Sequans Communications SA (SQNS) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Sequans First Quarter 2019 Results Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

Before I turn the conference over to your host, Mr. Georges Karam, I would like to remind you of the following important information in 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 financing positions, business strategy and plans, expectations for IoT and broadband sales and our objectives for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

These statements are only predictions and reflect our current beliefs and expectations with respect to 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 first quarter 2019 results conference call.

I'm pleased to report that the signs of improvement we were expecting in the first quarter have indeed materialized.

Broadband is improving.

CAT 1 is growing nicely, and CAT M/NB momentum continues to build as expected.

Only the vertical business was below our target this quarter.

We are very close to signing a large vertical deal that could have added $1 million to revenue.

Unfortunately, the project was pushed out at the last minute due to some corporate level changes at the customer organization, completely unrelated to Sequans.

Our cash position at the end of the quarter was lower than we expected as we had a bit of delay in collecting $2 million of receivables, and we had a low level of factoring.

Deborah will give you more details on that.

But I'd like to cover a couple of important points about cash before getting into other topics since this is, understandably, an ongoing focus for investors.

First, we believe we are close to finalizing a new strategic deal we've been working on for some time.

This deal will include a new business model for Sequans with a new go-to-market approach allowing us to expand our market share in IoT.

It is a multimillion-dollar deal bringing a new source of revenues based on licensing and royalties.

We are also working on a couple of similar deals that could materialize this year.

We have a lot of strategic interest from companies with complementary technologies that are lacking LTE connectivity, and we believe we have a unique position in the market that we can leverage.

Also, it's important to mention that during the second half we expect to receive about $3.7 million in cash from a combination of the research tax credit and grant proceeds from the French government, mostly in the third quarter.

Last, as you have seen from today's Form 6-K filing, we are adding $3 million of new convertible debt maturing in April 2021, along with the first tranche of convertible notes issued in 2015.

This will put us in a good position to manage through any delay in closing the new strategic deals.

So we want to point out that we are not depending solely on the trajectory of the ramp in product revenues to reduce our cash assumption -- cash consumption as the year progresses.

The pending strategic deals are key as they can enhance our cash situation without creating dilution, thanks to advance payments we expect to be included in such deals.

Meanwhile, together with the Board, we are continuing to explore the full array of possible alternatives and timing considerations for significantly strengthening our financial position and maximizing shareholders' value.

Since our clear preference would be to accomplish our balance sheet objectives, while avoiding or at least minimizing further dilution, we are concentrating a lot of energy on the strategic deals, while also making sure we are fully prepared to take whatever decision may be in the best interest of shareholders in the future.

There is no doubt that the intrinsic value of our technology, our know-how, our relationships and our pipeline of business is increasing all the time.

Turning now to the details of the progress we made during the first quarter.

We'll begin with the main growth drivers of the company, the IoT business.

We are extremely pleased with the traction we are seeing in our CAT 1 product.

The business with our CAT 1 module partner, Gemalto, which is now part of Thales after the acquisition, is doing very well and growing in both the U.S. and Japan.

They continue adding new design wins, including some large deals.

Also, we have finished the certification of our Sprint CAT 1 module and started shipping to several of our customer as planned.

This will be a new revenue stream within our CAT 1 business.

More important, we are pleased to see growing pipeline of new CAT 1 opportunities with a diverse group of potential new customers.

Specifically, we are working on a large opportunity with a European carrier, and we believe we are in a great position to win it.

Also, we have identified a potential opportunity to capitalize on our clear leadership in CAT 1 with a new low power, lower cost variant that would expand the market.

This innovation would make it clear -- would make it very difficult for other vendors to compete with us using their adapted CAT 4 technology.

We are getting strong interest in this approach from some large potential customers, and it's becoming clear to us that the CAT 1 market is going to be around in some form for a long time.

This is an area where our position as the only company offering an optimized CAT 1 solution makes us particularly well positioned to capture a leading share as we see greater long-term potential for this market, even after LTE-M and NB-IoT networks are fully deployed.

There are many applications such as audio streaming where CAT M falls short in terms of data rate, and CAT 4 solutions are too expensive.

We believe that despite some cannibalization by the CAT M/NB, the CAT 1 market size will be more than $400 million by 2023, and we are committed to maintaining a strong position in this segment.

Turning now to the CAT M/NB market.

As expected, our CAT M/NB revenue in Q1 was low due to the delay in the market ramp that we've been speaking about on the past couple of calls.

The good news is that the momentum keeps building up, and we are still expecting the revenue to pick up in the second half.

Several new Sequans-powered CAT M/NB devices will go into mass production around midyear, and we are starting to receive orders from them.

The total number of Sequans-powered CAT M/NB devices in mass production is expected to reach 50 by the end of the year.

Last quarter, we spoke about design wins or advanced design wins -- designs close to being secured, which, along with those already in mass production, represented an estimated $200 million of future revenue.

Many of those that were nearly secured at year-end were converted to fully secured design wins during the first quarter.

Counting all CAT M/NB devices already in mass production, design wins and those nearly secured, we now are looking at over $250 million of estimated future revenue represented by these projects.

Meanwhile, the pipeline of new opportunities continues to build with nearly double the number of opportunities at the end of Q1 compared with what had been identified at the end of last year.

In addition to more tracking and metering applications, we are seeing additional interest in asset tracking, such as pallet tracking that we discussed on our last call as well as some medical device application.

On the product side, we keep expanding the certification coverage of our Monarch CAT M/NB platform with carriers around the world.

We have introduced Monarch SiP on Verizon ThingSpace with very attractive pricing.

Remember, this is the tiny system in package solution we have codeveloped with Skyworks.

Last, but not least, we are getting very close to sampling our next-generation CAT M/NB platform: Monarch 2, which is our second-generation of dual-mode CAT M/NB chip and Monarch N, our dedicated CAT M/NB chip, allowing an extremely low-cost module for application requiring NB-IoT only.

The goal is to maintain our technology leadership position in IoT while capitalizing on our time-to-market advantage.

Turning now to the broadband business.

We believe this business has stabilized, and we expect gradual improvement as the year progresses.

We see several reasons to be encouraged as we look out past the current year.

First, we are diversifying our customer base with the 2 design wins we secured at the end of 2018 addressing the emerging markets.

The plan is to turn them to revenue in the second half of this year.

In the U.S., we are making good progress on the engagements we have on CBRS and enterprise router markets.

Meanwhile, the Jetpack business for Verizon keeps moving well, representing one of the longest-running products on its type.

So we are optimistic that the broadband business can achieve at least a similar level of revenue this year as it did in 2018.

But more important, we are seeing the pipe building up again for single-mode CAT 4 and CAT 6 with new customers addressing the developed market, namely U.S. and Europe.

In the first quarter, we have started a proof-of-concept phase on a very large deal, and we are in the design-in phase with 2 other major opportunities.

If we manage to secure them, our broadband business will recover completely and should show significant growth in 2020.

Finally, we have a strong and growing pipeline of business in various vertical markets.

We are now serving 3 general vertical market categories: satellite, avionics and public safety and military.

The Lockheed Martin business is going well, and we continue to add new projects.

Thales is our primary avionics customer, and this successful program has led to interest from other major player.

We're also expanding the number of public safety and military-related opportunities, again, with some large well-known customers, existing ones as well as new ones.

As I said before, a major project in this segment was pushed out due to customer-specific issues unrelated to Sequans.

But we keep building the pipe with the new vertical market opportunities, each with a multimillion-dollar NRE component.

These have the potential to contribute to revenue quickly once they become secured.

So we remain very optimistic about this business, even if it can be lumpy and the projects may take longer to close than we'd like.

As we've emphasized in the past, having strong relationships with various departments and levels with the operators' organization is one of our strengths as this is very difficult to replicate.

Our carrier relationships that we've been cultivating for a decade are deepening and expanding continuously.

Currently, we have formal strategic agreements with multiple operators in the U.S., Japan and Europe.

We also work with carriers in many other regions, such as Canada, Australia, Korea and China.

We are supporting CAT M/NB trials with several of them and have recently received accolades from one operator on the quality of our solution during an NB-IoT trial.

It's also worth noting that our operator relationships are not limited to cellular carriers.

We are also working closely with some major cable operators and new entrants.

We believe these relationships will continue to be a key differentiator and in addition to our technology will make us an attractive strategic partner to companies with complementary technologies who lack both the cellular connectivity and operator relationships we offer.

Let me now conclude with some highlights on 5G.

Even though we are still at the beginning of the ramp in 4G LTE for IoT, we are also fully engaged in mapping our future in a 5G world.

As you know, the 5G landscape covers 3 aspects: enhanced mobile broadband, massive machine type communications and ultra-reliable and low latency communications.

First, it's important to note that Cat M/NB will have a smooth evolution from 4G to 5G, and our latest generation of CAT M/NB platforms, namely, Monarch 2 and Monarch N that we'll be sampling soon, support software upgrade capability to 5G with the 3GPP Release 15.

There is a lot of buzz around ultra-reliable, low-latency communications for vertical applications.

Here we're talking about Industry 4.0, gaming, V2X, et cetera.

But the main focus of the 5G ecosystem now is around enhanced mobile broadband communication to serve smartphone and fixed wireless access market.

Our strategy here is to focus on 5G for fixed wireless access addressing consumer preferences and industrial applications.

The goal is to optimize our 5G platform for applications allowing us to differentiate from those building 5G to address the smartphone market.

Also this will give us different timing to launch our product as we need to align with the deployment of the 5G networks when they can achieve a high level of coverage.

After 5 years of research activity, we are now moving to the development phase, and we are very excited about this new market opportunity.

Our technology leadership and reputation built around 4G data devices as well as our relationships with cellular carriers will make us an even more attractive partner as 5G challenges become more complex than the current ones.

We also believe we can shine as the alternatives will be very limited and expensive.

Given our specialized focus on 4G, 5G, we believe we are in an excellent position to help our customers make a seamless transition and keep growing well into the next decade.

Now I would like to turn the call over to Deborah for some comments on the financials.

Deborah?

Thank you, Georges, and good morning to everyone on the call.

Before we discuss the Q1 results, I'd like to finish some old business from 2018.

As you may recall, when we announced our fourth quarter results, they were labeled as preliminary because we were still reviewing with our auditors the correct recording of deferred tax assets and tax liabilities related to our debt instruments with equity components.

Our annual report on Form 20-F, which was filed last week, contains the final adjustments, and we also call your attention to the correct comparative figures for Q4 contained in today's press release because the restated figures are slightly different from the preliminary ones we reported in February.

So if you're maintaining a financial model, you will want to enter the current figures for Q4 2018.

Now turning to the current results, our revenue was $7 million for the first quarter of 2019.

That's an increase of 15.9% sequentially from the fourth quarter of 2018 primarily due to the higher revenue in broadband and IoT partially offset by a small decline in revenue from the vertical business, as Georges mentioned, one large expected project was pushed out.

Q1 revenue represented a decrease of 37.4% compared to the same quarter a year ago.

And that change versus the first quarter 2018 reflected a decline in broadband revenue versus a year ago and the impact of some CAT M customer project delays in IoT.

In Q1, we had one greater than 10% customer.

This is a distributor generally serving a number of OEM and ODM customers, but primarily selling to one OEM in the first quarter of 2019.

Gross margin in Q1 was 41% compared to 43.3% in Q4.

This is primarily due to an increase in modules in the product mix and compared to 41.7% in the first quarter of 2018, mainly due to slightly lower license and service revenue.

Operating expenses were $10.3 million in Q1, down from $12 million in Q4, reflecting lower headcount and lower G&A expenses such as legal costs and bad debt expense compared with Q4.

The decrease from the first quarter of 2018 is also primarily related to lower headcount.

Non-IFRS operating expenses were $9.8 million in Q1, down from $11.7 million in Q4 and $11.4 million in Q1 2018.

The full effect of recent cost-reduction moves does not show completely in our Q1 results, and we continue to expect operating expenses to average about $9.5 million per quarter in 2019 on a non-IFRS basis.

Our first quarter operating loss was $7.4 million compared to an operating loss of $9.3 million in the fourth quarter of 2018 and a $7.3 million loss in the first quarter of 2018.

Our IFRS interest expense increased to $2 million in Q1.

And for the remainder of the year, we expect quarterly interest on a non-IFRS basis to be about $900,000 to $1 million per quarter.

Our net loss in Q1 was $9 million or $0.10 per diluted share or ADS compared to a net loss of $9.5 million or $0.10 per share in the fourth quarter.

The net loss in the first quarter of last year was $8.7 million or $0.10 per diluted share.

Our weighted average share count was 94.8 million shares in Q1 compared to 91.5 million a year ago and 94.6 million in Q4.

On a non-IFRS basis, our net loss for the first quarter was $7.6 million or $0.08 per diluted share and compared to a non-IFRS net loss of $9.4 million or $0.10 per share in the fourth quarter and a net loss of $7.5 million or $0.08 per share in the first quarter of 2018.

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

Cash used in operations in Q1 was $4.6 million compared to $7.5 million in the fourth quarter.

Our cash at March 31, 2019, totaled $7.6 million compared to $12.1 million at the end of Q4, reflecting our operating losses as well as late collections from several customers and less financing of receivables.

Since the end of March, we had collected $2 million and have no -- from our customers and have no collectibility concerns regarding the remainder.

Accounts receivable at March 31 were $8.3 million, a decrease from $13.2 million at the end of Q4 and DSOs had improved to 101 days, down from 122 days at the end of Q4.

We saw inventories decrease slightly to $7.6 million from $8.2 million at the end of 2018, and trade payables declined to $7.5 million from $9.4 million at the end of December.

Short-term debt from financing receivables decreased significantly from $10.3 million at the end of Q4 to $3.7 million at the end of March primarily due to the definancing of 1 large distributor who had not agree to go through our factoring facility.

As Georges mentioned, to improve our short-term cash situation, we are focusing on finalizing a strategic deal, which we expect to have a significant advance payment component.

And we have about $3.7 million coming during the second half of the year from a research tax credit earned in 2018 and from some government grants.

As an additional cushion to enable us to manage through any delays in closing strategic deals, we have issued $3 million in additional convertible debt to our current convertible debt holder.

The debt has the same terms as the other convertible debt that will come due in April 2021, except that the conversion price is $1.21, which is still a premium over our current trading price.

Looking at the near-term outlook, we expect our revenue for the second quarter of 2019 to continue the trend we saw in Q1 and to be better than the first quarter with continued sequential improvement through the balance of the year.

And before I turn the call back to Georges, 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 Webcasts and Presentations page.

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

And as an additional reminder, Georges and I will be participating in the Baird conference in New York on June 4 and look forward to meeting with you if you're planning to attend.

I'll now turn the call back to Georges.

Thanks, Deborah.

So just to conclude and to give you a little bit -- a couple of bullets to keep in mind as a summary of this call.

Again, from business point of view, at the helicopter level view, you see that our business is doing very well.

We continue growing our IoT business, and we are very excited about it.

We continue to expect obviously the CAT M to ramp in the second half of the year, and the pipe -- the momentum and the pipe and the design win potential are building up each day, and Q1 was really a good quarter from this point of view.

On top of this, what I could say the positive surprises from business point of view is that on the CAT 1 front that we always consider that this is quite a solid segment.

We're seeing more potential for this segment for the future with some new idea and new opportunity, but also with the new design win that we have secured just recently or close to secure.

So this has really give us more trend if you want to the -- more potential to the IoT growth year-over-year, and we remain excited about this.

And the other good news from business point of view, as I mentioned, is really the broadband where we, as you know -- all the growth we have managed to do in IoT in the last 3 years got offset unfortunately by the broadband losses, I will say, or a decline that we had in the same period of time.

And that's why we remain -- we didn't show growth at the top level.

But what we can say today is that, first of all, I mean, we're reaching the bottom of this, and we start to see improvement as planned for the second half.

So at least, in the short term, we see that our expectation and our [indiscernible] plan in terms of business is solid, but more important -- and this is really the good surprise of the quarter -- we are seeing quite few new opportunity where we are, as I said, where the proof of concept phase or very close to win, that they are -- have good potential, big potential.

And if we manage to secure them in this quarter at 100%, we can start planning a major growth on the broadband, I will say, for the next year.

That will come to complement all the growth we're doing on the IoT, and, obviously, all this is very positive.

Last, but not least, the other point is really on the strategic angle, and this is an important point.

We remain to be very attractive company from a strategic point of view, and this is obvious.

You don't see too many company like Sequans controlling those technology from IoT, 4G, 5G.

And this is creating a lot of engagement, and we're -- the good news here is that we have something that we are working on for a while, very close to be secured.

And we are very excited to count this as a new deal hopefully as soon as possible.

And in addition to this, we keep working as well on a couple of new ones that could be coming in the second half of the year.

So again, business and the strategic angle both are great.

It was a good quarter, and we remain very excited about the potential of 2019 and beyond 2019.

Thank you for your time, and I open now the call for questions.

Greg?

(Operator Instructions) Your first question comes from the line of Mike Walkley from Canaccord Genuity.

Georges, with the projects that you've highlighted representing $250 million of future revenue, can you help us think about the time horizon of those projects and how the revenue maybe builds into 2020?

And I know you're not providing any specific guidance by quarter or for the year, but do you think with the pipeline in the back half of the year that 2019 revenue will be higher than 2018 revenue?

Mike, so the revenue -- our estimation for future revenue in the pipe, the design win of a new CAT M/NB, we're estimating obviously for the life cycle of the product, which typically tend to be 3 years from full launch.

As for some of them, mainly when we go towards metering and so on, it could be longer going for 4, 5 years.

But in general, the majority of them are over 3 years from the launch of the product.

And regarding the second half -- the second question, which is your second half this year versus...

Total revenue for the year.

For the year.

So we remain -- very frankly, we start -- I mean, Q1 as I said, was -- we didn't see any major surprises in terms of shipment in CAT M. However, our plan for Q2 seems to be in line of what we are planning.

We start getting, as I said, collecting order for shipping in Q2.

We have quite a big number of products.

I mean it will be around midyear we'll be launching, and we still expect our sales around this year to happen.

I'm not giving really numbers for the second half.

I mean, there is always a challenge with the slippage of anything there that could happen.

But obviously, we expect to do more this year than what we did last year, I'll say, even on a half year or let's say on 3 quarters' revenue.

Okay.

And with the vertical market project postponed with some management changes at your customer, is that indefinitely postponed or should it come back in the models later this year?

And just overall how is the vertical markets pipeline?

Yes.

I mean, it's not bad.

It's just on an organization complexity that this can delayed.

I don't want to predict timing if this will -- because sometimes those things -- they could -- they tend longer.

Very frankly, it was almost 99% done, and something happened that we -- the deal put aside obviously.

All the activity was delayed a little bit for further decision.

However, there is good news on vertical.

It's not the only projects.

I mean, we have really a pipe, which is quite strong with 3, 4 other projects, all of them, they tend to be multimillion-dollar deals.

Some of them are with existing customers with whom we already did big projects so far and just only expanding or adding new application, new business.

So we are very, very positive, if you want, on the potential of this business.

Even if timing wise, it's always complicated because they tend to be one big projects planned.

And if this doesn't happen, we could see some impact on the quarter and see some lumpiness of this.

Okay.

Last question from me and I'll jump back in the queue.

Just with some of the CAT M/NB wins expected to go into mass production later this year, can you just add a little color on some of the end markets they are saving and the type of revenue opportunities you're seeing for Sequans on that product line?

Well, the end market is very frankly, very, very large in CAT M. And again, it's very complicated because we have some deals where we are engaged directly, and we are serving then customer.

And as you know, some others we are serving this through module partners, specifically Gemalto/Thales now.

And we know some of their projects that they have there.

The market is really still focused on U.S., Japan, a lot of good opportunity in Japan.

In Japan, you have a lot of metering activity where we are in.

We have a large panel.

We have a lot of business as well that we address as well in the telematic space.

And obviously, tracking an asset, tracking in general, I would say, all kind of tracking, which is expanding.

And I mentioned, we are seeing some medical applications.

So it's really quite large.

The complexity comes where -- to structure this in a way, which one will start first.

I tend to say what we are going to see first for this year, more telematic application, some as well metering and a lot of panel where I see there's a little bit of, say, some consumer tracking application as well.

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

Question on the cash situation.

So there's a lot of great detail in terms of shoring up your cash conversion.

As we kind of look to the end of the year and try to get a sense of what the ending cash balance could be, I was wondering if we could kind of talk a little bit about how we intend to get a kind of a higher cash balance.

You talked about the $3 million of new converts as well as potential grant proceeds from the French government and then in addition the strategic deal.

But I wanted to kind of get more details on that relative to the current quarter cash burn and how we should think about that going forward.

Well, I think, you also need to take into account that as the revenue ramps, we would expect to be running less cash as we go into the end of the year.

So as I mentioned, we have the additional $3 million of debt coming in.

The $3.7 million is -- while some of the grants has some timing questions, over $3 million of that from the French tax credit is certain.

So that we know that, that's coming in.

And then with the strategic deal, we expect that, that also has a large component that's upfront.

So from all of those things, we expect to bring the net cash burn down, and then obviously, as we get closer to breakeven, we're bringing less cash just in total.

Great.

And then switching, Georges, to the CAT M opportunity, you had mentioned momentum is building up and you expect revenue kind of to pick up in the second half as some of these designs enter into mass production.

I was wondering if you could talk a little bit about specific customers and the kind of the ASPs with respect to that business and how that will materialize throughout the year.

Well, Raj, obviously, customer -- it's very hard for me to mention customer if they are not public.

I mean but, obviously, you know that 1 big stream of this is our module partner, at least the one we named.

We have some small guys, but we have one of them, the biggest one is Gemalto.

We have -- I mentioned as well and this is public that we have an ODM in Asia addressing at least 4, 5 design win that we have, and this is Asiatel.

There is some public information on this.

And this is addressing various devices, I mean, some tracking devices in general for telematic, but also for other kind of application.

So this is what I could mention publicly.

We have a buy-here-pay-here service as well that we announced with Connected Holdings.

So these are the kind of application that we are going to see them in the short term.

I could not be more specific because otherwise we have some big deals if you want that we know the name behind Gemalto, but I could not say this before this is getting public.

Now -- and as I said, the market is U.S., but also Japan.

Japan is very, very nice.

I mean, we have a lot of very nice deals that we have secured in Japan.

They turn to be more in shipment -- full shipment end of the year, beginning next year, maybe some of them end of the year.

But they are quite meaningful because they tend to be metering projects and they go over multiyear contract, big deals.

And in terms of ASP holders, we're talking about CAT M around $4 chipset ASP in average.

This is what you should put in the model.

Great.

And last question with respect to the broadband business.

You're expecting it to stabilize and kind of improve throughout the year, and I think you mentioned it would be similar to 2019 revenue.

And you mentioned a few kind of ways to get there, one, the enterprise router market and also your diversifying your customer base in the emerging market.

I was wondering if you could talk about obviously the competition with respect to Huawei in the emerging markets and how you're kind of gaining the design wins competitively?

And has that given you confidence to kind of project broadband potentially being flat with last year?

Yes.

Well, Raj, I mean, let's say, the existing business of broadband, the one that we have in hand to whom we are shipping, as you know, we have the Jetpack business, which is shipping to Verizon and some of the annuals as well in the U.S. So this is going well.

And the good news here is that it continues to be moving well and give us some foundation if you want there.

And there is our emerging business, which is as well mainly we have the customer which is Genentech, one major one, that also is going well as well.

And we had some inventory issue in the emerging, but this is up solved.

So those variants if you want to stabilize, what I'll call it, some of the secured business that we have in hand.

Now in the shorter term and you are absolutely right, in the emerging, Huawei is capturing and capture a big part of the emerging market.

And this is what impacted, if you want, my customers, and that's why, by the way, we had some losses of market share at the end really in the emerging market, mainly on the CAT 6 product, not on the CAT 4. On the CAT 4, we still have an attractive solution that's very -- even if Huawei will not make major difference there.

But for sure, Huawei is taking some market share in the emerging to be very, very hard for my customers to take from them.

But they will never take 100% of the market because the carrier -- they don't like to stay with Huawei end-to-end, and they give them maybe mid-alliance market share on the device side, but they keep the other piece for other customers.

And here, what we are saying that we have a couple of design wins moving well.

They should -- 1 of them -- the 2 of them should start in Q3.

We should start turn them to revenue, and this is something we signed last year.

We have as well 1 market, which is we talk about it, Brazil, which is completely new.

We were not there, and we have a local manufacturing going well there.

And this is also another potential of supporting, if you want, the emerging market.

But the good news here really is -- beyond the emerging is really what's happening in the developed market, namely, U.S. and Europe, where we saw in end of last year and during Q1 a lot of new demand coming mainly for the CAT 4, CAT 6 platform, a lot on the CAT 4, where people are dropping the requirement of fall back They don't care anymore about getting 3G on the device.

And this is opening for us a new market.

And as I mentioned, we have today very close 3 deals.

Each one could be high single digit, if you want, on a yearly basis in terms of revenue.

One of them, we engaged in a proof-of-concept completely where the design is under testing and so on.

One, we're starting the proof-of-concept soon, and the other one is still under negotiation.

So this was really kind of surprise for me, if you want.

Not a surprise in a sense, we were trying to see this happening, and, finally, it's happening.

And this will support, if you want, the emerging market because we don't need only the emerging market.

We can get some business outside of the emerging, which is very important for broadband to give us the growth potential and not to have to face with the Huawei dominance in the emerging market.

Your next question comes from the line of Scott Searle from Roth Capital.

Just to get calibrated quickly, could you give us an idea what was broadband in the quarter?

And as we're looking out to the second quarter, it sounds like we continue to see a sequential increase.

It sounds like there's a sequential increase across all components of the business, CAT 1, M1, vertical markets and broadband.

Just want to clarify that.

And also then looking to the back half of the year, you talked about getting near cash flow breakeven.

Is that still the target?

Are you still feeling comfortable with that?

And then I had a couple follow ups.

So the first question was -- on broadband was -- so, first of all, IoT was over half of our revenues, and broadband was a bit more than 20%.

And again, Scott, for the broadband, you need to understand that it's very weak now, in a sense like the emerging is still at its limit, limit, limit.

Brazil is moving well, but this is going to improve, as you're saying, in Q2 a little bit and improvement will start to get even better in Q3, Q4 because we will have more business coming.

And obviously, the new deals I'm talking about that we engage for proof-of-concept, that will contribute to revenue more next year.

And you're right.

When you talk about the CAT 1, CAT 1 should continue improving quarter-to-quarter.

Obviously, we have the growth potential from Gemalto doing well.

This is really no surprise.

It's doing well and keeps building up, but also we have renewed revenue stream of Sprint module and new deal that I'm working on, big deal.

I am not sure if this will change, if it will come to revenue in this year, maybe potentially in Q4, but very likely Q1.

But in any case, we will exit the year with very solid CAT 1 that will continue to grow over the next year.

It's not going to stabilize.

It's going to keep growing the following year as well.

And in terms of cash flow breakeven for the end of this year?

So I think trying to get close to that certainly remains a target for us.

Yes.

And again, we're controlling the OpEx as Deborah -- we mentioned this.

So we feel comfortable about our CapEx staying at $9.5 million and below.

Depending on the gross margin, the breakeven point is around $20 million obviously.

So I don't know if we'll be there at the end of the year, but the target is really to approach it as much as possible, thanks to the ramp of all the component of the business.

Got it.

And Georges, just to follow up on the broadband front.

You had a comment earlier about some of these new design wins.

That broadband would fully recover.

Now you talked about 2019 being comparable to 2018 certainly implies growth in the second half of this year given where we're starting.

But a full recovery with some of these wins is what kind of quarterly revenue run rate?

Well, very frankly, if you have asked me the same question in Q4, and this is where I see -- it was obviously the expectation on the company and on the mindset of shareholders that is focusing on IoT and including me.

But to some extent, it was very pleasant surprise to see that the traction in the broadband in Europe and in the U.S. has not gone, and we have an excellent platform in terms of cost and performance where we have 0 R&D to do, but we can sell and make revenue with this.

And what happens is that if you ask me this question, I will tell you, well, broadband is going to stay maybe flat year-over-year.

And I'll be fighting to keep it in the range of $12 million on a yearly basis, which is kind of $3 million to $4 million a quarter.

But those new deals we are talking about, I see this can double.

This can go back to $20 million and why not above next year, if we have all these secured.

So this will give you the potential what we can do there.

We can go up to start getting $5 million, maybe $6 million a quarter on broadband if we have those deals secured.

Very good.

And just to dig a little bit more on the pipeline talking about that $250 million opportunity of secured design wins.

I think you said 50 will be in production or expected to be in production by the end of this year.

I was wondering of those -- in the past you talked about larger design wins that were over 100,000 to 0.5 million types of units.

How many of those you expect to be ramping into production in the second half?

And of those 50 design wins, kind of curious, is that 1/4 of that pipeline?

Is it 1/3?

Can you give us some magnitude of what that could represent once it turns to full ramp production?

Complicated, your question.

I mean we have deals.

Very frankly, when you talk about deals, in IoT, we have couple of them that exceed 1 million unit a year and some nice component -- some nice number around 300,000 unit a year.

And you have a lot in 100,000 a year.

So this is how you need to scale it.

If I look to the end of the year with the 50, I mean, we should have at least 10 of them, what I'll call them, above 300,000 unit a year on those 50 launching at the end of the year, and then the rest will be smaller.

And Georges, just to clarify.

On the strategic front, talking about some of these deals, it sounds like these are nonequity-based strategic deals.

These are going to be more license payment upfront and then a royalty on the back end.

Just to clarify.

Is that correct?

Absolutely.

Again -- by the way, again, when we talk about those strategic deals, even the one we have signed, the business is the main driver.

I mean in some situation, we could imagine equity component coming in.

This is what happens to us in Q4 for various reason, as I explained, but -- in Q1, right, beginning of Q1.

But when we look to the deal I am talking about here, there is -- I can say there is no equity component.

It's really a business deal, which is some licensing and royalty as I have mentioned.

Last question and I'll get out of here.

Intel's exit from the business, I think, is pretty profound and huge.

I think it's been greatly understated by the industry, but I'm kind of curious as to how that has driven dialogue in inbound calls since that has happened?

And also is there a target number for the market for M1 this year and next year that you're willing to put out there for the overall industry?

Obviously, the consolidation in the market is creating more traction around Sequans being the company that we could play all flavors of this silver IoT.

You could have even some people saying, okay, Intel is dropping the ball, while Sequans can make it.

And very frankly, this is -- I want to clarify it.

We are not playing in the smartphone.

And not playing in the smartphone is not about 5G only.

It's about the processor or the level of integration that a smartphone require in order to compete with the other major player that are playing in the smartphone.

Our business is really to focus on IoT, on fixed wireless, for industrials and so on which is big enough for a company the size of Sequans to bring this technology and differentiate it.

And obviously, not having Intel playing there has a positive side effect for Sequans in this game.

Having, I'll say, the main competitor focusing more and more on the smartphone give us more room to focus on the IoT and the space where we want to play and makes less competition in this space.

For example, Intel, they end of life their CAT 1 platform.

The traction on CAT 1 is not -- you could say because of our position, but also because you have less people as well that they can offer this platform because the other guys, they didn't do anything special on the CAT 1. They just only took their CAT 4 product and they put a software for CAT 1.

And now, in terms of size of the market, very frankly, again, it's a challenging question because depends on the ramp.

I always said that I'm looking and hopeful to see that this year in terms of CAT M market, I'm not counting the pure NB-IoT in China is to be in the range of 8 million unit.

I don't know if I'll be right or wrong.

We'll see at the end of the year.

If I compare to the last year, we have some number from analysts that were saying last year the total number were around 1 million, 1.5 million unit CAT M market, and it was only in the U.S. So this is what we -- what the last year number, somewhere between 1.2 million, 1.3 million unit.

And I am hoping this year that we can start reaching a high single-digit, if around 8 million unit.

Your next question comes from the line of [Gary Mine], a private investor.

Just a couple of questions.

Recently, you listed 14 additional positions on your website.

It seems like it's related to maybe a specific project.

But my questions are, is there some initiative that's going as a result of that and what is the impact on your expenses?

Most of the headcount -- the positions that are open in some cases are replacements and some are related to specific projects where we have -- where we don't have the competency in-house.

And a lot of times we use contractors for specific projects.

But we are always looking for permanent positions as well to replace existing contractors.

Okay.

So they are factored into your estimated...

Yes, this is included in what I said about OpEx.

This is all under control with the $9.5 million.

Obviously, we're always looking for talent.

We are looking for new blood and so on.

So this is part of any company that we have a lot of project.

But also keep in mind that we have some of the projects when we talk about, for example, project with some NRE or some licensing and so on, they will take some resources, that they will be part of the cost of good, if you want, of the deal that -- where we could have as well some resources up so for this.

Yes.

I just asked this because it's unusual to see so many in a short period of time.

My other question.

Georges, you had estimated that there would be 20 new CAT M devices shipped in the first half of 2019, and it sounds like that we won't reach that number.

But how many have we shipped or how many has Sequans shipped so far or how many devices including Sequans CAT M chips so far in the first half?

In this year, you're talking about 2019?

Yes, 2019, yes.

Very frankly, what I said, in Q1, we didn't ship much.

We shipped in Q1 below 100,000 unit.

Sorry, I meant unique devices.

You'd estimated there will be 20 new devices shipping in the first half.

New devices.

I mean when we have devices in production, some of them, as I'm mentioning, they are part as well of the module lender.

For example, you have many under Gemalto and so on.

So I need to track this in detail to give you exactly.

But all those devices we mentioned, they are in mass production.

We have some of them.

They are currently in mass production.

And how much is the...

About a dozen.

Yes, around a dozen, if you want, in mass production currently.

Again, when I count dozen, I am giving you under projects.

I am not -- Gemalto is not one.

It could be 3, 4 behind Gemalto, for example.

Understood.

Last question.

You have a relationship with Geotab in your CAT 1 product with -- in their GO8.

Is that relationship ongoing with their new GO9?

Yes, absolutely.

We are in the GO9.

Geotab is one of our customer, and they use -- they go on many carriers and we ship to them.

Some of them are with us like T-Mobile, Verizon, Sprint with some details like this.

And unfortunately, we're at the top of the hour.

I'd now like to turn the conference back to the company's management.

Okay.

Thanks, everybody, for your time and for all the questions.

Looking forward for our next conference call in a quarter time frame.

Thank you.

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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