Sequans Communications SA (SQNS) 2020 Q1 法說會逐字稿

Welcome to the Sequans First Quarter 2020 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. Before I turn the conference over to our host, Mr. Georges Karam, I would like to remind you 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 preliminary results over the first -- for the first quarter of 2020, expected revenue for the second quarter of 2020, the timing and availability of expected debt financing and tax credits, future results of operations and financial positions, business strategy and plans, expectations for Massive IoT and Broadband and Critical IoT sales, the ability to continue to operate remotely at high levels of productivity, increasing backlog of orders, the impact of the coronavirus on our manufacturing operations, ability to operate remotely 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 place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projection or forward-looking statements. More information on factors that could affect our business and financial results are included in our public footings made with the Securities and Exchange Commission.

Financial results described in this call should be considered preliminary and are subject to change to reflect the completion of our valuation of the convertible debt amendments made in March 2020 and posting of related accounting entries.

Thank you. Please go ahead.

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

As you have seen in our press release, our Q1 top line results are in line with the updated view we gave on March 31 with final revenue of $8.8 million and better gross margin from a more favorable mix -- revenue mix as well as a smaller loss per ADS than we indicated at that time. Since we explained Q1 business condition at length on our call 3 weeks ago, I'll not repeat the same discussion, except to summarize it quickly for anyone who did not hear the call, the following: during Q1, the coronavirus had some impact on our ability to produce and ship modules from our contract manufacturers located in the Shanghai area but are now operating normally after their employees were able to gradually return to work during the later part of Q1 as stay-at-home restrictions were removed by the Chinese government.

Our chips are produced in other Asian countries that experienced much less direct impact from the virus during Q1. So overall, we were fortunate to be much less affected in Q1 than many other semiconductor companies and both Broadband IoT and Massive IoT businesses increased sequentially compared to Q4. On the other front, the vertical and strategic business was lower in Q1 than Q4, but this was expected as it reflects the impact of the revenue recognition rules of the large strategic deals we signed in the fourth quarter.

Now I will turn to the main topic of this call: our current situation and how we see the future. On balance, the impact of the coronavirus on customer demand has been more positive than negative for us. The surge in demand in the U.S. for portable routers is creating a very large increase in orders for our modules that power Verizon's Jetpack mobile hotspot. And the main challenge with it now is simply the supply chain. We expect module demand for the Jetpack to remain at a relatively high level, even after stay-at-home orders are lifted. Therefore, we have taken steps to increase our module capacity and to deal with extended lead times for some of the components. Meanwhile, demand for Massive IoT devices already launched is building in line with our expectations, except for some business related to fleet management and car tracking devices that are somehow impacted by the stay-at-home situation. Projects planned to launch in the second half of the year may be impacted with some delay, but it's hard to quantify now. Finally, our vertical and strategic business is, by definition, less affected by the COVID-19 situation and is progressing very well.

Taking all this into account, including the backlog of orders, we expect revenue of at least $12 million in the second quarter, despite the challenges on the supply chain where we may face some shortage of components required to build our modules. This represents very strong growth both sequentially and year-over-year for the second quarter.

Looking at the full year 2020 picture, if we can manage to supply the demand we are expecting during the rest of the year, the upside from our expectations at the beginning of the year for Broadband IoT could more than offset the downside risk from COVID related delays in the projects that are scheduled to launch during the second half. However, given the number of variables in this environment, we prefer for now to assume that the pluses will balance out the minuses and continue to set our sights on the same order of magnitude of revenue for 2020 as we envisioned before the coronavirus. With many companies withdrawing annual guidance entirely, this is the most meaningful statement we think we can make at this point in time. Longer term, we firmly believe that several trends already favorable to our 5G/4G business will be reinforced and perhaps accelerated by the unprecedented global event.

Before we discuss each business in detail, we must first state categorically that there is nothing positive about the impact of COVID-19, even though there's increasing demand for some of our solutions. This pandemic has caused a global health crisis that has claimed hundreds of thousands of lives, taxing medical resources and shutting down all segments of the global economy. Millions of people are still confined to their homes, enduring various degree of hardship. And we would like to take this opportunity to acknowledge and thank those who are risking their lives on a daily basis, the medical personnel and the first responders as well as all the courageous people who go to work every day or volunteer their time in order to keep the rest of us going.

We are pleased that we can place some part in helping deal with the consequences of this crisis by providing seller connectivity for a variety of important devices. In addition to the Broadband IoT demand for the Jetpack hotspot, some medical device companies are using our Massive IoT solutions. Last summer, we announced a design win with a company called OneCare for a health monitoring wearable. We are also shipping to a medical equipment company that supplies innovative testing equipment to hospitals, laboratories and doctors' offices. Their devices are used to test for, among other things, infectious diseases, and they are at the forefront, designing small portable testing equipment. We also have a design win in the area of remote health monitoring, including cardiovascular monitoring that we expect to begin shipping to later this year. And we are in discussions with several more remote health care companies for various other applications, and we are powering many tracking or monitoring devices that facilitate our day-to-day life. We are gratified that we are able to contribute to people's safety and wellness by providing connectivity for these devices at a critical time.

With the number of people around the world who are forced to remain at home and to work remotely to the extent possible, high-speed broadband connectivity has become an even greater focus and will remain so in the future. This bodes well for our 5G/4G Broadband IoT business. This includes fixed wireless customer premise equipment as well as portable router. We also expect more focus on Massive IoT applications to enhance the home environment. If people are looking for ways to minimize their need to be in crowded places, they are apt to focus on making their homes smarter and more comfortable. An example of a currently shipping device powered by our Monarch platform is Comcast's Xfinity tablet. We have more smart home projects under discussion including connected speaker as well as additional home security applications.

Looking further ahead to what the new normal might look like, it's easy to imagine growing use of our technology to do more things remotely in an industrial setting via robotics or using smart building technology to minimize the need to touch surface in common areas or connectivities for -- connectivity for applications that improve the safety of public transportation and, of course, for additional remote health care applications. This pandemic is going to change the way we live and work, a reduced contact economy where we can work, study or be entertained remotely requires more connectivity for more devices. So it's important to look past the boost we may get from Jetpack-related orders and consider the bigger picture, even if it's difficult to forecast the exact timing and magnitude of the trends that are being reinforced.

Moving to a discussion of each business. We'll begin with Broadband IoT. Since this is one source of the sequential growth throughout the year. Current indications are that demand for the Jetpack mobile router will settle at a higher level than we were seeing prior to the coronavirus. We expect demand from emerging markets to gradually improve during the balance of the year, mainly from new customers we added last year. We also remain confident in our strong position in CBRS where we have won a growing pipeline of opportunities with multiple customers. We hope that the 1-month delay in the auction of licenses won't impact the ramp we have planned towards the end of this year. Finally, we could see additional design wins from new customer that would fuel growth in 2021. We are working with several of them, and some are in the final product evaluation phase in a couple of markets.

The natural evolution of our 4G Broadband IoT solutions is our 5G Taurus platform currently under development. This is going very well, and we are seeing a lot of traction and interest from many customers. We expect to be able to offer superior solutions for applications that enable Industry 4.0, a new level of automation and remote factory management, new smart city and security capabilities and more bandwidths for people to work and play in the cloud.

Turning to the Massive IoT business, we'll begin with Cat 1. The channel inventory issue we had with our large module partner was fully resolved during Q1 and this business is now moving well in line with our plan. Direct customer demand for Cat 1 modules seems okay for now, although we may expect some lower demand in the telematics and fleet management segment. In the second quarter, we are giving priority to certain components for modules to satisfy the huge increase in demand for Cat 4 modules used in the Jetpack. So there is some potential tradeoff between modules for the Broadband IoT business and Cat 1 modules for the Massive IoT business, which could push out some of our Cat 1 module revenue. We are on track with the development of Calliope 2, our next-generation Cat 1 platform, and we see a lot of interest developing in this new low-power, low-cost Cat 1 solution. This should help us increase our market share in the traditional M2M market and also expand our reach in the consumer IoT space where we have already 1 design win, and we are in an advanced stage with several others.

Cat M/NB grew sequentially in Q1 compared to Q4 and is expected to grow sequentially again in Q2 and beyond. Demand for devices that are already launched is in line with our expectations, and this includes sales to our main module partner. Given the various forms of disruption caused by COVID-19, we see more risk of some delays related to launches planned during the second half of the year, but we still expect a very sizable increase in Cat M/NB revenue for 2020 with even stronger longer-term prospects than before. We had several new design wins in Q1 for our Monarch platform. We continue to see a lot of interest in our Monarch SiP that we have jointly developed with Skyworks.

We are working on many big opportunities for various applications. Our go-to-market initiatives with our distribution partners, Avnet, RFPD, as well as our partnerships with MCU vendors, Microchip, NXP and SD are moving very well, and we expect them to begin contributing towards the end of the year. We have not observed any impact from COVID-19 on the development of our Cat M/NB pipeline of new opportunities. This keeps expanding and the interest in our second-generation platforms, Monarch 2 and Monarch N, is increasing. The highly secure iSIM capability provided by these chips and unique to Sequans today as well as the further optimization of power and cost keeps us very well positioned in the market.

Our Vertical and Strategic business also continues to be in line with our expectations, and we believe we will show a large increase in 2020 due mainly to revenue recognition related to the large strategic deals signed in the fourth quarter last year as we keep executing to meet the various milestones. We continue to have a good pipeline of opportunities and are hopeful we can finalize the large vertical deal in the satellite space we've been working on before the end of second -- this quarter. In general, our visibility is good in this position -- in this portion of our business, and we are on track to meet our target for the year, despite some timing risk related to the nature of such big deals.

Regarding potential new strategic deals, discussions are still ongoing with respect to ones we have mentioned previously, although it's more complicated with everyone working from home. This continues to be an area of focus for us. As expected, we executed the loan agreement with BPI, the French investment bank, earlier this month, and we are working to close another bigger one, both of them are COVID-19 related. These funds will add to the traditional innovation financing we are working on to support our 5G investment. Deborah will give you more details on this in a moment.

So to summarize, we are expecting very strong sequential growth in the second quarter, driven mainly by very strong demand for Broadband IoT modules. We don't think it's time to set our sights any higher than our pre-COVID targets for all of 2020. But we certainly have potential upside if we can successfully navigate the supply chain challenges and address all the demand. More important is that the long-term trends towards a digital economy are apt to be reinforced by this experience in working, studying, shopping and socializing remotely. Technology can't compensate for the human and economic tragedy from the coronavirus. But we expect Internet of Things to be even more important in a reconnected world with increased health awareness and concern for personal and workplace safety and well-being.

Now I would like to turn the call over to Deborah to give you more detail in the financial picture.

Hello, everyone. I'd like to add some details about our Q1 results and recent financing activities.

Our Q1 revenue was $8.8 million, a decrease sequentially of 4.3% from the fourth quarter, primarily due to the impact on our shipments from COVID-19. Revenue in Q1 increased 35.6% compared to the same quarter a year ago. We had 3 greater than 10% customers in the first quarter: 1 OEM and 2 ODMs.

Gross margin in Q1 was 51.3% compared to 47% in the fourth quarter of 2019 and compared to 35.9% in the first quarter of 2019. The substantially higher gross margin was primarily due to a more favorable proportion of chips versus modules in the revenue mix. There can be significant fluctuation in gross margin between quarters based on this mix. However, our assumption is that non-IFRS gross margin will average around 45% in the next several quarters.

Operating expenses were $12.3 million in Q1, higher than the $9.9 million in Q4, primarily due to higher R&D expense related to bringing on the new 5G development team in Israel as well as a onetime noncash expense recorded in general and administrative expenses also related to bringing on the new team. Q1 sales and marketing expenses tend to be higher than other quarters due to 2 major trade shows during the first quarter. Given these quarterly fluctuations, we are expecting non-IFRS operating expenses to average around $10.5 million a quarter for the next several quarters.

Our first quarter operating loss was $7.8 million compared to an operating loss of $5.6 million in the fourth quarter of 2019 and an $8 million loss in the first quarter of 2019. Our net loss in Q1 was $10.6 million or $0.44 per diluted ADS compared to a net loss of $9.2 million or $0.38 per diluted ADS in the fourth quarter. The net loss in the first quarter of last year was $9.6 million or $0.41 per ADS. Our weighted average number of ADSs in Q1 2020 was $23.9 million.

We have not yet finalized the valuation of the amendments to our 5 issues of convertible notes that was made in late March. The accounting entries resulting from this process are expected to lead to some changes in our financial and deferred tax expenses and, therefore, our consolidated IFRS net loss. Consequently, the results we reported today are preliminary. However, our cash position, operating results and non-IFRS loss for the first quarter are not expected to change. To assist some of you with developing your models, we expect non-IFRS financial and interest expenses to be around $2.2 million per quarter during the remainder of 2020.

On a non-IFRS basis, our net loss for Q1 was $8.7 million or $0.36 per diluted ADS compared to a non-IFRS net loss of $7.9 million or $0.33 in the fourth quarter and a net loss of $8.3 million or $0.35 per diluted ADS in the first quarter of 2019. Our non-IFRS net loss excludes noncash items related to stock-based compensation expense and the noncash impact of convertible debt amendments, effective interest rate adjustments related to the convertible debt and other financings and the deferred tax benefit or expense related to convertible debt and other financings.

Cash used in operations during the first quarter was $7.7 million compared to cash generated by operations of $16.1 million in the fourth quarter. Our cash at March 31, 2020, totaled $5.1 million compared to $14.1 million at the end of Q4. This cash balance at the end of March does not include several cash inflows recently secured: $2.2 million from a new loan from BPI we received in April, $2.8 million from the recovery of the 2019 French research credit we now expect in early May and additional EUR 5 million government loan just approved as part of the relief package aimed at helping French technology companies. We also have been able to take advantage of COVID-19 relief measures from the French government, which should enable us to defer certain charges and reimbursements during the second quarter, totaling approximately $1 million. These new debt financings from the French government will have no impact on our ability to receive innovation financing as part of a technology consortium for 5G. However, that process, as Georges mentioned, is moving slowly because of the focus on the COVID-19 relief measures.

Accounts receivable at March 31, 2020, increased to $8.8 million from $8.4 million at the end of Q4, reflecting higher product sales. DSOs were 91 days compared to 90 days at the end of Q4. Inventories decreased to $6.1 million compared to $6.7 million at the end of Q4. Current trade payables increased to $12.1 million from $8.8 million, reflecting primarily the large CapEx expenditures at the end of March. Short-term debt from financing receivables increased to $6.6 million from $4.1 million at the end of Q4. And the entire amount of our outstanding convertible debt now appears under noncurrent liabilities, after we recently extended the maturity over the tranche issued in 2016 by 1 year to April of 2021.

Finally, turning to the financial outlook. After taking into account supply chain challenges related to components for our modules, we expect at least $12 million in revenue for Q2. This represents more than 35% sequential growth and approximately 50% growth year-over-year. In addition, we continue to expect sequential quarterly revenue growth during the balance of 2020, so we are on track to achieve significant revenue growth for the year.

Before I turn the call back to Georges, I'd just like to remind you that at the conclusion of this call, we will post a written version of our formal remarks in the Investor Relations section of our website on the Webcast and Presentations page. That's the same location where you will find the audio replay. Also, Georges and I will be participating in the virtual Baird conference on June 4. We look forward to speaking with you if you plan to participate.

Now I'll turn the call back to Georges.

Thank you, Deborah. So to conclude, just a few words more on the year without really -- for 2020, the way I see it and stating, as a general statement, not to give you, for the time being, specific guidance for 2020.

As we said, in summary, if we look at our businesses, the Vertical business is doing very well in line with our expectation. All of what we have planned is moving, and it has 0 impact for the time being, at least the way we see it on COVID because, by definition, it's not sensitive to the situation of the COVID-19. And we see more opportunity, by the way, and progressing very well.

If I look to the Massive IoT business, the business is doing well, moving as expected, both on Cat 1 and Cat M, as explained. Really here, we're seeing even more traction by the COVID for a different situation as we talk about the push for health application there. The only risk we see, which is, as we are speaking, which is very hard to quantify, are for those projects that were planned to launch in Q3 and Q4. Obviously, our customers are executing on those projects. And for the time being, it's too early to say they are going to take a big delay there. But all the other projects, they have been launched and they are in production. Some of them are very big ones, are moving very well. And more important, the opportunity there keep building up. So we're not seeing, I would say, any negative there where we see, okay, people are not looking anymore to design a project and think about the massive IoT. In the future, this is really definitely an area of, I would say, interest of the people, which is going to be accelerated after the COVID, in my opinion.

And last, but not least, is really the Broadband IoT. Let me stress that all the components, whether we are in the emerging, the CBRS and all those applications, everything is moving according to plan and moving well. And obviously, here, we have the upside coming from the Verizon Jetpack where here, we have a huge upside. The challenge was -- is really the supply. What's also interesting that we see this expanding and over more than 1 quarter and very likely will set at a new plateau after the COVID because we expect people, as we explained, to move more and more to environment working from home and broadband will become a key component for them.

So overall, we are quite positive, and we remain excited about great 2020 that we can do this year. We remain, obviously, a little bit cautious with all this environment around us. But the way we see it today, the way we are sitting now, we are -- we believe that 2020 is going to be at least in line with our plan and hopefully, maybe some potential upside if we are able to serve all the supply. And more important, as I said, the 4G/5G IoT is going to be more and more the heart of our new economy. I believe this is obvious for everybody. And we are really happy to be in the right place for once and be able to contribute to the new world we are building and obviously, be able to deliver results for Sequans and create value for our shareholders.

Thank you very much for your listening. I will turn now the call maybe to take your questions. Operator?

(Operator Instructions) And we'll take our first question from Raji Gill of Needham & Co.

Congrats on the momentum. Just a question on the Verizon Jetpack. Has Verizon given you a sense in terms of how much volume they're expecting? And any kind of thoughts in terms of the growth of that product ramp as they progress throughout the year?

Well, obviously -- Raji, I mean, obviously, what we saw is the first wave, this is really real. But obviously, the first wave is a huge demand. So you cannot take this as the new trend. But in the same time, we're seeing demand for longer run and the discussion that obviously, we are getting today. That does feel like maybe this can go to a factor of 2 over -- down the road. It's still too early to confirm it, but my feeling is that we could be going to a 2x demand in Q4 and next year on this kind of business.

And just on the gross margin, the upside in the quarter, based on the favorable mix shift, but then kind of you said tracking at 45% for the rest of the quarter -- rest of the year. And any thoughts on kind of why it'll be around 45%?

It's primarily due to the mix in that we're not expecting the services and other revenue that tends to be higher margin to -- we're continuing -- we're expecting that to be fairly stable across the year, and the growth will come more from product revenues.

Okay. Got it. And lastly, the partnerships with the microcontroller companies, Microchip and NXP, you talked about you might see some revenue end of 2020. Can you elaborate further in terms of what their road maps are and how your technology corresponds with that?

Yes. I mean, absolutely. In terms of go-to-market with the MCU partners, obviously, what we did is really -- and today, the 3 solutions are available. You can get an integrated solution with -- where you have Microchip Sequans or NXP Sequans or SD Sequans. And this creates, obviously -- facilitate for our customers to build their IoT system very quickly and in an easy way. What we are doing as well with those partners is we are preparing maybe another version of those products like more integrated to facilitate it further. And obviously, it's the channel itself because for Sequans, it's really a big plus to play with those big players because it gives us access to some of the Tier 1 customer that could be maybe complicated for us to address them if we were alone. So all those angles are contributing to us.

Obviously, when you have a design win in terms of revenue, the early revenue will be coming because people are buying reference designs and so on. Even if you could have maybe many of them and this create maybe some number, the major revenue is going to come when you have full project launch with millions of units. And obviously, this is more -- needs some time from design win to production, and typically, it can take 12 months. So that's why we are saying we could see some revenue maybe in the second half, but in my opinion, they will be more related to some reference design early product. And then in the -- for next year, we could have more of our Cat M product accelerated, I will say, by those kind of partnerships.

We'll take our next question from Mike Walkley of Canaccord.

Yes, just on the surge of demand for Q2. Is that mainly just broadband or is IoT still growing? And then as you kind of look at sequential growth for the rest of the year, can you kind of just give us some color? Does broadband continue to grow in the back half of the year after the Q2 surge or is it more IoT-driven? Just trying to get a feel for the different lines of business and the growth trajectory you're seeing in your pipeline.

Yes. I mean, definitely, as I said, IoT, Massive IoT is growing. It grew from Q4 to Q1. And it's growing from Q1 to Q2. And the number I'm giving, I would say the $12 million minimum, we are targeting this year, and we expect to keep going. So there is -- definitely, the business of the company on the IoT is going well. Obviously, in terms of the second half of the year for the new project, I'm talking about really the second phase of the growth on the CAT M/NB. Here, we have a little bit maybe some risk. Today, it's very hard to identify it, but this doesn't mean it will not grow. Just only a little bit of delay or a couple of months on some project could reduce a little bit the slope of the curve. But from all what we have launched so far, we are in a nice shape in terms of growth.

And obviously, if you go to the broadband, very honestly, today, we have -- we could, as I said, do much more than the $12 million, if we serve all the orders we have in hand in the broadband. So some of them, maybe that will shift to beginning of Q3 because the demand -- we have a lot of demand, we didn't accept at all in Q2. We positioned some of it in Q3. So we have a little bit of upside as well in broadband in Q3 already related to the Jetpack. Beyond this, passing, I tend to say, August, September, too early to talk about it. It comes back to what I said previously to Raji by saying the signs we are getting today that is going to set on a new plateau, which was -- which is higher than what we used in the past because it's becoming more -- people are going to stay working from home longer than what anyone is thinking today. And we believe maybe we'll have continuous upside, maybe not at the same level we got in Q2 and beginning of Q3 of the broadband, in the Q4 as well. But for the time being, we are staying cautious on this because, obviously, all this is really their actions and more than specific guidance because we need to see how this will -- things will shape after, I'll say, July time frame, June, July time frame.

And just a follow-up on the broadband. You talked about some new customers coming in, with work from home probably more of a global thing than just the U.S. side. Are you seeing maybe upside in orders from new customers or any previous customers maybe coming back where there's more and more places around the world that might have this permanent work-from-home phenomena?

I mean, absolutely, I will. By the way, just to mention that the Jetpack is not only sold under Verizon brand. It's sold as well as for a couple of MVNOs in the U.S. So we see this similar demand coming there. And as I mentioned, in the broadband, we're seeing very good traction with the new deals. We are currently in advanced stage with the big guy who -- who's testing -- has the product in test in the U.S. and in Europe for a new version of this. So definitely, the demand is there and in the emerging as well is moving well. So I believe that the broadband is going to be -- is going to continue to grow. And obviously, the trend from 4G to 5G is going to continue. Just only what, I mean, I could not predict is really this spike we saw now for the order of Q2, where it's going to land in Q4, which is a little bit complicated to be precise on this, even if I see it setting up maybe at 2x the level where we are today.

Great. Last question from me and I'll pass it on. Just on CBRS, can you just update us? I know there's just a month delay but kind of how you're seeing that market development. What could be kind of, call it, calendar '21 type opportunity there for your business?

I mean, definitely, CBRS is -- it keeps developing. We have a lot of customers as you know already. Not all of them announced, but we have many of customers that they have product ready. We did see some revenue with this. We continue to see traction on the CBRS. The delay of, I'll say, announcing the auction by 1 month, I don't believe it's going to impact globally the market. Obviously, a little bit of delay here. We planned for this year maybe -- we stayed modest for this year, we planned kind of above $1 million CBRS this year, more coming in the second half. We're still targeting the same level today. But we see this really accelerating next year with more and more application because it's all about private LTE connectivity. And you have a lot of application there, even some of them are consumer-related application where people in a private environment, you could have connectivity. Instead of using the carrier network, you can have some local networks to connect on it. So this is definitely an area of growth for the company next year.

We can take our next question from Scott Searle of Roth Capital.

Georges and Deborah, really appreciate the color and commentary that you provided on the call. Hope you, your families and your teams are doing well, given the current environment. Just to jump in on the balance sheet, I want to clarify, from the end of the quarter, it looks like you've secured $10 million in incremental sources from tax credits, BPI loan as well as COVID-19 loan. Is that correct? And then in terms of the innovation loan, could you remind us how big that could be? And I think you've got some other sources as well in terms of potential upfront and the repayments that you've been talking about as well as the strategic opportunities there, I think, more related on the 5G front. So all in, could you give us an idea of what that total cash inflow could look like? I think even if it extends beyond the second quarter here, you put the innovation loan in some of these other sources, we're up over $20 million in incremental cash coming into the balance sheet. Is that correct?

So what we -- yes, so what we've secured already, Scott, is between the 2 French loans and the recovery of the tax credit is above $10 million. And on top of that, we have a boost in the quarter for another $1 million or so of deferral of certain payroll taxes and others, but that's more of a timing difference within the year. On top of that, we had talked about the innovation funding, which is totally unrelated to the COVID-19 situation. This is typically what's available in France and in Europe for major R&D projects. We had a -- we do a number of these every year, usually on a smaller scale. But what we're looking at is potentially EUR 7 million. So $8 million funding for the 5G project. So this is something where we're hoping to finalize this in the quarter. As Georges mentioned, this is one of the things where it's taken a bit of backseat to all of the other COVID measures put in place by French government, but we're moving forward on that.

[That's more a big one], yes, I mean there is no issue with it.

Yes, yes. And in addition to that then, of course, we have -- sorry, yes?

Oh, sorry. No, yes, just -- and as well other sources in terms of strategic options, with potential partners out there, I think, specifically related to 5G and some other NRE. It sounds like there's some incremental potential cash opportunities additionally?

We have. And I mean, definitely, obviously, the strategic option, as I mentioned, we are moving very well. There is at least one quite -- I mean, we have a couple of them, but one is really progressing. I don't know if we'll be able to close it in the quarter, maybe, I believe, more beginning of Q3, what I'm setting to myself. And it's moving very well. I mean, even if the COVID is not impacting, I will say, the demand or anything, it's just really making things a little bit more complicated because the priority of management and company is really short term and everything a little bit longer is put on the side, but this is recovering, and we'll come back. And we believe this could be kind of bringing high single digits. I mean, it could be at close maybe $10 million. We have couple of others as well, similar.

And I wanted to say another one as well. Yes. Oh, yes, what I want to say as well that the -- from -- even if you could not qualify it, I mean, it has some cash impact. The vertical deals, I was talking about big deal that we are working on since last year. And now I was saying on the call that we should close it this quarter. I'm more than 90% confident that this should close this quarter. This is really more than a 2-digit number, and it has as well some upside down payment. So the vertical deals as well, they can contribute a couple of million dollars at least upside that will add up to the strategic. So you're absolutely right. If you add all this, what Deborah mentioned, more than $10 million already secured. And you add the [$78 million] of the innovation funding, and other strategic plus some vertical, so definitely, we start exceeding the $30 million of source, with the strategic close to $30 million -- if you add the strategic, it will be close to $30 million new money coming to the company.

Great. And Georges, maybe just a follow-up on the 5G time line. It seems like with the hiring of the team in Israel, the inbound interest as it relates to 5G in general, and in particular, it sounds like a lot around fixed wireless access. What is the current time line of when you're expecting to have some initial product at least taping out into the marketplace and revenue? Is that a '22 type of opportunity? Or something that -- is that getting pulled forward into '21?

I mean, very honestly, we're trying to do something. I mean, all depends how you accelerate things, but '21 will be measured, I would say, we'll start seeing some of the technology. I don't believe we'll be shipping anything in '21, it will be more for '22 to start shipping to customers. But in '21, we could be sampling without giving more details for the time being. So all the R&D investment is on this. The team in Israel is doing well now. We have there more than close to 40 people and strong focus because more and -- the more -- the less we are doing on Cat M, obviously, because we have -- our new generation is already in hand. The more and more people are engaged into the 5G, which is now becoming like the major R&D investment in the company.

Got you. And just 2 follow-ups, and then I'll move on. But in terms of broadband, could you calibrate us what it was in the first quarter and what you're expecting for the second quarter? And I think, Georges, in the past, you'd said expect somewhere in the ballpark on an annual basis, getting back to the $10 million or so range. Is that kind of correct? And are we seeing some upside to that? And then in the past, also, you've talked on the massive IoT market, a lot of activity certainly going on there related to Skyworks, your MCU partners and some of the distribution channels that you've delved with Avnet and other and things like Monarch Go. What is the size of the pipeline? Is there some way you could help us understand? I know you've talked a lot qualitatively. But in the past, you've given some numbers around the magnitude of that pipeline of opportunities. Maybe not explicitly in numbers, but can you kind of gauge it in terms of size? Is it 50% larger than spend? Is it more than that? I mean, I'm just trying to gauge the level of activity there.

Well, I mean, just to talk about the broadband, obviously, I don't want to -- because the broadband, as you know, we have the emerging and we have Verizon and the upside is coming from Verizon. Verizon typically, on the Jetpack, we do around $1.5 million to $2 million depending per quarter. This is the level, what I will call it, nominal level. Obviously, the demand is -- we get -- if we were able to supply 5x of this, definitely I will take it, I mean, in Q2. So definitely, we have a lot of demand. We didn't accept all the demand because, obviously, we need to be serious and knowing because we have limitation as well of what we could build and in very, very short time, impossible to do. We took more than -- we accepted order more than what we can supply at risk, if you want. And we are working hard to see how to serve this between Q2 and Q3 because some of this demand can shift to Q3. And I'm hoping that beyond this, that this -- only this product line maybe will go to a new high, maybe to close to $3 million per quarter instead of staying at $1.5 million, $2 million. So this is on the broadband side.

You spoke about the IoT. I mean, if I compare the projection, if you want, we are talking about quarter-to-quarter these days, even with the Q2. Even when we counted some of our growth of Q2 is coming from the broadband, still relying on about 30% growth into the IoT. So the IoT is growing every quarter and it will continue like this. Obviously, the Cat 1 is not really growing. It's going to stable, if you want, as it is today. I don't see quarter-to-quarter major growth. I mean the growth is minor. Before we introduce new customers -- I mean, we have a customer, but it's more towards the end of the year with bigger project that could add further growth. But we are going to see a little bit the Cat 1, our target is kind of at least in the coming quarters to be flat and all the growth is coming, obviously, generated by the Cat M/NB that -- with the product we have there.

And in terms of opportunity, the -- we are talking about -- we're still talking about more than $250 million, I'll say $300 million opportunity of Cat M/NB. So we stopped reporting those because sometimes we start getting as well very big one. If you add them -- I mentioned last time that we have some good success in the metering space. We continue there. And those projects tend to be not only 3 years' business. They tend to be 7, 8 years' business. And just only 1 project, I can just do -- 1 project alone, we're talking about one, just I have in mind now where we are really in a very good position. We're talking just this project alone could be more than $100 million, just only 1 design win, if you want, [and customer]. Because it's not only 3 years, it's going about 4 years there and -- sorry, 7 years there. So this is really progressing well, and we keep building the pipe.

And as I mentioned, a lot of traction around the SiP with Skyworks. The push of the distributor is helping. Too early yet to say it's -- to celebrate this, but the quarter was very good since we signed them because obviously, it takes time to put everything in place, train all their salespeople. We did a lot of training for more than 2 teams, each one of them close to 100 salespeople get trained by our sales and marketing people to push deals everywhere. So the pipe is increasing because of this extra sales force, if you want, that we are getting, thanks to the distributor. So all this is really going into the right direction. I'm still -- I don't want to anticipate, I would say the success. I would like to see it happening before we start talking about it. But all what we did in Q1 was really very well and very promising, I will say, that we're having.

We will now take our next question from Tristan Gerra of Baird.

You mentioned how the supply disruptions out of China were pretty much behind, anything else that you see in terms of disruptions outside of China, whether it's for you or your suppliers? And also, if you could talk about the type of components where you're seeing shortages.

Tristan, obviously, the main shortage we had was in China, I tend to say into the fab. What I spoke in Q1, it was really we didn't have a challenge of finding component or anything because we had everything ready anticipating our production for Q1. We didn't have any lead time because the units were there and so on. The challenge was really the production capacity get stopped because people went home and they were not able to work. So this is behind us. The Chinese are working, our office in China, all of them are working from the office. Obviously, they have all the measures, they use masks and so on. But things are moving well very close to normal. I don't want to say normal, but very close to normal in China the way we see. However, the challenge going into the future, and this is where you see it, for example, we didn't hear in Q1 anything about any disruption in Singapore. And as you are hearing recently, Singapore started getting some problems. Thanks, God, that they maintain what they call...

Essential services.

Essential services open. And for us, Singapore is very important. This is our hub. This is where we have our logistics, our manufacturing team. And we have a lot of packaging [off-site] the company doing for us there. So this was a little bit of concern, very honestly, in the last couple of weeks. But so far, so good. I mean, we are getting even yesterday that the Prime Minister of Singapore was giving a new update and everything is moving well there. We had -- so we have as well with TSMC, there is demand on TSMC. So we had some -- I don't say because we're coming and jumping in long lead time, we're getting a little bit more pressure on the lead time with TSMC, but so far so good. We -- I don't want to say it's like normal, but I'm managing and TSMC is -- was always a great supporter of Sequans. So we're managing to get our capacity. I don't see issue there.

So on the chip, we don't see issue. We are managing, even if it's tight because we have a lot of demand and you need to serve it. It's not easy, but it's tight. We -- and the only challenge I see in terms of supply today, I mean, I touch not about anything that could happen next month because I have no clue but what we see today, we have long lead time on some of the components we use on the module. Quite often, they are the analog piece. And without naming our friends, Skyworks, they have some long lead time, and we used some of their component on our modules. There is some -- still some manufacturing in Malaysia shutting down. So we have some components, not all of them. They are short, and we need to go and figure out ways to get some from the gray market and so on to accelerate -- to serve our supply. So that's how I see it. It's not really 100% clear. Otherwise, I will be coming and serving all the capacity I have because it will be more. So we want to be cautious. But we evaluated what we have in hand, the risk we can take it, and that's why we estimated what we can build for Q2 and took this in our number for Q2 with the hope to get more, if things will get cleared by June time frame.

Okay. Good. That's great color. So it sounds that on a quarterly basis, you could see $1 million or $2 million upside in the revenue from that Jetpack business. Now you've talked about some Cat M and N -- Cat M delays in the second half. What will have been the type of revenue contribution in the second half that you would have expected from that business without any pushout?

I mean, let me say it in other words. But first of all, we don't have any pushout. I don't want really to say because it's too early because they -- when the customer, for example, they get their PCB under test and they didn't receive it because of the COVID on time, they got it later on 2, 3 weeks. Are they going to catch up or not? So it's very hard to come to conclusion because, obviously, the customer, they would like as well to get their product out and they have order, they have customers, for example. I'm thinking about one guy in mind who has customers and order waiting for him. And his challenge was that he was supposed to get ready with the best production, get some good position in Q1. And in Q1, he was not able to receive his boards because of the COVID situation. So obviously now he's working in Q2 to catch up. So we'll see.

But if you think about -- our Cat 1 business is not impacted. We're talking here mainly about the Cat M new projects because here where we have the new projects. And you could say like our business was the -- kind of the growth in the second half, half of it was coming from new projects. So let me talk about -- we're talking about like $1 million, maybe $2 million in Q4 relying on new projects. So this is the order of magnitude of risk versus my target, if you want, at the beginning of the year. So obviously, if those $2 million will get impacted, and I will do one of them, 1 instead of 2, I will be short by 1, hopefully, if the broadband is giving me the 1 back, I will be in the same situation, and I will be still making my number and maybe with a little bit of upside if things come well with the supply and not too much risk -- not too much impact on the Cat M. That's how I see.

There are no further questions in the telephone queue so I'll hand the call back for any additional or [closing comments].

Okay. So thank you for all of you for all the questions and staying on the call. Looking forward, obviously, to seeing you in the near future or at least talk with you hopefully, hopefully seeing each -- seeing you again to come faster than everyone is dreaming about -- thinking about, but who knows? We need to get used to this virtual reality where we meet and talk without touching each other. Okay. Take care, guys. Thank you very much. Thanks, operator.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.