Sequans Communications SA (SQNS) 2020 Q3 法說會逐字稿

Welcome to the Sequans Third Quarter 2020 Results Conference Call. (Operator Instructions) As a reminder, the conference is being recorded.

Before I turn the conference over to our host, Mr. Georges Karam, I'd like to remind you of the following important information on behalf of Sequans. This call contains projections and other forward-looking statements regarding future events or 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 expected revenue for the fourth quarter of 2020, future results of operations and financial positions, business strategy and plans, expectations for Massive IoT and Broadband-critical IoT sales, the ability to continue to operate remotely as required at high levels of productivity, increasing backlog of orders, the impact of the coronavirus on our manufacturing operations and on customer demand 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 risks and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not 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.

Thank you. Please go ahead, sir.

Thank you, madam. Good morning, ladies and gentlemen. This is Georges speaking. I'm with Deborah Choate, our Chief Financial Officer. Welcome to our third quarter results conference call.

We hope everyone is staying safe and remaining healthy, as all of us continue to deal with this -- with the pandemic. Our global organization continues to take the necessary steps to ensure the safety of all our people, and we have been functioning quite well.

I'd like to take this opportunity to acknowledge our entire worldwide team for their determination, their flexibility and for generally living our values during this challenging time.

As you have seen by our press release, we exceeded our target revenue in Q3. And we are expecting another sequential increase in Q4, putting us on track to grow over 60% for the year compared to our previously announced target of 50% year-over-year growth.

At a high level, the positive revenue impact of the coronavirus on our Broadband IoT business is offsetting the short-term drag it's having in other areas. So we are on track to achieve a stretch revenue target, but with a different mix of business than we were expecting as we began the year.

I'm pleased to say we are executing very well and the momentum in all segments of our business is building up. Our key accomplishment fall into 3 areas: design wins, product development, and go-to-market strategy. I'm proud of what we have achieved already in each of these areas, and we expect to accomplish even more before the year is over.

Let me now take you through some of the detail of each of our business segments, and I'll start with the Broadband and Critical IoT. We exceeded our revenue target for Q3 in our Broadband IoT business because we managed to accommodate more orders for modules powering the Jetpack Ellipsis, 4G portable routers sold by Verizon.

On the past 2 conference calls, we have spoken about the exponential increase in demand that began in the first quarter related to these routers being supplied to schools as part of COVID-related distance learning support. We also have spoken about the challenges we have faced with extended lead times for certain components. Fortunately, our supply chain issues became more manageable during the third quarter, and we were able to ship more than originally expected.

On our last conference call, we were assuming orders related to portable routers would settle back toward pre-COVID levels in Q4. But we currently see Q4 module sales and Broadband IoT remaining at a very high level similar to the -- to Q3.

Looking into next year, we don't have good visibility yet. But our current assumption is that we will not remain in surge mode for portable routers in Q1. As a result, we are expecting a shift in business drivers in Broadband IoT next year and more customers diversity as the new CBRS market begins to ramp, and we gain more traction in our emerging markets business.

We are excited about the CBRS business. Design wins we gained so far this year, are beginning to move to production, and we will have some modest revenue from this market already in Q4. Recently, the U.S. Government completed the auction of licenses for the 3.5 gigahertz spend referred to as CBRS. This spectrum will be used by various entities to build their own 4G/5G private networks as well as by mobile operators and other service providers to improve network's coverage and capacity.

Last year, we introduced the industry's first CBRS modules designed from the ground up to enable cost-effective and easy deployment of Broadband IoT devices on private CBRS networks. The modules are based on our Cassiopeia LTE technology, which has benefited from a decade of experience in 3.5 gigahertz spectrum deployments in various countries. Since we introduced them last year, these products have been very well received by the market because the platform is mature and the solutions are optimized for this market. Therefore, they are much less costly than our competitors' product.

Having a cost-effective solution is extremely important for private CBRS networks, where 4G/5G is being used as an alternative to WiFi, offering guaranteed quality of service by using semi-license spectrum. We are working with more than a dozen companies, who are using our LTE Cat 4 and Cat 6 CBRS modules. With distance learning likely to remain important, we believe educational institutions will create their own platforms using private LTE networks. There is also significant interest in private networks' deployment from other vertical markets, such as industrial IoT, health, public safety and utilities. We have numerous additional engagements that have not yet converted to design wins, and we believe we are well-positioned to achieve significant market share in this area.

As part of our go-to-market strategy for CBRS, we added a major module partner to help expand our reach in this market. Our partner, Telit, has launched 2 CBRS modules based on our platform. And last week, we had a very well attended joint webinar with Telit to discuss the impact of CBRS on various vertical markets. We are off to a good start, and we expect to begin accumulating design wins through them rather quickly.

We also expect emerging markets to make a larger contribution to Broadband IoT revenue next year. The customer we added this year are ramping up and will complement the business we have with long-time relationships with customers such as Genpact. They have been winning new projects in new regions such as Southeast Asia and the Middle East.

Finally, we are discussing a few opportunities about devices based on our Cassiopeia platform with different U.S. carriers and service providers that could generate some potential upside in the second half of next year. The surge in orders to support remote learnings was helpful, fueling the growth of the Broadband IoT business this year. But the exciting long-term future of our Broadband and Critical IoT business is going to be driven by gaining a large share of a completely new market like CBRS, where we have a product advantage and a strong go-to-market support, and coming to market at the right time with a cost-effective 5G platform that's optimized for non-handset applications; and capitalizing on technology leadership and several other advantages, such as the support of world-class strategic partners and the market duopoly we can create outside of China.

We are extremely pleased with our progress on 5G technology development. We have continued to reach all important milestones on or ahead of our target dates. Also when thinking about our R&D spending, it's important to note that we are now laser-focused on 5G technology. We're excited about the growing interest in our Taurus 5G platform, and the increasing number of engagements with prospective customers and strategic partners.

To update you on the status of the potential strategic partnership for 5G that has been in active negotiation for a while now, we are pleased to say we are moving ahead on a first phase of initial study this quarter, while our partner is concluding its budget allocation to proceed to the second phase and full project that will have the same scope and revenue amount we have previously expected. In addition, we have made progress on the other strategic engagements we have initiated, and we have a growing confidence that several of these will come to fruition as well based on the strong interest in our 5G technology. So we are moving ahead on all fronts on 5G. We continue to feel very confident and excited about our position and our ability to drive growth for more than a decade.

Let's now turn to Massive IoT. We are very confident about our Massive IoT business, and we believe the ramp in Massive IoT will support a high rate of overall growth for the next few years because we are securing major design wins and the momentum is there. But a certain amount of patience is required to operate successfully in this market.

We know many of you are frustrated just as we are with how long it's taking to see the Massive IoT market growth accelerate. COVID-19 was a headwind in 2020, that was a temporary drag in a few places, but the ramp is happening. We are so far ahead of where we were a year ago. We are winning bigger projects with bigger companies and filing (sic - filling) the pipeline with even more exciting opportunities. We have solved the problem of how to address the fragmented market efficiently, and we are extending our reach through mutually beneficial partnerships. And we are completing the second-generation of our products, which will strengthen our competitive advantages and enable customers to transition seamlessly into a 5G world.

Going into a little more detail, our Massive IoT revenue stream coming from our existing base of Cat 1 and Cat M/NB customers is doing well and growing. The business with Gemalto, our largest module partner, is performing well, and we have with them a large number of secured design wins in the U.S. and Japan, with both Cat 1 and Cat M/NB Technologies. As an example, the second phase of a major metering project in Japan, we are addressing with them, has been finalized. It will begin next year and last for about 18 months. Also, we are reaching the launch phase of another major design win with them.

On the other side, our module business in the Automotive segment, such as tracking and fleet management, is coming back after being affected by COVID, and we'll continue to see strong order pattern from our customer, who's building infectious disease testing devices.

Some of the Cat M projects we have in hand, which were delayed by the pandemic situation, are now reaching the launch phase with initial orders received. In Q3, we have secured a new customer designing 2 health monitoring devices, and the pipe of opportunities keeps building with high-quality customers.

We are gaining traction in the metering space, where our Monarch SiP has some distinct advantages over competing solutions. We mentioned a major metering project using our Monarch platform on our last call, and we can now say this is a deal with Itron, and we have finalized the product supply agreement this quarter. Meanwhile, Monarch 2, the second generation of the Monarch platform, has been sampling to a few customers for evaluation and is about to enter carrier certification. The feedback from customers is outstanding, and 2 of them have selected this chip for new projects.

We are consistently better than the competition in several respects. We have industry-leading power consumption, which we have further reduced with Monarch 2. The platform also features a highly secured integrated SIM capability and low-voltage operation down to 2.2 volts that allows for optimized low-cost battery selection. We expect this new platform to be a strong factor in the growth of our Massive IoT business over the next several years.

We have a lot of interest in our Cat 1 second generation Calliope platform -- Calliope 2 platform, which will be sampling early next year. We are developing an excellent pipeline of opportunities as the only non-Chinese vendor with a low-power Cat 1 offering coming to market. The Cat 1 speed and voice support capabilities make such technology ideal for some IoT devices such as security systems and wearable and hearable application.

One thing that has been reinforced by our experience so far -- while the time to revenue can be very long for certain applications, the business, once it's been won, is also very sticky. For example, new medical devices must go through a long comprehensive approval process, not directly related to the cellular connectivity. There is also a very long qualification process for smart meters. These approvals and qualifications are in addition to the certification required by carriers before any of these devices can run on their network. However, on the positive side, customers will not be quick to switch vendors because it will require them to start the process all over again. Once we are deeply involved in a project with the customer, even if it hasn't launched, they are not likely to be swapped by a promise of something just around the corner by a competitor. Furthermore, we have succeeded recently in displacing other vendors in situations where the competitor failed to deliver what they promised.

Another key lesson we have learned as a pioneer in Massive IoT is, when it comes to new designs and applications enabled by new 4G/5G technology, it has to be easy to incorporate into the design of the device. Providing a development kit or a pre-integrated platform reduces complexity and design cost for the customer. This is where we have made a great progress during the year.

For example, with Avnet, one of our distribution partners, we recently combined Monarch Go with a widely used and understood development environment called Raspberry Pi HAT. HAT stands for hardware attached on top and enables Monarch Go to be plugged directly onto the Raspberry Pi board, which vastly simplifies the development of many types of IoT applications.

We announced bundling our Monarch platform with microcontrollers from several large top-tier MCU partners such as Microchip, NXP and STMicro, and integrating the software as a first step toward offering more integrated solutions with some of them. Just last week, we added a new MCU partner, Renesas, one of the largest microcontroller companies. They will offer a variety of modules based on our Monarch technology, creating a complete and unique integrated hardware and software solution that's ready for use. This will save customers both time and money. You will be hearing more about various types of more integrated solution over the next several months.

In addition to simplifying the process of adding cellular connectivity to IoT devices, these partnerships greatly enhance our go-to-market strategy and will enable us to penetrate the IoT market faster by extending our reach to all corners of this very fragmented market.

So to summarize, what will make a real difference in the Massive IoT business next year: one, our second generation Cat M/NB product is very successful based on the great feedback we are getting from customers and the first design wins we have secured so far. This new platform should maintain our technology leadership and increase our design win rate. Also, we'll have a unique and differentiated position with our next-generation Cat 1 product, that will help us covering all the spectrum of Massive IoT applications.

Second, we now have several mutual beneficial partnerships with large marquee companies that chip billions of microcontrollers for IoT devices every year. And we are just beginning to scratch the surface of what can be accomplished with them.

Last, to conclude on vertical markets, turning to projects for vertical markets, which are mainly services provided to our customers to adapt our software for avionics, public safety, military and satellite applications, we are very close to finalizing a new satellite project that we have engaged in the third quarter. This project is a new one in addition to the large one we have secured with our customer, but where we are waiting to learn if our customer has been awarded the deal.

Regarding the Slash project, we are encouraged by the fact that the deal is reaching the final phase of selection. Our customer appears to be confident in their chances of winning because they decided to move ahead with some preliminary work that will enable them to move faster once they get the final word expected sometime during Q4. So we'll have a minor amount of revenue in Q4, but the large deal will likely be finalized next year.

Most of the revenue generated by our vertical markets business is from services. And of course, strategic projects revenue is also services. Thus, we expect higher services revenue next year based on the various vertical and strategic projects we've discussed today.

So with this positive report on our business, as we navigate the challenges of operating during the second phase of a global pandemic, I will now turn the call over to Deborah. Deborah?

Thank you, Georges. Good morning, everyone. I'd like to add some details about our third quarter results and other developments.

Our third quarter revenue was $14.1 million, a sequential increase of 15.5% from the second quarter, primarily driven by a 32% increase in product revenue. Revenue in Q3 increased 116.6% compared to the same quarter a year ago. We continue to expect further sequential growth in the fourth quarter, putting us on track for greater than 60% top line growth for 2020.

We, again, had 3 greater than 10% customers in the quarter, 1 is an OEM and 2 are ODMs. Gross margin in Q3 was 42% compared to 48.3% in the second quarter and compared to 30.3% in the third quarter of 2019. The Q3 2020 gross margin reflects a much greater proportion of modules in the product mix than in Q2 and a lower proportion of service revenue. We expect a more favorable mix in Q4, which will enable us to improve our gross margin.

Operating expenses were $11.8 million in Q3, up slightly from the $11.5 million in Q2, primarily due to an unfavorable euro-dollar exchange rate compared to Q2. Non-IFRS operating expenses were $11.3 million, up from $10.8 million in Q2.

Our third quarter operating loss was $5.9 million compared to an operating loss of $5.6 million in the second quarter and an operating loss of $8.6 million in the third quarter of 2019. Our net loss in Q3 was $9 million or $0.30 per diluted ADS and included a noncash gain of $1.5 million from the revaluation of the embedded derivative arising from the March 2020 amendments to the convertible debt agreements. This compares to a net loss of $19 million or $0.70 per diluted ADS in the second quarter, which included a noncash loss on the revaluation of the embedded derivatives of $9.1 million.

The net loss in the third quarter of last year was $9.8 million or $0.41 per ADS. Our weighted average number of ADSs in Q3 was 30.3 million, an increase of 3.1 million ADSs, reflecting the full impact of the equity offerings in May.

On a non-IFRS basis, our net loss for Q3 was $8.4 million or $0.28 per diluted ADS compared to a non-IFRS net loss of $7.5 million [or] $0.28 per diluted ADS in the second quarter and a net loss of $8.6 million or $0.36 per diluted ADS in the third quarter of 2019.

Our non-IFRS net loss excludes the following noncash items: stock-based compensation expense, the impact of the fair value and effective interest adjustments related to the convertible debt with embedded derivatives and other financings, the impact of convertible debt amendments and the deferred tax benefit or expense relating to the foregoing adjustments to convertible debt and other financings.

In analyzing the difference between our actual non-IFRS net loss in Q3 and the various analyst estimates, we noted that where there was a difference related primarily to the assumptions used regarding foreign exchange gain or loss for the quarter. In Q3, we had a foreign exchange loss of almost $900,000 or $0.03 per ADS, most of which was unrealized and noncash and related to the revaluation of euro-denominated net liabilities totaling about EUR 18 million 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 derivative from the convertible debt amendments, can cause significant differences in net income or loss from quarter-to-quarter while the impact of swings in the value of the embedded derivative is excluded from our non-IFRS presentation, foreign exchange gains and losses, whether realized or unrealized or not.

Cash flow used in operations during Q3 was $7.9 million, compared to cash flow used in operations of $2.3 million in the second quarter. Our cash and short-term deposits at September 30, 2020, totaled $25.3 million compared to $35.5 million at the end of Q2.

We are pleased to report excellent progress toward French government innovation financing as part of the technology consortium of 7 partners for 5G. It's in what's called the instruction phase, which is the final phase, and we believe proceeds could be more than EUR 5 million.

Accounts receivable at September 30, 2020, increased to $14.1 million from $10.7 million at the end of Q2, reflecting the higher product sales in the quarter. DSOs were 91 days compared to 61 days at the end of Q2. However, this was due to a great extent to a large payment due at the end of September that was received in early October.

Inventories decreased slightly to $5.8 million compared to $5.9 million at the end of Q2, despite the ramp in product revenue. Current trade payables remained stable at $17 million. Short-term debt from financing receivables increased to $14.4 million from $10.5 million at the end of Q2.

Now turning to the financial outlook, we are targeting 10% sequential revenue growth in Q4, which leads to greater than 60% year-over-year growth for 2020 as a whole. For those of you developing financial models, we assume that non-IFRS gross margin will continue to reflect a high proportion of modules in the mix, similar to Q3, but with a slightly higher level of services. We expect gross margin for the full year to be around 45%.

For non-IFRS operating expenses, they are expected to be a little bit higher in Q4, mainly in R&D and assuming that the euro-dollar exchange rate remains stable. Part of the reason for the increase is that we expect to capitalize less R&D costs as development of our second-generation Cat M and Cat 1 chips is completed, and we are not yet capitalizing costs related to the 5G chip development. We expect non-IFRS financial expenses to be around $2 million in Q4, excluding any foreign exchange gain or loss.

To help guide your assumptions about the impact of changes in the euro-dollar exchange rate related to the revaluation of euro-denominated net liabilities on the balance sheet, currently each $0.01 change in the euro is close to $200,000 of unrealized gain or loss based on the balance sheet position at the end of September. You should make your own assumptions, and we're giving no guidance on foreign exchange rates for the future.

For modeling purposes, the exact number of ADS-es on September 30, 2020, was 30,312,160. And finally, we wanted to let you know that since our current shelf registration statement expires shortly, we will be filing a new S-3 replacing our old one, and it will have essentially the same terms.

Before I turn the call back to Georges, 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, the same location where you will find the audio replay. Also, Georges and I will be participating in the Virtual ROTH Technology Day on November 12, and we look forward to speaking with you if you plan to participate.

And I'll turn the call back to Georges.

Thank you, Deborah. So to conclude, just only a couple of points to wrap it up. We are very happy with the ramp of our revenue, obviously, this year, and with the progress we are doing on all fronts: products, customers, but also strategic partnerships.

We have all the foundation to keep growing in the 3 business segments we have, whether on the Broadband IoT business, the Massive IoT business as well as our Vertical Markets business. We are very excited about our partnerships we are doing and we have done with the top-tier MCU players. And we are looking really to become the provider of the cellular core technology in this space.

Finally, we are very excited, and we continue to be excited about our 5G position. This is really attracting a lot of strategic partner to us so far. And I believe we will have more to secure -- that we will be securing in the near future that will help us finance and complement the investments we are doing in this space.

Thank you very much for listening, and I will turn now the call for questions. Operator?

(Operator Instructions) And we'll now move to our first question today, which comes from Mike Walkley, Canaccord Genuity.

Congratulations on the revenue momentum and strong results. Question for me is, on CBRS, a lot of commentary on the script on CBRS. Sounds like it's going even better than planned from last call. Can you maybe help us size the market opportunity in 2021 for your CBRS momentum?

So Mike, I mean, there is -- the point that -- one of the challenge we have is, if you look to all the study around CBRS, is really to size this potential because as you see, it can go to many, many applications. And when you start dealing with the private networks and so on, that's a little bit complicated. But when I look to the number of customers we have and the interest we are seeing in the pipe, we said in the past that we believe that we'll be doing maybe next year, as a target for us, somewhere like between $3 million to $5 million next year. This is my target in this segment. Obviously, we're doing this on the basis like of an analysis of bottom-up with the deals we have in hand and estimating each customer, how much will be doing with us. However, I still believe that the potential can be much more than this. It's just only a question of having enough time to estimate all those projects, how big they can be each one of them.

Great. And just a follow-up -- broadband strong again with maybe the CARES Act and the surge in demand. Can you just talk about supply-demand dynamics into Q4? And how you see the surge continue?

The -- in -- for terms of supply chain, in general, all the semi industry these days is under stretch, somehow in terms of capacity, including if you go even to TSMC, even our regular products, we're seeing, I will say, longer lead time than usual, but we are managing this. I believe all that I could say, the issues we have seen in Q1 and Q2 are behind us in terms of -- because we get really a lot of problems when this demand happened, and we were not able almost to serve 20% of the orders we have received. Now in Q3, we start seeing -- we saw that we managed to get this mainly starting in August timeframe. And for Q4, we don't expect major problem. I mean we see the company capable of serving the orders we have in hand.

Great. And last question, I'll pass on the line. Deborah, can you help us with any 10% customers during the quarter?

So clearly, the demand for Jetpack was the big contributor. But we also have our traditional, in the IoT -- in the Massive IoT space, partners that we work with there, and one was a -- for service revenues.

We'll now move to our next question, which comes from Scott Searle of ROTH Capital.

Georges, Deborah, really nice job in a difficult operating environment. Just to clarify quickly, in Broadband in the quarter, there were still some supply constraints. Did you quantify the impact, what you guys could have potentially shipped if you were not constrained? And looking into the fourth quarter, sequential 10% growth, I just want to confirm you're expecting Broadband to grow sequentially? And I had a couple of follow-ups.

Well, in Q3, we start having -- we had a problem in July and in the last months we recovered a little bit. So I don't know, I mean, I could -- I mean we could do a little bit more obviously if we didn't have the problem of July in terms of capacity, but I could say maybe in the order of magnitude, maybe of 10% that I consider has slipped between Q3 to Q4. I'm talking about the -- just only the order of Jetpack. But these supply constraints, by the way, put some stretch as well on other modules we manufacture for the Massive IoT, the Cat 1 modules, in general.

And what was the other question? I missed it.

Well, sequential outlook, Georges, into fourth quarter for Broadband.

The outlook on the Broadband, as I said, the demand for -- we expect to do almost the same level in Q4 in terms of portable router versus Q3. So we are assuming not too much growth in Broadband, at least the major driver of the Broadband. We could have a little bit of growth coming from some CBRS orders that we are serving, because we'll have some. And we have a couple of new orders from the emerging that they could be as well bringing some growth. But if I look to the Jetpack business, I consider it flat between Q3, Q4.

Great. Perfect. And moving on to Massive IoT, so much going on that front for you guys with the Renesas relationship just announced. I was wondering if you could provide a little bit of color in terms of how some of the MCU relationships should ramp up as we go into 2021. Also, Monarch 2, a key new product, it sounds like you're starting to enter carrier certifications. Just want to clarify the timeline on that. And Itron as well -- it's nice to see you being able to announce that customer. How big can that be? When does that start to ramp up?

Starting with the -- obviously with the MCU partnership, again, if you look to the partners that each one has its own strategy, how to go-to-market and where to go with us, if you want. The baseline is obviously for -- which is common for all of them is to integrate the solution and get the software fully integrated, and use them as a channel to market. So this is -- you can consider it like this is almost similar. Obviously, when you look as well to the position of NXP versus Renesas versus Microchip, you're talking a bit on MCU between 8 bps to 32 bps, various segments. Each one has some strength and some of the segments, less in others. And this is really good for us because they complement each other the way we're seeing, and it accelerates our go-to-market in general. In other words, it brings more design win.

They also can look some kind -- they could be -- also help us winning big deals when Sequans is challenged as a small company, because, obviously, having those big companies backing us, help us, I'll say, closing the deals and avoid any issue that can be considered like from financial strength, I will say, if this is a KPI for the customer.

With Renesas, what I want to say, which is a little bit at least at the time being different from the other guys, Renesas wanted to move much faster in the go-to-market strategy and offer directly under their brands, modules integrating Sequans technology. And the partnership is really starting from this point, not only integrating the software, but they want to integrate the hardware and have their own modules, branded Renesas, where Sequans chip is inside and will be sold to the market.

Obviously, the module will not be only integrating Sequans technology, they will add their own MCU and their own Bluetooth and so on to make a variety of module. And this is, in other words, they can look in the future, Renesas can be a customer, if you want, from this point of view because they will be buying chips from us. And they will be generating direct business versus the other guys that will be indirect because it will be coming from the end customer. And again, very hard to quantify it for the time being. All what I could say, they are going to be -- to help us a lot in the growth of Massive IoT because it give us reach and obviously, acceleration of the design win.

On Monarch 2 timeline, the chip is sampling to customer, as I said. We are giving this to customer. We're expecting end of this year to go through the certification process, which will be like in Q1 we should be done. But already before reaching the certification, before going with the certification, because we have the certified software and so on.

We already sampled this to some alpha customers and already, I mentioned 2 of them selected the product, selected the chip for the future. Everybody is giving us extremely good feedback on the power consumption, on the cost of the solution globally because of the integration we have done. And we have some advanced features that no one has, like we are engaging with the carriers on this, which is the integrated SIM. So quite happy about this product, and this is, again, will be a key driver for next year.

And about Itron, I don't want to comment much about the nature of the project, just to keep it confidential for our customer, but nothing to hide there. It will be -- it's a metering, but the timeline for -- the timeline in terms of revenue, it takes the time to qualify the meter. So for us, we expect this -- more beginning of 2022 in terms of revenue than next year. But it's a big project because you could imagine the size of those deals that can be -- how much Itron can generate in terms of number of meters they can do.

Perfect. And lastly, just on 5G, it sounds like you're on or ahead of schedule in terms of your product development. Just wanted to confirm that timeline of when you would expect to sample. And I think you said several engagements in terms of customers that you're actively engaged with on the 5G front. Just want to confirm that. Nice job.

Thanks, Scott. I mean, obviously, our 5G plan, we're expecting to start sampling end of next year or beginning of 2022. I mean we'll be making tape-out next year. And depending on the definition of something, but we'll have silicon in hand, if you want, end of the next year.

And regarding the interest, the interest is really large. And very honestly, it's at all level. From regular customer, what I call them really pushing us to give them this solution because as you can imagine, the ecosystem is putting us in a unique position here. And -- but also the strategic angle where the one we have engaged, we made progress at least with one of them, and we are quite confident that this will conclude. But also, we have a couple of other engagement moving very, very well, and I consider them very likely to happen, if you want.

We'll now move to our next question, which comes from Craig Ellis of B. Riley Securities.

Congrats on the nice results. Georges, it was helpful to get the quantification around your view on CBRS potential for next year. I'm wondering if you could do the same thing with what you're seeing with the pipeline in emerging market broadband. Can you give us a sense for how big that could be in calendar '21?

The pipeline -- in the emerging market, my estimation was that this is -- we'll go to a similar order of magnitude. It's somewhere between $4 million to $5 million. This is our target, I will say, next year. Very honestly, there is some dynamic in the emerging market happening with the pressure that Huawei is getting, on getting access to silicon. And as you know, this is a space that Huawei dominates in general. And obviously, there is -- I'm seeing more and more opening to our existing customer and the new customer we have added in this space, where I see them competing on new deals and being able to enlarge our chunk of business because of the challenges there. So we are not -- maybe -- hopefully we could have some nice surprises there, where we can get more Broadband in emerging next year. But our target is really like $4 million, $5 million.

That's helpful. And then the next question really goes to the MCU partnerships that you've established. So you've got 4 partners now. I think about 40% of all MCUs get deployed to the industrial end market. So a lot go to auto. There's a significant portion that goes to industrial. I'm wondering if you can give us a sense for what the application exposure might be with some of your MCU partners. Where do they expect to deploy the capability that you have with the MCUs that they have been and will be selling?

Craig, I mean, in general, it's really matching. It's really industrial, in general. I know that the big name -- the big definition of industrial, but also what we're seeing is essentially smart home and smart cities. This is one key application around the security related to home and so on. Obviously, all the metering, you can put it under this brand as well, like the smart home application. We're seeing a lot of demand as well in the health and well-being devices.

And last but not least, really all the tracking, in general, whether tracking of good, of assets or food, all the system is really a lot of demand there. So it's not different from the application we were pursuing, if you want. But obviously, going with the MCU partner, give us access to the thousands and tens of thousands of customers doing this because they have their existing channel, their existing distribution network and their relationship. And the customer is used really to deal with their MCU softer environment, so that help us to get access to this quickly.

And if we were to look ahead to next year, Georges, would you expect a greater contribution for Massive IoT to come from these new MCU partners or from the distribution partners that you've developed this year, Avnet and Richardson, RFPD?

Well, I mean, it's complicated because some of them, they will deal as well with Avnet and RFPD. So it's because even themselves they go through distributor. So -- and as I said, Avnet, for example, it's a key distributor for most all of them. But no, I believe the distributor can bring to us some of the -- directly, what I would call it, because Avnet, for example, you saw that they are coming with some combination of solutions. They are trying to make it more than just only an MCU and environment that could be helpful. RFPD, for example, we use them to sell the SIP with the Skyworks and they have some channel, which I believe, it will be a privileged to them, but to be different from the others. But we're hoping that the contribution of the MCU will be bigger, in general, if I have to qualify it like this.

Got it. And then lastly, any further color on the strategic partner that you mentioned potentially getting something signed with moderate revenue this year? And then if we got that done, would you expect the larger revenue contribution to be in the first quarter of next year or is there a chance that it would come later than that, say, in the second quarter?

No, I don't want to give -- I mean, the challenge when I give timing, and I know that all the market will be waiting for me to make the press release on the timing and if I don't do it, everybody isn't happy and the stock will go down. So I don't want to jump to this. But very honestly, the short-term stuff is happening. So there is no risk on this. And we're expecting really to close those deals. They are very advanced. All what I'm talking about should happen in the first half of the year and not the second half. So there are really very hot deals. Now they could happen beginning of Q1, end of Q1, I don't want to go with timing on this. But for me, they are early beginning -- early next year.

We'll now move to our next question from Denis Pyatchanin of Needham & Company.

So I'm asking this on behalf of Raji Gill. Could you please talk about how we're going to think about kind of the 5G impact on adoption of Cat M and kind of the narrowband IoT as we enter 2021 and the next phase of 5G deployment?

I mean it's very important to keep in mind -- because this branding of 5G, it's really a brand. Behind it, you have releases of 3GPP and so on. And Cat M/NB are part of the 5G. They are not like, okay, this is the old thing and the 5G is the new thing. The 5G, by definition, has 2 umbrellas, if you want, at least, not to say 3. But to make it simple, it has 2 umbrellas. One really oriented for Massive IoT and this means Cat M/NB, as we use it today in the 4G, with some softer evolution to the future, where your chip needs to be capable of evolving this. And this is what we said because our platform, whether Calliope 2 or Monarch 2, they are 5G ready, and they are able to continue supporting this.

And you have the other umbrella of 5G, which is really the high speed, low latency, this is really about more speed. And here, we talk about what we call the new radio, where you have a new waveform and a new radio to enable those kind of capacity, and this is our Taurus platform. But when you look from a network point of view what the operators are doing, are really deploying this high-end new radio, if you want, but at the same time, keeping, maintaining the Massive IoT software and evolution that's going to happen. So it's not going to be any interruption, and it's not going to have a conflict, if you want. So between the two.

Got it. And then just one follow-up question. Could you talk a little bit about the kind of the satellite customer pushout that had happened before? And if you think that's going to come back in the next few quarters or so? Can you give us any update on that?

Sure. I mean, first of all, I mentioned, just to clarify it, if the script was not clear -- we have a new deal, which is smaller deal than the first one. I mean smaller, I mean, nice for us. I mean we like it. And this is a new deal that came to us end of the -- end of Q2, and we're concluding this now, it's under signature. So this is one deal moved. However, the reference to the satellite project, you're talking, it's really the big satellite project, what I said, this can generate 2-digit revenue for Sequans. This is progressing very well as well because our customer, in what they call in the last negotiation of pricing, best, how do you call it, last and final negotiation. And this is happening now.

So it's not delaying. It's really as we expected. It gets delayed mid last year a little bit, but now it's still on time to come to conclusion in Q4 where we will get the conclusion if our customer gets selected. And if so, this means we will have the big project award to us as well. But in the meantime, as I said, this customer asked us to start the work in anticipation this quarter because he doesn't want to lose timing. And for this, we entered into a small agreement just to start the work in Q4. And once he get the big grant, he will award to us the big project that we will sign, maybe, end of Q4 or beginning of Q1.

We'll now move to our next question from [Christopher Hilley of Rubi Capital].

You're talking about a lot of exciting applications that are in your pipeline. If you look farther out, say, 3 to 5 years, could you help sort of rank which ones you think will be the largest? And if there's any applications that you haven't discussed today that you think will be meaningful in that timeframe that you haven't mentioned so far on this call?

I mean it's a very complicated question because to compare between them, what I could say, some of them are less risky. In other words, when you look to all those applications, all of them make sense. The challenge we have, when you look to some new applications, where you don't know the adoption, you don't know how much is going to be successful, the timing and so on. What I could say today, for sure, that the metering will be a big segment in this space because all the metering companies are moving. I'm seeing this everywhere and on a worldwide basis, not only in the U.S., but also U.S., Japan, Europe, and we are engaged with all those metering company. And we have already some good business there, and this will continue.

Security system, this will be another big play as well. And the tracking device, still a question mark in a sense how big it is. Everything tends to be -- I mean, I tend to believe this will be maybe the biggest, the tracking. If this will happen, this should be the biggest because the number of things that you need to track are, where we are talking about hundreds of millions of units for any application.

The challenge there is that all this is new, and are you going to stick a tracker on everything? And is it going to happen or not? We're seeing very good progress there in this space, but this is maybe the one lagging in terms of ramp, in my opinion. So this is just to give the 3. And obviously, I'm discarding here all consumer applications because obviously, going to any of consumer application, this could be big in general but the consumer application, kind of depends on the brand, depends what you will be launching, depending on the technology, but like on wearable application and so on. But it's a little bit hard to estimate how big it will be versus the other one.

Okay. And maybe one more. Within the 5G opportunity, could you just characterize what you think your niche or your advantage is in certain applications?

Well, our 5G, what's clear is that what we are doing is that we have a comprehensive solution for non-handset. This is what we are doing. In other words, we are trying to optimize our solution completely for anything outside the phone. When you see today, if you take an iPhone and you look to the 5G solution inside, how to put a millimeter wave inside and so on, you do it completely different, if you are building this for your fixed router or for a portable device or for an industrial machine. So all those -- the different, if you want, from a technology point of view, allow us to optimize the solution and make it cheaper to address this. And obviously, we should not forget as well that there is this duopoly that we are creating outside of China, not too many players that are able to offer 5G and having Sequans that create, obviously, we're seeing a demand from the market to have Sequans delivering 5G. And this has also give us more chances, I will say, to win a nice market share.

We'll move to our next question from Jon Lopez of Vertical Group.

I just had a couple of clarifications, if I could, and then a question. The first one is, if we look at the calendar Q3 product sales trending, is it fair to think that Broadband outpaced that from a growth perspective?

Outpaced what?

Yes, excuse me, from a growth perspective. So product sales were up 32% quarter-to-quarter, is it fair to say that Broadband outpaced that 32%?

Yes.

Yes.

Yes.

Okay. Great. And then secondly, I thought in the beginning or at least in the prepared remarks, there was some commentary about Broadband for calendar Q1 of '21. Did I hear that correctly? Is there an expectation of, say, some moderation just after the very aggressive couple of months of activity as we look into the early part of next year?

Yes. I mean this is -- I mean, very honestly, no one knows. So it's not like we have -- we're looking through a crystal ball with all what's happening in this pandemic and the demand related to this. But the way we're seeing that the source of demand is a little bit, at least, as we are speaking, we're putting ourselves in a position that Q1 will go back to normal from this portable routers. Obviously, we'll have the CBRS. We'll have the emerging. We have other broadband moving and they are not related to the pandemic, but we are putting our position -- our projection, if you want, in a position that we're not relying on the source of demand we have seen it in Q2, Q3 and Q4. Yes.

Got you. Terrific. Sorry, just 2 more quick ones. The first one, just on CBRS. Are you guys participating both on the access point side as well as the client side? Or are you more focused and concentrated at one end of the wire?

No. No. We are on the -- only on the user side, where you could -- sometimes you could have an access point where you have a backhaul of wireless, then obviously, we can play there, but we are not on the access point technology, if you want. We're always on the user side.

Got you. Okay. So a cluster on the client side. Got you. And then my very last question. If we look in recent weeks, you've got a competitor in Asia Pac that I think historically has not focused on markets like Hotspot and CPE, that appears as though they plan to do so with a portion of their 5G portfolio. I suppose my question for you here is, is this something that competitively you think they will address customers that like aren't your focus; or should we think about this as perhaps opening a competitive vector in places like North America, maybe more core to your business?

I don't know if I get your question right. But...

I didn't -- it wasn't clear to me either.

It was clear for you, Deborah?

No.

JD, are you saying -- can you...

I'm sorry, yes, I can, yes, of course, I'll restate it. I'm sorry, I didn't mean to be cryptic. MediaTek, I want to say, maybe a month ago or so, made a pretty pointed announcement of their intention to target things. Yes, yes, with Hotspot and CPE. And I guess my question was, are they targeting, say, customers in places you don't want to go after? Or is that potentially something that we need to think about in say, places like North America? Sorry for being cryptic.

No. You -- I mean, let's just say it like this here and talk about the 5G technology. In general, to name it, outside of China, you have only 2, MediaTek and Qualcomm. And obviously, their main drivers is really to build the technology for the phones. This is really the major business they are pursuing and they are optimizing their solution. Obviously, when you do this, you are able on the corner to serve other businesses. I'm not saying we always compete with Qualcomm even in emerging markets. So there is nothing that prevents those guys from going to this market, but they don't do it in the right way with the right focus in general. And this is when Sequans is only focusing on this is able to do more.

Now on MediaTek, obviously, they will come -- in principle, they are Taiwanese, and in general, they are able to come and sell in Europe and the U.S. But their main focus as a market, their major market is China, in general. So I'm not saying we'll not see MediaTek and compete with them. But to some extent, if we will compete, it will be MediaTek and Qualcomm, so we will have 2 instead of one. We're still, with MediaTek, a little bit tuned more towards Asia than really U.S. and Europe.

Thank you. As there are no further questions, I'd like to turn the call back to the management team for any additional or closing remarks.

Thank you very much for your questions and listening all the time we spend on the call. Thank you, operator. We're done.

Thank you, sir. Ladies and gentlemen, that concludes today's Sequans' third quarter 2020 results call. Thanks for your participation. You may now disconnect.