Sequans Communications S.A.

Welcome to the sequence first quarter 2020 results conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. Before I turn the conference over to our host, Mr. George Karam, I would like to remind you of the following important information on behalf of sequence. 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 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 are objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. Financial results described in this call should be considered preliminary and are subject to change to reflect the completion of our evaluation 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 31st, with final revenue of $8.8 million and better gross margin from a more favorable 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 three weeks ago, I will 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. Both 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 we'll 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 we face 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 it's increasing demand for some of our solutions. This pandemic has caused the 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 play some part in helping deal with the consequences of this crisis by providing cellular 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 IUT 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 healthcare 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 you 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 users. 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 a growing use of our technology to do more things remotely in industrial setting via robotics, or using smart building technology to minimize the need to touch surface in common areas or 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, the 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 one growing pipeline of opportunities, with multiple customers. We hope that the one 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 customers 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 bandwidth for people to work and play in the cloud. Turning to the massive IOT business, we'll begin with Cat1. 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 Cat1 modules seems okay for now, although we may expect some lower demand in the telematic 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 Cat4 modules used in the Jetpack, so there is some potential trade-off between modules for the broadband IoT business and Cat1 modules for the massive IoT business, which could push out some of our Cat1 module revenue. We are on track with the development of CalIUP2, our next-generation Cat1 platform, and we see a lot of interest developing in this new low-power, low-cost Cat1 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 one design win, and we are in an advanced stage with several others. CATM and B 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&B revenue for 2020 with even stronger longer-term prospects than before. We have 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 Scouts. 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 and XP and ST, 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 CatMNB 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 Sequence 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 this quarter. In general, our visibility is good in this portion of our business, and we are on track to meet our target for the year, despite some timing risks related to the nature of such big deals. Regarding potential new strategic deals, Discussions 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 a loan agreement with BPI, the French investment bank, earlier this month, and we are working to close another bigger one. Both of them are 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. I 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 toward 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 the 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 on 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 three greater than 10% customers in the first quarter, one OEM and two 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 one-time non-cash expense recorded in general at administrative expenses, also related to bringing on the new team. Q1 sales and marketing expenses tend to be higher than other quarters due to two major trade shows during the first quarter. Given these quarterly fluctuations, we are expecting non-IFRS operating expenses to average around $10.5 million per 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 five 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 non-cash items related to stock-based compensation expense and the non-cash 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 5 million Euro 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 a million dollars. 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 George mentioned, is moving slowly because of the focus on the COVID-19 relief measures. Accounts receivable in 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 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 non-current liabilities after we recently extended the maturity of the tranche issued in 2016 by one year to April of 2021. Finally, turning to the financial outlook, after taking into account supply change 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 George, I'd just like to remind you that at the conclusion of this call, we will post a written version of our formal remarks in the investor relations section of our website on the webcasts and presentations page. That's the same location where you will find the audio replay. Also, George and I will be participating in the virtual Baird Conference on June 4th. We look forward to speaking with you if you plan to participate. Now, I'll turn the call back to George.