Sequans Communications SA (SQNS) 2019 Q2 法說會逐字稿

Welcome to the Sequans' Second Quarter 2019 Results Conference Call.

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

Before I turn the conference over to our host, Mr. George Karam, I would like to remind you 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 financial 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, the potential for new strategic transactions and our objectives for future operations, are forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, 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 to the Securities and Exchange Commission.

Please go ahead, sir.

Thank you, Sean.

Good morning, ladies and gentlemen.

This is George speaking.

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

Welcome to our second quarter 2019 results conference call.

Our Q2 results continue to confirm that we are gaining traction in the IoT business, and the recovery of the broadband business is on track.

Notably, product revenue is up 49% sequentially in Q2 with both the IoT and broader businesses contributing to this improvement.

The other revenue category has a tendency to be lumpy and was lower than normal in Q2, but we expect it to grow as we have a strong pipe of vertical opportunities, specifically in the satellite space.

To give you more color on the main growth driver, the IoT business, both CAT 1 products and CAT M/NB, showed very nice sequential growth.

Our CAT 1 module for Sprint is moving very well, and the large opportunity with the European carrier we mentioned last quarter has been converted to an official design win for launch next year.

Also, we continue to see nice revenue stream via our CAT 1 module partner who continues to add new design wins in the U.S. and Japan.

We'll begin to see some volume transition from CAT 1 to CAT M on some CAT 1 location tracking applications beginning in the second half.

But this is a good sign long term because it validates the strategy of winning the customer early on with the CAT 1 solution and helping them agree to CAT M/NB if there is no need for CAT 1 features.

Also, we continue to see larger new business opportunities in the pipeline for CAT 1 solutions that require the throughput of CAT 1 and will not migrate to CAT.

Here, we have the advantage of being the only vendor with an optimized CAT 1 solution.

And as we mentioned on the last call, a new low power variant continues to garner very strong interest with some large potential volumes that could contribute to strong growth in IoT next year.

The ramp in LTE-M and NB-IoT continues to be the largest factor in the expected IoT ramp during the second half of this year, and we are pleased to see some backlog of orders driven by the design wins we have in the production phase.

We are seeing strong activity for CAT M in both the U.S. and Japan, and we have design wins and some large prospects for NB-IoT as well.

We are happy to say that 1 major U.S. project is launching this quarter, and the end customer has granted a new 1 to us that should double its volume next year.

After the U.S. and Japan, we expect to see Europe begin to ramp as well.

We are beginning to gain design wins for Europe, and it's just a matter of the time it takes for the design cycle and the certification process before we see IoT revenue from Europe begin to ramp.

We continue to convert opportunities into firm design wins at a strong pace.

In Q2, we added several new design wins for various devices, including bus, consumer and industrial trackers and smart cities application.

Last quarter, we spoke about design wins or those close to being secured, which, along with those already in mass production, represented over $250 million of estimated future earning.

With several more design wins entering mass production midyear and more opportunities nearing design win status, we now see that figure approaching $300 million of future revenue from these projects.

As that pipeline expands at one end, we continue to help our customers to prepare to launch devices at the other end.

We are on track to see more than 2,000 devices go into mass production during the second half of the year.

Based on design wins already in hand, we see the momentum accelerating.

And in 2020, we could see CAT M/NB revenue several times the 2019 level, which was affected by a slow start at the beginning of the year.

Turning to the broadband business.

We believe the recovery is clearly underway.

In the near term, the longevity of the successful Jetpack mobile router with Verizon serves as a foundation for revenue are granted by very strong interest in CBRS.

We are successfully converting this interest into design wins, and we have added several new CBRS design wins during the second quarter.

We believe we are very well positioned in this space with only 1 other vendor who's offering a solution, but a much more expensive one.

As noted on the last call, we are seeing the pipe building up again for single-mode CAT 4 and CAT 6 with the new customers addressing the developed market.

The requirement for 3G fallback, which will put a damper on our ability to address opportunities in the developed world, is disappearing rapidly as carriers move to turn off 3G to reform the spectrum for 4G and 5G.

With the market moving towards our sweet spot, single-mode solutions, we expect the broadband business to continue its steady recovery during the second half of 2019 and throughout 2020 as well.

We continue to have a strong and growing pipeline of business in various vertical markets with the new projects in all categories: satellite, avionic and public safety, military applications.

We have developed a strong reputation in this area and are very well positioned to continue with the steady stream of high-margin products.

Predicting the timing of the revenue related to these projects continues to be difficult, and we remain subject to quarterly lumpiness of the type we experienced this quarter.

But we continue to believe the vertical business has the potential to generate over $10 million per year in revenue going forward.

Turning now to our strategic initiatives.

We gather that some investors are discounting our unnamed strategic investors because we are not allowed to disclose their name.

We are pleased to report that the project is going very well, and the relationship is excellent.

With our competitors focusing their attention on the smartphone portion of the market, we expect to reinforce our current leadership in 4G solutions for non-handset applications in the 5G market as well.

The transition from 4G to 5G is much different than from 3G to 4G where they shift to us to a fundamentally new type of technology.

5G is really an extension of 4G technology.

We have a huge ramp ahead in 4G solutions for IoT that will eventually be software upgradable to 5G.

And the demand for 5G solutions for non-phone applications will develop a couple of years later than the smartphones.

But the time to seize the leadership spot is now, and this is one of our key priorities.

As indicated last quarter, we believe we are very well positioned to complement various mass market device technologies with LTE for IoT connectivity via some sort of non-exclusive licensing arrangement with recurring revenue from [your wildest dream].

We are engaged with a few potential partners to develop this new go-to-market strategy.

And on the last call, we indicated that we were close to finalizing a new deal this time.

To update you on the status, some of the discussions have become more complex as we are potentially expanding the scope of this relationship.

Also, during Q2, we made significant progress on a new deal involving customizing our solution for a partner's particular use case.

We could expect this type of deal to involve some form of advanced payment as part of the terms.

We are hopeful that we will be able to conclude 1 or more of the deals under discussion in the second half of the year.

This would help enhancing our cash situation without creating dilution because our clear [plus] preference is to accomplish our balance sheet objectives while avoiding or at least minimizing further dilution.

But to strengthen our financial position while negotiating such deals and to provide a cushion during the second half of the year, we have obtained a backstop from 1 of our long-standing shareholders for up to $15 million of convertible debt and/or equity.

So we remain optimistic about both the ramp in product revenues and our ability to finalize additional strategic relationships.

As I noted on the last call, there is no doubt that the interesting value of our technology, our know-how, our existing relationships and our large pipeline of business is increasing all the time.

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

Deborah?

Hello, everyone.

I'd like to add some details about our second quarter results.

Our revenue was $8.1 million for the second quarter of 2019, an increase of 15.1% sequentially from the first quarter of 2019 primarily due to the higher revenue in broadband and IoT, partially offset by a decrease in other revenue from vertical customers.

Q2 revenue represented a decrease of 36% compared to the same quarter a year ago, and this reflected a decline in broadband revenue as we've previously discussed.

In the second quarter, we had 3 greater than 10% customers, 2 of which were distributors generally serving a number of OEM and ODM customers.

And if we look through to OEM customers served through these distributors, 2 of them were 10% customers in Q2.

Our third 10% customer was an OEM, which is also served indirectly by 1 distributor.

Gross margin in Q2 was 40.1% compared to 41% in Q1 primarily due to a decrease in other revenue and a higher portion of modules in the product mix.

This gross margin compares to a 39.4% gross margin in the second quarter of 2018.

Operating expenses were $9.8 million in Q2, down from $10.3 million in Q1, reflecting lower average headcount and lower sales and marketing expenses as there were no major trade shows in Q2.

Non-IFRS operating expenses were $9.4 million in Q2, down from $9.8 million in Q1 and from $11.4 million in Q2 2018.

Our second quarter operating loss was $6.6 million compared to an operating loss of $7.4 million in the first quarter of 2019 and a $7 million loss in the second quarter of 2018.

Our IFRS interest expense increased to $2.2 million in Q2.

And on a non-IFRS basis, interest expense was $1.2 million.

Our net loss in Q2 was $8.9 million or $0.09 per diluted share, or ADS, compared to a net loss of $9 million or $0.10 per diluted share, or ADS, in the first quarter.

The net loss in the second quarter of last year was $8.1 million or $0.09 per diluted share.

Our weighted average share count was 95 million shares in Q2 compared to 94.8 million shares at the end of Q1 and 94.5 million shares a year ago.

On a non-IFRS basis, our net loss for Q2 was $7.6 million or $0.08 per diluted share compared to a non-IFRS net loss of $7.8 million, also $0.08 per share in the first quarter and a net loss of $6.8 million or $0.07 per share in the second 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 adjustments related to the convertible debt and other financings and deferred tax benefit or expense related to the convertible debt and other financings.

Cash used in operations in Q2 was $5.7 million compared to $4.6 million in the first quarter.

Our cash at June 30, 2019, totaled $5.9 million compared to $7.6 million at the end of Q1.

This reflects our operating loss partially offset by $3 million in new convertible debt and the higher financing of receivables at the end of June.

Accounts receivable at June 30, 2019, was $12.5 million, an increase from $8.3 million at the end of Q1, reflecting the increase in revenues, invoicing of NRE milestones and the timing of shipments and billing.

DSOs were 113 days, up from 101 days at the end of Q1.

Our inventories decreased to $6.9 million from $7.6 million at the end of March, and trade payables were about the same at $7.4 million compared to $7.5 million at the end of Q1.

Short-term debt from financing receivables increased to a more typical level of $7.3 million from the $3.7 million we had at the end of Q1.

As George mentioned, we are continuing to work on finalizing 1 or more strategic opportunities, and we have about $3.7 million due to come in during the second half of the year from our French research tax credit earned in 2018 and from some grants.

Meanwhile, we have secured an offer of financing for up to $15 million of convertible debt and/or equity from a major shareholder to provide additional cushion in the event of further delays in the strategic deals during the second half of the year.

Looking at the near-term outlook, we expect our revenue for the second half of 2019 to continue to trend a sequential quarter-by-quarter improvement through the balance of the year.

Before I turn the call back to George, I'd just like to remind you that at the conclusion of this call, we will post a written version of our formal remarks in the Investor Relations section of our website on the Webcast and Presentations page, the same location where you will find the audio replay.

And now I'll turn the call back to George.

Thank you, Deborah --

So to conclude, I would like to stress that our 3 business segments are really doing and moving well.

As I said, the broadband is recovering with the new deals in the developed markets and for application, [CBRS] application.

The IoT keeps building up with CAT 1 as an established foundation that keeps growing, and CAT M/NB IoT ramp accelerating obviously first in the U.S. market, followed by -- is going to follow by Japan, where we have very good position today, and all the engagement that will come later in Europe when all those design win will be in mass production.

And last but not least, as you know, we keep adding and getting new project in vertical application that will -- that looks like a solid foundation and now an expertise for the company.

On the strategic front, as I said, our technology leadership and scarcity continue to attract partners.

We have many new engagement -- all -- many engagement, some of them already engaged previously and some even that we added in the last quarter, and we should conclude more in the second quarter.

This helps our financing but more important, it opens for us new markets and ease our go-to-market strategy for -- specifically for mass adoption of IoT.

So many thanks for listening.

And I would like now to open the call for questions.

Sean?

(Operator Instructions) Our first question will come from the line of Scott Searle from Roth Capital.

George, just to quickly nail down on the cash front.

So you've got $3.7 million coming in from R&D tax credits.

You've got the backstop for $15 million.

Is that at the company's option?

And have you determined the terms?

And also, as related to the strategic dialogue that you've had ongoing, it sounds like the scope is improving, I would assume then the dollar amounts were improving.

So is that overall pipeline from that initial customer larger?

And also, with the other, it seems -- sounds like multiple deals now that are starting to come into the funnel.

Does that overall increase the dollar amounts related to the licensing opportunity?

Scott, so essentially -- Scott, obviously, as we said, we confirm $3.7 million.

So when you look to the balance sheet, definitely, you need to take what we have end of June and project -- add to this $3.7 million, which is obviously secured because this is typical in France where we have tax credit, and those grants are always coming.

It's just only a question sometimes of timing.

The worst could happen is a slip of a couple of weeks.

But we're expecting this to get it in September, as we used in the past.

So this is a long -- don't put pressure on us.

And as I mentioned, we have a lot of strategic engagement, and we are talking about high single digit with -- and sometimes, even we have 1 deal which is really more than -- it's 2 digit, the discussion.

We are confident that one of those will close in the second half of the year.

But obviously, in light of all this, and mainly, really is not just only to provide some cautious, but also to put the company in a position to be stronger to negotiate those deals because it's never, I'll say, nice to be in a position when you're negotiating a deal and you know that you need the money tomorrow.

So we secured with 1 of our key shareholders, this offer.

So we have an offer on the table.

It's on the option of the company.

And obviously, the terms -- there are typical terms that we used to negotiate there that you have seen that we have done similar in the past, but will be finalized obviously when we draw down the money because it depends obviously on the market condition of our stock.

Got you.

And following up on the product front, I think -- are the top line really obscured that the product sales were up 49% sequentially, well ahead, I think of expectations across the board?

But just to clarify a couple of items in terms of new product development, where is the Monarch 2 and the Monarch N in terms of tape-out and certifications?

It sounds like that revenue will start to contribute maybe in -- from the NB-IoT standpoint at the beginning of next year.

And also, on the M1 front, I think you said you had 2 dozen design wins that are expected to ramp into production.

In the past, you talked about some deals that are potentially larger, hundreds of thousands.

Are those in those types of numbers?

Yes.

So Scott, I mean obviously, just to be clear that we have deals in NB-IoT, even we have design wins already using our Monarch solution today and even some in Japan.

And even next year, we'll have NB-IoT deals using the Monarch 1. As you know, Monarch 1 supports both CAT M/NB, and we are in very good position.

And you saw as well as some certification happening in Japan with NB-IoT.

So this is really related to design win activity.

As you know, we put our priority in terms of certification with carrier as the business, I would say, require, and we move the 1 carrier versus the other first just because we have deals there and we focus on the business.

In terms of Monarch 2, Monarch N, they are 100% on track.

And indeed, we should see them in Q3 as planned.

So you will hear more about it.

Allow me not to, I would say, give exact timing on this for competitive reason.

But the 2 chip are really moving well as announced and as planned.

The beauty about those chips, as we said, that we have a lower-cost solution globally.

Much lower power, 60% better than the first generation.

And we have a lot of extended feature in those chips.

And obviously, from positioning point of view, we'll be the only company in the western world able to offer a dedicated solution for NB-IoT while having in the same time a dual mode solution CAT M/NB.

And this is the Monarch 2 and Monarch N. As you know, the Asian competitor, they have only NB-IoT.

And the western, they used to have CAT M/NB dual mode.

And we're seeing a market developing where there is a need for dedicated NB-IoT low cost.

And this puts Sequans in great solution.

This will be -- obviously give us potential to win more design with the Monarch N on NB-IoT and drive our revenue next year.

Back to the types of products, we talk about the -- obviously, as you know, we have already products in mass production driving the CAT M, and we're talking about new deals to come.

I tend to say, yes, we have deals with -- we're talking 100,000.

And I tend to say, in the deals we have announced, without really pointing 1 specifically to keep this a little bit, we have 1 that can -- which is above 1 million units that we spoke about.

And this is really imminent, I tend to say, in terms of mass production.

So yes, we have variety of deals there.

As you know, as well, we have -- many of those deals are driven some by our module partners because our module partner addressing some of those deals and some in the -- a couple of hundred thousands unit per year, and we have a couple of them already in mass production or moving to mass production.

They even can reach 1 million unit potential.

Our next question will come from the line of Mike Walkley from Canaccord Genuity.

George, just building on the $300 million in future revenue pipeline.

Can you just give us kind of the time horizon of revenue and how you see that maybe building through 2020?

And I know you're not giving specific guidance.

But would you expect that the product revenue that was strong in Q2 to increase sequentially into Q3?

And could overall product revenue maybe reach 2018 revenues?

Mike, so I mean, obviously, the -- when we estimated the potential product revenue, we're setting this on the life cycle of the products.

And typically, we consider 3 years, except a few cases where we know that the project is really going to be shorter or longer, but in general, is really 3 years what we take there.

And as I mentioned, this will accelerate because you need to keep in mind that when we talk about potential deals and over 3 years, the 3 years are not, I would say, aligned because they are staggered, right?

I mean as you have 1 deal, so that's -- so the ramp, for example, now we have maybe close to 20 -- a little bit around 20 device in mass production already.

And we are going to get another

(technical difficulty)

One moment, please.

Ladies and gentlemen, please stand by.

Once again, ladies and gentlemen, appreciate your patience.

Give me just another moment.

(technical difficulty)

Hello?

Thank you.

And ladies and gentlemen, our host has rejoined.

Please go ahead.

Okay.

Thanks, Sean.

I'm really sorry, Mike.

I mean I was addressing your question.

So I was talking about the life of -- our future revenue is estimated over 3 years.

And obviously, the 3 years are not aligned because we have product already launching and others to come.

As we move forward, some of the design win will enter into volume next year and even the second half next year in our estimation.

So I want you to consider this.

But despite this, when you look to the 2019 and the growth potential that we can have in 2020, obviously we are talking about several times the revenue that we can achieve in 2019 because all this will add up as we move to 2020.

Regarding the short-term projection in terms of product revenue, allow me not really to give any guidance there.

I mean we remain to be -- frankly, we remain sensitive because you're talking about a few deals moving on in terms of product revenue.

And in general, we are pleased with the CAT M. It's moving well.

But we are -- we have also dependency on other product revenue, and we could have an issue that could happen any quarter.

So I don't want to give a projection, but we are optimistic on -- that we will be on target for the second half of this year.

We have a question from the line of Tristan Gerra from Baird.

Since the Huawei ban was enacted, have you seen any renewed interest from non-Chinese customers that previously were looking at using high silicon and any other impact that you may be seeing from those trends that are unfolding?

Tristan, obviously, I mean without commenting the geopolitical, say, impact of this that could be negative and so on for everybody.

But if we focus really on the positioning of Sequans, we have definitely a unique position there because we can take advantage of this, specifically in the NB-IoT area because all the NB-IoT technology has been originally driven by the Chinese and all the Asian customer focus on building NB-IoT and dropping CAT M are doing much from CAT M. On the other side, U.S., Europe, I would say, semiconductor company were building CAT M, and they did the NB-IoT just only as a version of software without major change of the cost structure.

And Sequans, we took the bet to start like this, but very quickly come with then a solution, which is NB-IoT only that looks like the Chinese version, essentially to address the remaining of the market.

And from this point of view, definitely, we have a highway in front of us to be almost uniquely positioned if the Asian, they don't come to this market to serve the market with NB-IoT only.

Because all our competitor, the closest to us in the western world, they have solution that they are dual-mode CAT M/NB, which as we have already, as you know, but they don't have a solution, which is dedicated NB-IoT.

So this is a plus for the company.

But it's very hard to predict the future on this business only as this is related to geopolitics decisions that can change over time.

Okay.

Great.

And any example you could provide in terms of NB-IoT applications in the pipeline in the U.S.?

What will be the type of market segments where we're likely to see that ramp over time?

I mean, first of all, you have -- obviously, there is an overlap between the technology CAT M/NB.

What NB can do, often CAT M can do -- that CAT M can do.

So the question is more to provide -- if the solution doesn't need more speed, then you can go to NB because you can get really a couple of dollar on the solution cheaper, and application, for example, any small tracker -- for example, all the buy here, pay here services that today, we have a lot of business in this in CAT 1. They can go to CAT M, but they can live as well with NB-IoT.

We have as well some unique positioning like, for example, in the U.S. today, T-Mobile, they have NB-IoT only.

They don't have CAT M. So if you're running on T-Mobile NB-IoT alone, so why you pay CAT M when you need NB?

Obviously, all the mass market where you have smoke detectors, all those CAT application, NB is much better, lighting application, all the smart cities.

So essentially, anything which is just only provide a sensor -- measure the sensor and send it back.

NB will be really the most optimized solution from speed point of view.

And obviously, it gives you the cost and so on.

And we have a couple of application as well related to smart city in Japan and a project, which is we are -- we're engaged in a product, which is 3 million, 4 million unit could be.

And NB-IoT is enough for this because it's all about 1 sensor to -- information to send back.

We have a question from the line of Ari Shusterman from Needham & Company.

Ari on behalf of Raji Gill.

So when it comes to operating expenses and costs, what steps have you done to reduce the amount of the company that tends to be profitable at a certain point?

So what we've said all along is that our objective is to average our non-IFRS OpEx at $9.5 million per quarter.

So we are on target for that.

And I'd say, we have no -- we're keeping those in line and not have -- not expecting those to go higher.

No particular additional cost-cutting measures are planned at this time.

What I can add maybe one thing.

Obviously, I believe Scott was talking about Monarch 2, Monarch N, which is the new platform where we put a lot of energy in R&D spending.

With this, and as you know, it's imminent to be in the market.

So obviously, we have less R&D spending on this program.

So the company, if you want, we are in a position to engage with the new project for the future.

And our plan was more to focus on some new projects, specifically the 5G, by using the existing resources.

But obviously, this give us a leverage if we want -- if we have pressure not to go full speed in spending on this and do further saving if we want to do.

But for the time being, as Deborah said, I mean we believe there is no need to go further below $9.5 million target to be a match.

Okay.

And I have one more quick follow-up.

So with regards to gross margins, do you have a long-term target gross margin?

And like what makes you confident that you'll be able to achieve this margin?

Yes.

The long-term target is to be close to 50%.

This is really a question of having the most of our revenues -- most of our product revenues being chip-based rather than module-based.

Already on our chips, we tend to have a direct margin that's closer than above 50%.

However, with modules, we're typically more in the sort of 25% margin range.

On the service revenues and licenses, of course, we have typically a higher margin, closer to 60% or 70%.

So when we get into a more scaled rate where chips are, say, more like 80% of revenues with maybe 10% modules, 10% service is kind of offsetting their margins, then we should get close to that target gross margin percentage.

We have a question from the line of [Gary Millman], private investor.

I'm sorry.

Sequans' stock has been out of compliance for about 1.5 months with the NYSE.

Is it more likely that it will come back into compliance by the stock price recovering?

Or will you be looking at doing a reverse split?

We believe it's more likely it will come back into compliance through an increase in the stock price.

And we have 6 months, as you know, to be in compliance.

Thank you.

And at this time, I have no further questions in queue.

Okay.

So many thanks for you attending the call.

Pleasure to have you with us and thanks for all your questions.

Operator, many thanks.

Thank you.

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

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

You may now disconnect.