Sequans Communications S.A.

Welcome to the sequence third 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, 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 in 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 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, our forward-looking statements within the meaning of the Private Securities Justification 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 of forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made to the Securities and Exchange Commission. 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 the high level, the positive revenue impact of the coronavirus on our broadband IUT 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 accomplishments fall into three 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 router sold by Verizon. On the past two 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 in a broadband IoT remaining at a very high level, similar 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 band referred to as CBRS. The spectrum will be used by various entities to build their own 4G, 5G private networks as well as by mobile operator and other service providers to improve networks 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 GHz 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' products. Having a cost-effective solution is extremely important for private CBRS networks, where 4G, 5G is being used as an alternative to Wi-Fi, offering guaranteed quality of service by using semi-licensed spectrum. We are working with more than a dozen companies who are using our LTE Cat4 and Cat6 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, Telet, has launched two CBRS modules based on our platform, and last week, we had a very well-attended joint webinar with Telet 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 customers we added this year are ramping up and will complement the business we have with long-time relationships with customers such as Gemtech. They have been winning new projects in new regions such as Southeast Asia and the Middle East. Finally, we are discussing 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 are 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 the first phase of initial study this quarter, while our partner is concluding its budget allocation to proceed with 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 in 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 MassiveIoT. We are very confident about our MassiveIoT business. and we believe the ramp in MassiveIoT 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 MassiveIoT 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 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 bit more detail, our massive IOT revenue stream coming from our existing base of Cat 1 and Cat M and B 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 secure design wins in the US and Japan with both CAT-1 and CAT-MNB 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 will continue to see strong order pattern from our customer who's building infectious disease testing devices. Some of the CATAM 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 two 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 two 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 applications. 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 great progress during the year. For example, with Avnet, one of our distribution partners, we recently combined Monargo 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 MCO 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 solutions 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 when our second generation CAT-MNB 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 Cat1 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 ship 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 this large 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 three greater than 10% customers in the quarter. One is an OEM and two 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 dollars, 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 non-cash gain of $1.5 million from the revaluation of the embedded derivative arising from the March 2020 amendments to the convertible debt agreement. This compares to a net loss of $19 million or $0.70 per diluted ADS in the second quarter which included a non-cash loss on the revaluation of the abetted derivatives of $9.1 million. The net loss in the third quarter of last year was $9.8 million or 41 cents 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, $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 non-cash 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 3 cents per ADS, most of which was unrealized and non-cash and related to the revaluation of Euro-denominated net liabilities totaling about 18 million Euros 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, are 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 a technology consortium of seven 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 €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 remain 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're 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 one cent 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 ADSs 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 F-3, replacing our old one, and it will have essentially the same terms. Before I turn the call back to George, 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, George and I will be participating in the virtual Ross Technology Day on November 12th, and we look forward to speaking with you if you plan to participate. And I'll turn the call back to George.

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 the three 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 partners to us so far, and I believe we will have more that we will be securing in the near future that will help us finance and complement the investment we are doing in this space. Thank you very much for listening, and I will turn now the call for questions. Operator?

Thank you, Mr. Karam. Ladies and gentlemen, if you have a question, please press Thank you very much.

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?

Hi, Mark. Mike, sorry. Hi. So, Mike, I mean, the point, you know, one of the challenges we have, if you look to all the studies around CBRS, is really to size its potential because as you see it can go to many, many applications and when you start dealing with the private networks and so on, it'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, you know, between $3 to $5 million next year. This is my target in this segment. Obviously, we're doing this on the basis like of analysis of bottom-up, you know, with the ideas we have in hand and estimating each customer how much he 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, you know, having enough time to estimate all those projects, how big they can be, each one of them.

Great. Thanks. And just to follow up, you know, broadband, strong again with maybe the CARES Act and the surge in demand. Can you just talk about supply-demand dynamics in the Q4 and how you see the surge continuing?

You know, the... In 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're 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 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 order we have in hand.

Great, thanks, 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 a big contributor, but we also have our traditional massive IoT space partners that we work with there, and one was for service revenues.

I hope everybody stays well, and thanks for taking my questions. Thank you, Mike.

Thank you. We'll now move to our next question, which comes from Scott Searle of Roth Capital. Please go ahead, sir.

Hey, good morning, good afternoon. Thanks for taking my questions. George, 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, you know, in Q3, we had a problem in July, and the last month 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%, you know, that I consider has slipped between Q3 to Q4. I'm talking about the, just only the order of jetpack, you know. But this supply constraints, by the way, put some stretch as well on other modules we manufacture for the massive IUT, you know, the Cat 1 modules in general. And what was the other question? I missed it.

Oh, a sequential outlook, George, into fourth quarter for broadband.

The outlook on broadband, you know, 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, you know, the major driver of the broadband. We could have a little bit of growth coming – from some CBRS order that we are serving because we'll have some. And we have a couple of new order 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 in 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 end. 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 MCU partnership, again, if you if you look to the partners that each one has his 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 you know obviously when you look as well to the position of NXP versus Renaissance versus microchip you know you're talking bit on MCU between 8 bits to 32 bits the various segment each one has some strength and some of the segment less than others and this is really good for us because they complement each other the way we're seeing and it accelerate our you know go to market in general and others to brings more design win they also can look some kind you know they could be also help us winning big deals One sequence is challenged as a small company, you know, because obviously having those big company backing us help us, I will 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, The Renesas wanted to move much faster in the go-to-market strategy and offer directly under their brands modules integrating sequence 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 sequence chip is inside. and will be sold to the market. Obviously, the module will not be only integrating sequence 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, you know, generating direct business versus the other guys that will be indirect because it will be coming from the end customer. and again, you know, very hard to quantify it, you know, for the time being. All that I could say, they are going to be, you know, to help us a lot in the growth of massive IoT because it gives us reach and obviously acceleration of the design. On Monarch 2 timeline, the chip is sampling to customers. As I said, we are giving this to customers. 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 two 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 the integration we have done. And we have some advanced feature 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 key driver for next year. And about iTron, you know, I don't want to comment much about the nature of the project just to keep it confidential for our customer, but, you know, nothing to hide there. It will be, it's a metering. But the timeline, you know, for the timeline in terms of revenue, you know, it takes the time to qualify the meter. So for us, we expect this, you know, 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 you can be, you know, 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. Thanks so much. Nice job.

Thanks, Scott. I mean, obviously, our 5G plan, you know, we're expecting to start sampling end of next year or beginning of 2022. You know, I mean, we'll be making tape out next year. and depending you know on the definition of something but we'll have silicon in hand if you want end of the next year and regarding you know the interest and 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 the 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 engagements moving very, very well, and I consider them very likely to happen, if you want.

Thank you, sir. We'll now move to our next question, which comes from Craig Ellis of B. Reilly Securities. Please go ahead, sir.

Yes, thanks for taking the question, and good morning, good afternoon, everybody, and congrats on the nice results. George, it was helpful to get the quantification around your view on CBR's 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?

You know, the pipeline in the emerging market, you know, my estimation was, you know, that this is, we'll go to similar order of magnitude. It's somewhere between $4 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 dominate in general. And Obviously, 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 win larger chunk of business because of the challenges there. So we are not, you know, maybe hopefully we could have, you know, some nice surprises there where we can get more broadband emerging next year. But our target is really like four or five million dollars.

That's helpful. And then The next question really goes to the MCU partnerships that you've established. So you've got four 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, you know, it's really industrial in general. I know the big name, the big definition of industrial, but also what we're seeing is essentially smart home and smart cities. You know, 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, of food, you know, all this 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 MCO 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 MCO software environment, so that help us to get access to this quickly.

And if we were to look ahead to next year, George, 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, you know, I mean... it's complicated because you know some of them they will deal as well with Avnet 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 you know the distributor can bring to us some of the you know directly what I will call it because you know 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, an environment that could be helpful. RFPD, for example, we use them to sell the SIP with the SCAVOX, and they have some channel which I believe it will be a privilege to them to be different from the others. But we are hoping that the contribution of the MCU will be bigger, you know, 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? Thanks, Gene.

No, you know, I don't want, you know, 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 time. And if I don't do it, everybody is unhappy and the stock will go down. So I don't want to jump to this. But very honestly, the short-term stuff is happening, you know, so there is no risk on this. And we're expecting really, you know, 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 they are really, you know, very hot deals now. They could happen beginning of Q1, end of Q1. You know, I don't want to go with timing on this, but for me, they are early beginning, early next year.

Got it. Thank you.

Thank you. We'll now move to our next question from Dennis Pietranin of Needham & Company. Please go ahead.

Hi, thanks for taking my question. So I'm asking this on behalf of Roger Gill. Could you please talk about how we're going to think about kind of the 5G impact on adoption of CADM and kind of the narrowband IoT as we enter 2021 and the next phase of 5G deployment?

Hi, Danny. I mean, you know, it's very important to keep in mind because, you know, this branding of 5G, you know, it's really a brand. You know, behind it you have releases of 3GPP and so on. and Cat M and 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 two umbrella, if you want, at least, not to say three, but to make it simple, it has two umbrella, one really oriented for massive IoT and one This means CAT-M, NNB, as we use it today in the 4G, with some software evolution to the future, where your ship needs to be capable of evolving this. And this is what we said, because our platform, whether Calibre P2 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 5G. 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 network point of view, what the operator are doing are really deploying this high-end new radio, if you want, but in 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. Thank you. And then just one follow-up question. Could you talk a little bit about the satellite customer push-out that had happened before and if you think that's going to come back in the next few quarters or so? Can you provide some kind of 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 a 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 Q2, and we're concluding this now, you know, 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 where I said this can generate two-digit revenue for sequence. 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 get 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 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 will sign maybe end of Q4 or beginning of Q1.

That was all from me. Thank you. Thanks, Danny.

Thank you. We'll now move to our next question from Christopher Hillary of Ruby Capital. Please go ahead.

Hi, thank you for taking my question. You're talking about a lot of exciting applications that are in your pipeline. If you look farther out, say three to five 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 time frame that you haven't mentioned so far on this call? Thank you.

I mean you know it's it's it's very very complicated question because to compare between them you know what I could say some of them are less risky in other words when you look to all those application all of them make sense the challenge we have you know when you look to some new application where you don't know the adoption you don't know how much is going to sell to be successful the timing and so on but I could say today for sure that the metering will be a big, 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 the metering companies, 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 tend 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, you know, the number of things that you need to track are, you know, 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, you know, 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 RAM in my opinion. So this just to give the three. And obviously I'm discarding here all consumer application 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 all wearable application and so on but it's a little bit, You know, hard to estimate how big it will versus the other one.

Okay, thanks. 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, you know, our 5G, what's clear is that what we are doing is that we have a comprehensive solution for non-handsome. 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, you know, 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 a fixed router or for a portable device or for an industrial machine. So all those 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, you know, not too many players are able to offer 5G and having Sequence there create, obviously, we're seeing a demand from the market to have Sequence delivering 5G. And this is also give us more chances, I would say, to win a nice market share.

Thank you very much.

Thanks.

Thank you. And we'll move to our next question from John Lopez of Vertical Group. Please go ahead.

Thanks very much. 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?

Oh, sorry. Yeah, excuse me, from a growth perspective. So if product sales were up 32% quarter to quarter, is it fair to say that broadband outpaced that 32%?

Yes, yes, yes.

Okay, 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?

Okay. Yeah, I mean, this is, you know, I mean, very honestly, no one knows, you know, so it's not like we have, we're looking to 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 surge of demand is a little bit, you know, at least as we are speaking, we're putting ourselves in a position that Q1 will go back to normal from this port of outdoors. 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 projection, if you want, in a position that we're not relying on the surge of demand. We have seen it in Q2, Q3, and Q4. Yes.

Gotcha. Terrific. Sorry, just two 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 only on the user side. 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 are always on the user side.

Gotcha. Okay, so cluster on the client side. Gotcha. And then my very last question, if we look in recent weeks, you've got a competitor in AsiaPAC 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 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'm sorry, I could, 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. Yeah, yeah, 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 know, I mean, you know, let's say it like this. Here, when we talk about the 5G technology, you know, in general, you know, to name it, outside of China, you have only two, MediaTek and Qualcomm. And obviously, their main drivers is really to build the technology for the phones. You know, this is really the major business they are pursuing and they are optimizing their solutions. Obviously, when you do this, you are able on the corner to serve other businesses. I'm not saying, you know, we always compete with Qualcomm even in emerging markets, you know. So there is nothing that prevents those guys from going to this market, but they don't do it with the right way, with the right focus in general. And this is when Sequence is only focusing on this, is able to do more. Now, on MediaTek, you know, obviously, they will come. In principle, they are Taiwanese, and in general, you know, they are able to come and sell in Europe and the U.S., but you know their main focus as a market you know 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 you know if we compete it will be MediaTek and Qualcomm so we'll have two instead of one we're still you know with MediaTek a little bit tuned more towards Asia than really U.S. and Europe.

Gotcha. Thanks so much for all the help I really appreciate it.

No problem. Welcome.

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 you spend on the call. Thank you, operator. We're done.

Thank you, sir. Ladies and gentlemen, that concludes today's sequence third quarter 2020 results call. Thank you for your participation. May now disconnect.