Sequans Communications SA (SQNS) 2018 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the Sequans Fourth Quarter And Full Year 2018 Results Conference Call.

(Operator Instructions).

As a reminder, this conference is being recorded.

Before I turn the call -- conference over to your 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, expectations for IoT and broadband sales, and our objectives for future operations and potential strategic partnerships 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 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.

Thank you, Greg, good morning, ladies and gentlemen.

This is Georges speaking.

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

Welcome to our fourth quarter and full year 2018 results conference call.

I'll start by saying that we have begun a new year by finalizing a very important strategic investment.

Through the purchase of warrants to buy Sequans stock this company is investing approximately $8.4 million to accelerate the development of our 5G product roadmap.

It will allow -- it will also allow us to forge an important strategic partnership.

As confidentiality is very important to our new investors, we cannot say more about the deal beyond what appears in the press release this morning.

This company has done a lot of homework and we are gratified that they have chosen to invest in us.

We believe this investment demonstrates that our technology leadership continues to be recognized for what it is, a very scarce and valuable resource.

Turning to our results.

2018 was a good year for the IoT business, with year-over-year growth of about 70%.

It wasn't the great year we have -- we had been looking for because the IoT growth was not sufficient to make up for the weaker-than-expected broadband business.

Our CAT 1 business grew very nicely, especially our CAT 1 chipset revenue, which nearly tripled year-over-year.

Although the trajectory of our LTM revenue stalled during the second half of the year because of a 6-month delay in the market, revenue from LTM grew more than 50% year-over-year.

Some additional temporary issues with channel inventory concerns and delays in closing a couple of vertical deals during Q4 contributed to a weaker-than-expected finish to the year and made Q4 well below the usual revenue run rate generated by our mature shipping products, specifically broadband vertical markets and CAT 1 IoT products.

However, the situation is definitely improving and we expect to be back to normal in these area in Q1.

The inventory in the channel is resolving and we have already closed some of the vertical business that was pushed out from Q4.

The issues that held us back in 2018 seem to be mostly behind us.

We believe Q4 was the low point and revenue will improve significantly in Q1 with accelerating growth throughout the remainder of 2019.

We'll discuss our specific reasons as we go through each of our businesses.

Turning to the discussion of each business.

I'll begin with IoT.

Our CAT 1 business had been going well particularly with Gemalto, our module -- our main module partner.

As noted, CAT 1 chip volume tripled in 2018 with a more moderate increase in module volume as the expansion of CDMA activations in the second half of last year has impacted the shipment to one of our major CAT 1 module customers.

Looking ahead, we have good visibility on the CAT 1 business.

We are targeting further growth in 2019 as the Gemalto business continues to perform well and as new products come on stream.

On the CAT 1 module front, we will start shipping module supporting Sprint network to a couple of customers in Q1.

And we are seeing a nice traction on this version of the market.

It's important to remember, however, that we are expecting some customers to migrate their business from CAT 1 to CAT M as the CAT M networks mature, which will temper the CAT 1 growth somehow, even though it will contribute to the CAT M ramp.

As everyone is well aware the momentum in CAT M halted temporarily due to the extension of CDMA activations, which affect the transition from 2G to CAT M for some customers who had 2G inventory or chose to delay projects over concerns about network coverage and future results.

This situation caused some of our channel partners to have inventory and in Q4 we chose not to force LTM chips into the channel in order to avoid burdening 2019.

Nevertheless, in 2018, we grew CAT M/NB volume and revenue more than 2x compared to 2017.

We believe doubling our volume is significant, even if it's from a small base.

In fact, even if the CAP M/NB market has developed more slowly than expected, we have been in the market winning business while our competitors have been trying to bring a solution to market.

Our Monarch platform is already certified all over the world.

Just recently, we finished CAT M certification in Australia and we are about to complete certification of our CAT NB solution with European carrier.

We are also extending our strong partnerships on CAT M with carriers in Japan to include CAT NB as well.

Very successful CAT NB testing and trials in the U.S. are being completed.

And we expect the first CAT NB devices to be launched by midyear.

Meanwhile, we are also engaging on CAT NB with non-cellular service providers in the U.S. as well.

To give you the update as of the end of 2018, we have shipped close to 1 million CAT M/NB chips for devices that are in mass production.

While less than the annual volume we expected, this remain a significant milestone as this reflects a sizable market share and confirmed our advances and readiness with carriers worldwide.

As you know, carriers certification criteria are constantly expanding and new networks in various regions of the world are being upgraded to support CAT M/NB.

Every device that runs on a carrier's network has to be certified.

There aren't any shortcuts.

So we maintain our confidence in our competitive position as we continue to gain traction.

During the fourth quarter, we converted several more LTM or NB-IoT projects in our pipeline to design win status.

On the last call, we mentioned having over 60 CAT M/NB design wins or advanced designs close to being secured that represented future revenue of at least $140 million over the collective life of these deals.

Now we have over 75 CAT M/NB projects that represents more than $200 million of future revenue.

In addition, our pipeline of new opportunities continue -- continues to expand giving us a line of sight to an ever increasing level of future revenue for CAT M/NB.

At the Consumer Electronics Show in January we had potential new customers proactively seeking us out for meetings as well as current customers proud to showcase their devices based on our technology.

There was a lot of interest in the asset tracker live demo where we used a new location of things technology.

It's a cloud-based location of our LTE technique developed by a partner, the name of the partner is Polte, integrated into our Monarch platform.

You can take a look at the video we have posted on our website if you haven't already seen it in order to better understand what all the excitement is about.

This is part of our ongoing effort to tailor solutions to various use cases rather than expect customers to live with the one-size-fits-all solution.

For an asset tracker application, that only needs accuracy of 50 to 100 meters, we now offer this solution that works without the need for GPS and which consumes less power, has lower cost and works indoors as well outdoors.

This adds to our previous Chloe offering where we have an integrated solution, hardware and software, with a GPS from STmicro for tracking applications that need more precise location accuracy.

We believe one of our competitive strength is having a variety of solutions optimized for various use cases.

One interesting example of an asset tracking application is our work with Polymer Logistics.

They demonstrated that pallet tracking device that eliminates fire risk by using standard AA batteries rather than lithium and can work up for 3 years depending on the reporting period.

It's small enough to fit between the pallet slabs so the forklift won't damage it and does not have to be removed for washing plus it includes temperature and accelerometer sensors.

Pallet tracking is a very interesting potential opportunity with a total available market that can eventually be very large.

Since there are billions of pallets worldwide that may someday be tracked.

When you stop to think that something like 20% of these pallets are lost every year, the potential savings could be really significant, especially when you add the potential savings from avoiding damage or spoilage with various types of sensors.

As we think about some of these applications, we begin to get a real sense of how successive generations of LTE chips for IoT that are even smaller, more power efficient and less costly could continue to revolutionize some businesses.

We are well down the road on our next generation of LTE- M/NB chip and I will talk more about that in a moment.

We've also probably seen that we've already made a few announcements ahead of Mobile World Congress next week together with our long-term partner, STmicro, we have developed a dedicated extension board for the STM32 development kit in order to combine our expertise in cellular connectivity with ST's expertise in low power MCUs into an easy to use solution for developers.

We also indicated that the next step on the path to integrated solutions will be to add STM32 MCU to our CAT M/NB module to create an all-in-one solution, which will be available later this year.

As we all know a major segment of the IoT application started around the MCU, then developed to require short-range connectivity such as BLE and Zigbee.

We believe that the significant portion of those applications will require CAT M/NB cellular activity.

Hence our focus to expand our market reach through partnerships with major MCU players such as STmicro.

An upcoming Sequans power device that everyone can appreciate is the recently announced smart wearable for babies, the Neebo.

It's the size of a penny and fits on a newborn baby's wrist to monitor vital signs and perform other functions that provide peace of mind to parents.

It's truly a tiny device for a tiny person.

As the clear technology leader, we are again raising the bar for the industry with our second-generation Monarch platform that we have just announced.

Monarch is already the world's most advanced LTM and NB-IoT solution and Monarch 2 will take advantage of all the field and customer experience we've gained over the last 2 years to provide a quantum leap forward in security, power consumption and integration.

Monarch 2 brings several significant advancements including a government-grade integrated secure element, enabling integrated SIM.

60% improvement in power consumption, beating the already industry best level of Monarch and an industry-leading high level of integration with MCU and location engine that further simplifies and lowers the cost of IoT device design.

More important, Monarch 2 will leverage our Monarch mature certified software and allows our customers to seamlessly migrate to the second-generation platform reusing their existing application software.

We continue to expand and refine our ability to address different market needs with optimized solutions at different price points.

We have Chloe for trackers requiring GPS and Monarch SIP to deliver an ultra-low size, certified and ready to go system in package that will ease and simplify IoT cellular design and make it look like Bluetooth.

This is our value proposition to customers and an important point of differentiation.

Our competitors are just introducing their first generation all-purpose solution that won't be equally suitable for every IoT application.

Turning to the broadband business.

Q4 was below our expectations mainly due to further weakness from the emerging markets.

In fact, we had a good business with BOLT in Indonesia and unfortunately, the Indonesian government has terminated their frequency permit and a smart friend telecom took over their 4G operations.

Consequently, our customers shipping to them halted production and we are waiting to see the final outcome of this event.

As explained in the past, our broadband business in the emerging markets has suffered from our decision to focus our R&D on the IoT business rather than on a second-generation CAT 6 product offer.

Also, the macroeconomic and trade concerns have caused extra cautious behavior in the market and created some challenge inventory issues that we are working through.

Still, we expect to see gradual improvement in the broadband business, even a little improvement in Q1, which tends to be seasonably -- seasonally affected.

Specifically, the design win we have landed in Brazil, plus another one we have secured in the last quarter, should help us increase our market share in the emerging markets and contribute a new revenue in the second half of 2019.

Also, we are pursuing new projects in the U.S. with one very close to becoming secure and continue to expect CBRS business to ramp where we have customers ready with the products fully designed.

Longer term, we expect to continue to benefit from greater, single-mode penetration as more 4G networks reach full coverage.

We expect more focus on growth from developed markets as the opportunity in industrial routers continue to grow.

We are planning for only gradual improvement from the broadband business during 2019, but we believe it can grow faster over the long term as 5G will be deployed.

As you know, we have been working on 5G technology for the past 4 years and we will be shifting more effort to this development in the second half of the year as we are getting the second generation of Monarch out to the market.

The vertical markets in Q4 were in the typical range of revenues but below our expectation.

We had several new projects expected to generate license and/or NRE revenue in Q4 so we thought that Q4 revenue from vertical markets would be above its typical run rate.

But delays in finalizing the agreements have pushed some of the revenue into 2019.

Meanwhile, we continue to anticipate higher vertical markets revenue in 2019 and remain positive on this activity as we are working on many new projects with existing customers and new ones that we hope to secure during the first half of the year.

On the strategic front, I have already spoken about the most significant strategic development.

The funding we have secured will provide additional cushion that's helpful to fund our roadmap and execution.

The overall level of interest from potential strategic partners remain high and we are always exploring opportunities.

Currently, there are interesting potential discussions in a number of area from company -- from companies with complementary technology and go to market capabilities and none of the deals we've done so far would preclude us from pursuing these others.

So we continue to remain actively engaged in looking at strategic opportunities.

To summarize, we believe that despite 2018 being a challenging year and the conversion of some temporary issues made Q4 even more challenging, we had a significant growth in the IoT CAT 1 business and we doubled the shipment of IoT CAT M/NB.

Hence, our belief that the low point is behind us and we should see sequential improvement throughout 2019.

This holds true mainly for IoT , but we should be also see improvement on a broadband with the new design wins we have secured.

The vertical markets business has a tendency to be somewhat variable on a quarterly basis but is certainly expected to grow in 2019.

Obviously, during the early stage of such a dynamic IoT CAT M/NB market, we'll continue to be affected by factors we can't control or even predict.

It's the nature of any emerging market.

But we firmly believe that our visibility will continue to improve as we add more operators, more customers and more projects for a variety of applications.

Longer term, we will accelerate the development of our 5G chip and extend our technology leadership into the next generation of cellular technology.

Now I will turn the call over to Deborah to discuss the financial perspective.

Deborah?

Hello, everyone.

I'd like to add some details about our Q4 and full year 2018 results and the outlook for 2019.

Our revenue for the full year was $40.3 million, IoT revenue increased 70% versus 2017 with CAT 1 revenues doubling which was more than offset by the 58% decline in broadband revenue while vertical markets category remained flat.

IoT accounted for approximately 50% of total revenue compared to about 25% in 2017.

Gross margin in 2018 declined to 40% reflecting a greater proportion of modules in the product mix.

Operating expenses increased year-over-year to $47.2 million reflecting higher headcount and other expenses as well as the impact of a stronger euro versus the dollar.

Financial expenses were also higher than 2017 reflecting the new debt added during the fourth quarter and the amendment to the existing debt, offset slightly by the extinguishment of $1 million principal of convertible debt.

You will note in our press release, we indicated that our results are preliminary.

This is because in the context of preparing our 2018 financial statements we determined that certain deferred tax assets and deferred tax liabilities related to the application of IFRS to debt instruments with equity components had not been recorded.

The expected accounting changes do not affect the cash position or the operating results for the current or prior periods.

The company has not yet finalized its review but the corrections are expected to lead to a decrease in the 2018 consolidated IFRS net loss and could also lead to a decrease of the 2016 and 2017 IFRS net losses.

No change to non-IRS results is expected.

Excluding this impact, our preliminary net loss in 2018 increased to $36.9 million or $0.39 per diluted share in ADS compared to $26.2 million or $0.34 per diluted share in 2017.

On a non-IFRS basis, our net loss for 2018 was $31.8 million or $0.34 per share compared to a full year non-IFRS loss of $21.4 million or $0.28 per share in 2017.

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

Now if you look at the fourth quarter, our revenue was $6.1 million in the quarter, a decrease of 41% sequentially from the third quarter, primarily due to the delayed ramp in CAT M and other customer and project delays in broadband and vertical markets.

And a decrease of 46.3% compared to the same quarter a year ago.

The change versus the fourth quarter of 2017 reflected a significant decline in broadband revenue versus a year ago and to a lesser extent customer project delays in IoT.

In Q4, we had 2 10% customers, 1 is a distributor serving a number of OEM and ODM end customers and 1 is an OEM.

Gross margin in Q4 was 46.9% compared to 35% in the third quarter of 2018 and compared to 41.7% in the fourth quarter of 2017.

A higher gross margin was primarily due to a higher proportion of chips versus modules in the mix of revenues.

Operating expenses were $11.7 million in Q4, up slightly from $11.5 million in Q3 reflecting higher legal fees and bad debt expense somewhat offset by a lower headcount compared to Q3.

The increase in the fourth quarter of 2017 is for the same reason plus taking into an account an unusually high favorable impact in Q4 2017 of R&D grants which totaled over $1 million.

During the fourth quarter, we began implementing several cost reduction measures by optimizing various support functions and realigning our R&D resources.

The full effect of these measures does not show in our Q4 results due to offsetting factors in the quarter, however, we continue to expect operating expenses to average about $9.5 million per quarter in 2019 on a non-IFRS basis.

Our fourth quarter operating loss was $8.9 million compared to an operating loss of $7.9 million in the third quarter of 2018 and a $5.6 million loss in the fourth quarter of 2017.

With the new debt financing put in place in September and October, our quarterly interest expense has increased.

For 2019, we expect quarterly interest to track fairly closely to what we saw in Q4, $1.6 million to $1.7 million per quarter on an IFRS basis and $800,000 to $900,000 per quarter on an non-IFRS basis.

Our preliminary net loss of Q4 was $10.2 million or $0.11 per diluted share compared to a net loss of $9.9 million or $0.10 per diluted share in the third quarter.

The net loss in the third quarter of last year was $7.6 million or $0.10 per diluted share.

Our weighted average share count was 94.6 million shares in Q4 compared to 79.8 million a year ago and 94.5 million in Q3.

On a non-IFRS basis, our net loss for Q4 was $9.4 million or $0.10 per diluted share compared to a non-IFRS net loss of $8 million or $0.08 per share in the third quarter and a net loss of $5.9 million or $0.07 per share in the fourth quarter of 2017.

And again, 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.

Cash used in operations in Q4 was $8 million compared to $1.3 million in the third quarter.

And our cash at December 31, 2018, totaled $12.1 million compared to $5.2 million at the end of Q3, reflecting the addition of $4.5 million of the new convertible debt and EUR 12 million of traditional debt, as well as the repayment of $1 million in convertible debt during the fourth quarter.

Accounts receivable at December 31, 2018, were $12.7 million, a decrease from $17.1 million at the end of Q3.

DSOs were 119 days, up from 114 days at the end of Q3 and continue to reflect the impact of billings being concentrated in the last part of the quarter.

Inventories increased slightly to $8.5 million and anticipate a higher levels of revenue and trade payables declined to $8.9 million from $13.6 million at the end of Q3.

Short-term debt from financing receivables increased by $800,000 to $10.3 million at the end of Q4.

And with the $8.4 million investment from our new strategic investor, which will appear on the balance sheet during Q1, the debt financing we secured in Q4 combined with the reduction in the level of operating expenses in 2019, we believe we have sufficient financial flexibility to reach cash flow breakeven.

Assuming projects during the second half remain on target, we continue to target cash flow breakeven or very close to it by the end of the year.

Looking at the near term outlook, we expect our non-IFRS results for the first quarter of 2019 to be better than the fourth quarter but given seasonal factors revenue will probably not reach the level of Q3 2018.

And we are continuing our recent practice of not giving detailed quarterly guidance until we have better visibility on the LTE-M ramp.

Before I turn the call back to George, I just like to remind you that at the conclusion of this call, we will post the 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 can find the audio replay.

As an additional reminder, George and I will be at Mobile World Congress in Barcelona next week and we will be participating in the Roth conference in Laguna Niguel on March 18.

And we look forward to meeting with you at one of these events if you're planning to attend.

I'll now turn the call back to Georges.

Thanks, Deborah.

So a few points to conclude and turn it to questions.

Obviously, while 2018 was a challenging year mainly as we said because of the decline of broadband and I will say the slow ramp of CAT M to compensate this decline, we feel very confident about 2019 and we remain extremely convinced about the potential of our IoT business.

We saw clearly that CAT 1 chipset revenue nearly tripled year-over-year between -- from '18 to -- from '17 to '18.

Knowing that CAT 1 is just simply very small step in comparison to the LTM NB-IoT potential.

So we should expect an exponential growth in CAT M/NB.

We just need to be patient until the market will start ramping.

We continue to see a growing pipeline of opportunities and we continue to secure new deals.

Last year, the focus was only on the U.S. market but we see now deals everywhere as the carrier are finishing their network upgrades.

Japan, Korea, Europe, Australia, name it, we are playing in all those regions.

While we think on CAT M/NB ramp, the interest level from Tier 1 partners has increased significantly.

And we'll expect to see more strategic deal to happen during 2019, and obviously, let me conclude by saying that we are extremely pleased with the new strategic investment we have announced.

This will help us accelerating our 5G roadmap and forge an important strategic relationship.

Thank you, Greg, I can turn now the call for questions.

If you don't mind.

(Operator Instructions) Your first question comes from the line of Scott Searle from Roth Capital.

Georges, for starters, on the 5G strategic partner, it sounds like you can't say a lot, but can you give us some more clarity.

Are there additional payments?

Are there some milestones here?

And is there any exclusivity related to this partner and/or the end markets that they participate in?

Scott.

Obviously, I want to avoid repeating myself, but we -- there is no exclusivity related so I could say easily.

No exclusivity related to this relationship and this doesn't preclude us from doing any other strategic partnership in the future.

As for the nature of the deal, I could not say more than what's in the press release and as announced this morning.

Okay.

Deborah, maybe I just want to make sure to clarify on the OpEx front, it seems like there was some higher cost, G&A was bigger in the fourth quarter, but you're talking about $9.5 million in OpEx average throughout here.

How quickly do we hit that?

And then in terms of the cash earned or getting to a cash neutral situation, you're still saying by the end of this year.

So I want to make sure to delve into that a little bit more in detail so that implies we're getting back to the high teens, to 20-ish kind of the exit rate from a revenue standpoint depending on the gross margins and mix of business exiting 2019 but we're not going to be back in the first quarter to the third quarter levels?

Is that correct?

So we're on a pretty big ramp into the second half and those OpEx, where -- when do we hit that kind of $9 million or sub-$10 million market OpEx, we can hit that in the first quarter?

We should be very close in the first quarter, I think, we'll still be at -- we'll be a bit above the $9.5 million average but we should see the benefits of the cost reduction measures coming in quite strongly in the first quarter.

Got it.

And then just in terms of the ramp that we're through, if we're getting to a cash neutral situation by the end of this year, it is a significant ramp.

So you're still feeling good about the visibility of this pipeline monetizing and design wins ramping into production, it's really the commercial timeline of when they start to ramp, is that what you're struggling with right now?

Just to be clear.

Yes, that's exactly right.

Okay.

And then Georges, if I could, just in terms of looking at the marketplace, just some other clarification, the timing, I'm not sure if I heard the timing of Monarch 2, the timing of the MB only solution when we will we have that, kind of, hitting commercially into the marketplace and looking for certification?

And then just what you're seeing competitively from a win rate perspective, you guys are racking up lots of wins.

You had a product that's been in the marketplace and certified for many, many quarters at this point in time.

What are you seeing on the short list in terms of building that pipeline of win rate?

And now I'll get back in the queue.

Yes, Scott, I mean we for -- I mean, we didn't say, I didn't say this but we will get those samples, Monarch 2 and NB by midyear.

I mean, this is the plan.

So we're very close to start something this.

And we will have -- again, this is very important position.

We'll have the comprehensive offer here because we have the dual mode CAT M/NB that some people they need this dual mode to get the roaming capability between -- or crossing regions or changing sometimes carriers that they have the 2 networks available but depending on the service, they can run it on CAT M or they can run it on NB, and this is what the Monarch 1 and Monarch 2 are able to do.

And Monarch N will be really pure NB, where the focus there is on cost of the solution to bring the module cost down below $5 and Sequans will be one, I intend to say, maybe the unique vendor that has the 2 solution in the portfolio.

And in terms of design win, I don't know if I get well your question, Scott on the second.

So well as I said very frankly, we have a lot -- we continue I mean, the pipe building and more than this, the conversions from new business opportunities, the design win is moving very well, I mean, I gave some number of the evolution between Q3 and Q4 but what we're seeing as one larger deal, much bigger deal and with more dollar opportunity behind it.

We're seeing as well expansion of the projects not only -- beyond the U.S. So we don't have all the deals in U.S., Japan is very dynamic, a lot of things happening in Japan but also Korea and other places like in Europe and Australia, as I mentioned there.

And I mean, we're still running for the 20 design I mentioned previously that we have some around 20 projects that some of them have been launched already and we're shipping for them and some will be launching in the first half of this year, in other words between now and June 2019.

And this is what will be fueling our initial ramp or initial acceleration of the CAT M/NB quarter-to-quarter in 2019.

Your next question comes from the line of Rajvindra Gill from Needham & Company.

Congrats on the strategic partnership.

Question on the update in terms of the new designs from Q3 to Q4 and your expectation that those deals will represent $200 million of future revenue versus I think, $160 million, $170 million.

You had mentioned that the deal sizes are getting bigger, the dollar opportunities are getting bigger.

I was wondering if you can elaborate on that point.

I think that's an interesting point.

And also, are you expanding your customer base with these new designs?

Raji.

In fact -- as we said the last -- we had around 60 projects, to mention around Q3 between fully designed, fully won, I will say they are in hand and other verticals to converge for design win and we said around $140 million.

Also estimating the life cycle of a project, I mean, there is a little bit of -- typically most of the projects they tend to be 3 years but some of them are 5 years so these are the assumption we have.

And this is how we count our dollar estimation there.

And we're seeing, what I said, larger deals because you're seeing, for example, more and more application in the metering and those projects tend to be in millions not in hundreds of thousands, if you want.

Lot as well of, we have in the tracking devices, in general, the asset tracking, I'm not talking about the personal or pet tracking, that they remain interesting opportunity but they tend to be a little bit more smaller.

Asset tracking are big, when we talk about the pallet tracking projects, you know the potential is really extremely huge and then even we are very, very extremely conservative in our dollar amount because we assume the penetration rate in terms of converting a pallet to become connected very low.

But very frankly, nothing prevents you from having all those pallets and all those assets tracked.

The solution we show at CES, it doesn't have even GPS, so you're talking about the solution where it has practically an LTM modem only, that's what you have, plus the battery, plus couple of sensors.

And with this, you are able to, by software, to track assets in the 50 meter to 100 meter position which is far -- which is more than enough for asset tracking application.

So those projects are important as well and big.

So -- and obviously in terms of customer raise, definitely we're adding number of customers.

We have obviously some module partner because there is 2 ways of looking to the projects from Sequans.

You have projects where Sequans is securing directly, could be some ODM in the middle, but essentially they are -- they tend to be big deals, we're talking about in general million plus unit that Sequans is securing directly.

And we still have funnel from our module partners where themselves are securing dozens of projects on their own, some could be small and medium and couple of them could be big.

So we're adding all this up to come to the number.

And definitely, we're adding more customers mainly to address regions like Japan, Korea, and Europe as well.

Okay, that's very helpful.

You mentioned that you believe that the visibility is improving in Q1 and that the inventory in the channel is starting to get resolved and that gives you confidence about the CAT 1 products from [M] products as well.

Could you elaborate in terms of where we are with the channel inventories?

Also, can you maybe elaborate in terms of when you expect these customers to start to migrate from CAT M to CAT 1?

And how do we think about the impact to CAT 1 business?

In fact, many, many question here, Rajit, but let me talk about the last one first of all.

The impact from CAT 1 -- our business from the CAT 1, we have chip business going through our module partners, which is specifically Gemalto.

So obviously, they address, in general, end-to-end market, lot of telematic, a lot of panel, even some metering applications and so on.

And those products tend to be, once they are secure, people they don't change the product overnight.

So in some situation they need CAT 1 technology and they will not evolve at all from CAT 1 to CAT M. And in some other situation, you could say, okay it makes sense to move to CAT M, but obviously they don't do it on the existing product they do it on a new product that they're refreshing the future.

I have, for example, one customer buying module from us.

They are contemplating CAT M, but very frankly, they are not in a rush on this because they want to be sure that the 4 carriers in the U.S. have CAT M network working before they switch because they want to play with the 4 carriers and as such some of them are ready with the CAT M, the others are not ready yet or they are deploying.

So all this creating as well give us more room on the CAT 1 business.

So we feel very strong for the CAT 1 business this year.

Obviously, for next year, we expect some of this that will develop -- will evolve to CAT M in 2020 but we -- in the same time, we believe this business will stay there because you will have many projects where you need voice, you need speed, where people will have all the good reason to maintain CAT 1 technology.

My estimation in the IoT market, you will have around 10% CAT 1 and 90% CAT M/NB.

So this is typically what we should expect in the future and it's -- and CAT M/NB will come more from new application, new market as well.

That's giving us the growth potential there.

In terms of visibility, and inventory we discussed about what happened, and here I'm talking really about 2 things, the IoT market specifically.

We had really a small accident on the CAT 1 that limited our module shipments in the -- on the last quarter because we have one major customer there buying module from us, I'm not talking about the Gemalto channel which was -- is doing well and we didn't have major issue there.

But one customer where he's buying module for the CDMA activation.

He put on -- he stopped turning from 2G to CAT 1 his product and used all the inventory of 2G because he has 6 months expansion.

And suddenly for us it was kind of stop shipping for 6 months.

So it's really temporary period and it's going away in Q1.

We start seeing this coming back now and we are confident about this.

On the other issue, I mentioned about the IoT was more related to the CAT M but the CAT M it was more, as we mentioned, we had very nice -- it started well last year in the first half, accelerated in Q2.

We felt like things are going well in Q3 and suddenly in Q3, we had all those issues about CAT M that some project deciding to delay because they felt like the networks are not ready.

CDMA activation affected some other projects.

And we had all this inventory in the channel stop there.

It's not the huge inventory because obviously it was the beginning of the ramp.

So it's not like a major issue.

It's just only an issue that -- if you want 1 quarter shipment and this is again supposed to be resolved and will go back to normal in Q1.

Okay, great.

And just last question then I'll get back into the queue.

On the 5G opportunity, how do -- if 5G restructure is going to, kind of, accelerate this year?

How are you positioned to benefit from 5G?

What challenges do you anticipate to move towards 5G?

And how do you expect to overcome them?

And along those lines, do you expect to see new revenue from 5G in '019 or '020?

Well, so first of all when we talk about 5G, we need to always keep in mind that it has many angles.

And one of it which is the IoT even if this is not when you read all the excitement and with the carrier talk about the 5G they're focusing more about the, what we call, the enhanced mobile broadband which is the high-speed millimeter frequency and sound.

But on the 5G IoT, this is exactly what we're doing.

Monarch 2 what we announced, this is a Release 15 capable which is what we call the 5G IoT, if you want.

So this path is fully under control and it's a continuity of all what we have done under 4G IoT to continue over 5G.

So there is no, I will say, no challenge at all for us and we are leading the market and it's happening.

On the other opportunity which is 5G enhanced mobile broadband, this is for us like the extension of what we start doing in the broadband on 4G.

And very frankly, the addition of 5G -- the application of 5G is giving us like fixed application with millimeter frequency band and so on.

It -- all those applications are giving us more potential, obviously, with higher ASP and so on.

There is a lot of push in the U.S. obviously, in terms of network to be ready and we'll hear about it this year.

We decided from the beginning as a company to work on the technology, to develop the foundation and to come to market just on time.

We don't want really to -- the competitive landscape there is not too much.

Not too many player can develop this technology.

If you count them they will not go to the more than 3, I'll say, or 4, if you start eliminating the Chinese, not able to sell in the U.S. You'll find that Sequans has a huge opportunity there to be another player because we control all this IP.

We have all this technology just only for us to take the technology and make a product and take it to market.

My feeling that the market for our application can wait for the 2021.

So that's why our thinking is really working.

We're accelerating, we'll be moving this year more actively in developing the product to bring something towards the end of next year for revenue in 2021.

Your next question comes from the line of Mike Walkley from Canaccord Genuity.

Congratulations on the strategic.

Just building on, kind of, that last question, Georges.

As you look at kind of the broadband business, soft now, but with some new channels building.

How do you look at your resources in terms of investing for your business between broadband, IoT and the new 5G opportunity with your strategic?

Well you know, I mean.

Mike, I mean, if you look obviously now and you look shorter, you'll say okay your IoT is not yet flying to the moon.

So obviously, from resource point of view, you could say it's crazy.

You're right you're not going to spend on the two front in the same time.

And that's what we did.

I mean, that's why we decided little bit to position the 5G a little bit in time where we stay comfortable in terms of market and to some extent the right decision for a company in the size of Sequans, but at the same time keep in the first stage the resources on IoT to come with the second generation of Monarch.

So our strategy today as Monarch 2 is going out to market mid this year, so the team if you want, at least the chip level, will have plenty of resources to accelerate the 5G there.

And definitely, the relationship and the partnership, the strategic partnership, are all those angles that can help Sequans speed up this roadmap and even complement the resources that we need to develop this kind of technology.

So this is how we're thinking about.

I mean, I could not say more, elaborate more about the detail there for competitive reasons obviously.

But we believe that we can move at some level of acceleration alone this year, the help of strategic partners help us to go faster and to secure it and we still have other partners that you can line up and obviously, not to forget you need to project 5G in 2020.

So in 2020, hopefully, our IoT will be going to the moon and then we'll have sufficient resources ourselves may be to scale further our own resources to expedite the 5G roadmap.

And just my follow-up question.

With a 75 plus representing $200 million of revenue and you talked about 2020 could be strong year for IoT.

Can you give us any color of just on the time horizon of the $200 million revenue?

And how do you see the build between now and 2020?

Well you know, I mean, I talked about 75 projects that we have secured or close to be secured.

And obviously, we mentioned that the pipe keep building.

We're talking about -- on a daily basis, we're getting new business opportunity and as I mentioned we're seeing more and more business opportunity in millions of unit.

So I'm expecting the pipe to continuing growing and so this will add up.

So projecting this to 2020 and beyond, hopefully this may be -- should be doubling in terms of potential projects that we have in hand.

That's -- I'm here looking a little bit in the crystal ball but I don't see no reason because there is an exponential -- the market is moving and then those projects will materialize and will have more deals in hand to feed 2020 and beyond.

The other question was more regarding the -- how we structure $200 million.

Obviously, we're talking about 3 years' life.

So with the -- with some kind of ramp from year 1 to year 2, year 3. So obviously for us, if you say 75 projects, they are not all yet in launch.

We are talking about 20 of them being in the market before mid this year.

So we're talking about remaining 40, 45 to come between second half and beginning of 2020.

So this is how we see it.

And from there, you need to -- you can average a little bit the ramp of all those deals over the coming 3 years.

And at this time there are no further questions.

Okay, thank you very much all for the questions, and obviously, for the time you spent listening to us.

Looking forward to talk with you and exchange with you on the next conference call in Q2.

Thank you, Greg.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T Executive teleconference.

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