Sequans Communications SA (SQNS) 2018 Q2 法說會逐字稿

Welcome to the Sequans Second Quarter 2018 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, our future financial performance and potential financing sources.

All statements other than present and historical facts and conditions discussed on the call, including any statements regarding our future results of operations and financial position, business strategy and plans, expectations for IoT and broadband sales, sources and availability of funding and our objectives for future operations and potential strategic partnerships are forward-looking statements within the meanings 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 amended.

These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on the assumptions and subject to risks and uncertainties and subject to change at any time.

We operate in a very competitive and rapidly changing environment.

New risks emerge from time to time.

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

Actual events or results may differ materially from those contained in the projections 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, Sean.

Good morning, everyone.

This is Georges speaking.

I am with Deborah Choate, our CFO, and we welcome you all to our second quarter 2018 results conference call.

Before we get into the details of the second quarter, I'd like to take a moment to summarize our strong business and technology position to provide some context in which to consider the details of the quarter.

Looking first at our primary growth engine, I mean the IoT business, we are very pleased to say that momentum is continuing to build, and we are reinforcing our position as a technology leader.

All operators around the world continue to move full speed deploying LTE-M, NB-IoT and, often, both of them.

We are engaging with dozens of these operators in various regions, North America, Asia and Europe, certifying our Monarch platform and enabling the ecosystem.

And some of these engagements are formal ones aimed at helping the operators accelerate the readiness of their networks.

The U.S. market is currently ready, and we are enjoying some initial shipments.

We expect Japan to follow in the second half of the year.

China is ready with NB-IoT but is now working to expand their networks to support LTE-M.

European operators are also moving to catch up, and we expect them to be ready early next year.

Hence, we are very excited about the growth potential of this market.

The recent Ericsson report has almost doubled the forecast of cellular IoT connections, predicting there will be 3.5 billion connections in 2023.

With our technology leadership position and our time-to-market advantage, we are planning to capture a major market share that will drive an exponential growth for our company.

Our pipeline of opportunities continued to grow, and we continue adding design wins and new customers.

Our existing OEM and ODM partners are making progress with their developments and first product launches they have secured.

Also, they are expanding their design wins with more products for more operators in more regions.

In turn, our list of design wins and active projects grows longer each week.

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Just to go back a little bit.

Our pipeline of opportunities continued to grow, and we continue adding design wins and new customers.

Our existing OEM and ODM partners are making progress with their development and first product launches they have secured.

Also, they are expanding their design wins with more products and more operators in more regions.

So in turn, our list of design wins and active projects grows longer each week.

We have many end customer projects in the last phase of development before launch.

So we continue to expect LTE-M shipment acceleration in the second half of the year.

The only frustrating thing is that we are seeing some minor project delays, affecting the timing of our LTE-M revenue ramp, similar to what we experienced with CAT 1 last year.

But as you know, despite these initial delays, CAT 1 has become a major revenue stream, and we are confident that LTE-M will ramp even faster than CAT 1. Note that from 2016 to 2017, total IoT revenue increased more than 40%, largely on the strength of the second half ramp in CAT 1 revenue.

This year, our first half IoT revenue is more than 2.5x our IoT revenue in the first half of 2017, again, mainly due to the sales of CAT 1, but also initial LTE-M shipments.

We expect total IoT revenue to be between 2 and 3x the 2017 level in 2018, and to achieve double again in 2019 as LTE-M and NB-IoT continue to ramp.

This early momentum should drive strong growth in the IoT business for years to come.

Meanwhile, our legacy broadband business, which had been growing steadily, suddenly dropped significantly in Q3 last year.

Since then, the decline in broadband has masked the strong performance of IoT.

However, we believe the worst is over in the broadband, and we expect it to recover.

Our referral market in the broadband space is growing, with more operators expanding their 4G network coverage and enabling single-mode LTE technology.

We also think this business offers good potential with enterprise and other applications, CBRS and 5G in the future.

The primary implication of the broadband decline relates to our cash position, and we have been very focused on concluding some of the strategic agreements we alluded to on previous calls.

On this front, we have made significant progress, and we expect to conclude one of them, which includes the funding element, during the third quarter.

In the meantime, we have secured commitments of $5 million in additional convertible debt, and are working to close another financing facility for up to $20 million.

This will add to the $4.7 million of cash we expect to collect from the French government in the third quarter from grants and research tax credit.

Therefore, we are comfortable with our cash situation for at least the next several quarters.

So with this overview, as we get into the details of the second quarter and the explanation of our guidance for the third quarter, the short-term developments should be viewed in the context of our huge opportunity and a strong position in the market.

Looking specifically at the second quarter, revenue increased sequentially, as expected, and we're within the range of our guidance, but we're below the midpoint, mainly due to a delay at one of our CAT 1 customers.

This delay related to a network modification issue that required a new software release to be tested.

So we were able -- we were unable to ship nearly $1 million of product.

The business remains in our backlog and will be shifted during the second half.

Now, I'll provide some additional color on each of the main segments.

Starting with our IoT business.

Aside from the delay in the CAT 1 module shipment I have just mentioned, our CAT 1 business performed according to our expectations and continues to build.

Gemalto, our CAT 1 module partner, is adding end customers in both the U.S. and Japan.

We have very good visibility, and the business is growing as expected.

Our direct module customers are moving forward and expanding their products to cover additional networks in the United States.

In fact, during the quarter, we concluded an agreement with Sprint to expand our CAT 1 technology to support Sprint's network.

We have now a comprehensive CAT 1 module solution covering all 4 operators in the U.S.

Even if some of the IoT applications would be better served with LTE-M and NB-IoT, CAT 1 technology remains crucial for all applications requiring guaranteed speed above 100 kilobit per second, like video and music and voice, at least until we start seeing LTE-M networks supporting good-quality voice.

As such, we continue to see our pipe of CAT 1 business expanding.

As we said previously, the LTE-M and NB-IoT business momentum is increasing, and the market potential is huge.

Our module partners have achieved certifications in the U.S. and are busy engaging with many customers.

Some of them have already launched their products, hence our initial CAT M shipments.

As we've said in the past, our LTE-M revenue acceleration during the second half of the year relies on several LTE-M projects with specific launch dates.

Some of those projects are supported by our module partners and some by us directly, with some devices to be marketed by the operators.

All are moving well, and have entered certification and the final testing and approval phase before launch.

But we are seeing on some of them minor issues affecting some launch dates in the second half of the year, with some impact on the timing of our revenue ramp.

As you know, even a few weeks of delay on the launch dates can affect the trajectory of the revenue ramp between the third and the fourth quarter and can push a few million dollars from the second half of this year into 2019.

Bear in mind, this won't translate into loss of business or market share; this is just a delay in the market ramp, and our competitors are facing similar issues.

This is complicated stuff.

Networks are building up and operators are tuning them, but soon, we'll move to the ramp phase, and we'll enjoy the full potential of this market, as these customers are ours with or without delays.

During the second quarter, we continued to add important design wins in both the U.S. and Japan for a variety of applications, including metering, telematic, industrial IoT and smart homes.

Also, our existing CAT 1 customers adopted LTE-M solutions with us based on the strength of the relationship we have developed.

We haven't talked as much about NB1 as we have about LTE-M.

But we are making excellent progress with NB1 and have several NB1 design wins in hand, with many more opportunities in the pipeline as more NBN -- as more NB-IoT networks are deployed.

We also see growing interest in dual-mode LTE-M 1 NB1 as operators become more familiar with the details of the technology.

This is because of the strong case for enabling devices to switch from NB mode to LTE-M in order to perform a software upgrade over there.

In the U.S. alone, we see Verizon, AT&T and T-Mobile adding NB-IoT as well as some greenfield service providers, who see an opportunity to challenge the incumbents.

Similarly, we are seeing interest in both LTE-M and NB-IoT in Japan, Korea, Europe, Australia and China.

We are generally pleased with our go-to-market partners' progress, and we have strong relationships that position us well in most regions of the world.

We are very pleased with the progress of Gemalto, WNC, Sercomm, Wisol and Foxconn, to name a few.

We have seen a slight shift in focus on the part of Huawei, since our last call.

Three months ago, they were going full speed after the U.S. market, but since then, they have shifted their focus more towards LTE-M for Europe and China, which implies a ramp of volumes with Huawei later than if they had continued to address the U.S. market.

As we've discussed, China can be a bit tricky for non-Chinese vendors, but the carriers there are adding LTE-M to their existing NB-IoT deployments.

This creates a unique opportunity for us from a competitive landscape.

We have started the certification work for Monarch with the Chinese operators, and we have engaged a Chinese partner to support a successful go-to-market strategy for China.

We are also working to reinforce and expand this go-to-market strategy.

Switching now to broadband and vertical.

As expected, our broadband business improved in the second quarter compared to Q1.

We see some very interesting potential opportunities in this business, and we converted a few of them to design wins in the second quarter.

We expect to gain additional traction in the U.S. with these new design wins.

One of them is a mobile router for MVNO, another is a device for sports and leisure for the U.S. market.

In the emerging markets, the channel is still working down some inventory, but we are betting on a strong recovery as soon as we will introduce our new CAT 6 platform that will offer 4x4 MIMO and an extremely cost-optimized architecture for low-cost routers.

We are seeing more and more traction for single-mode for rerouters outside of Verizon and the emerging markets.

The 4G network coverage of many carriers around the world is reaching a very good level, and as such, we are getting new business opportunities to win with our single-mode LTE platform.

Also, we continue to be very active in the light-licensed CBRS band and have a number of active projects, including customers doing trials in the U.S. in anticipation of the SEC opening these bands soon.

We are working on opportunities for the enterprise market, which would expand our served market even more.

In summary, we are assuming near-term improvement of our broadband business will be very gradual, but we believe this business has good potential to grow in the future based on the number of opportunities we are working on.

Moving to vertical market business.

We continue to enjoy good visibility in this area, and we signed additional deals during the second quarter, including an expansion of an existing relationship and several carrier deals.

We also have added new projects with customers that are service providers, but not the usual wireless carriers.

In addition, we have several interesting opportunities still in the pipeline.

For some of them, before signing and kickoff, the timing can be very difficult to anticipate because of the potential customer's project is dependent on certain factors that are beyond their control, such as regulatory decisions.

The others are moving well, and we expect to finalize them during the second half of the year.

So overall, our business -- our vertical business is performing in line with our plan and should continue to grow in 2019.

To update you on the strategic front, as we indicated on our last call, we've been working on several possible strategic opportunities for quite some time with the potential to finalize one, and possibly 2, of them soon.

Regarding the first one, we are at an advanced stage of negotiations, and we target to finalize an agreement during the third quarter.

We are also making progress on a second one, and we are very close to concluding the business agreement.

Our aim is to finalize it by the end of the year.

I will end my remarks in the same vein as I -- as they began, noting that the IoT business will clearly be a strong growth driver for Sequans for years to come, and we can already see that we will soon become increasingly diversified in terms of the number of CAT M and NB networks, the number of individual projects in which we are involved and the types of applications they represent.

As discussed above, we anticipate more and more opportunities in the broadband and vertical market space as well.

Therefore, we are confident in our future and determined to deal with any minor delays which could impact the scope of the revenue ramp in the short term.

Now, I will turn the call over to Deborah.

Thank you, Georges, and hello, everyone.

I'd like to add some details about our second quarter results and discuss the outlook, including our guidance for Q3 of 2018.

Our revenue was $12.7 million for the second quarter of 2018, up 12.7% sequentially from the first quarter, primarily due to 30% sequential growth in product revenue and a decrease of 4.2% compared to the same quarter a year ago.

The change versus the second quarter of 2017 reflected significantly higher IoT product revenue that was masked by lower product -- broadband product revenue and lower other revenue compared with a year ago.

But as expected, the broadband business improved sequentially from Q1, and we expect a gradual further improvement going forward.

In Q2, we had 3 10% customers, 2 are distributors serving a number of OEM and ODM customers, and one is an ODM directly.

Gross margin in the second quarter was 39.4% compared to 41.7% in the first quarter of 2018 and compared to 42.1% in the second quarter of 2017.

The lower gross margin was primarily due to a shift in product mix toward a higher proportion of modules as our CAT 1 business continued to ramp, as well as lower license revenue.

Operating expenses were $11.9 million in Q2, down slightly from $12 million in Q1, reflecting the benefit of a higher French research credit reducing R&D expense, offset by somewhat higher legal and bad debt expenses.

The increase from the second quarter of 2017 is primarily a result of the increase in headcount and the impact of the strength in the euro versus the dollar.

We continue to expect non-IFRS operating expenses in 2018 to average about $11.5 million per quarter.

Our second quarter operating loss was $7 million compared to an operating loss of $7.3 million in the first quarter of 2018 and a $4.1 million loss in the second quarter of 2017.

Our net loss in Q2 was $8.1 million, or $0.09 per diluted share in ADS, compared to a net loss of $8.7 million, or $0.10 per diluted share in ADS in the first quarter.

The net loss in the second quarter of last year was $6 million, or $0.08 per diluted share ADS.

Our weighted average share count increased to 94 point million (sic) [94.5 million] shares in Q2 compared to 75.9 million a year ago and 91.5 million at the end of Q1, reflecting the full effect of the equity offering in January 2018.

On a non-IFRS basis, our net loss for Q2 was $6.8 million, or $0.07 per diluted share ADS, compared to a non-IFRS net loss of $7.5 million, or $0.08, in the first quarter, and a net loss of $4.9 million, or $0.06, in the second 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 the effective interest adjustments related to the convertible debt and other financings.

Cash used in operations in Q2 was $8 million compared to $6 million in the first quarter, reflecting increased working capital requirements.

Our cash and short-term deposits at June 30, 2018, totaled $7 million compared to $15 million at the end of Q1.

Our Q3 balance sheet will reflect $1.5 million in grant payments already received in July, and we expect to collect a further $3.2 million in September for last year's French tax credit -- research tax credit.

As Georges noted, we are in advanced stages of negotiating terms of one of our strategic opportunities which includes a funding element, and assuming it closes this quarter as expected, the additional funding will appear on our balance sheet in Q3 or soon thereafter.

We also have secured commitments of $5 million in additional convertible debt and are working to close another financing facility for up to $20 million.

We are continuing to explore additional strategic partnerships, some of which could include a funding element as well.

Given the progress we have made on our strategic funding and the expected CAT M revenue ramp during the next several quarters, we believe we have sufficient funding to reach cash flow breakeven and maintain acceptable balance sheet optics.

Accounts receivable at June 30, 2018, were $21.4 million and included $3.4 million in currently unbilled service revenue resulting from recognition of our NRE contracts on a percentage of completion basis.

We have a large contract that's back-end loaded in terms of billings and other contracts nearing the end of the deliverables that are awaiting final billing.

Excluding the impact of unbilled service revenue, DSOs were 112 days, up from 101 days calculated on the same basis at the end of Q1, and continue to reflect the impact of billings being concentrated in the last part of the quarter.

Inventories were slightly up at $7.7 million.

And short-term debt from financing receivables increased by $2.9 million to end at $8.2 million at the end of June 2018.

Looking forward, we expect revenues for the third quarter of 2018 to be in the range of $13.5 million to $16 million as IoT revenues continue to ramp.

The wider guidance range reflects some caution about project timelines as new LTE-M devices are brought to the market.

We expect non-IFRS gross margin in Q3 to be above 40% and non-IFRS net loss per diluted share to range between $0.06 and $0.08, based on approximately 94.5 million weighted average diluted shares in ADSs.

Our guidance for Q3 non-IFRS net loss per share excludes noncash stock-based compensation, affected interest adjustments related to the convertible debt and other financings, and any other relevant noncash or nonrecurring expenses.

As Georges indicated, we continue to expect strong growth in IoT in the second half of 2018 and beyond.

The broadband business is expected to improve gradually, and 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 of CAT 1 combined with the ramp in LTE-M 1, 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.

Before I turn the call back to Georges, I'd like to just 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.

Georges?

Thanks, Deborah.

So just to conclude and pass it over to the questions, to stress again, that the overall momentum in our IoT business is very, very strong.

We're talking about a huge market opportunity and a unique leadership position for Sequans.

As the broadband business now -- challenges are behind us, we will be growing sequentially each quarter, driven mainly by the IoT business ramp.

The slope of our revenue ramp in the short term could be difficult to predict as this depends on the launch date of our customer product, but there is no doubt that the LTE-M and NB-IoT market ramp is imminent, and we are extremely well positioned to capture a strong portion of it.

So my team and I are very confident in the future of our company.

Thank you for listening, and I pass the call now to the questions.

Operator?

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

With the IoT business ramping in the first half, how should we think maybe about the second half of '18 versus the first half of '18?

I know there's some timing pushes you've talked about, but do you think the CAT M business could exceed $10 million in '18?

Or do you still think it can maybe reach even the $15 million you talked about earlier in the year?

Mike, I mean, definitely, today, we still believe that this will exceed the $10 million.

As I said from the beginning, we had a little bit less than $1 million in Q1 and repeating on a flat basis in Q2.

We will have some acceleration in Q3, and we'll get more acceleration in Q4.

So it's really a question, Mike, about those launch dates.

We have many products between September, October timeframe.

Some shipments could be in the quarter, some could be next quarter.

But on a global basis, we remain confident that we'll be, for sure, above $10 million CAT M business this year.

Okay.

That's helpful.

And with your strategic bet on CAT 1 that seems to be ramping well, can you talk about maybe the longevity of this business opportunity?

And how maybe you see that business 2019 and beyond versus the good ramp we're seeing in 2018?

Yes, absolutely.

I mean, this is a good point.

I mean, I see, definitely that the CAT 1 will stay -- I should never say this, but maybe forever, because there is no reason to take it out that.

There is really a segment of the IoT application where you cannot address it today with NB-IoT or LTE-M and you need CAT 1. All this related to order music or streaming music or video application and, to some extent, even voice calls, because even if LTE-M is designed to support voice, this will take at least, to operator, maybe 1, 2 more years to be ready and the quality level to compare it to the CAT 1, because CAT 1 will give you the quality level exactly as you have on your phone from voice call point of view.

So for all those good reasons, I will say that CAT 1 will stay there for a long, long time.

Now the impact in the short term -- in the short term, we could see some applications instead of going CAT 1, they go LTE-M.

But at the same time, we're seeing more and more applications going to CAT 1. So for us, the way we look to it, we look to a growth trajectory between 2018 and 2019.

We are -- we have very have good visibility, for example, on our module partner, where we have nice growth year-to-year.

In other words, our visibility for 2019 is very good, and we believe it's decent growth.

And our module guys that we have in hand, we know that they are expanding to new carriers.

As you see, for example, if you take now Sprint, they are deploying CAT 1; CAT M will be later on.

So all the application of IoT on Sprint as they are turning CDMA, they will be moving CAT 1. Also, you have the other reason that many applications that they started with CAT 1, but they are sticky, like metering applications and so on, they will stay for 3, 4 years before they switch over to LTE-M.

So again, to summarize all this, we see CAT 1 growth year-to-year, and we expect 2019 to grow again versus this year.

Maybe to be conservative, I see 20% or 25% of growth year-over-year on the CAT 1 between 2019 and 2018.

And beyond 2019, I mean, we'll see how this will develop.

But for sure, it will be there, a decent business that will continue in Sequans on CAT 1 application.

Last question for me, and I'll pass the line.

Just on the broadband business, can you give us any just color on how Q2 improved over Q1 in terms of maybe percent growth?

And how you see that slope of recovery into the second half of the year.

And maybe in '19, maybe if you'd give us some parameters how you see the business in '19 versus these '18 levels?

Yes.

I mean, we have one major -- as you know, on our broadband, we have the Verizon, and we have the emerging market.

On the Verizon, things settled today.

I mean, Verizon in the U.S. market, first of all, the business went back to normal, and on top of this, as I mentioned, we have an application with an MVNO adding extra business as well in the U.S. We have 2 new design wins reinforcing this revenue stream, with MVNO using Verizon network, as well, in this case.

So this business is fine -- the business in hand, I intend to say.

The emerging remains a little bit of a challenge, because as we've said in the past, all this is now CAT 4. Our CAT 6 is very weak there.

And we need to come with our new platform to recover more market share in the emerging market.

But the good news about this is that we have a lot of traction with the new application outside Verizon and emergings, in the U.S., but also outside the U.S. and Europe, and we have some of them are almost secured deals that will contribute to revenue growth next year in the broadband.

So for this year, we'll see modest growth.

We've got a good recovery so far, and we'll continue more or less same level quarter-to-quarter.

But we expect next year will -- mainly when we introduce this new platform of CAT 6, to accelerate, and obviously, once we get the new business beyond Verizon and the emerging business that we have in hand, turn into revenue, which will be next year as well.

And our next question will come from the line of Quinn Bolton from Needham & Company.

I just wanted to follow up on a couple of things.

Just the -- can you quantify for us, if possible, that the sort of revenue at risk due to the timing shifts in the CAT M business, it looks like it might be on the order of maybe $1 million to $2 million in each of Q3, Q4.

I just wanted to see if that was kind of the right ballpark?

The answer is yes.

I think more or less, this is the right ballpark.

Again, there is no risk at all for our CAT 1 business.

It's really because there's business shipping ahead and we have very, very good visibility.

And obviously, the broadband, as I said, and the vertical, now they are doing well there.

The CAT M is building up.

We have revenue, we have, again, I mentioned that we are shipping, but more than shipping, the fact that we have 6, 7 flows going this year.

Some of them, as I said, are on the edge, in Q3 launch, some more in Q4.

A slippage of one product there, you could have $0.5 million moving from one quarter to another on one deal.

So we are talking about the millions of dollars order of magnitude also between quarters.

Great.

And then just on the...

And again, Quinn, let me just -- I want really to stress this.

I said this previously, but we saw similar things in the CAT 1 world even if the CAT 1 ramp up was not that fast.

And here, we're not talking about the pipe is not less.

We're adding more in the pipe.

We're adding more design wins, and we have more and more designs turning to product launch.

It just only -- the initial phase of it, we still have them in hand, and the potential is the same.

It's just on -- if you look on a calendar quarter, you will see plus/minus impact, but if you look -- if you project this business over 4 quarters or whatever, there is no impact at all for us from this point of view.

And those CAT M projects that are sort of scheduled to launch sometime September, October timeframe, are those mostly smart city?

Smart home?

Tracking applications?

Can you give us a sense of the range of applications for those CAT M projects?

We have a lot in the range, what I call tracking.

But tracking can go between consumer device, or professional or telematic and automotive.

So we have a lot of this.

And it happens that we have many of them like this.

We have -- some of them are carrier SKU that we'll be launching by carriers.

As I mentioned there, we have 3 products going with carriers this year.

And we have, as I said, mainly the module partners, a couple of them, they are at an advanced stage.

Some of them, they are shipping, they have secured even some big deals that will be launching in Q4.

And it could be even going to smart homes.

Some of them are in the smart home area as well.

Great.

And then just following up on the broadband business.

You've mentioned on several calls the new cost-reduced CAT 6 platform, and you've sort of given us a sense it's going to ship next sometime next year.

I was wondering if I might be able to pin you down to a more specific time for that launch?

Is it first half?

Is it second half?

Any thoughts you could provide?

We'll be sending the product first half.

And again, the picture there, and even if I had to go back onto broadband, our broadband was not very diversified and focusing on 2 markets: Verizon and emerging.

Hence, any impact there, we saw the damage there.

But still, with those 2 markets, we managed to be very close to $10 million per quarter.

So I still believe in this -- in the potential we can capture from the emerging.

And with this platform, we can come back and get the market share on the CAT 6 platform because we have a very optimized solution there.

And beyond this, obviously, as I mentioned, expanding to other carriers, which will give us a more diversified business on the broadband.

Great.

And then just for Deborah, the $20 million credit facility, I assume that's going to be a straight debt credit facility?

We have a couple of options.

One is -- and yes, they're both straight debt with different kinds of terms.

Great.

And will you pursue that $20 million facility regardless of the outcome of the strategic collaborations?

Or is there a scenario where you sign the strategic collaboration in Q3, a second in Q4, that may obviate the need for the $20 million facility?

I think we'll see where the strategic comes in, and then we can adjust downward the -- or eliminate the debt option if it's not -- if it's no longer required.

And then we have a certain amount of flexibility on the debt sizing.

And our next question will come from the line of Scott Searle from Roth Capital.

Just to quickly follow-up on Quinn's question related to cash on the balance sheet.

Looking at the strategic options that you have out there, could you give us some idea about what that funding could potentially look like?

Are you thinking license fee?

NRE?

Or does this somehow have an equity component to it?

It sounds like you've got a couple of different options with this and the credit facility that should get you to cash flow breakeven.

But just kind of wondering what the discussion is at this point in terms of how that cash could come in from a strategic.

Scott, I mean, again, on the cash situation, let me stress again what we said, which is still -- I support my -- what I said on the previous call and I can repeat it again.

We don't need cash to go through the year for the company, even no debt facility.

Obviously, optics doesn't look good, that's why we are adding, if you want, the debt facility that gives us some option, if you want, even in terms of growth if next year, we accelerate fast, and we need some working capital.

So it's better to use this instead of going back to market and making a dilution.

And then in addition to this, as we've said, we have the strategic option that we are pursuing them, first of all, for the strategic interest.

And strategic interest is really developing the business for the company and the relationship.

So definitely, either any -- we are pursuing 2 of them.

And both of them, the main advantage of this is really business strategy.

In other words, even if there is no funding component while we're pursuing them.

Now it happens that in the 2 of these we're discussing, there is some funding component, and essentially, it includes all that you said before.

It could be scaling from licensing to some kind of investment as well, but you know, for the time being, just the confidential nature of this discussion, I'd prefer not to comment more.

Fair enough.

And just to follow up quickly on M1.

Not unusual to see at the early ramp of a market like this some delays.

But when I see it from a carrier standpoint, the networks are ready, the technology is available, you've been certified.

Are there other pricing issues that they're having from a service standpoint or getting their marketing plans online?

What is -- what's kind of the holdup from your perspective when you're looking at M1 really starting to hit this major inflection?

Well, I mean, very frankly, again, M1, this year, is really in the U.S., and the 2 carriers in the U.S., with M1, they are ready, even if it was [too smart.] But when you say ready, the deployment, larger scale, and then you go through testing and so on, you get some hics here and there and some modification that needs to happen, whether on the network on a software, globally, from device and so on.

So went through this, and it's more behind us, all this.

But this delayed a little bit the process in general.

Now what we are facing is not at all any pricing issue.

I mean, it's really project kicked off, launch decided and then we go to market.

There is no debate on this.

The only issue is just on the execution.

All that's left us today is execution, to take your product, fully certified in a sense, [tape] approved, and you can move it to mass production and volume and send to the street.

And this is a little bit -- you could have hiccups of sometimes modification of the specs, sometimes issues, when you do trials in the field and you find yourself that you need to add some software feature here, that delays the stuff.

Sometimes it's the server application, some -- so there are many issues from the system, end-to-end, that takes some time.

And again, we are not talking about quarters of delay; we're talking about weeks.

But those weeks on a quarter -- or on a calendar of a quarter put us a little bit on a more cautious approach.

If the order, if the shipment -- as I was speaking today, for example, I have order in hand.

I am not 100% sure if this will ship in September or it will ship in October, because a customer will be pushing to -- not to take them if he doesn't need to build the product ahead of time.

So all this give -- put us in a cautious approach, but we remain very, very excited and bullish on the market, on the launch, on the potential of what we are going to get.

It's just only a question of getting $1 million more or less within a quarter that, obviously, when -- because you are zooming in on a quarter, you see it big.

If you look to the potential, what we are targeting for 2019, you see it like it's nothing.

But that's how it is.

Got you.

Very helpful.

And then lastly, if I could, looking to NB1, or the Monarch N product, I'm not sure if I missed it earlier.

Have you talked about a timeline of when you expect to commercially have the part available.

And it's interesting to hear your comments as well in terms of how China is shifting a little bit.

It's been going on, I think, behind closed doors for a little bit, more so of entertaining the idea of CAT M1.

But could you talk a little bit maybe about the China strategy?

You're NB1 expectations for 2019?

And the dual-mode between M1 and NB1, how big of an opportunity is that going to be even in NB1-only markets -- or NB1-focused markets or applications where M1 could be used as an OTA for broader band applications to update the device, et cetera?

Well, I mean, let's start with China first.

As you know, in all the carriers in China, they launch NB-IoT, and to some extent, the government kind of pushed or stimulated the business a little bit to have some millions of units already deployed.

But in the same time, they realized that they need CAT M, because NB-IoT is very low speed, low latency, no mobility, many application, and it's more than NB and this is why you need LTE-M.

On the other side, which is quite interesting, you see in the U.S. where, to some extent, maybe Verizon was pushing a little bit to announce their NB, but even recently, AT&T, where they have an LTE-M network ready, and they say, well, I have a free spectrum, which is the guard band of 200 kilohertz, if I put an NB system there, I can have very, very cheap IoT that I can offer for people that are not looking for too much speed, like kind of, take as an example, a smoke detector or a kind of sensor, so why not using this as well.

And when you look really to the market, you look to Japan -- frankly speaking, almost 90% of the carriers now, they are clear that they need the 2, and as I've said in the past, if I am a carrier, I would be doing the 2, because it doesn't cost me anything; it's just only software.

So a software upgrade on my network, I enable 2 services, and I can have a comprehensive data plan offer from narrowband IoT up to higher speed, and I can really market my business in a smart way.

So this is what we are seeing, and as such, really 100% in line of what Sequans -- what we did in Sequans by starting with LTE-M and adding the NB software, which is, as I said today, it's today, we have a trial, we have design wins, we have advanced level of certification with carriers where we have our NBN -- NB1 solution.

So from our angle, we have the 2. I can ship the same Monarch platform, I can ship it LTE-M only, I ship it NB only.

And in the future, I will have my Monarch N, which is a cost-reduced version of Monarch, to support NB only for people that they are very, very sensitive to price.

In the meantime, and this is what I mentioned, carriers realize that even when you have an NB network, the speed of NB doesn't allow you to do photos, to do software upgrade over there in an efficient way.

So that's why more and more carriers -- because they have the 2 networks, LTE-M and NB.

Even when you have an NB device, they can turn this device to LTE-M mode to download the software and go back to NB.

And this creates a lot of interesting applications for Sequans because you can monetize this as well.

Because you can create a business model where the dual-mode nature is a plus in the service you are giving them.

And this is part of our go-to-market that we are discussing currently with carriers.

So in brief, for us, it's 100% in line of what predicted -- what we predicted.

We have LTE-M and the world adding NB, and we have the 2 solutions, and we can go with dual-mode or single-mode approach with our NB or LTE-M for all the carriers.

Great.

Just to confirm one last thing.

For IoT, this year, it's 2x to 3x what you saw in 2017 and looking for that to double again in 2019, correct?

Yes, absolutely.

(Operator Instructions) We have a question from the line of Craig Ellis with B. Riley.

First, I wanted to follow up on some of the comments around design win activity.

It seems like that continued to be strong in the second quarter.

Georges, the question is, is there any way to quantify what you're seeing through the second quarter and early here in the third quarter versus what you saw in the first quarter?

And how that impacts visibility as you look beyond this year into 2019?

Craig, I mean, in terms of design wins, very frankly, we didn't see any cooling down at all.

I mean, even -- my challenge is really the filtering of all those application.

I mean, we have on a daily basis, whether we are hunting new deals or we are getting people to ask through the carrier requesting solution.

So very frankly, the market is booming.

A lot of people coming with applications.

Some of them driven simply by replacing the 2G and the CDMA service, and this is really now -- it's a matter of fact in all the U.S., and all the applications need to move to this.

And some are -- with a new kind of application, we talked about the palette kind of tracking, or we talk about container tracking, we talk about logistics as a new application in general.

So it's very hard to go into the exercise, start counting units, because we are really -- we have big, big, long list of customers and design wins.

We, obviously, continue to focus on the top, I will say 20%, that they will create 80% of our revenue next year, which is another (inaudible).

At the same time, we have a long, long list of applications.

We are using more and more district distributors we are putting into place really to expand our business, not to have direct business, because, very frankly, some of the accounts were not able to handle them.

And just we're moving them to some distributor with whom we have relationship and we are training them to take those accounts.

So things are going really great, and I don't see anything going in the wrong direction here.

I mean, from quarter-to-quarter.

The next question is really a clarification, and this may be more for Deborah.

But with respect to the guidance for the third quarter, the range is a little wider than normal, it looks like.

And it sounds like that's due to just the sheer number of projects that are hitting in the September and October timeframe.

But as we hit the, really, the knee of the curve here with the IoT ramp, should we expect a wider range for the next couple of quarters?

Or is there just something unique that you're seeing this quarter?

And then beyond this quarter, we'd go back to what I think has been a narrower range in the past?

No, I mean, very frankly, the range, it's essentially really related to the initial start.

If you -- in other words, the caution there is that it's very, very hard to say -- when you look to the number, really we can exceed this range.

If we go -- if everything will go fine.

But obviously, if things delay, you could be more on a lower level.

So that's why we -- one of the debates we have this quarter because really, the market is starting.

And we're getting the orders, and they're getting turned.

I expect to have, for sure, much better visibility in Q4 and next year, because we'll have more revenue stream moving on, as when you look to our CAT 1. I can tell you, our CAT 1, I can predict it within almost 50k, 100k units in a quarter.

So CAT M is going to be like this.

It's just only a first phase.

Now, can we see this also in Q4?

We'll see, but it's really in Q3, this is more relevant, I tend to say, than in the future.

And then the last question, Deborah, we're still expecting cash flow breakeven at $20 million in revenues?

I think it really depends on the product mix.

But I think it's closer to, let's see, $23 million, something like that.

And at this time, I have no further questions.

Please go ahead.

Okay.

Thanks for all of you for the questions, and staying on the call and listening.

I hope to see you soon.

Many thanks, Sean.

Thank you.

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

Thanks for your participation and for using AT&T executive teleconference.

You may now disconnect.