Sequans Communications SA (SQNS) 2021 Q1 法說會逐字稿

Greetings, and welcome to Sequans Communications First Quarter 2021 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kim Rogers, Hayden IR.

Thank you, Joe. Thank you to everyone participating in today's call. Joining me on the call from Sequans Communications are Georges Karam, Chairman and Chief Executive Officer; and Deborah Choate, Chief Financial Officer.

Before I turn the call over to Georges, I would like to remind our participants of the following important information on behalf of Sequans. Sequans issued the press release this morning and was posted to the company's website at www.sequans.com/investors under the News section.

Before we start, I'd like to remind everyone that this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and potential financing sources. All statements other than present and historical facts and conditions contained in this call, including any statements regarding future results of operations and financial positions, business strategy and plans, expectations for Massive IoT and broadband and critical IoT sales, the impact of the coronavirus on our manufacturing operations, supply chain and on customer demand, the impact of component shortages and manufacturing capacity 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 rely on or 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.

And now I'd like to hand the call over to Georges Karam. Please go ahead, Georges.

Thank you, Kim. Good morning, ladies and gentlemen. Welcome to our first quarter 2021 financial results conference call. We hope everyone is healthy and safe. Sequans is cooperating globally with local regulations to ensure that all our people are safe. We continue to operate with efficiency and effectiveness despite the constraints we are facing because of the pandemic. Hopefully, soon this crisis will be behind us as the vaccination is expanding worldwide.

First quarter revenue grew by 40% year-over-year, driven by significant gains in our Massive IoT business that offsets the decline in the mobile router business. At the same time, supply chain constraints that delayed approximately $2 million of Massive IoT product shipments impacted our first quarter revenue, resulting in a 2022 -- 22% sequential decline. Module shipments were the most affected because of the PCB shortages, and related lead time increase. As a result, we had higher percentage of chips sales in Q1, which lifted gross margin to 50.1%, up 500 basis points from the prior quarter.

Despite a 22% sequential decline in revenue, our first quarter operating loss only increased by 7%, helped by stronger gross margin and lower operating expenses. On a year-over-year basis, the 40% revenue growth helped deliver a 25% improvement in our operating loss.

Since the beginning of 2021, Sequans has seen momentum in our sales funnel. Our 3-year lifetime product revenue pipeline rose by 20% to $600 million during the first quarter, which included a similar increase in design wins growing to $240 million. Massive IoT represents 80% of this funnel as it's currently the main growth driver of our business.

We also had growth in the quarter from CBRS business, and we continue expecting CBRS to become an important portion of our broadband IoT business. Note that this pipeline does not include services revenue generated mainly by our large 5G strategic deal and vertical business that continues to develop. I will discuss in further detail the performance of each category in a moment.

The buildup of our revenue pipe keeps us on track to achieve our stated goal of an average of 50% annual growth for the 2020-2024 period, even if 2021 growth will be below the average, in particular due to the supply chain issues. As we indicated on a prior investment event, we anticipate our served market to grow a little above 40% a year on average through 2025. We expect the additional growth to come from market share gains with our second-generation Massive IoT products in the near term and our high-end 5G NR Taurus platform in the latter half of the time range.

Before I move on to cover the business categories, I want to discuss the recently announced financing. Earlier this month, we closed a $50 million private financing with Lynrock Lake comprising $10 million of equity and a $40 million convertible bond. We are pleased to have Lynrock team as investors, whose long-term value oriented investment strategy and investor experience in the semiconductor industry demonstrates confidence in our product offering and business strategy. The financing removes any concerns regarding our balance sheet and Sequans' viability as a long-term player in the market.

We are now well positioned for the ongoing discussions with strategic partners and customers suppliers to maximize our opportunities in Massive IoT and Broadband IoT. Deborah will provide in-depth commentary on the financial results and the impact of the financing in her comments to follow.

We grew year-over-year and sequentially in Massive IoT and Vertical. As expected, the broadband category declined year-over-year and sequentially due to lower portable-related revenue -- portable router related revenue. For the remainder of this year, we expect the reduced demand for portable routers to be offset by the ongoing ramp in Massive IoT, a category we expect to be the primary growth drivers for Sequans in 2021.

New CBRS business and revenue growth from emerging markets within the Broadband IoT category should also help compensate for the reduced portable router related revenue. The Vertical category is anticipated to grow year-over-year with the revenue contribution from our large strategic deal and new satellite contracts.

A few key takeaways from the first quarter. Massive IoT grew by 30% sequentially and over 100% year-over-year. Both Cat 1 and Cat M/NB categories are contributing to this growth. Broadband IoT decreased by nearly 70% from the prior quarter and 8% from Q1 last year, primarily due to lower portable router sales as we expected. The vertical category grew nearly 20% sequentially and 15% year-over-year. This category includes the NRE revenue from the strategic deal with a Fortune Global 500 company for 3-plus years that we signed in Q4 2019.

We saw solid bookings with customers placing advanced purchase orders, with some covering the whole of 2021 and into early 2022, improving our visibility and ability to address the supply challenges. The $2 million of delayed product shipments was due to supply chain issues that reduced some material availability. We anticipate recovering these sales in the future quarter. Supply challenges remain a concern for the whole industry, but we don't expect this to result in lost business, only potential delays.

Let's take a closer look at each category, starting with Massive IoT. In the first quarter, both Cat 1 and Cat M/NB sales grew significantly. Most of the revenue here is driven by our first-generation Calliope and Monarch platforms, although we started Shipping our second-generation Cat M/NB Monarch 2 platform for some initial ramp. The Cat 1 Calliope business is ahead of plan with good visibility for 2021. Thales Gemalto, our module partner in this category, is shipping to many end customers in the U.S. and Japan for various applications such as metering, vending machines, security and asset tracking.

Also our direct Cat 1 business in fleet management and medical applications is exceeding our expectation. In Q1, we started the initial shipment for the European design win for a connected speaker. We expect this project to scale in the second half of 2021.

As we explained previously, Cat 1 category is required for specific Massive IoT applications, where a guaranteed speed above 100 kilobits per second and/or voice feature is needed, functionalities not supported by Cat M/NB. Such applications include specific security and metering devices and consumer terminals, such as wearable and hearable supporting voice and streaming music. Sequans is developing our second-generation Cat 1 platform, Calliope 2, to better address this market segment and expand our Cat 1 market share. Calliope 2 is highly optimized in cost and power with additional advanced and integrated features. Since the product announcement early this year, we secured Thales Gemalto and Renesas as our first module partners of Calliope 2.

Also, a large consumer electronics company is designing a connected hearable device powered by Calliope 2, and we are pursuing other target customers and partners. The chip has taped out, and we should receive samples for testing this quarter with sampling to customers in Q3. I remain confident that by year-end, we will receive multiple design wins using Calliope 2. This product is expected to fuel the growth of our Cat 1 business in 2022 and beyond.

On the other front, we have made progress in the Cat M/NB category of Massive IoT with a growing revenue stream from Monarch, our first-generation Cat M/NB platform. Monarch is now shipping to several design win projects for various IoT applications such as smart home, security and asset and car tracking. Thales Gemalto is 1 of our major Cat M/NB module partners serving this market. Renesas now has its own Monarch-based module certified, thus accelerating sales engagement with new opportunities.

Monarch 2, our second-generation Cat M/NB, is now in production and shipping. Withings, a design win we secured in January, is now in production with a smart body scale device shipping in the U.S. The Monarch 2 platform is the primary driver of our sales pipeline and design win growth. Customer traction remains excellent, and the conversion rate from design-in to design-win is impressive, thanks to the advanced integration and power consumption advantage of Monarch 2.

During the first quarter, we secured more design wins with Monarch 2 including 2 new projects with a major health care company, 2 new design wins in the metering segment and secured a recent design win for an air monitoring device. In the smart home and security space, design wins secured in January with Building36, a wholly owned subsidiary of Alarm.com and Napco, are progressing nicely.

We also won a new tracker design to provide buy-here-pay-here service for car retailers. Most of these design wins will be launching in Q4 2021. Also, the pipeline continues to grow weekly with the new opportunities with several deals landed in Q1 now in the advanced stage. Specifically, we are working on 3 new opportunities: 2 in the metering segment and 1 for an e-health application.

On the go-to-market front, Thales Gemalto, a module partner on the first generations of both Cat 1 and Cat M/NB products, has expanded the partnership, adopting our second-generation platforms. With Skyworks, we are shipping a System-in-Package, a tiny design integrating the Skyworks RF front end with Monarch. Now we are co-developing the second-generation of SIP based on Monarch 2 to bring to market this year. The integration level we can achieve with such a SIP, combined with its unique packaging characteristics, makes this product ideal for water and gas metering applications.

We continue to grow with our existing MCU partners: Microchip, NXP and Renesas. And we are developing relationships with a few others. These partnerships and the several large distributors we added last year have delivered design wins and significant new business opportunities. They are a key growth driver, expanding our reach and better positioning Sequans to serve the Massive IoT market.

In summary, our Massive IoT business is ramping as planned in our targeted IoT segments: metering, smart home and security, well-being and medical, asset tracking, and last but not least, wearable and hearable. In all these segments, we have Tier 1 customers, some currently shipping products, some designing products to launch in 2021 or next year and others working on closing. Most of this business has a long cycle before going to production that tends to be sticky as most of it typically deploys over 5 years.

Shifting now to Broadband IoT. Our broadband CBRS business is ramping according to plan, and we expect this segment to grow sequentially this year, making CBRS a new growth engine for Broadband IoT. In addition to the design wins we announced with AMIT Wireless, we further expanded our CBRS revenue pipe with 2 new customers. Our CBRS customers are building devices to serve the private networks for factories, utilities, campuses, stadiums and transportation hubs, such as airports and train stations.

Private networks for school district facilitating distance learning is now a critical application in the U.S., where a few customers are already shipping products integrating our CBRS Cat 4, Cat 6 modules. Also, we are working with customers focused on mobile computing applications and building CBRS tablet or Wi-Fi devices. Our ODM customers building Cat 4, Cat 6 CPE are gaining traction in the emerging markets. As such, our revenue generated from this business should grow this year and has the potential to double from last year's level.

Regarding the legacy broadband portable router business, we forecasted a sales decline at the end of 2020 due to excess inventory and an expected diminishment of demand from the COVID peaks of 2020. However a new development this month may further impact this line. Verizon announced a voluntary recall of the Jetpack, the portable router manufactured by Franklin Wireless, that includes a Sequans modem due to a battery heating issue. At this time, we're not sure when shipments of the Jetpack will resume and how sales to Franklin will trend in the second half of 2021. We are forecasting that the growth potential of our Massive IoT and CBRS and emerging Broadband IoT would offset the decline in portable router related business. Still this new factor may impact 2021 revenue by up to $6 million.

Looking ahead to the 5G Broadband IoT front, we continue to progress on our 5G Taurus platform development. Our focus applications here are fixed wireless access and mobile computing, followed by high-end industrial IoT and private 5G networks. Our strategic partnership with a Fortune Global 500 company remains on track with NRE revenue forecasted to increase in 2021 over 2020. This revenue is currently recognized in the vertical category. We expect to sample the Taurus platform next year and begin generating 5G product revenue in 2023.

We are also working with Renesas to optimize the 5G module solution as our partnership with them has been expanded from Massive IoT to 5G Broadband IoT. As you know, the French government selected Sequans to lead a consortium of 7 French companies and was awarded a grant of approximately $6.8 million. The first payment of the grant was received on April 1.

A key takeaway that I want to leave you with today is that the interest in our 5G solution continues to grow. Currently, there are ongoing discussions with potential customers and partners that we expect will deliver additional strategic deals as we approach the sampling date of the Taurus platform. Strategically, Sequans is well positioned in 5G, as evidenced by our partnerships, the numerous companies interested in being Taurus alpha customers and the French government grant. Sequans offers a unique solution in 5G fully optimized for IoT applications, and the scarcity factor related to this technology strengthens our position.

Switching gears to vertical category. As I stated, the NRE revenue from our large strategic partner is the dominant contributor to this category. This category also contains revenue from satellite, avionic, public safety and military customers, who rely on Sequans' ability to modify the software of our 4G and 5G platforms for their requirements. For the next few years, growth in this category is primarily from NRE revenue. But we will also have some product shipments, as is now the case with Lockheed Martin for the satellite project.

On our last earnings call, I stated that we anticipated winning a large satellite project. We won the business with a prime contractor. However, the prime contractor was not awarded the contract. While we are disappointed, we received a smaller satellite contract with EchoStar, and we are finalizing another vertical deal that can offset the missed revenue opportunity this year. Also, we are engaged in 2 new projects in the satellite and military space.

As I referenced in my opening comments, the current snapshot of our pipeline of potential business in Broadband and Massive IoT has grown to $600 million in product revenue, assuming a 3-year revenue cycle from the date the customer's device goes into initial production. Design wins increased as well and now represent 40% of the product pipeline or $240 million. We can add to this services revenue secured by design wins that exceed $40 million, with more potential opportunities fueling the pipe every quarter.

In summary, we have a record backlog, a growing pipeline and increasing design wins, which we see contributing to revenue later this year along with continued strategic traction in our 5G. Overall, Sequans is well positioned to achieve our stated goal of an average of 50% annual growth for the 2020-2024 period. This vantage point, we are modeling revenue to approach or exceed $100 million in 2022 and to reach its scale on a quarterly basis in 2023.

We continue to execute our long-term growth strategy on 3 fronts: continued growth in massive IoT and CBRS IoT; expansion of our go-to-market channels; and ongoing development on our 5G product line.

I will now turn the call over to Deborah to take you through the financial section.

Thank you, Georges. Good morning, everyone. I'll make some comments about the details of our first quarter 2021 results and other developments.

Our revenue for the first quarter was $12.3 million, an increase of 40.5% versus Q1 of 2020. While this fell short of our revenue goal, the shortfall was primarily due to the delayed shipments resulting from the supply chain issues Georges discussed. Sequentially, revenue in the quarter declined 22%, primarily due to expected seasonality and lower portable router related revenue, but as well due to the shipment delays from the supply chain constraints.

Revenue from Massive IoT in Q1 2021 doubled compared to the first quarter of 2020 and increased about 30% from Q4 2020. Both Cat 1 and Cat M/NB revenue increased in 2021, and Massive IoT accounted for over half of total revenue in the quarter. As expected, Broadband IoT revenues decreased significantly from Q4, primarily due to lower revenue related to portable routers. The vertical category, which includes service revenue generated by our major 5G strategic deal increased in Q1 2021 compared to both Q4 and Q1 2020. In the first quarter, we again had 3 greater than 10% customers. All are ODMs.

Gross margin in Q1 2021 decreased slightly to 50.1% from 51.3% in Q1 2020 and increased from 45.1% in the fourth quarter 2020 due to the revenue mix. We had a higher proportion of chip sales and license and service revenues in Q1 2021 compared to Q4 and a higher proportion of chip sales but much lower proportion of service revenues compared to Q1 2020.

IFRS operating expenses were $12 million in Q1, down from $12.5 million in Q4, primarily due to higher capitalization of R&D as we began capitalizing 5G development costs, lower fees related to convertible debt conversions and a more favorable euro-dollar exchange rate compared to Q4, partially offset by higher staff costs. Non-IFRS operating expense, meaning without stock-based compensation expense, were $10.8 million in Q1 2021, down from $11.7 million in Q4.

Our first quarter operating loss was $5.8 million compared to an operating loss of $5.4 million in the fourth quarter of 2020 and a $7.8 million loss in the first quarter of 2020.

Our net loss in Q1 was $11.4 million or $0.33 per diluted ADS and included a noncash loss of $4.1 million on the revaluation of the embedded derivatives related to our convertible debt. This compares to a net loss of $11.3 million or $0.36 per diluted ADS in the fourth quarter of 2020, which included a noncash gain on the revaluation of the embedded derivatives of $111,000. And the net loss in the first quarter last year was $15.3 million or $0.64 per ADS, and that included a noncash loss on the revaluation of the embedded derivatives of $5.6 million.

On a non-IFRS basis, our net loss for Q1 was $5.1 million or $0.15 per diluted ADS compared to a non-IFRS net loss of $8.5 million or $0.28 per diluted ADS in the fourth quarter and a net loss of $8.7 million, $0.36 per diluted ADS in the first quarter of 2020.

In Q1 2021, we had a foreign exchange gain of almost $1.4 million or $0.04 per ADS, most of which was unrealized and noncash, related to the revaluation of euro-denominated net liabilities on the balance sheet. Investors should be aware that possible changes in foreign exchange rates related to balance sheet items and the marking to market of the embedded derivatives related to the convertible debt can cause significant differences in net income or loss from quarter-to-quarter. And while the impact of swings in the value of the embedded derivatives are excluded from our non-IFRS presentation, foreign exchange gains and losses, whether realized or unrealized, are not excluded.

Cash flow generated by operations during Q1 was $9.2 million compared to $1.4 million used in operations in Q4 and $7.7 million used in operations in the first quarter of 2020. We received a substantial portion of the $5 million strategic deal with Renesas as an upfront payment in Q1. The cash related to the grant from the French government will be paid over 3 milestones with 25% upfront, which was received on April 1, and therefore, excluded from the cash balance at the end of March.

On April 9, we closed a $50 million hybrid equity and convertible debt financing in a private transaction with an institutional investor Lynrock Lake. Just under $19 million of these proceeds were used to repay the remaining amount of the existing convertible debt that was due on April 14 as well as prepayment of the venture debt that otherwise would have been paid down through April 2022.

Taking into account the new sources of cash received in April and the repayment of debt, our cash and short-term deposits on a pro forma basis totaled approximately $46 million compared to $18.5 million at the end of Q1 2021 -- I'm sorry, compared to $13.5 million at the end of Q1 2021 and $18.5 million at the end of 2020.

Turning to some other balance sheet items. Accounts receivable at March 31, 2021 decreased to $7.1 million from $17.3 million at the end of Q4, primarily reflecting the fact that most of our service and license revenues in the quarter were prepaid as well as an improvement in the on-time payment performance by customers buying products. Due to the prepayment of service and overall payment performance improvement, DSOs were 27 days compared to 73 days at the end of Q4.

Inventories decreased to $4.6 million compared to $6.2 million at the end of Q4, reflecting lower finished goods and components due to the industry supply chain situation. Current trade payables decreased to $14.7 million versus $15.7 million at the end of Q4. Short-term debt from financing receivables decreased to $11 million from $14.2 million at the end of Q4.

Our convertible debt, which is all classified as long-term under IFRS rules, decreased to $16.1 million from $26.1 million, reflecting the partial conversions in January and February of the convertible note issued in 2015.

Turning to the outlook for Q2, our pipeline and backlog continue to build. And despite the continued supply chain constraints and factoring in the risk related to the portable router business, we are targeting an approximate 10% sequential increase in revenues. For those of you developing financial models, you can make your own top line assumptions, but to help you with your modeling, we'll share some of our OpEx and financial expense assumptions.

We continue to expect that non-IFRS operating expenses should average $11 million to $11.5 million per quarter in 2021, assuming a stable euro-dollar exchange rate. We expect non-IFRS financial expenses to be around $2.4 million in Q2, excluding any foreign exchange gain or loss. This takes into account the conversions and repayment of the previous convertible debt, the repayment of the venture debt with about $500,000 of remaining interest and the issuance of the new convertible debt with interest accrued at the PIK rate of 6%.

Unless we exercised our option to pay the annual coupon on the new debt in cash to benefit from a lower rate of interest of just over 5%, we expect the quarterly cash payments and interest expense going forward will be minimal given the low rates of interest on our government debt and receivable financing. Finally, for modeling purposes, the number of ADS outstanding today is 37,275,000.

Before I turn the call back to Georges, I have a few housekeeping items to cover. First, in connection with the private placement with Lynrock Lake, we agreed to grant registration rights. So we will be filing a Form F-3 registration statement within the next 2 weeks to comply with this obligation. There will not be any sale of shares at this time nor any new equity issuance associated with this registration statement.

I'd 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. That's the same location where you can find the audio replay.

Also, Georges and I will participate in the Needham Virtual Technology and Media Conference in May and the ROTH Virtual London Conference in June. And we look forward to speaking with you sort of in-person if you plan to participate.

So now I'll turn the call back to Georges.

Thank you, Deborah. Operator, we are now ready to open the call for Q&A, please.

(Operator Instructions) Our first question is from Scott Searle from ROTH Capital.

Thank you for the detail, a lot in there, Georges and Deborah. Maybe just to start, some quick housekeeping. I just want to make sure I understand fully where the balance sheet is today on a pro forma basis. We have $40 million of the new converts, roughly $5 million of the August '22 converts, outstanding government debt or loans or grants with now cash on the balance sheet post the $50 million hybrid raise of $40-plus million in cash. Is that roughly where the balance sheet stands today?

Yes. And in the investor presentation that we'll be posting at the end of the call, we have a pro forma presentation as well that should help clarify things.

Perfect. And Deborah, interest going forward on a quarterly basis therefore, should be less than $1 million versus what we've seen in the past?

So interest expense includes a lot of different items. What we said is for Q2, we're expecting it to be $2.4 million. That includes a $500,000 cleanup with the venture debt. So it will be likely all in all to be $1.9 million on a non-IFRS basis.

Okay. Great. And then looking forward into the second quarter, that 10%-ish sequential increase, what are you factoring in at the current time on the broadband front? I know there's been headwinds just in general in terms of normalization, the surge work-from-home demand, but on top of that, now we've had the Franklin battery issue. So are you factoring in any recovery there whatsoever?

And just to clarify, Georges, I think you said $6 million potential Impact from that, but being offset by demand in IoT. I want to make sure that you're seeing that Massive IoT demand is offsetting any of that potential annualized impact of $6 million related to broadband issues with Franklin?

Yes. I mean, Scott, obviously, for the quarter, our assumption exclude any portable router. It will be -- I mean, but honestly, we don't know -- I mean, we don't have -- I cannot guarantee, maybe there is a little bit of chance of getting some upside, but it's negligible, in my opinion, for the current quarter. So that's why we are assuming 0 in the -- 0 shipment in the portable router in Q2. Still a question mark for the second half. So this means the growth is coming.

If we look to Q2, you could see like a decline in the broadband because even if we have the emerging and the CBRS in Q1, we did a little bit of broadband, we did like more than $1 million for portable router that went to Franklin. And this will go away in Q2. And obviously, this means massive growth from Massive IoT and more than 10% the growth in vertical as well quarter-to-quarter. So this is, I would say, for the picture in the fourth term.

If you look for the full year, the $6 million is really the worst case, what I consider because we always said like we could be -- we are doing $8 million on a normal situation, which is like $2 million per quarter on portable router business. I mean sometimes, we were a little bit below, but sometimes a little bit above. So on average, like $2 million. So the $6 million reflects like [$2 million] times 3 quarters assuming this will not -- we'll not see any recovery. But still, I'm hoping maybe in the second half, we could see some of the recovery and maybe we'll not go to the worst-case situation with all those $6 million less in revenue.

And obviously, the growth engine in Massive IoT, as I said, we are extremely pleased, whether Cat 1 or Cat M., and this is really much more than 10% per quarter. The growth was happening, and obviously, with the vertical going well. So all in all, we're able to offset this loss of portable router.

And's lastly, if I could, and then I'll jump back in the queue. But Looking at the second half of this year, the pipeline is building really well. Conversions on that pipeline in terms of design wins up 20% in the first quarter. It sounds like you're incredibly positive in terms of what you're seeing going into the second half. You've given us a lot of the drivers.

Can you talk a little bit about how you're managing some of the supply chain aspects of that? Because that seems like it's more of a gating factor than anything else from a demand standpoint or design win standpoint where you're winning the business. What you're able to do on that front? And the recent financing, how that's impacting your ability to really execute against that?

Thanks, Scott. I mean on the supply chain, obviously, the industry -- I mean, it's really a very critical situation in the whole industry. Not only Sequans is impacted. All our, I would say, even competitor. I'd have to say even from time to time, we see some upside because some of the customer realizing that they depend on some other competitor where their focus is not IoT, they come like second in the list. And they realize that -- they regret Sequans, and they come back for us. So we're seeing some positive, I would say, from design win potential. It's very hard to quantify it. But we are seeing very positive feedback from customer coming from this angle.

For us, the challenge is really on all angles, whether PCB, substrate was a major issue, and obviously, the foundry. What I was struggling with in the short term was really PCB and substrate. And I mentioned that my challenge on the foundry is more in the second half. We're working daily with the TSMC to get a little bit of upside here and there. As soon as we see some free capacity, we take it. The gap is not that big on TSMC. And I'm moderately optimistic. I will say that I can -- I will not get all the, I would say, shortage and maybe some of it will be recovered in the second half with TSMC.

And regarding the substrate, it's really a major issue because lead time went to kind of 300 days or so overnight, and we had to address this with second source. So we worked all the item, all the chips where we have shortage and challenges, almost like 4 ships get impacted to the substrate. And we build second source for it. 3 of them are behind me in terms of problems and solved. Last one, I'm fixing this now, and I believe we should be fine based on the recent work we have done as a team.

So the challenge is really shifting from quarter-to-quarter or managing the priority between customers, that's how we're dealing with this. We're not losing business. I tend to say, we are even gaining business because of the shortage because some customers realize that they need to bet on a company focusing 100% on IoT and can take them like top priority.

Our next question is from Mike Walkley from Canaccord Genuity.

Just building on some of Scott's questions. For the kind of nonproduct revenue or the other revenue line item with that large satellite customer not winning the end business, how are you thinking about growth in that line item this year relative to what it might have been with that contract?

Mike, yes, I mean, as we said, first of all, the vertical, what we can't underline, we are part of this -- it's included inside as well the 5G strategic NRE deal. And this is alone is ensuring nice growth year-to-year, first of all. On top of this, obviously, we have a lot of opportunity in the vertical not going away. So -- and what I mentioned on the call, yes, this deal not happening, reducing our forecast from one angle. But on the other side, I mentioned that we closed the deal with EchoStar, and we are closing now another deal. It's not as large as the first one, but the impact for the year in terms of revenue is equal because it's happening at a shorter term -- shorter period. So all in all, we believe the vertical business will be in line with our, I would say, 50% growth year-over-year at least.

Okay. Great. That's helpful. And just a follow-up question. I'll pass the line. On the supply chain issues, you talked about spillover demand from customers coming to you with a second source. Are you seeing because your customers can't get their own components, any kind of push out in orders? Or is it really just the order book staying pretty similar for the year?

Yes. I mean we're getting the order. We were receiving -- are seeing The same. We're not seeing any push out, even people are pushing us to accelerate shipment. And as I said, we have -- the backlog is quite solid, and we see -- we have order -- placed order for even beginning of 2022 just to cover this. So again, it's a painful, the supply chain, in a sense like managing delay. We're not able to really -- even independent of the financial reporting, I will say, but even with customer, we -- until the last minute, you could have problem not shipping in the months. We need to ship second months. We have a delay of a couple of weeks here and there.

But overall, I'm not in a panic mode. We fixed a lot of issues so far with second source on the subtract, and TSMC is treating us fairly well. And I believe we can go through without any major, major impact.

Our next question is from Craig Ellis from B. Riley.

And my first question is just a follow-up to the first quarter's strong gross margin performance. And the question is this, with the mix of business in the second quarter tilting significantly to Massive IoT and with continued vertical strength, and with those trends seeming pretty predominant through the year, should we expect gross margins to remain there, 50%, as we proceed through the year? Or would there be some gives and takes in the back half of the year? And if so Deborah, to what extent would we see that?

For the time being, we're still sticking to what we had said, I think, at the last quarter, which is overall for the year targeting at least a 48% gross margin. I think it's a little too soon to be sure we don't have other impacts in terms of mix or sort of side effects from the supply chain issues.

Got it. And then, Georges, nice to see the CBRS business gaining traction. The question is, as you look out to the fourth quarter of this year, can you help us qualitatively or even quantitatively, scope how big you think that business could be? And as we think about Calendar '22, does CBRS hit that a 50-ish percent growth level? Or would it be above that just given its base from calendar '21?

Yes. Craig, well, I mean, obviously, we start shipping CBRS late last Year. We had some shipment in Q3 and a little bit in Q4, I would say. But overall, the number were well below $1 million, I would say, for the year, last year, CBRS. And this year, I mean, we are -- I mentioned that some time that we should be able to hit more than $4 million for the year in CBRS. And we have good visibility on this.

We are working as well -- we're seeing a lot of opportunity coming. I mentioned that during the quarter, we have another 2 customers. We have some opportunity as well with more and more application of the CBRS and let us feel like this market has nice potential. We could have more than 4 this year, I'm hoping, if you want, that we can do -- we can beat this, maybe get $1 million or $2 million more if things will convert. For the time being, I remain a little bit on my target.

But next year should continue. And the growth, yes, I believe next year maybe it has -- it should have more than 50% growth, the CBRS, I mean because we are at the beginning. So the growth should be much more than 50% year-over-year because we are at the beginning of the potential of this market.

That's really helpful. And then my next question is related to some of the strength that you're seeing in the design win funnel, and it's great to see that move up so significantly through the first quarter.

The question is this, to what extent is that being driven by things that are more on the Sequans side with the capabilities you've developed over the years? Or to what extent is it really driven by some of the newer ecosystem relationships that really came into the portfolio over the last 18 months with your distribution partnerships and with the MCU partnerships, with Renesas, Microchip and NXPI? Any Color on the degree to which that broader ecosystem is helping would be really Useful.

I mean obviously, it's a combination of the 2. We have great platform, first of all, I mean, with maturity of the first generation and second generation really beating the competition in power consumption and other features that we provide that are unique and -- which is product-ready and moving there. But we should not neglect at all, what I would call it, the positioning of Sequans or the brand of Sequans getting far much better.

Even if by the way -- even if we are winning the deal alone, without even a partner like an MCU partner or a distributor, just only the brand and the positioning, the viability of the company is improving every day. And last year, I believe we -- with all those relationships, this helped us a lot. And definitely, in terms of new I would say, acceleration of the pipe, the go-to-market is a key element as well. Even if I look to the design win conversions, maybe I don't have the same ratio. But if I look to the pipe and the number of deals, a lot, a lot are coming through our partner, whether on the distribution or the MCU partners. And I believe we will have more and more conversion to design win in the near future.

So the 2 factors are very important. But if you tell me a year ago our product was great, I will say yes as well, but we were winning less. So I tend to favor like the positioning of the company was really instrumental and go-to-market was really a key change in the company since last year.

That's great. And then lastly for me before I jump back in the queue a follow-up to Scott's question to Deborah. Deborah, I wasn't clear in the point on cash on a pro forma basis, right now $46 million. Does that include the $5 million payment that was agreed to with Renesas around the time of the Virtual Analyst Day? Or does the benefit of that payment come in sometime later? And if so, when?

The Renesas payment was predominantly Q1, so it's already in the balance at the end of March.

But no government, no French government.

That's right.

Our next question is from Tristan Gerra from Baird.

Just a quick follow-up question on gross margin. Some companies have talked about their expectations for higher material prices that could impact margin in the second half and their plans to raise pricing. So the question is, how much visibility TSMC is giving you in terms of wafer cost for the second half?

You've mentioned that, so far, you're still holding on your gross margin target for the year. But I'm assuming you have already some visibility for the second half. And what is your ability to pass along any type of wafer price increases with higher ASPs to customers?

Tristan, I don't know if I should say this, but we appreciate a lot TSMC. I mean to some extent, we don't see -- we have good visibility on the cost structure with TSMC, and we don't see this an issue at all. It's more the capacity where I would like a little bit more help from them than really on the visibility on the costs. However, we're seeing cost increase on other component because when you go with, call it, like more -- substrate, the relationship with those guys, it's not like as strategic as you can as we have with TSMC. So obviously here we're seeing all element, people waking up and saying, if you want to get it now, then you pay that much more. I will give it you. Otherwise, you don't get it. You'll get in 3 months and so on.

So we are buying sometimes some capacity, and there is some increase we're seeing as well in the module cost -- some cost increase related to some increase of the bill of material, for example, the memory. So we saw some component price increase, substrate challenges to repay for lead time, if you want, much less with TSMC to be honest. And overall, obviously, this has some impact here and there on our cost structure that we are integrating, factoring in, in the target Deborah was giving, for the 48%, at least for the year.

But also regarding your question, passing this to customer, it's possible. It's not like something -- obviously, it's part of the policy that we adopted to some customers for those placing order with good visibility ahead of time and covering the year, we're respecting our engagement in pricing. For those coming late to place orders, we're reflecting some price increase, definitely. And we're passing some of it.

Great. That's good color. And then going back to the Cat 1 opportunities, and you've mentioned connected speakers. Sorry if I missed it. Could you talk a little bit about the revenue potential that you see from Cat 1 for the year -- growth year-over-year? And also, how much of that higher bandwidth segments within Cat 1, such as connected speaker, is expected to contribute over the next few years?

Yes. I mean -- first of all, the Cat 1, I mean, it's growing nicely. I mean -- and we will hit our more than 50% this year, year-over-year already with the existing business. In this -- for this year, the connected speaker element is not going to be that big. Maybe it will be like, what, I should say, maybe a few percent of our Massive IoT if you want globally, including Cat M because the launch of the volume of this product is happening in the second half. And it's in the initial market. So still at the beginning. But this will continue next year. And I mentioned as well that we have a design win with another major company, making connected speaker but using Calliope 2 and this will be next year.

So in general, we believe this segment will develop. There is a question mark, obviously, about the size of the market because why do you need cellular on a connected speaker, and what will be the customer perception, brand and so on. So we remain a little bit cautious. We don't want to be too bullish on this. But definitely, there is a demand happening there, and our product is ideal for this solution.

And we see this helping the growth, what we are talking about, the 50% in average year-over-year. Some contribution is built for the Cat 1 as well there with this connected wearable, I would say, segment and hearable segment contributing to it as well.

Our next question is from Denis Pyatchanin from Needham & Company.

Taking a question here for Raji Gill. So first question I have for you guys is can you just speak a little bit more about how much of the broadband in that Verizon Jetpack you're still seeing in Q1? Did I understand correctly that it's just $1 million in sales, and it's nothing to Verizon anymore? Is it just going to Franklin? Or did I misunderstand that?

No. I mean obviously, there is -- I mean, I don't want to confuse you. When we talk about the end market, which is Verizon, obviously this portable router used by Verizon, this business is going to Franklin and by the way, not directly to Franklin, it's going to an ODM, an EMS in Korea building the product and then going to Franklin. So we are talking about the same business.

And this business in Q1, we did $1 million, which was, by the way, in line with our expectation because we have some -- we ended the year with a little bit of inventory. So we expected Q1 to be low. And start recovering in Q2, Q3, to go back to the normal level, which is, as I said, can reach around $2 million per quarter in average. And due to the recall, we're expecting 0 in Q2, the current quarter. And then we'll see what will happen in the second half of the year.

Got it. That's helpful. And then just a bit of a bigger question around CBRS opportunity in the private 5G networks. Could you just give a brief rundown of kind of what we can see over the next few quarters regarding either design wins or what's ramping up?

In CBRS, I have more than 15 customers already. All of them, they have product, currently, all of them. I mean they have product ready. So I believe here, what happened is that the market was well known, the people who are working on it. And we were waiting for the regulators to open the frequent events so people start shipping. And this is, as you know, get a little bit delayed last year and towards the end of the year in the -- towards Q4. Then regulatory open the ban, and people started shipping to this. And we're seeing products there.

A lot of products around, as I said, providing a router capability, whether to campus, or I mentioned the situation of distance learning with the school district coverage. But we have a application, for example, for stadium. We have one guy who have -- they have connected speaker all working in the National League, by the way. The football league, they are using this product, and this product is [famous] there.

So we have a lot of application like this. And it's all standing by being high-speed connectivity like modem, could be download, could be router. But what we are seeing as well, a tablet -- a regulized tablet, again for kind of application where we are in private networks, and they need a tablet connection or portable router. So these are the kind of applications we're seeing there. And obviously, today, it's all 4G Cat 4 and Cat 6. And in the future, this can evolve to support 5G as well.

Great. And then just lastly, could you please speak about maybe kind of your -- the competitive landscape and how you're positioned against some larger players like Qualcomm or Nordic or Altair, just kind of comparing product positioning?

Yes. I mean as we mentioned, we -- the only guy who can really compare in terms of coverage of portfolio, product portfolio is really qualcomm because they have the -- they have all the family of products. When you go to Nordic and Altair, we compete with them only in Cat M, and they are on their first-generation product and our Monarch 2 beat them, and they don't have Cat 1 either. Calliope is not there. So we don't compete with them. We compete more with the Qualcomm with Cat M and Calliope and 5G and Cat 4, Cat 6.

And as you know, the differentiation there is Qualcomm not focusing on IoT, and they don't have the best product for IoT application quite often. And that's how we differentiate our products in front of them.

Unfortunately, I think we're going to have to wrap it up at this point.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Georges Karam for closing remarks.

Okay. Thanks, operator. Thank you. Thank you, all of you again for joining the call today. We look forward to catching up with you and again on our second quarter earnings call. Thank you very much.

This ends today's conference. Thank you very much for your participation. Have a great day.