Sequans Communications SA (SQNS) 2018 Q1 法說會逐字稿

Welcome to the Sequans First Quarter 2018 Results Conference Call.

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

Before I turn the conference to our host, Mr. George Karam, I'd like to remind you of the following important information on behalf of Sequans.

The 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 historic facts and conditions discussed in this call including any statements regarding our future results of operations and financial position, business strategy and plans, expectations for IoT and broadband sales, 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 in Section 21E of the Securities Exchange Act of 1934.

As this call contains projections and other forward-looking statements regarding future events or future financial performance and potential financial sources, all statements other than the present -- I'm sorry, that these statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risks and uncertainties and subject to change at anytime.

We operate in a very competitive and rapid changing environment.

New risks emerge from time to time.

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

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

More information 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, Sean.

Good morning, everybody.

This is Georges speaking.

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

Welcome to our first quarter 2018 results conference call.

We are off to a very good start in 2018, with particularly strong performance from the IoT business.

As expected, Q1 revenue was flat with Q4, although Q1 tends to be seasonally weaker.

The strong momentum in our CAT 1 IoT business mostly offset the typical seasonal pattern and the expected weakness in the broadband business.

In fact, IoT revenue grew more than 50% sequentially in Q1, setting the stage for IoT to be more than 50% of total revenue for the entire year, up from 25% of total revenue in 2017.

In addition to the CAT 1 growth, we continue to gain traction with our Monarch CAT M1/NB1 solution and expect related revenue to accelerate during the second half of the year

The strong momentum in IoT is really the main story of Q1, but our vertical business also is performing very well, and we believe our broadband will pick up gradually during the balance of the year followed by acceleration from some new projects next year.

Allow me now to go into the detail of each business segment, and I will start with the IoT business.

The ramp in our CAT 1 revenue during the first quarter certainly validates our decision to be the first to offer a CAT 1 solution and essentially create this market.

We all experienced some frustration as it took longer than we had hoped for CAT 1 to start moving.

But now it has clearly passed the inflection point.

We are shipping Calliope CAT 1 chips to Gemalto, our CAT 1 module partner, who's addressing end customers in both the United States and Japan.

Also, we are shipping CAT 1 modules to several end customers deploying in the U.S. Meanwhile, we are working on new opportunities, and we expect CAT 1 revenue to continue to grow each quarter during the remainder of 2018.

Obviously, the CAT M1/NB1 markets will be much larger than CAT 1. However, we believe our CAT 1 business will remain significant beyond this year as not all CAT 1 business will transition to CAT M1/NB1.

There are multiple reasons for this.

First, not all operators will be ready at the same time with their CAT M1 or NB1 networks, and customers may deploy CAT 1 in the meantime.

Second, once a major CAT 1 project has begun, the customer will not stop it to switch to a different solution when their project economics were already justified based on CAT 1. Third, and most important, there are some specific applications that require better than CAT M1 throughput and features such as video, audio streaming and certain voice applications.

Turning to CAT M1 and NB1, the report here is also excellent.

As we have noted before, the demand for these solutions is more organic because these technologies have been anticipated by the standards body to address the low-power and low-cost requirements of IoT devices.

We enjoy the first-mover advantage here as well, and we expect to see CAT M1 and NB1 reaching the inflection point more quickly than CAT 1 did.

We continue to see operators, module partners and end customers pushing ahead to launch CAT M1/NB1 as quickly as possible.

We can confirm that product launch has begun.

As expected, one of our end customers we serve through a module partner has launched his product at the end of Q1 on one of the U.S. carriers and is now in full production.

We are very busy supporting our OEM customers and module partners with their product design and certification activities, and we expect a significant number of them to launch during the second half of this year.

We continue to believe we can ship more than 3 million units in CAT M this year, although we will remain vulnerable to unexpected minor delays along the way.

The most important factor is that these are firm design wins, and even if the timing were to slip a little, the business belongs to Sequans.

We believe the number of design wins we have in hand and the number of opportunities in the pipe promise us a major market share in the CAT M1/NB1 market.

To give you some color on the design wins we have moving forward toward their target launch dates.

We have close to a dozen tracking applications of various types.

Many design wins covering automotive telematics, various types of high-value asset tracking as well as wearables for tracking the elderly, children and pets.

We also have a few design wins in hand for safety and security applications such as alarms and smoke detectors.

And we have multiple customers designing connected bottom for just-in-time ordering of supplies.

These CAT M1 devices will launch first in the U.S. market, where both AT&T and Verizon CAT M networks are ready.

Meanwhile, I have also made good progress in developing the business in Japan.

Our Monarch platform is now certified on SoftBank's network, and we are fully engaged with DoCoMo and KDDI supporting their networks readiness and achieving certification as well.

This will help us expanding our CAT M1/NB1 business to Japan by early 2018 -- 2019 where we already have a metering design win.

During the first quarter, we also added several design wins for both CAT M1 and NB1.

A couple are focusing on NB-IoT applications and one is addressing a metering project.

We continue to be sought after by operators to work with them on expediting the readiness of their CAT M1 or NB1 networks.

In addition to the U.S. and Japan, we have added new engagements in Europe, Australia, South Korea and China.

As we look toward the CAT M1 and NB1 ramp becoming significant during the second half of this year, you can see how much more diversified our customer base will become from design wins already we have in hand.

And this is only the beginning.

On the competitive front, we feel very comfortable with our position.

We have remained the only vendor shipping a fully optimized solution for longer than we originally expected.

Also, we have been sampling 2 derivative platforms.

Monarch shipped the smallest system in chip for ultra-compact IoT devices that we have designed in collaboration with Skyworks; and Monarch SX, an integrated system on chip for smart IoT devices that we did in collaboration with Foxconn; not to forget CLOE, an integrated CAT M GNSS solution that will go to market with SDMicro.

These derivative solutions have been very well received by our customers and we already have several design wins using our CLOE platform and our Monarch SiP.

In the future, as competitors introduce their first generation or first generation optimized products, we hope you will remember that these solutions are late for a market where the design cycle is long.

It would be hard to exaggerate the importance of the relationships and reputation we have built since Monarch first begun sampling almost 2 years ago.

By the time these first generation competitive products are shipping, we'll be sampling our second generation platforms, such as Monarch N that we announced earlier this year.

Let me now give you some detail on the broadband and vertical markets.

We'll also see some very interesting and exciting potential opportunities in our broadband business.

It's frustrating to see the emerging market situation and the slow improvement in the U.S. broadband business mask the great progress we are making in IoT.

So naturally, we are disappointed by the low level of broadband revenue, but there are potential new opportunities that can dramatically change the picture.

We believe Q1 was the low quarter for this business and continue to expect gradual improvement during 2018, maybe at slightly lower pace than we indicated on the last call as one of our customers serving the emerging markets will still have some inventory cleanup to finish.

We see some specific signs of improvement in the U.S. broadband business but we prefer to stay cautious for now.

Most important, we are discussing multiple new and very interesting opportunities that could make a significant change to the broadband business next year.

They cover different types of devices for the U.S. market, and some of them could be launched on multiple operators' networks.

Also we are looking at some potentially large opportunities for enterprise networks as some applications for private networks such as government or campus settings.

We are very well positioned to serve the CBRS ecosystem and we have already been chosen by a few players.

And we are in active discussions or trials with others.

To remind you, CBRS is the licensed or license-exempt 3.5 gigahertz spectrum where we have considerable experience.

Moving to vertical market business, we have plenty of good news here as well.

We have closed multiple new deals in Q1 and we believe our target revenue for the year is secured.

We are very pleased to say that we are also continuing to expand the scope of our relationships with existing customers such as TELUS, Motorola and Lockheed Martin.

Meanwhile, in addition to the new customers, we are at an advanced stage with other potential customers, most of them very large companies, like our current vertical market partners.

Some of the projects could be quite significant ones.

Several of these engagements extend beyond the traditional telecom carriers to include other types of service providers such as cable or satellite as well as private networks or government-related projects.

Finally, on the strategic front, we are making progress in a couple of important areas.

We continue to work on new projects with our technology partners such as SDMicro, Foxconn and Skyworks.

We are also cooperating with them to take advantage of the relationships we each have.

And on other important initiatives, we have been working on expanding our go-to-market capabilities via new strategic relationships that extend our reach into markets beyond the traditional telco or regions where a strong local presence is required, like China for example.

Discussions regarding some of these new relationships have been going on for quite some time, and concrete progress has been made.

We've signed an agreement for the initial business phase with one go-to-market partner and we'll consider a broader, more strategic relationship in a second phase if things go well.

We also are engaged in discussions with 2 other potential partners, and it appears that we could reach agreements with both by the end of the third quarter.

These opportunities would lend themselves to strategic components and are not mutually exclusive.

The funding aspect of these strategic relationships will also be our avenue for handling any potential short-term capital needs, if they should arise.

So bringing one or more of these opportunities to conclusion is an area of focus for us.

Before turning the call over to Deborah, I'd like to remind you of the vast variety of exciting business we are pursuing.

Looking beyond this year, we have a rapidly expanding pipeline of new projects that we expect to convert to design wins.

Some of the new projects involve different applications on a scale not represented by the design wins that are set to launch later this year, and we are very excited to see these moving forward.

Examples would include things like pallet tracking, connected speakers, set-top boxes, health monitoring equipment, gaming devices, smartwatches and even feature phones, just to give a few generic examples of things being discussed.

We have an abundance of exciting business opportunities in IoT, broadband and vertical markets, supported by strong existing partnerships as well as several interesting strategic discussions that have reached an advanced stage.

Therefore, in our estimation, we have all the ingredients to continue on our path to profitability and to achieve even stronger growth and value creation for shareholders as we move toward the future 5G world.

Now I'll turn call over to Deborah.

Deborah?

Thanks, George, and hello, everyone.

I'd like to add some details about our Q1 results and discuss the outlook including our guidance for Q2 of 2018.

Our revenue was $11.2 million for the first quarter of 2018, flat compared to the fourth quarter and a decrease of 9.6% compared to the same quarter a year ago.

This reflected very strong growth in IoT that again was masked by a further decline in the broadband business.

But as George noted, we believe this is the trough quarter for broadband and that we'll see gradual improvement during the balance of the year in addition to further quarter-to-quarter growth from IoT.

In Q1, we had 4 10% customers, 2 are distributors serving a number of Asian OEM and ODM customers.

One is an ODM and one is a vertical market customer.

Gross margin in Q1 was 41.7%, the same as in Q4 of 2017, but below Q1 of 2017 when gross margin reached 47.1%.

The change from a year ago primarily reflects a shift in mix toward a lower proportion of chips versus modules and lower overall product revenue less efficiently absorbing fixed costs.

This is partially offset by higher license and service revenues.

Operating expenses were $12 million in Q1, up from $10.3 million in Q4 primarily due to an unusually high favorable impact of grants reducing Q4 R&D expense by over $1 million and the expenses related to 2 major trade shows and the impact of currency changes increasing expenses in Q1.

We continue to expect non-IFRS operating expenses in 2018 to average about $11.5 million per quarter, reflecting the impact of the stronger euro versus the dollar as well as some headcount increases primarily in engineering compared to last year.

Our first quarter operating loss was $7.3 million compared to an operating loss of $5.6 million in the fourth quarter of 2017 and a $4.2 million loss in the first quarter of 2017.

Our net loss in Q1 was $8.7 million or $0.10 per diluted share or ADS compared to a net loss of $7.6 million or $0.10 per diluted share in the fourth quarter.

The net loss in the first quarter of last year was $5.6 million or $0.07 per diluted share in ADS.

Our weighted average share count increased to 91.5 million shares in Q1 compared to 79.8 million at the end of 2017 as a result of the equity offering in January of this year.

On a non-IFRS basis, our net loss for Q1 was $7.5 million or $0.08 per share compared to a non-IFRS net loss of $5.9 million or $0.07 per share in the fourth quarter of 2017 and $4.7 million or $0.06 per share in the first quarter of 2017.

Our non-IFRS net loss excludes noncash items related to stock-based compensation expense and the noncash impact of convertible debt amendments and effective interest rate adjustments related to the convertible debt and other financings.

Cash used in operations in Q1 was $6 million compared to $9.3 million in the fourth quarter of 2017, reflecting improvement in accounts receivable collections as accounts receivable declined by more than $3 million partially offset by a $2 million reduction in accounts payable.

Our cash and short-term deposits at March 31, 2018, totaled $15 million compared to $3.3 million at the end of 2017, reflecting the net proceeds of the equity offering in January.

Accounts receivable at March 31, 2018, were $17.6 million, reflecting DSOs of approximately 113 days, down from 120 days at the end of Q4.

And inventories were stable at $7.4 million.

Short-term debt from financing receivables decreased by $2 million to $5.3 million in Q1 primarily due to the revenue mix, which contained lower product revenues and services that could be financed compared to the prior quarter.

Looking forward, we expect revenues for the second quarter of 2018 to be in the range of $12.5 million to $14.5 million as IoT revenues continue to ramp and with some recovery expected in broadband revenues.

We expect non-IFRS gross margin in Q2 to be above 40% and non-IFRS net loss per diluted share to range between $0.07 and $0.08 based on approximately 94.5 million weighted average diluted shares.

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

As George indicated, we continue to expect strong growth in IoT in 2018.

The broadband business is expected to gradually improve during the year.

Our assumption is that revenue from the vertical markets, which includes public safety, avionics and various strategic partnerships, will be at least similar in 2018 to 2017.

So our growth in 2018 will be driven by a full year of shipments for CAT 1 combined with the ramp in CAT M1/NB1 during the second half of the year, and we continue to expect IoT to account for more than 50% of total revenue in 2018.

Now before concluding, I'd like to mention 2 housekeeping items.

First, you may have seen that this morning, we filed a new form F6 to register more American depository shares.

This is not reflective of any further registration of the underlying shares.

Those are still covered by our existing shelf registration on Form F-3.

The original F6 was filed at the time of our IPO and registered at 200 million ADSs.

Since we're now approaching this limit, we needed to file again to be sure we can cover conversion by debt, stock option exercises, et cetera.

So no one should jump to any erroneous conclusions about the amount, which is just the same as before, and this filing does not signal any plan to access the capital markets.

And second point, our Board of Directors has called for our Annual General Meeting with shareholders to take place on June 29.

So voting information will be sent out in early June.

And before I turn the call back to George, I'd just 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, the same location where you will find the audio replay.

George?

Thank you, Deborah.

So just before taking your question, let me stress one more time that we are very pleased with our business in general and with the progress, specifically, very excited about the progress of IoT.

As I said, CAT 1 is now a solid established business, and this is -- we waited a long time to see it happening, and this is here today and it's here to stay.

And on the CAT M/NB front, obviously here, the potential is much bigger.

And as I explained, we have all the ingredients, whether from design wins in hand, to secure ramp as fast as possible.

The pipe of opportunity to show -- to continue expanding this business for the following couple of years, the carrier networks readiness giving you a little bit, the urgency of the timing of the development of this market are reaching an inflection point as well the application.

When you look to the end customer -- end customer application, you see all of them makes sense for really expanding and deliver on the promise of the IoT.

All this in hand, let us feel like we have -- we are really in a great position to make this business successful and be obviously, an order of magnitude bigger than our CAT 1 business already.

And with all this, let us feel like the IoT is really -- execution in the company, is really set here to prepare for an exponential growth year-over-year for the coming 3 years down the road.

And I'll turn now maybe the call for your questions.

Thank you for listening.

And maybe Sean?

(Operator Instructions) Our first question is going to come from the line of Quinn Bolton of Needham.

And good to see the beginning of the hockey stick here in the IoT business.

George or Deborah, just wanted to start with just kind of the mix of business in the March quarter.

Can you give us a sense what the broadband business did and what the IoT business, what the revenue for each of those segments were?

And then the other revenue was $3.6 million this quarter.

How do you split that other revenue between broadband and IoT?

And then I've got a follow-up.

I think we're not going to give the specifics on a quarterly basis just because the information remains a little bit sensitive from a competitive situation.

But IoT was definitely comfortably over 50% in the first quarter.

And I'd say that there is a bit of service revenue included in the IoT numbers but most of that -- because we do sign when we add a new licenses for example related to IoT customers, that will go into our IoT bucket.

But the bulk of the other revenue line was more from -- was from verticals.

And so that would be in the "broadband" segment then?

Yes.

Got it.

Got it.

And then George, you talked about still looking for I think you said greater than 3 million CAT M units this year depending on ramp timing.

I think in the past, you've said sort of 3 million to 4 million.

I'm just wondering if there's been a little bit of a tone change or expectations change?

Or are you still sort of consistent with that CAT M ramp as you look into the second half of the year?

Well, Quinn, I mean, the trend remains there.

There is no real -- there is nothing changing other than adding up and we feel the ramp happening.

The question, is always -- by the way, I mean when -- I always talk about 3 to 4 million last year, it's more in preparation of some timing of some project on hand that needs to happen on a given time.

And no matter how much you -- you (inaudible) the execution of the large dates, you can have a slippage of one month here, one month there.

So there is also maybe -- so for all this, I'm factoring a little bit more closer execution because of the timing of the launch is more precise now for some of the devices.

There is another element which is -- I don't know how much is more to be cautious on the issue that you are seeing was at the end of Huawei, mainly on the Huawei angle.

As you know, Huawei is one of our module partners and they have products for the U.S. So without really getting any detail here because product -- that work on the product continues on and they are working on as well for products outside the U.S. But we are taking a little bit some cautious approach there, maybe saying this maybe will take time to happen, taking the new geopolitics or whatever you want to call it happening between the U.S. and China these days.

So all this, it's more moderating a little bit the number, but we still end up in the bracket that we are thinking about.

Okay, great.

And then Deborah, just can you walk us through the sort of timing of government grants, tax credits you'd sort of -- that you would expect here in calendar '18?

Sure.

So the biggest impact and the one that is -- that is easiest to plan for is the reimbursement of our French research tax credit.

This is received from us annually.

We have $3.2 million from 2017 that we generally are able to collect in September each year.

There could be some risk that it slips to October but there is no risk of it not being received.

Otherwise, we have -- government grants are more sort of scattered across the year, probably a little bit less than $1 million in total expected this year, so a few hundred thousand each quarter expected to come in.

And then any of the vertical market projects that you're working on, say with TCL, do those generate onetime sort of cash payments through the year?

This year, they are more spread across the year.

So in the past, we had in the example of TCL, there was a large upfront payment received in the first quarter.

And this year, it's -- we're now having that spread across the year.

The next question is going to be from Mike Walkley from Canaccord Genuity.

Yes.

It's great to see the IoT business strengthen.

And also George, as we think about just growing IoT throughout the year, can you maybe walk us through some of your carrier opportunities, such as SoftBank?

It sounds like Japan would be more of a early '19 ramp.

Is it mainly U.S. the key driver this year?

And how should we think about different carriers and opportunities, timing of CAT M all layering into the model as we think about sequential growth throughout 2018?

Hi, Mike.

I mean it's -- obviously, the U.S. market is ready.

So there's no question about it.

As we said, we have product launching there, and I'm talking here to the 2 carriers, about Verizon and AT&T.

With both, we are certified.

We have many customers certified on this and it's moving.

When you look globally -- before saying what's happening -- when you look globally, you feel -- you realize that just after the U.S., the guys that they are pushing I tend to say to be as fast as possible will happen in Japan, and maybe SoftBank in Japan as the first guy, followed by DoCoMo and KDDI.

And you see as well Korea, South Korea.

You see as well Australia.

All this I believe it's really on the trend to happen this year.

So we should see them ready as a carrier this year, second half of the year more than maybe Q3 and worst case Q4, depending on those carriers.

And then you will see a lot of activity with the European carrier.

And what I feel like they -- even if they could be launching here and there, some regions in Europe could be ready before others, I tend to say this is more towards the end of the year that startup about more general readiness.

And obviously in line of all this, our strategy is obviously to our focus on the first mover, I mean who's ready first.

That's why we focus a lot on the U.S. so far.

And our second focus was to move on Japan, and that's why you saw some announcement about certification with SoftBank but also the other guys, we are very close as well.

And we should complete, this remains our first priority.

We have, even if we didn't -- are not mentioning this, we have also Australia, a good move there.

And it's again really driven by the design win quite often and the readiness of the carriers.

So these are the carriers what I see them happening first and, to some extent South Korea.

And then we have a partner as well for China that we closed this quarter and we are now putting some energy even on China and the IoT through this partner.

And it seems like during the quarter, the IoT business offset what maybe was perhaps weaker-than-expected broadband business.

Can you give us your updated thoughts on the size of this business, how you think it is for 2018 and maybe an update on the U.S. market like Verizon working through inventory et cetera?

I believe in -- well, what I mentioned is we're still on a recovery plan in the broadband.

So I believe we reached the minimum in Q1.

And it has 2 reasons.

Q1, as you know, it's seasonally weak for this market, particularly, obviously, because it's something established.

It's not like the IoT where you have new launches.

So Q1 in general is weak.

But here, we get the double hit of Q1 seasonable plus, obviously, the inventory we're talking about.

We have, as I said, some nice news ourselves on the U.S. front, U.S. broadband.

We're seeing some forecast of recovery.

And for the time being, I'm still a little bit cautious.

I would like to see it happening because we start seeing this really now, I mean almost fresh news where I'm seeing this.

So this, in any case, indicates that this business will go back to normal after the struggle we had end of the last year.

And on the emerging, we have some recovery with one major carrier, the other major customer.

The other guys still have a little bit of inventory.

So all this to say, we're still on a plan of recovery maybe a little bit slower towards the end of the year.

But if you project this for 2018 -- 2018, we have the new design win we are working on today, and as I mentioned, we are working -- one of the issues we face in the broadband is that we are really typically working on 2 regions, 1 business with Verizon and the other business in the emerging.

So we're not too much diversified.

So any problem happening there could hurt us.

So we've put a lot of energy recently on expanding this market for other regions.

And I mentioned a few applications there.

A lot, by the way, in the enterprise, in the CBRS businesses, it's in the U.S. Market on many -- on new carrier.

So we see a real opportunity that we are addressing and we are closing.

Some even we got them already almost in hand I tend to say.

So this should help us beefing up this business.

So 2018 can -- 2019 can go back to normal growth, if you want.

So we see this year kind of bottom of the year and we should go back to growth next year.

(Operator Instructions) We have a question on the line of Scott Searle from Roth Capital.

George and Deborah, just a couple of quick clarifications, M1 in the first quarter, do you have some relative numbers of where we were?

I think it was about $700,000 in the fourth quarter.

Was that up sequentially?

Also on the broadband front, if you could give us an idea of what the U.S. versus emerging markets mix was.

And then on the vertical front, you talked about doing very good about the year.

I think George, you talked about it $10 million to $15 million for the year.

Are you thinking more towards the higher end of that range at the current time?

And then I have a couple of follow-ups.

Well, let's start with the last one.

I mean on the vertical, obviously, I mean the range, I was talking about doing at least $10 million.

And today, I tend to say, we have this in hand.

So obviously, there's still a couple of quarters to go.

We hope to secure more and exceed this $10 million.

Are we going to go to the $15 million?

It's still a little bit big bet to say it like this.

But at least the $10 million is -- because many of those deals, they are -- we recognize revenue over time.

And some they are a big deal when you when to sign them.

So when you look to our backlog it's kind of secured.

And my point is that securing, I will say, the low end of the range and then, hopefully, this will allow us to get some upside if we close a couple of deals in Q2 and Q3.

On the question about the broadband, the split between U.S. and emerging, technically, we should have in principle broadband -- the emerging bigger than the broadband than the U.S. in general, I would say.

Maybe, 60% emerging, 40% U.S. Now obviously, if we focus just on the current quarter, I believe that maybe it was half, half, something like this, if I have to think about it because both of them were kind of weak in Q1.

On one side, we have the inventory -- on both sides, we have the inventory issue.

But I believe they tend to -- they were closest to 50, 50.

But if we go back to normal, we should have more 40%, I'll say, the U.S. and 60% the emerging at the current level where we stand for this year.

And if I go to the first question about the M1 and what's happening [in Q1], what they said in -- we have a couple of customers ready already.

And I know some of them, by the way, they are sampling to a dozen of customers and here I'm referring to some module partners.

So the engagement, as I mentioned, always to remember, on M1, we have direct engagement, where ourselves we're helping the end customer to build the device and take it to the market directly, and this is obviously 100% in our control because we know the timing and execution at 100%.

Then we have a big chunk of the business going through a [modular] partner like Gemalto, like WNC and so on, where those guys, they are ready.

By the way, all of them are ready with their -- at least version for the U.S. and they have engaged customers.

Some of them are very advanced.

Some of them moved to production.

This is what I mentioned.

One guy has moved to full production in Q1 and some are targeting for Q2.

So we shipped as I mentioned, at the end of Q4 some quantity.

I mean last year, we shipped around 300k units.

Obviously, this was to start serving the Q1 ramp with those customers on the module side.

In Q2, we ship as well, I don't know, it's still a similar level, if you want, of volume for all those new customers.

Some of them are in the initial launch.

Some still sampling on this buildup for us some amount for this quarter.

And just to follow up.

I apologize it's one of my multi-part questions.

Looking at the M1 opportunity, continues to seem like more and more design traction as you're going on, part of that related to the competitive landscape.

Part of that related to your leadership in time to market.

But a lot of the designs seemed like they were focused towards ramping in the third quarter, and your expectations were really focused and built around about a half dozen or so larger design wins contributing to that 3 million to 4 million units into $15 million.

Is that still the case?

And it seems like you have visibility to it.

So if you could comment on that.

And then some of the other areas that you've talked about that are higher-volume opportunities in terms of wearables, pallets, et cetera, that seems like it's all upside to those numbers.

Is that the case?

And how does China fit in to what your current expectations are for the year?

Definitely, a big chunk of our -- what I mentioned that my number is building around getting half a dozen or 5 new streams established this year, knowing that we have, I don't know, 30, 40, I don't know how many designs.

Now if I count them, maybe we are close to 40-plus customers designing with us, CAT M1 and NB IoT.

I'm betting, if you want, on half a dozen of them where they have secured design on their end and a product on their end moving to production.

And the majority of them are more in Q3, the launch of those guys.

So this is true, still valid, not changed on this versus what I said.

But also we continue to engage with a lot of opportunities.

Some of them, by the way, are design wins already in hand.

But production is more for 2019 because if you take, for example, eHealth application, you could imagine that production of eHealth will take time.

The guys, they have a much longer cycle, I will say, to take product to market, and this will happen more in 2019.

Some of them as well like large deployment like metering and so on, they could be sometimes waiting as well to get the maturity of the network ready before pushing on the bottom.

So it could be they're making trials to be sure it's working but they are waiting to get the assurance that all the coverage is good.

And by the way, those projects are not only for the U.S. We're seeing a lot of projects outside the U.S. as well.

And where maybe in some places you have some challenging environment in terms of coverage, and they are waiting more for the carriers to get there.

So this is still true.

I mean there is no change for this other than building up more design win in hand.

The only visibility we have a little bit more, I mean, for example, we could have a product with the launch planned for end of June, July, we could be fine-tuning this and we have the exact date when this can happen, if it has slipped 2 weeks or 3 weeks.

So this is what we have today.

But still the 3 million units I'm betting on is based on the same foundation of design wins in hand.

We have a question from Craig Ellis from B. Riley FBR.

Congratulations on the momentum in the IoT business.

George, the first question was partially answered in your response to the last question.

But I wanted to go back and acknowledging that in cases where you're working through a module partner you may not have the visibility.

But where you're working directly, what are some of the use cases?

You mentioned metering and eHealth.

But beyond that, what are the early adopters doing with the technology from your vantage point?

The early adopters, and this is what -- what we are going to see this year, first, we're going to see a lot of tracking solutions, whether in telematic or going to personal tracking, whether for old persons or for kids, for pet, for personal assets.

So these are -- the tracking function is really largely -- we see a lot of applications on this.

And with all that, all kind of services around, they don't serve the same kind of application on all of them but all kind of services.

For us, it tends by being really a tracker, taking a different form and under a different application.

So this is where we see a lot of applications there.

We're seeing metering.

Definitely, this is -- we have metering in hand.

Metering tends to take time to kick off.

I mentioned as well the bottom to order service.

This is, we should see it as well in the early adopter piece.

So these are the kind of applications we're seeing them now.

And for eHealth and maybe some larger project like pallet tracking or something like this, those, you could see some trials but they are more for us business for end of the year or beginning of next year in terms of customer launch.

That's very helpful.

And then the follow-up question goes back to comments you made about the geographic waves of adoption that are coming into the U.S., Japan, Korea, Australia and then Europe and China.

And It's more of a longer-term question.

As you look out to, say, the second half of 2019 and where you'll exit next year, can you help us size where you'll be geographically with technology shipments and deployments?

Would you expect the U.S. to be your largest geography at the end of next year?

Or are you seeing things that leads you to believe that Japan or Korea or one of the other geographies would be your #1 geo?

Any color on longer-term adoption and uptake would be helpful.

Well, I believe if we look for mid-2019, I believe all the markets will be open for us.

In other words, it will be maybe excluding some emerging market, where the 4G deployment is not large, but I tend to say all the markets will be open for us.

You need to keep in mind as well that we have many customers, when we talk to them, they are working today on the U.S. market.

But those guys, they sell as well outside the U.S. and they are ready and eager to move to Europe, to Japan, to other places.

So we have, for example, design wins today in the U.S. And those guys are promoting a solution in Japan or promoting a solution in Europe to sell it.

So for us, it's like in one stone we have 3, 4 birds, I mean, expanding the market with that same customer.

So if I project for the second half of '19, I look to my business, I still believe the U.S. will be the dominant -- in IoT the dominant market just because of the maturity, the readiness, the competitive landscape with the -- between the carriers.

I believe it will be there always [for us] -- the major market.

But maybe with -- between if we add Japan, Australia, Europe and all those guys, we'll start maybe being at least 1/3-plus of our IoT business if I compare it to the U.S. Kind of 2/3 U.S., 1/3.

Now China, I'm excluding explicitly.

This I believe I had this question before.

Maybe I didn't address it, which is we always, in all our numbers and all this, cautiously decided not to include China in our number as kind of making, say it -- I would like to call it complicated market to address.

Not to say it -- we're happy not to address it but we assume it's a little bit more complicated.

But we didn't give up on this.

As I said previously, well we're working with a close partner to build a go-to-market strategy there that can work in China despite all the challenges that you can face there.

And this market is big.

It's not negligible.

And I hope between now and maybe mid-'19 to see some components of our business in China through this kind of partnership.

But maybe revenue-wise because this will be maybe some model that we could adopt-- not giving us, I would say, the 30% of the revenue but just only a portion of it because we're leaving a portion to our go-to-market partner.

But still on a profit basis, I believe it should be significant for the company as well.

And currently, I have no questions in queue.

Okay.

So if no more questions, thank you all for the questions and staying on the call.

Thanks, Sean, as well for helping and arranging this conference.

And ladies and gentlemen, that does conclude our conference for.

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