Sequans Communications SA (SQNS) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Sequans Third Quarter 2017 Results Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

Before I turn the conference over to our host, Mr. Georges Karam, I would like to remind you of the following important information on behalf of Sequans.

This call contains projections and other forward-looking statements regarding future events our future financial performance and potential financing sources.

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 other 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 subject to risk and uncertainties and subject to change at any time.

We operate in a very competitive and rapidly changing environment.

New risks emerge from time to time.

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.

Actual events or results may differ materially from those contained in the projections or forward-looking statements.

More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission.

Please go ahead, sir.

The floor is yours.

Thanks, Steve.

Good morning everybody.

This is Georges speaking.

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

And we welcome you to our third quarter 2017 results conference call.

Revenue for the third quarter was slightly above our updated guidance at $11.3 million, and our non-IFRS loss per share was within the range of both our original and updated guidance at $0.07 loss per share.

Our update call on October 4 was devoted mainly to a detailed discussion of issues in our broadband business.

On today's call I want to focus on what went right during the third quarter, namely the Internet of Things business, which is the primary growth driver for the company going forward.

We'll be very happy to answer any question you have about the broadband business.

But the situation there remains as we described it on the update call.

We have some very specific reasons to expect improvement next year, particularly during the second half.

First, we believe the inventory issues on the 2 Verizon devices are being addressed and orders will resume.

Second, we have some newer customers such as Askey and Comba still ramping.

We have some projects launching next year, also the new customers.

And we'll be introducing a new Cat 6 product next year with both performance and cost advantages.

Last, we also are in discussions regarding broadband devices for other operators in North America and we have other opportunities for new market segments such as CBRS which you may recall is the 3.5 gigahertz band that's going to be available in the U.S. for the first time.

Together these opportunities represent potential upside for next year.

Meanwhile we believe the broadband business will stabilize during the fourth quarter.

And our current assumption is that it will improve gradually during 2018.

Longer term we remain confident that the broadband business will remain a major source of growth for the company specifically as we evolve toward 5G.

Now let's focus on the IoT business which is growing very rapidly and will be very strong growth driver for the next several years.

Our near-term confidence is based on improving visibility as we see our Cat 1 business ramping as expected.

Gemalto is now shipping in volume in both the U.S. and Japan to a variety to customer for applications such as security and metering and we expect their volume to continue to ramp next year.

Meanwhile our 3 major Cat 1 end device customers focused on automotive aftermarket and tracking applications are now shipping for multiple networks in the U.S.

We are encouraged by the combination of precious orders and promising forecasts from these customers.

First we've kept on shipping in volume in both the U.S. and Japan throughout 2018.

We are expecting Cat 1 growth to accelerate next year based only on design wins already in hand from Gemalto and our direct end device customers.

Clearly, Cat M1 and NB1 offer the most potential for growth and we understand that investors are keen to understand the ramp of this new business.

This means they focus on the short-term outlook for Cat M1, NB1.

So we'll address the short term first.

We are very pleased with the design win momentum in Cat M1 and NB1.

We continue to engage and win new customers, kicking off projects with our Monarch platform, and additional new design wins have been secured in the third quarter.

But more important, we start to get through the long list of customers when we have a good visibility on the applications and end devices that will be launching next year.

As of today we see more than half a dozen well identified CAT M engagements that will drive the initial ramp of our revenue next year.

In fact for our module partners we are counting here only those who are sharing with us detailed information on the customers and end devices they have behind their initial forecasts.

You understand that we cannot share much detail here, but we believe that our main module partners such as Gemalto, Huawei and Wilstron, to name a few, each have multiple end device design wins already in hand.

Several of these are expected to generate at least 0.5 million units a year after the initial ramp and some will exceed 1 million units per year.

Also through a new OEM win we recently have secured a new Cat M [carrier skew] that will launch in 2018 and could also ramp to 1 million units a year.

Everything I mentioned so far is business we have in hand where the project has already kicked off and is moving ahead according to a specific timeline toward full production and launch in 2018.

The main risks are slippage in the timing of the launch and how fast the customer will be able to run the device specs.

But I think you can see from what I have said about the business we already have in hand that shipping 4 million units or more in CAT M during 2018 is not an unrealistic assumption provided that the timetables shared with us by our customer do not change.

And even then we would not be looking at loss business, only delayed.

In addition, we have new business opportunities where the discussions are quite advanced and some of these could close in time to contribute to 2018.

All our module partners, OEMs, and ODMs are moving full speed to get these deals and in some cases promoting solutions to very exciting companies.

We already have 4 customers working on solutions based on the CLOE platform resulting from our partnership with STMicro to provide a comprehensive tracking solution.

As an example, one of our OEMs is a small company itself but is working on a very large deal.

We have been engaged directly with most of the prospective end customers, and some of the discussions are at an advanced stage.

Some of these companies are among the largest in the world, so these discussions could lead to multimillion dollar projects over several years which increases our confidence that we can continue our strong growth in 2019 and beyond.

To give you a sense of the applications represented by these projects, they include various types of asset tracking, industrial IoT applications, aftermarket telematics and fleet management, consumer products, wearable and health monitoring devices.

Everything I've mentioned until now has been in the U.S. As you know, operators in Europe, Japan and other regions are planning to launch either CAT M or NB-IoT networks at various times next year.

Several of our partners, including Huawei, Fibocom and Wisol, are targeting devices for these operators networks as well.

Speaking of operators outside the U.S., we are engaged with many of them worldwide.

Specifically we are actively engaged with Vodafone, Deutsche Telekom and Orange in Europe, as well as SoftBank and DOCOMO in Japan.

Although we can't discuss the nature of these engagements in detail, many of them are expected to be revenue-generating soon.

We are not only building important relationships but we are also providing valuable services that operators are willing to pay for.

The same is true of the vertical markets.

We have already secured substantial business for 2018 in the vertical market space such as public safety and avionics.

The number of projects in production and under discussion has grown to a level where we are confident that the vertical market segment will produce a steady stream of revenue for the coming years even if it has the tendency to be lumpy from quarter-to-quarter.

We are discussing a number of opportunities to expand existing relationships or engage new ones.

Many of them are multi-year strategic arrangement.

I'm not using the word strategic in casual way here.

In most of the projects under discussion our customer would consider our role vital to achieving their objectives and would be willing to expand the relationship by offering strategic financing that can take the form of licensing or other support.

These types of projects like the ones we have announced with Thales, Lockheed Martin and TCL are multi-year, multimillion dollar projects where we receive upfront and ongoing payment tied to achieving certain milestone.

As you know, we had hope to finalize one of these new deals before the end of the third quarter.

We are still optimistic about closing at least one of these soon, but such deals can become complex when you get into the details so they sometimes take longer than intended to finalize.

Turning to our financial position for a moment.

We are aware that investors have been concerned about the convertible notes scheduled to mature in April 2018.

First, we believe we could have a number of further positive developments in the short term that would help support a share price well above the $1.85 conversion price for the 2018 notes.

At the same time we have concluded that it would be in the best interest of shareholders to avoid having this near term cash requirement overhanging in the market.

So as you saw in the press release we have reached an agreement with institutional investors who own the 2018 and 2019 notes.

They have agreed to extend the maturity on both notes by 1 year with the same interest in exchange for adjusting the conversation rate on the 2019 notes.

You can review the revised agreement in the 6-K filing we made today.

The primary investors holding these notes has historically been very supportive, so we were able to conclude this matter quickly, and this enables us to keep our focus on the business.

Meanwhile, some major shareholders have expressed interest in providing new money via convertible debt on similar terms to the currently outstanding notes in case we need more financial support in 2018.

I want to say how much we appreciate the confidence in Sequans indicated by this interest.

Although this is not a binding commitment and we of course cannot assure you that we will reach a definitive agreement for additional convertible debt.

Now have -- now having removed the largest most obvious cash requirement from the existing convertible notes coming due we believe the preferred way to increase our cash cushion and preserve the upticks of our balance sheet would be as part of the terms of some strategic deals we are currently negotiating.

We believe if we are able to handle it this way it would be in the best interest of the company and all shareholders.

Before I turn the call over to Deborah I want to take a moment to look beyond the short-term issues we've been discussing and to say that we have never been more excited about the prospects of our business.

This is based on improving visibility on the rate at which the market is developing.

While we rarely acknowledge that it's difficult to predict the exact timing and trajectory of the Cat M1/NB1 ramp, there can be no doubt that it's happening and will be a major source of growth for Sequans in 2018 and beyond.

We started the ramp of the Cat 1 and this will be a new established revenue stream in 2018 that will add to our existing broadband and vertical businesses.

The broadband business is well established business with an attractive long-term future (inaudible) by the short-term bump in the road.

Similarly we have several years of experience with vertical market projects and a growing pipeline of new projects such that we can see the stream of revenue continuing at least at the current rate going forward.

This means we should expect a strong growth in 2018 with the primary variable being the slope of the Cat M business ramp.

We understand why investors are concerned in the near term but it's still important to consider Sequans value as a company in the context of our potential growth driven by the IoT.

Our scarce and valuable know-how, the important relationships we have built over the past several years and the multi-year projects we have in hand, because we firmly believe the short-term uncertainty are manageable.

Now I would like to turn the call over to Deborah.

Hello everyone.

I'd like to add some details about our Q3 results and discuss the outlook including our guidance for Q4 2017.

Our revenue was $11.3 million, slightly better than our revised guidance, but down from $13.2 million in the second quarter.

We had 4 10% customers in the quarter ranging from 12% to 21% each and the 2 largest are distributors serving a total of 10 Asian OEM and ODM customers.

Gross margin was 44.3%, reflecting a more favorable product mix between chips and modules this quarter compared to Q2.

Operating expenses were $10.6 million in Q3, up from $9.6 million in Q2.

The increase was in line with expectations and we expect this level to be sustained going forward.

Our third quarter operating loss was $5.6 million compared to an operating loss of $4.1 million in the second quarter and $4.0 million loss in the third quarter of 2016.

Net loss was $6.9 million in Q3 compared to $6 million in Q2 and $5.1 million in the third quarter 2016.

Basic and diluted loss per share was $0.09 in the third quarter 2017 based on 79.8 million average shares outstanding compared to net losses at $0.08 in the second quarter based on 75.9 million shares and $0.08 in the third quarter of 2016 based on 61.6 million shares.

The increase in weighted average shares outstanding reflected the equity offerings in September of 2016 and June 2017, as well as some stock option exercises and conversion of $150,000 in debt.

We have also reported our results on a non-IFRS basis, which excludes from net loss, the noncash items related to stock compensation expense and the noncash effective interest adjustments related to the convertible debt and other financing.

Non-IFRS net loss was $5.9 million in Q3 2017 compared to net losses of $4.9 million in Q2, and $4.3 million in Q3 2016.

Non-IFRS basic and diluted loss per share was $0.07 in the third quarter.

This compares to $0.06 in the second quarter of 2017 and $0.07 the third quarter of 2016.

Cash used in operations in Q3 was $5.3 million compared to $4.4 million in the second quarter of 2017.

In addition to the effect of the operating loss, the total amount of cash used during the quarter reflected a large pay down of accounts payable.

Included –- including the receipt of over $3 million pertaining to the reimbursement of the French R&D tax credit for 2016 and grants from the French government, our cash and short-term deposits at September 30, 2017 totaled $13.3 million compared to $19.5 million at the end of Q2.

We expect to receive additional grant payments of approximately $1.8 million in Q4 and $1.9 million from the renewal of a strategic partnership in Q1 next year.

As Georges indicated, the maturities of the convertible notes have each been extended by 1 year to April of 2019 and April of 2020.

This means we have no convertible debt maturing in 2018.

Accounts receivable at September 30, 2017, were $16.3 million reflecting DSOs of approximately 106 days, again due to a concentration of shipments at the end of the quarter.

Inventories increased slightly to $8.8 million compared to $8.5 million at the end of Q2, while short-term debt from financing receivables increased slightly from $7.6 million in the quarter –- I'm sorry, to $7.6 million compared to $7.4 million at the end of June.

Looking forward, we expect revenues for the fourth quarter of 2017 to be in the range of $11 million to $13 million, and we expect non-IFRS gross margin in Q4 to be above 40%, resulting in non-IFRS net loss per diluted share to range between $0.06 and $0.08 loss based on approximately 79.8 million weighted average diluted shares.

Our guidance for Q4 non-IFRS net loss per share excludes noncash stock based compensation expense, affected interest adjustments related to the convertible debt and other financing and any other relevant noncash or nonrecurring expenses.

As Georges indicated, we expect the IoT business to continue to ramp during Q4 and show accelerating growth next year.

The broadband business is expected to stabilize during Q4 and then show improvement in 2018.

At this point our assumption is that the broadband business will improve on us in the course of 2018, that for the year as a whole it will be about flat with broadband revenue in 2017.

Similarly, our assumption is that revenues from vertical markets which includes public safety, avionics and other strategic partnerships should be at least similar in 2018 compared to 2017.

So with no change in the positive outlook for IoT our growth in 2018 will be driven by full year of shipments for Cat 1 which really began to ramp in the middle of this year combined with the ramp in Cat M1/NB1 from design wins already in hand as well as others we may close in the near future.

It is premature to give a specific target for IoT next year, but we expect substantial growth in Cat 1 as customers provide devices on more networks and we fully expect the ramp in Cat M1/NB1 to build momentum as the year progresses.

Before I turn the call back to Georges I like to cover a couple of housekeeping items.

We expect to be making some filings that will provide us with the flexibility afforded by an active shelf registration.

As you know, the shelf filings are good for a 3-year period.

And -- but I emphasize that currently we have no plans to access the capital markets.

So 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.

This is the same location where you will find the audio replay.

And one final reminder about our policy of publishing our quarterly earnings date and time on the last business day of each quarter.

This has been our practice every quarter since the IPO, and we've adopted this policy for the expressed purpose of not having investors assume any significance to the timing of the routine communication.

So we wanted to take this opportunity to remind everyone that this is our practice and this is why we do it.

Georges?

Thank you, Deborah.

So before turning the call to questions I'd like just to stress again that the main engine of our business growth, in other words the IoT, is moving very well and is in a very, very good shape.

Cat 1, as we said, is now moving to an established business as we are shipping in volume to all our customers.

Customers to whom we ship chips as well, module.

And we have a great position in Cat M1/NB1 on all fronts as I explained before, whether on -- in terms of carriers engagement, and this is worldwide, U.S. and beyond the United States.

Customer wins we have in hand.

Visibility on end devices launching in 2018 and a growing pipe of new opportunities and deals that we are working on to close in the near future.

All this IoT business will be adding up on the -- on 2 established business, the broadband and vertical that have been -- that were fueling our revenue in the past years.

Thank you very much for listening.

And I will turn now the call for questions.

Steve, if you don't mind.

(Operator Instructions) Our first question will come from the line of Mike Walkley of Canaccord Genuity.

This is Josh for Mike Walkley.

George and Deborah, with the convertible debt pushed out a year, can you discuss the anticipated cash burn and potential timing or revenue level for cash flow breakeven given the assumptions of ramping IoT revenue and recovering broadband revenue in 2018?

And then also how should we think about the puts and takes in terms of tax credits grant and partner payments impacting cash levels over the coming quarters?

Well, for the time being I'd say there's really no change in the breakeven point.

That's still in the low 20s on a quarterly basis, assuming that we have gross margin in sort of in the mid 40s and keeping operating expenses close to where we are in currently.

So I think this is something we're expecting to be able to achieve sort of in the midpoint next year, don't know exactly which quarter at this point.

And in terms of the cash, as I mentioned, we have a number of grants already in hand that are expected to come in in Q4.

We typically have at least $2 million on an annual basis, sometimes up to $3 million from grants that come in each year.

And the tax credit in France typically is between $2 million and $3 million, and we typically collect that in September each year.

Okay.

And then we realize many investors have focused on your module wins, such as Gemalto, Huawei, SIMCom and others.

However can you discuss additional design wins and opportunities directly to customers such as alarm panels or wearables and with initial Cat 1 and some Cat M1 shipments beginning?

How should we think about the overall sales pipeline?

Can we just get some more color on that in 2018?

Yes.

I mean Josh -- Josh, I mean obviously I would like to remind everybody that our go-to-market strategy is quite comprehensive because indeed we have some customer that we engage directly at the chip level because -- and quite often those guys, they tend to be consumer type product or carrier skew.

Carrier wants to launch a device and obviously the -- quite often here there is an OEM directly engaging with us and the relationship is really selling chip to this guy and he will build the product.

And we have the other 2, I'll say ways of engagement which are engaging with module vendor, we ship to them chip and they make module.

And here we have 2 types, we have OEM, like Gemalto, like Huawei, but we have as well ODM like Wistron and Foxconn and so on.

So really deal by deal all of them could be -– one of those guys could be better positioned to any deal, and on this basis vary on personal engagement.

Now what I try to give the color here little bit, because obviously if we look to the number of module makers and so on, you could argue based on their historical market share how much market share we are collecting, so this is one way of looking to the problem I will say are to predict this, but obviously you can make large mistakes here because it depends on the -- you cannot predict the future with just only mainly the initial ramp just on the basis of how much market share they used to do, those module maker when they were selling 2G, 3G module and to some extent even Cat 1 module.

So that's why I gave some colors about end devices.

So many of them we have some visibilities, some not that precise visibility I tend to say.

But focusing on this, what I mentioned that we have more than half a dozen identified device where those devices are going beyond our module vendor, whether OEM or ODM.

And I mentioned as well that we have recently as well secured 1 new OEM going on a carrier skew as well.

And on this basis you know what I said, more than half a dozen which are big deals when you identify them, the customer behind, we are able to estimate the number I gave for our Cat M ramp which is when you look to the number the potential is big but obviously the challenge is that some of those products we'll be launching in Q2, some we'll be launching in Q3, some will be in Q4.

So it's -– we need really to predict the slope product by product and add them up.

But anyway I look to it, I feel like assuming a minimum of 4 million unit next year will be a fair assumption for our ramp in Cat M today.

Our next question will come from the line of Quinn Bolton of Needham.

Deborah, thanks for some of the initial thoughts as you look into 2018.

Just wanted to come back to the IoT business given the ramp of Cat M and sort of a I guess also the ramp at Cat 1. As you look at your revenue in 2018 can you give us any sense whether you think that Cat M business would be equal to or larger than Cat 1, or do you think Cat 1 is likely the larger of the 2 IoT components?

Well, obviously if we project this for 2019 and so on, Cat M will be by far much larger than Cat 1. If we look now to 2018, looking to the ramp level, we have -- we have the feeling that's going to be split half by half –- half-half if you want.

Okay.

And just relative size, I assume the IoT business for the full year probably larger than broadband, if the ramps don't slip out in time as you currently forecast them?

Yes, absolutely.

Yes.

That's how we…

Okay, great.

And then just, there has been a talk recently about some of the NB-IoT tenders in China, and the launch of NB-IoT services.

Can you give us any update on how you are positioned for NB-IoT within the China market with the Monarch platform?

Yes, absolutely.

I mean, I didn't -– I didn't go through a lot about the technical position and certification and so on.

So I take the opportunity to say that I didn't want to give you too much detail on the -– on this on the call but all is going extremely well.

Specifically the NB-IoT, we already doing what we call it interoperability testing with one carrier in Europe, so and with the infrastructure vendor.

And we expect to have a software ready for what we call it initial deployment beginning of the next year, kind of January timeframe.

So it's moving well.

It's just only software because we have the Monarch platform which is very stable today.

People use it for Cat M, but the same platform can be used as well for NB-IoT.

Now specifically on China, as you know, NB-IoT by the way you have some carriers in Europe with whom we engaged with.

And then there is some other demand coming in the U.S. with T-Mobile with whom we are discussing as well NB-IoT engagement.

And in China where the carrier they start with NB-IoT even if today the good news there that they were launching as well Cat M because in some of the use cases the latency created by NB-IoT is kind of show-stopper for those use cases, and that's why the carrier are launching Cat M. Now our direct engagement, ourselves in China, obviously we are engaged with the carriers which is part of our promoting our technology and preparing for the certification and so on.

But we rely for the local Chinese market on partners.

And as you know, here we have at least in terms of module maker two announced names, one is Huawei, one is FIBOCOM and those guys will be using Cat M technology of Sequans.

On the NB-IoT there we have little bit maybe different perspectives in -- could happen in with Huawei because they have their own NB-IoT chips.

But at least for the Cat M in China which will be a big business Huawei hopefully will be selling our product as well there as Cat M.

Okay, great.

And just wanted to come back to the financing question.

It sounds like in order of preference your preference would be first to source any financing requirement through strategic collaboration agreements, second through the convertible debt instruments and then lastly probably coming back to the equity markets.

And Deborah, you had mentioned that you don't have any current plans to access the capital markets.

I wasn't sure whether that was meant to include your comments around the convertible notes and some of the interests you've heard expressed from current shareholders about convertible -- new convertible note instruments or whether that comment was specifically just to address an equity-only financing?

It was more specific to an equity-only financing.

And I agree with -- agree with the way you prioritized our expectations in terms of additional financing that may be needed during the year.

So definitely prioritize privatized strategic agreements followed by a convert and last case would be going back to the equity markets.

Our next question will come from the line of Tom Sepenzis of Northland.

Deborah, I was just wondering if you could help us understand what are the differences in the terms for the 2019 notes in order to get the extension?

. Sure.

So the notes that were maturing in April of 2018 we've extended for 1 year still at 7% PIK interest, no change in the convert price.

The notes that are due -- that were due in April of 2019 have been extended by 1 year and the conversion price also at 7% PIK, and the conversion price was reduced from 271 to 225.

Great.

Thank you.

And then Georges, you just mentioned that while we may actually sell your Cat M products in China which I think is new, so when will you know if that's actually going to take place?

Is that something that you are in discussion with them right now or…

Well -- I mean, Huawei, I mean they selected only Sequans for the, what I would call it, the Cat M or dual mode platform because obviously Monarch is able to serve Cat M and NB1 if you have a product supporting the two technology and Cat M1 when there is a carrier requiring only Cat M. It's well known that Huawei, they have their own chip serving the NB-IoT, so when they need NB-IoT only I'm expecting them to use their chip.

So it will not be surprise for me if otherwise.

And from there obviously they launch the first product we were talking about that has been launched and now in the last phases and has been announced by Huawei which was publicly was really addressing the U.S. market, the carriers in the U.S. with Cat M. But beyond this they already started already the discussion to kick off projects to address a new carrier, outside the U.S. carriers including China.

So this is really any I would say -- I mean there is no decision to be taken.

It's more engaging the development in terms of priority and so on.

And I don't want to comment more on this, but what we feel very good about that Huawei will remain our -- will remain good part of the Huawei on all Cat M business worldwide, whether China, U.S. or Europe.

Our next question will come from the line of Craig Ellis of B. Riley.

Georges, on the prepared comments when you were talking about the module business there was quite a bit of commentary around U.S. activity.

As we look ahead at 2018, can you frame the growth in the module business U.S. versus OUS through the year?

At what point do we start to see the more meaningful part of the OUS growth kick in?

I don't think I got the question.

Is your question regarding our margin business?

How…

Right.

Yes.

I didn't see the link to the U.S. Why you are referring to U.S.?

I thought you had said that when you were talking about new customers early in your prepared commentary following a discussion of Gemalto and some others that there was quite a bit of color that you had provide a around U.S. activity.

Yes.

And that's why I was looking for just (inaudible) in terms of geographic breakdown of the module (inaudible).

Yes.

It's the module -- let me -- and when you look to the IoT obviously you have 2 main segments, one which is the Cat 1 business which is they call it now -- it's becoming a legacy because this is what we have so far and the Cat M/NB1 which is new.

On the Cat 1, very frankly the market is really mainly U.S. and Japan, whether it's module or chip, because not many, for example Europe and many other carriers they didn't launch Cat 1 network, it was limited more to the U.S. and Japan.

Now for our business Gemalto is addressing U.S. and Japan and this is chip business.

On the module business all the customer we have they are really shipping in the U.S., U.S. carriers at least for now with this Cat 1 technology.

So all our module Cat 1 business is really addressing the U.S. which are the 3 carriers, Verizon, T-Mobile and AT&T.

Got it.

Thank you.

And then just moving on to operating expense, Deborah, clear guidance for the fourth quarter.

Should we expect that level of operating expense to persist through next year?

Yes.

That's our -- our target is to try to keep the OpEx flat at least in the first half of next year.

Our next question will come from the line of a private investor, [Mr.

Gary Milani].

George, you gave an interview at NWCA, and in that you estimated the timeline for AT&T certification of Monarch as being few days.

Now presumably you have some type of issue come up, how serious was that issue and what is the new estimate for certification?

I believe there is a little bit of, because when you talk about certification we talk about the chipset certification or the module certification.

So first of all, our chip is -- even when I said few days it was there we finish ADAPT what we call it.

The chip is certified on AT&T and people are using it as a certified chip to build module.

When you go to the module certification on AT&T very, very frankly, the preference was, as you know, because we are pushing the Cat M to get real, not as Sequans selling module and stay at the chip level.

So we are engaged with more than, I tend to say most of our modules and all of them are pushing to finish the AT&T certification and I tend to say 3 of them are really in the last mile finishing there.

So there is no issue at all.

I mean just maybe the confusion when I was talking about chip where people expecting module.

We didn't make an announcement very frankly because we are more focusing on the final product because saying our chip is certified everyone knows that AT&T announced, for example, WNC as a module used for their IoT program, accelerator IoT program.

And this chip is using Sequans.

So by definition our chip is certified on AT&T.

The module of obviously WNC, Gemalto, Huawei and all those guys, they are really in the last mile.

And I don't want to say when you will hear about them, but there is no issue at all and this is happening on time and they will be ready to be used for production if you want end of this year, beginning of the next year depending on the product they would be launching.

Thank you.

One last question.

If Sequans were approached by a strategic acquirer, would you give a serious consideration or is Sequans committed to maintaining as independent for the foreseeable future?

As you know, I mean our main role as a management team and as CEO first of all is really to make the best interest for our shareholders.

And depending -- and this cover everything.

Obviously someone approaching us but as well how we develop ourselves as a company and how we grow it.

And the management and the board will take the right decision that makes sense for our shareholder depending on the risk reward and our internal plan versus a strategic offer.

So definitely there is no answer in advance because obviously we need to have the data on the table to make a decision on this, but we are open for any opportunity that can come for the company, definitely.

(Operator Instructions) And we have a question from [Bill Tipid], an independent.

(foreign language) George, you mentioned CBRS.

Can you give your view of the current situation with CBRS and the FCC?

Yes, I mean CBRS is the -- this is the 3.5 gigahertz switches, kind of semi-licensed, I mean to qualify it, it's not the right way to call it.

But instead of having an unlicensed band, completely unlicensed band that anyone can use it or 100% licensed band where only the owner of this band can use it in the U.S. the 3.5 gigahertz has been put under -- because it's used as for some military application, for space and so on.

But however you have a lot of area in the U.S. where this frequency is free and no one is using it.

That's why they came with this new regulation which is you can declare the use of this band and use it, for example, for utility, for local broadband connectivity and so on.

And there is a lot of interest there because this could be a kind of -- obviously the carrier, the traditional carrier can jump on it to use it for extra capacity, but we'd have as well newcomers.

Any guy who wants to serve internet in a limited zone could find it very easy way of using this.

And Sequans has very good position there, very well positioned there because the 3.5 gigahertz is a frequency band that we used a lot in the emerging market.

So we have products serving there.

And we have customer who are -- who is developing product to serve the CBRS.

So this is for us a potential growth which could be completely different.

It will not be -- it will not look, I will say, for the regular carriers, like the AT&T and Verizon even if those guys will be interested in this, but it could look like where you have a newcomer that they want to make vertical projects, vertical deployment I will say in a city, in utilities and so on where they can launch a network using the CBRS frequency.

And Sequans will see this as a potential market of growth for our broadband.

I'd like to turn the conference back over to our panel for any closing remarks.

Please go ahead.

Okay.

Thanks very much for all the questions and for the time you spent on this call.

Looking forward for our next conference call to talk to you again.

Thank you.

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

On behalf of today's panel we'd like to thank you for your participation and thank you for using our service.

Have a wonderful day.

You may now disconnect.