors are focused on your module wins such as Gemalto, Huawei, SIMCom and others.

However, can you discuss maybe larger opportunities directly to customers such as alarm panels or wearables and just maybe discuss the overall pipeline?

It sounds like, CAT 1's ramping through the year-end and you might get some CAT M exiting the year?

I mean on the -- I'll take the -- starting with the CAT 1 products.

As I said, the good news about it that we have visibility, we have orders, we have all our direct customers using our CAT 1 module.

They finished the product, I will say, approval on Verizon.

And many of them are moving as well to get this approved as well on T-mobile and some of them are working on AT&T.

So this is really, I will say, half a dozen of customers engaged with Sequans, moving in full production and building up.

Some of those are quite big, significant, I tend to say.

And that will be really the foundation of our CAT 1 module business.

Obviously, not to neglect on top of this, we have the Gemalto business, with whom we have engagement in Japan and in the U.S., and the product is really -- they have -- can -- set of customers behind them moving well as well in production.

So all this is moving nicely after, I will say, waiting more than expected, because this business, as we explained the last time, takes always longer than what you think to be established.

But once it's there, it's quite sticky, and this is for long term.

I mean, we have projects where the people selected Gemalto or selected us.

It's for 3, 4 years' projects.

So it really gives us a lot of visibility and confidence that the revenue will be there for the CAT 1. And obviously, when you add all this is the CAT M. And on the CAT M, it's really amazing.

When you look to about a dozen of module maker, and the list speaks to -- I mean, we look to the name, people like Huawei, other guys, and they select us.

It's really tough comparison between us and the other competitor, the big competitor that we have next to us, and they select Sequans, and they move with us.

So obviously, this is really -- gives us access to the market, go-to-market, because each one of them, those dozen partner, is looking for opportunity for this M2M and IoT in general.

So -- and by the way, it's in a variety of applications, as I mentioned.

This could be on metering as well as wearable as well as e-health and so on.

The good things about it is that our position is taking us beyond, I will say, talking -- we are not talking only with the module maker, we are talking even with the end customer.

And with really Tier 1 customer, and I apologize that we cannot name those guys, and they can go from industrial to wearable.

And those guys, they talk to us because the engagement -- first of all, they want to be close to the technology to understand the best choice that we -- they are doing.

But then, some of them could have the choice between going chip-on-board, in other words, depending on the design, they could decide to go directly with the chip of Sequans and to become our direct customer, or decide to go with one of the 12 module partners that we have, whether it's an ODM or OEM, depending on what they are looking for in terms of support and cost and so on, so they can make their trade-off and make their choices.

And here, we are very, very confident that things are moving well with the carriers, as I mentioned.

So this let me feel still this is a business in terms of major revenue for us 2018, but these things are moving well to start seeing some real revenue even in Q4, maybe in Q3 a little bit, but more in Q4.

Last question for me for Deborah.

Just to comment about the fully funded cash flow breakeven.

On Q2, should we expect some of the working capital maybe to reverse, with DSOs coming down.

Just trying to get a feel for the cadence of cash burn between now and year-end when you might be breakeven?

Well, we're definitely working on that.

So as we go into more volume production, we're expecting we can be able to ship more evenly over the course of the quarter, and that should help us in terms of the DSOs and trying to only build inventory on sort of a just-in-time basis.

But I think it continues to be something we manage day to day to try to optimize the cash in hand.

The next question in queue that will come from Quinn Bolton with Needham & Company.

Just sort of take a step back.

You guys, obviously, have very strong position in CAT M. Wondering if you could comment on CAT B -- or, sorry, CAT NB1 and whether there are delays on that technology, especially around the TDD spectrum?

And if so, is that giving -- are you seeing growing interest now in the CAT M solutions as a result?

And then I've got a follow-up.

Quinn, on the CAT M, I mean, indeed, a year ago, it was this position of the 2 technology, which they have in place both of them market, as I explained many times, because one will give you a higher speed, but also mobility, voice; and NB1 will give you maybe better price, better cost structure without all those, I will say, features, with limited messaging, I will say, communication.

But what happens in the market, as you've seen, that the U.S. decided to go M1, essentially AT&T and Verizon, both of them will work on NB1, but they push it really down the road.

I don't believe NB1 as a full-launch nationwide coverage will happen in the U.S. before 2019 between Verizon and AT&T.

We may see some trials next year in 2018, but I believe full deployment (inaudible).

This obviously boosts the ecosystem of the CAT M1 to accelerate, and many carriers were hesitating, mainly in Europe.

They said, "Well, I'm not going to go NB1, I'll go CAT M1, because this is what the ecosystem, first I'll start with this." Still, however, some carrier, they are really firm on the NB1, like Vodafone and China.

Even if in China, you mentioned there is a problem of spectrum, so they are talking about TDD on M1, but they need a new frequency which is -- to get FDD frequency China Mobile to use the NB1.

So for us, as a conclusion of all this, M1 is now happening.

NB1, it will happen, it will have kind of 1-year delta in my opinion in terms of real NB1 massive deployment, that is something for 2018.

In the meantime, Sequans, and this is important, we are not waiting, because our chip is able to support M1 and NB1 Monarch.

And even if we put the focus at the beginning on M1, since last quarter in Q1, we put a dedicated team working on the NB1 software along with the NB1 engagement and we have already some engagement with few carrier interested only in NB1, with whom we will start testing even this quarter.

In second quarter, we should have some initial testing this quarter and have certification and so on maybe in Q3.

So this is really aligning well for us with kind of 6 months delta in terms of moving this to mass production, and the market maybe has more than 6 months, and this is -- but I still expect NB1 to happen as a market.

It's not like it disappears and there is nothing there.

Okay, great.

And then a second question I had, just kind of longer term.

Obviously, a lot of the CAT M1 and NB1 applications or things like tracking devices, wearables, alarm panels, wondering if you're seeing any interest from some of the bigger devices such as smartphones to use CAT M as a sort of low-power connectivity solution that would enable them to turn off the base band during times when you don't need to use the full base band and application processor in an effort to sort of provide better battery life, but still connected services.

Is that a market you think could develop for CAT M over time?

Well, I mean, I could imagine that something may be in the smartphone to put it in a kind of mode where your phone backup is the time when you reduce power.

But as you know, in the smartphone, you still have the screen, you have many other stuff and so on.

So the application is there.

However, where I believe the M1 has a big play, similar to the smartphone, is really in the wearable, because you can imagine all those watches, essentially, if you are able to put voice on the watch and get the speed of a few hundreds kilobits for all the application.

So you have it all.

And you can imagine as well some kind of feature phone, let's say, low-cost feature phone for some application running only in M1, you don't need anymore, because you have a little bit few hundred kilobits to get some data and then you get your voice.

So definitely, M1 will go beyond, I will say, the pure, call it, tracking or metering application.

It can offer a little bit more, and it has good potential, indeed.

Great.

And then just one quick one for Deborah.

You mentioned the cash payments from the government grants and R&D tax credits in the third quarter.

Can you give some rough estimate of how large you think those payments would be?

These typically run about $2 million.

(inaudible)

About $3 million.

$3 million, okay.

Our next question will come from Scott Searle with Benchmark.

Nice to continue to see the positive outlook building for 2017 and 2018.

George, maybe just to quickly follow up, I just wanted to clarify on the earlier China question.

So it sounds like, at this point, China is continuing to march down the NB1 or NB-IoT front as opposed to maybe pause and reconsider for M1, is that correct?

Well, the 2 are moving.

First of all, when you talk about China, you talk about China Mobile and China Telecom.

So only China Mobile has the problem of the TDD spectrum.

So the others, they have FDD spectrum.

So in principle, they can go NB1 straightforward.

So the China Mobile -- China Telecom -- sorry, China Mobile, because they have FDD spectrum, they have the problem, they cannot move quickly on NB1, they need to have the new spectrum, and they need to deploy maybe some radios and so on, it's a little bit more complex.

That's why they're considering TDD CAT M1.

So we are seeing, if you want the 2 demand, you are seeing CAT M1 and TDD, and we're still seeing as well the NB1 at least whether for trial to prepare the future or for China Telecom, because they have FDD spectrum.

Okay.

And just to follow up on an earlier wearables question to clarify.

It sounds like there's certainly design activity, but do you actually have design wins on the wearables front this time with smart watches, et cetera?

Well, allow me not to comment much on this.

We have on the wearables -- we announced one which is public, which is Orion, which is a push-to-talk button for security reason, where the people, they have the button on them, and if they have a problem, they push on the button.

And this is really for a senior person and so on.

So this is moving well.

This is the design win we have, and it's public.

For the watches, wearable and so on, we have a lot of engagement.

I cannot say more for the time being.

Okay.

And just lastly, to follow up on 2 things, carrier certifications, you're on that path right now with M1, with Verizon, AT&T.

Is there an expectation or a target by the end of this year how many carriers you would expect to be certified?

And just to clarify as well, it sounds like for NB-IoT, you'll have some certifications by the end of this year as well.

And lastly, Europe, it seems like it's starting to finally build some momentum.

When does that really start to ramp up?

When you look at 2018, who are the key carriers who are going to turn this on first and start to get aggressive?

Just on the NB-IoT, as I said, indeed, we'll -- our target is to get certification this year.

We will start testing in June with carriers, I tend to say, because we have already -- we could do them all today, we have already the software, because essentially, it's using the same hardware, but just only the software to evolve it to support NB1 feature.

And this will be fully complete and comprehensive, I will say, next quarter.

So the target is definitely to get certified.

And here, we're engaged.

Obviously, we'll have some Chinese, but mainly the focus is really on Europe, where we have people like Vodafone, but you have other carriers like Deutsche Telekom or carriers like Orange and so on.

Some of them, they need CAT M as well, not necessarily NB1, the NI-IoT.

So the engagement within Europe is definitely large.

We have a lot of demand; same, by the way, in Japan and Korea and even Canada I mentioned just on the call.

So really, we are getting a lot of traction from all the carrier around us.

All of them, they want to move fast.

I believe, Europe, very frankly, I don't see them a network on a nationwide coverage before next year, before 2018.

We may have end of 2018 some trial activity, some announcement, some certification.

But to get full launch, I see it more 2018, which is fine.

It's kind of 6 to 9 months behind the U.S., which is, in my opinion, normal.

You asked a question about the M1 certification.

Yes, how many -- I mean, definitely, obviously, on Verizon, we already did the certification at the beginning of the year at CES.

And now, as Verizon has moved to the, what they call it, the nationwide network, they had set the feature and we recertified it.

So we didn't make an announcement, but you could say that on Verizon, we have done 2 certification already.

In AT&T, we are in the lab, and this is when Sequans is making a certification, because we have so many partners, as you can imagine, those module partners who are trying a little bit to get them as ready as we are ready and very likely all of them will be certified almost few weeks after us.

So the point is that getting even the module partner certified.

And behind this, you have the customers, which are using those modules to get certified.

Some of them on Verizon have been announced already at the beginning of the year, and those guys will continue.

But we'll have more new guys, essentially some big guys, Tier 1 guys that when they integrate the module, they will come certification.

So in terms of -- I don't know if I can give you a number, but essentially, it's going to be at the end of the year, we should have at least a dozen module maker, and behind them, even if we have one customer with each one of them, we should have similar devices, I will say, certified as well.

Next in queue is Tom Sepenzis with Northland Securities.

First one, George, I think you mentioned at the very beginning of your prepared remarks, you have a new either aerospace or military customer.

Can you talk a little bit more about that, give us some color?

Is that a broadband or an IoT type win?

Is that CAT M or CAT 1 through 10?

What...

Tom, so essentially, Lockheed Martin, and, indeed, we have this new project.

In terms of technology, it's a little bit -- I could not share more for the time being, but because they're -- we cannot -- I cannot give you color about what we are doing.

But if I say about the chips, the deal we have with them give them access to the -- all our technology, whether it's, I will say, Streamrich or Streamlite.

In other words, whether IoT or broadband.

It's a little bit complicated to -- for me to give you an answer without saying more about what type of system we're working on.

Okay.

And then, Deborah, you mentioned the government grant, $3 million in Q3, and I believe you also mentioned that you have a new credit facility.

Did I hear that correctly?

We're putting that in place.

It's not finalized as of today.

Okay.

Great.

And then in terms of CAT M timing, you've been consistently saying that you expect revenue to come in, in Q4.

Just curious with Verizon launching their network in Q1, is there an opportunity to maybe see that start to hit the model earlier in the year?

Or is your visibility such that you know that you won't really see anything until the fourth quarter?

Tom, I mean, Verizon, obviously, they launched the network, and they need to have it ready.

And as you see, all the customer on Verizon tested today are Sequans customer.

But when you look to the profile of those customer, they are small volume.

So it's not like we are not shipping at all in Q2 or some CAT M chips.

I mean, we could be shipping thousands of those chips, but it's not going to be significant in terms of revenue.

For a Tier 1 customer, which is big volume and so on, those guys are -- they tend to take more time to get their product up and ready and launch and certified and so on.

And this take longer for them to be ready.

That's why our projection more to see them ready beginning of '18.

Hence, the beginning of the revenue for us in Q4.

Our next question in queue will come from Craig Ellis with B. Riley & Co.

Congratulations on the good start to the year.

George, I wanted to follow up on one of your comments regarding your module partners.

You have 12 now, which is a very nice long list.

Can you help characterize that group of partners and how you've assembled them and whether it be on a geographic basis, those with perhaps particular end-market specialties?

And as we look ahead through 2017 and 2018, should we expect that number to stay fairly stable?

Are you looking to grow that number?

And if so, to what degree?

Craig, so I mean, just to be what -- we are very close to 12.

We are not 12 today, because we were closing few of them.

And if we close them, we'll get up to 12.

If you go through the list, it's a little bit today -- a little bit below and almost 2 digits.

So now, to characterize those guys, first of all, you need to look to them as some of them are ODM type, some are OEM.

The OEM people like Huawei, like Gemalto, if you want, they run their own business.

In a sense, like Fibocom and so on.

So those guys, they have their own, I will say, market, their own customer, their own speciality.

Some of them, they are strong on something, weak on something else and so on.

So the good things about those guys; that they bring the existing base of customer and they capture it, because they have their own existing customer.

They sold to them in the past.

They are well known for them and so on.

So as soon as they have product, they can turn those product to them, and we will get them as a customer.

So this is very, very good, because we can capture all the market share, I will say, they had -- they have with their existing technology, whether 2G or CAT 1 or so on, and we turn it to CAT M with us.

Then you have other guys, like the ODM guys, like Foxconn, like Wistron.

And here, you -- those guys, they could have some special relationships sometimes with the carrier to make kind of special access to market.

But the good things about those guys is that, all kind of application, mainly when they are big volume application, they tend to be very sensitive in price, and they tend to go to the ODM to optimize their cost structure.

And having the Tier 1 already with us gives us really a very good position to have the end customer selecting us almost without -- almost they discover us.

And he knows it's working, he knows that the ODM have the product and so on.

So this is really very helpful for us.

So it gives us access, but I will call it to big volume.

So the OEM, they you give access to small, medium volume, and the ODM give us access to very large volume and millions of unit, in general, I will say.

So this is how I qualify them, and they tend to allow us to go from wearable to industrial, all of them.

Now a number of more module maker, obviously, the list is limited that sometime we'll be almost done with all of them.

We still have on the list a few guys, for example, from Japan, because if you look to the location, we have people from China, people from Europe, so people from Korea.

We are -- that we won.

We are working on some other guys that could be coming from Japan.

So this gives us as well another good point, which is we'll have the local guys.

Now you will have people that they can access the local market in better position than someone who's coming from abroad to this market.

So we believe that the list will be set somewhere, I don't know, is it 12 or 13, 14?

I mean, that's -- with this, I tend to say we're almost done.

There is no more need really to add module partner on top of this, because executing with those will give us access to big chunk of the market and will allow us to get nice market share at the end of the day.

That's very helpful.

And then just following it up and maybe just flipping to the other side of the go-to-market strategy.

Can you just summarize where you are with your direct engagement process for chip sales and the degree to which you are in a position that you're happy with?

Or if you'd like to grow your capabilities either with salespeople in a particular region to increase direct access?

Or if that model is where you'd like it to be for the next 12 to 18 months?

Thanks, Craig.

Well, I mean, in terms -- I mean, first of all, I'm very happy.

We did very good work last year by rebuilding or adding more or expanding our sales team, because we strengthened the U.S., we strengthened China, we're adding one more in China this quarter, obviously, to get all the footprint between Asia and the U.S. and Europe as well.

We had one in Europe.

But you need to keep in mind the go-to-market strategy is essential for us.

We engage almost with many, many deals, where -- whether we have big names coming to us directly.

And at the end, maybe they will not buy the chip from us, they will buy a module, because when we talk with those partner, we tell them, okay, these are our customer, you can work with Gemalto, you can work with Huawei, you can work with Fibocom, you can work with Foxconn.

Based on the project, we give them recommendation, and obviously, they will make their own decision on one side or tell them we can do chip-on-board with you, because your case makes sense to make chip-on-board looking to the volume and so on and engage with them.

So this engagement comes with people coming to us or sometime -- and quite often people going to the carrier and the carrier send them to us.

In other words, we have a lot of leads coming from Verizon, AT&T as well, all the carriers around the world.

They come to us, because when they talk to the carrier, they tell them who is ready with this technology, it is Sequans.

So they end by coming to us.

So we don't have a problem to get leads.

I mean, we're getting even more than what you need.

I mentioned last time we're getting almost 1 plus per day, and we remain on similar flow without really quantifying this.

But we're getting a lot of traction there.

And from there, we -- obviously, our module partner on their side are engaged with some of them.

We have discussion with them.

Depending on the module partner, some of them, they like to keep it like their secret story or like you could imagine maybe Huawei, we discuss with them about the project details and so on, but they are not going to share with us with whom they are talking.

Maybe with Gemalto, we have a little bit more open dialogue.

So depending on the relationship with the partners, we have a little bit more open dialogue.

So we know who are the end customer and sometimes we bring help to them to win the deals.

So -- but we are not -- we don't have a problem of getting where we need 50 sales guys to sell this.

I mean, the business remains -- we need business developer guy more than really pure sales, what I will call it, just getting to the deal.

So -- and this is by taking our sales team, the marketing team we have, we have more than enough, I will say, to address the market today.

And whatever people we need, it will be really kind of limited need here and there to reinforce ourself in some regions.

(Operator Instructions) Next in queue is Wes Cummins with Nokomis Capital.

George, you might have already answered this, but just a couple of quick questions.

Just your views on opportunities with CBRS here, potentially in the second half in the U.S. and then also on FirstNet, maybe that's more of next year?

Wes, so obviously, on FirstNet, we're engaged with this, and it's, I believe, public that Motorola is part of this, so Motorola being our customer.

So we are, obviously, happy to see that finally FirstNet is moving.

For the time being, we see it more next year in terms of acceleration.

So far, things are going very well with Motorola.

I mean, we have other projects and so on.

So we believe this will grow up -- will grow more next year.

FirstNet will develop as planned.

On CBRS, let's keep in mind that CBRS is 3.5 gigahertz frequency that everyone knows.

With a little bit of positioning, the 3.5 different from we do it outside the U.S., I will say, the U.S. is a licensed band.

And the U.S. is going to be kind of unlicensed band.

I will say, not fully unlicensed, but kind of unlicensed.

And many people, they did testing in the U.S. to test this 3.5 gigahertz by calling Sequans and get product from Sequans.

So we provided many Tier 1 customers in the U.S. products, dozens of devices and so on, so they can make their own study, their own trials with the 3.5.

So we have the 3.5 gigahertz frequency.

And as I said, because we sold this to the emerging market and we got -- we used to have close to 100% market share.

I mean, we were the first guys to come with this, and we did very, very good business with the 3.5 gigahertz.

So turning what we have today to become a CBRS, if you want, ready, it require a little bit of software just because if it becomes unlicensed, then you need to detect the spectrum before sending the spectrum.

So it's more on the baseband software than really the radio.

So the radio is ready, we believe, in the CBRS, but this has good potential.

Some people, by the way, they talk about it, obviously, for broadband, but you can think about it as well for the IoT.

Some people -- even they think, why not using this as well for some CAT M CBRS and so on.

Either way, I mean, we are ready for this.

We are just more waiting for the market before pushing final product to market.

But the technology is in-house, and we can be first on this.

And this will be part of our 5G evolution as well.

At this time, I'd like to turn the conference back over to management team.

Okay.

Thanks very much for attending, and hope to see you, obviously, in any visit to the U.S. Thank you.

Thank you.

And, ladies and gentlemen, that does conclude your conference call for today.

We do thank you for your participation and for using AT&T's Executive Teleconference.

You may now disconnect.