Sequans Communications S.A.

Welcome to the CQAN's fourth quarter 2020 conference call. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is 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 CQAN's. This call contains projects and other forward-looking statements regarding future events or 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 seasonal revenue decline for the first quarter of 2021, long-term revenue goal, Future results of operations and financial positions Business strategy and plans Expectations for massive lot and broadband and critical lot sales The ability to continue to operate remotely as required At high levels of productivity Increasing backlog of orders And the impact of the coronavirus on our manufacturing operations Supply Chain and Other Customer Demand and the Impact of Incomponent Shortages and our Manufacturing Capacity and our Objectives for Future Operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 Section 27A of the Securities Act of 1933 as Amendment and Section 21E of the Securities Exchange Act of 1934 as Amendment. 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 suspect to any change at any time. We undertake no obligation to update the information made in this release in the event facts or circumstances subjectively change after the date of this call. 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 production or forward-looking statements. More information on the factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. Thank you. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen. This is Georges speaking. I'm with Deborah Choate, our chief financial officer. Welcome to our fourth quarter and full year 2020 results conference call. We hope everyone is remaining healthy. Our global organization continues to take the necessary steps according to local conditions to ensure the safety of all our people, and we continue to function very well. As you have seen by our press release, we exceeded our revenue targets in Q4, even as demand related to portable routers had begun to return to pre-COVID levels, leading to full-year revenue growth of 65% compared to 2019. This is a very good start toward our goal of an average of 50% annual growth for the 2020-2024 period. As we indicated during our investor event a month ago, we are expecting our served market to grow a little above 40% a year on average through 2025. We set our five-year target for an average annual growth above the expected market growth rate because we believe that we will be in a strong position to gain market share with our second-generation massive IoT products and later with our high-end The remainder of our results for the fourth quarter and full year were in line with or better than our expectations, and we've strengthened our balance sheet as well. Deborah will give you all the specific financial details. I will focus here on the business aspect and share with you what we think is significant from this perspective, then highlight some key accomplishments and exciting new developments. In 2020, I'm pleased to say we grew in each major category. Massive IOT grew 8% with the impact of COVID on the automotive related business and the timing of some projects partially offset by stronger demand from e-health customers. Broadband IOT grew 145%. mainly due to the huge demand generated by initiatives with schools related to supplying portable routers for distance learning. By year end, the portable router related demand had already begun to return to pre-COVID levels with some excess inventory at the operator. The vertical category grew over 50%. Note that this vertical category includes the revenue contributed by our major strategic deal with the Fortune Global 500 company for three plus years signed in Q4 2019. In 2021, the reduction in demand for portable routers should be more than offset by the acceleration in the ramp in demand for massive IOT, especially relative to the last year. And we expect this category to be the primary driver of growth for sequence in 2021. New CBRS business and more revenue from emerging markets within the broadband category will also help to compensate for the absence of a surge in portable router related business. And the vertical category will also grow year over year with higher revenue contribution from the large strategic deal and new deals we expect to close. Gross margin for both products and services improved in 2020. Meanwhile, our operating expenses reflected the headcount increase necessary to support our 5G development. Given the higher than expected revenue on a gross margin, our net loss was less than expected in 2020. And after adjusting for all the non-cash accounting items and foreign exchange differences, we had a smaller loss than in 2019. So it was a year to be proud of from the execution standpoint. 2020 was also an excellent year from the sales and business development perspective. We ended the year with a large pipe of design wins and advanced opportunities, and we closed 2020 with the highest ever level of booking, a strong indication that momentum is building. And since the end of the year, we secured multiple additional design wins. I will speak more about those in a moment. Let me start by highlighting some other important accomplishments in 2020 that are not captured by the financial statements. We made an important step in sustaining our technology leadership in massive IUT by introducing the second generation of our Monarch platform optimized for LTM and BIUT, which has been sampling since the beginning of 2020. In Q4, we introduced a module based on Monarch 2. As we noted during our January investor event, the customer reception has been excellent, largely because we have built on the maturity of Monarch One and its reputation, adding advanced features and significantly reducing power consumption. During the event, we spent considerable time discussing the major opportunities we see in metering. We also discussed our relationship with ITRON, the largest company in the metering space, So I won't repeat it all here, except to note that in Q4, and so far in Q1, we have landed many new design wins in the metering space, as well as other massive IoT applications. Meanwhile, during 2020, we also announced our second generation Calliope platform for category one, which will be sampling in the first half of this year. As mentioned during the investor event, This is a unique offering with a huge potential, and we expect CaliP2 to drive market share gains in the Category 1 portion of the market beginning next year. During Q4, we secured a proof-of-concept phase of a project with a large customer electronics company for a product using CaliP2, and extended our Renaissance engagement in massive IoT to cover CAT-1 in addition to LTM and BIUT. Then in January, we were very pleased to announce that Thales Gemalto will adopt both Monarch 2 and CaliP2 as the basis for its new LTM and CAT-1 modules for MassiveIoT. It's always confirmation of our performance and leadership and gratifying to win a repeat customer. In this case, for the third time. There is also a strong interest in CaliP2 from other module makers as well, and we have recently engaged with a major OEM on this product. Meanwhile, we are pleased that we are seeing strong demand for our current Cat1 platform, which is the CaliP1, much stronger than we expected from existing CASF. On top of our work on second-generation massive IoT products, we also managed to reach all our major 5G milestones on schedule, and the relationship with our major 5G strategic partner is progressing very well. As announced last month, in addition to Monarch 2 and Kalaipi 2, Renesas has chosen to work with us on Taurus, our high-end 5G, 4G platform. We are seeing very strong interest in Taurus from both potential strategic partners and potential alpha customers. We expect this interest to increase as we get closer to sampling because everyone is looking for a more fully optimized and cost-effective solution for broadband and critical IoT applications than is currently available in the market with existing solutions that are optimized for smartphones. Finally, During 2020, we implemented very important go-to-market initiatives designed to scale our direct sales capability with the addition of several reps and to scale our channel capabilities with the addition of several large distributors and several microcontroller companies as partners. All of these have already borne fruit in the form of design wins or significant new business opportunities. and we expect even more traction as times goes on. Expanding our reach and positioning the company to serve a fragmented market through these distributors and channel partners will be a key factor in our ability to reach a scale. The important takeaway from this summary is all these accomplishments will lead to business that will turn to revenue in future periods. During our virtual event last month, we also shared a snapshot of our pipeline of potential business. $500 million in product revenue, assuming a three-year revenue cycle from the date the customer's device goes into initial production. Also, we have indicated that we have another $100 million in potential services revenue that we track separately because it tends to convert to revenue a bit differently than products. Over this part of opportunity, we indicated at the event that 40% of the product pipeline has been secured by design wins and will turn to revenue. The percentage of potential services revenue secured by design wins is a little higher than 40%. Today we are very excited to highlight further design win Progress since the beginning of the year. Let me start with the Massive IOT. We announced a design win with WeThinks in January. This well-known company is a spin-off of Nokia that provides smart health devices. We are pleased to report that we have already received our first order from this customer. E-Health is an important market within Massive IOT. and we have a great traction there with many advanced opportunities. Specifically, we are finalizing and are about to kick off two projects with the healthcare division of a major conglomerate. Meanwhile, our existing e-health business, driven mainly by the infectious disease testing application, continues to have strong demand. We continue to enjoy success in the metering market. We have secured the second phase of deployment with TEPCO in Japan. We are working to launch the first ITRON project and one with a new metering customer we secured in Q4. Since our virtual investor event, we have landed another major metering design win. Plus, we have a strong interest and ongoing discussions with two new big deals. So we believe metering is going to be a source of strong growth for the company. In the smart home and security space, we have recently secured two new design wins both using our Monarch 2 platform. Product development has started and they are targeting a launch in Q4 this year. In the wearable, hearable area served by category one, We have a major design win in Europe scheduled to begin initial shipment this quarter. Also, we expect to move the design win we have in the U.S. from the proof of concept phase to the full launch phase with the arrival of CaliP2. Engagements on CaliP2 will be developing through the year and we feel very confident that we can end this year with multiple design wins in this space. through the partnership of Thales Gemalto and Renesas. In tracking and monitoring, we recently secured several smaller deals, and we are working to close some larger ones as well. In January, we also announced a demo of a joint solution with EPS, a pioneer in energy harvesting, a technology that would enable IoT devices to run without batteries. While we are far away from generating revenue from a joint solution, collaborating with this type of company shows our commitment to remain at the cutting edge of technology and also demonstrates our commitment to sustainability and a better environment. In summary, we are entering 2021 with a strong feeling about the ramp of massive IoT, and we see our business developing in the following four markets. 1. Tracking and fleet management 2. Medical and well-being 3. Security and smart home and 4. Metering followed quickly by wearable and hearable as a fifth market segment and we believe most of this business is very sticky and will deploy over six or seven years if not more Let me now go a little bit on some detail on the broadband and critical IOT. We are seeing CBRS beginning to generate revenue and we expect this ramp to accelerate during the second half of this year. Last week, we announced two design wins with Amit Wireless to facilitate distance learning using CBRS private networks. As we've mentioned previously, we have more than a dozen customers including Telet as a module partner, intending to serve private networks for factories, utilities, campuses, stadia, and transportation hubs such as airports and train stations. Over time, we think the CBRS market has very good potential, particularly since we are beginning to see some mobile computing applications for tablet and MiFi devices to repeat what we said a month ago. By gaining traction in emerging markets as expected, our business from emerging markets doubled in 2020 from a very low base in 2019. We see the potential for it to double again in 2021 and make a more significant contribution to broadband revenue. We are working to close a couple of sizable new projects for our Cat4, Cat6 products with existing customers in the U.S., and we are engaged with a few others in Europe as well. We continue to expect that jetpack demand to be at pre-COVID levels during 2021. And in the very short term, there is also some excess inventory that will need to work down. We saw some impact from this in Q4 as jetpack related revenue declined from the peak of Q3. We never expected jetpack demand to remain at COVID surge levels. Therefore, all our previously communicated long-term growth targets have assumed the primary demand drivers in 2021 would be massive IOT and that broadband IOT would be, at best case, flat versus 2020, but more likely somewhat lower because the growth in CBRS and emerging markets may not be enough to completely offset the decline in portable router-related business. For this reason, we are especially pleased by the recent good news I just discussed within MassiveIoT because it gives us additional confidence that demand from MassiveIoT will be more than compensate for lack of growth in broadband IoT as a whole. On the broadband 5G front, We are making very good progress on our 5G Taurus platform development. The major strategic deal we have with our Fortune Global 500 partner is on track since Q4 2019 and we expect to recognize more revenue from this deal in 2021 than we did in 2020. Note that we track this revenue in the vertical category because the services project is so large It would distort the broadband category from quarter to quarter, and the vertical category is typically lumpy anyway. Once we start to have product revenue from this customer, it will be counted in the broadband category as 5G product. Also, as mentioned earlier, in Q4, Renesas became a module partner for 5G in a deal around $5 million. with revenue to be recognized over 2021 and 2022. This new deal expands our go-to-market partnership from massive IoT to cover also 5G broadband IoT. Finally, we recently announced that we were chosen to lead a consortium of seven French companies in one of only four projects awarded by the French government to support technologies It deemed strategic for national interest. This award comes with funding in the form of a grant of approximately $6.7 million. The work of the consortium will be aimed at securing national sourcing for strategic technology for critical industrial, medical, and scientific markets and delivering end-to-end 5G solution for public and private networks with particular focus on the enterprise market. From the strategic perspective, the partnerships, the companies interested in being 5G alpha customer, the government grant, all these illustrate a point we've been making, which is the scarce resource we represent, particularly when it comes to 5G. It appears the scarcity factor is beginning to be recognized in our values. I'll turn now to vertical business. There is a lot of traction in the satellite and public safety and military spaces where customers are relying on our ability to modify the software of our 4G and 5G platforms to fit with the requirements of such applications. Hence, we continue to be confident that 2021 will show higher revenue in the vertical category. As I just mentioned, we count services revenue recognized from our large 5G strategic deal in this category, and this will grow in 2021. In addition, our confidence is growing that our vertical market customer in the satellite space will be successful in winning the large project which has been waiting a formal decision for some time now. The decision is expected any day now, and we hope it will come in time to finalize the deal and recognize some initial revenue in Q1. We have active discussions on additional vertical deals where we are optimistic because they are extending our work with satisfied existing customers and some are with potential new customers. To recap all these positive developments, we not only have a backlog That's the strongest we've seen, but we have new design wins that could move fast enough to contribute to revenue this year and will certainly contribute to next year and beyond, plus new strategic projects that will help fuel the next wave of growth related to 5G. We expect this will constitute enough demand to achieve 2021 revenue consistent with our long-term growth objective. To elaborate on our growth objectives, we believe our company can be 50% per year grower for at least five years. Not necessarily every year, but on average as an order of magnitude indication of what we think our business can deliver. In 2020, we grew above the trend line with almost 65% growth. We are not particularly concerned about whether our revenue and a given period is slightly above or below the trend line since timing of revenue recognition can be a major factor in addition to demand. We now have a line of sight that says we should expect to exceed $100 million in revenue next year and to reach a scale on a quarterly basis the year after. With a whole new growth engine represented by our 5G Taurus platform, Beginning to contribute in 2023, we can realistically expect to reach a scale for the full year in 2024 with revenue over $200 million. This is the growth trajectory we keep in our sights, not the quarter-to-quarter fluctuation due to seasonality or timing factors. So given our backlog and strong design wind momentum, we are comfortable with the range of analyst estimates for this year, strictly from the perspective of demand. However, like the rest of the industry, we are facing sourcing challenges in the form of a global shortage of some assembly material like PCB and substrate and silicon capacity constraints at TSMC. We are working on various initiatives to mitigate the bottlenecks in our supply chain, but meanwhile, there is a risk that some shipments could be delayed. Since the entire industry is in the same boat, we don't expect this to result in lost business, only potential delays. As we work on mitigation plans for the near-term sourcing issues, we continue to develop greater confidence in our long-term growth as we secure more business via design wins and identify new opportunities and gain more interest from our 5G platform to help fuel our growth beyond the next two years. I will now turn the call over to Deborah.

Deborah? Thank you, George, and hello, everyone. I'd like to add some details about our Q4 and full year 2020 results and other developments. Our revenue for the full year was $50.9 million, an increase of 65% versus 2019, substantially exceeding our goal of over 50% year-over-year growth. Revenue increased in all categories in 2020 compared to 2019. Broadband IoT accounted for about 50% of total revenue in 2020, primarily due to the surge in demand related to portable routers. Both Cat 1 and Cat M revenue increased in 2020, and Massive IoT accounted for about 30% of total revenue. The vertical category, which includes service revenue generated by our major 5G strategic deal, increased in 2020 compared to 2019 as well. Gross margin in 2020 increased to 46.1% from 40.1% in 2019. Product gross margin was 32.4% compared to 23.9% in 2019, even with a high proportion of modules in the revenue mix. The increase in operating expenses occurred mainly in R&D and resulted primarily from an increase in headcount and related recruiting fees. Financial expenses were higher than 2019 due to higher interest expense, mainly the result of nearly a full year of interest on the convertible debt issued in 2019, the change in the fair value of the embedded derivative in convertible debt, which alone represented a non-cash loss of $13.1 million, plus a less favorable foreign exchange rate causing foreign exchange losses. As a result, our IFRS net loss increased to $54.5 million or $1.94 per diluted ADS compared to $36.7 million or $1.54 per ADS in 2019. On a non-IFRS basis, our net loss for 2020 increased from $33 million or $1.17 per ADS compared to $31.6 million or $1.31 per ADS in 2019. Our non-IFRS net loss excludes non-cash items related to stock-based compensation expense and the non-cash impact of the fair value and effective interest adjustments related to the convertible debt with the embedded derivatives and other financings, and the non-cash impact of convertible debt amendments and the non-cash deferred tax benefit or expense related to the convertible debt and other financings. Adjusting for the foreign exchange loss in 2020 and a foreign exchange gain in 2019, our non-IFRS loss in 2020 declined year to year and was a better result than most analysts' expectations. Neither we nor the analysts attempt to forecast changes in foreign exchange rates. Turning to the results of Q4, our revenue was $15.8 million, a sequential increase of 11.8% from the third quarter which was above our target of at least 10% growth. Revenue in Q4 increased 58.4% compared to the same quarter a year ago. In the quarter, we again had three greater than 10% customers. One is an OEM and two are ODMs. Gross margin in Q4 was 45.1% compared to 42% in the third quarter and compared to 51.2% in the fourth quarter of 2019 when there was a higher proportion of license and service revenue in the mix. The Q4 2020 gross margin reflects a higher proportion of chips in the product mix than Q3, as well as a higher proportion of service revenue. IFRS operating expenses were $12.5 million in Q4, up from $11.8 million in Q3, primarily due to higher non-cash stock compensation expense fees related to the convertible debt conversion in December and an unfavorable euro-dollar exchange rate compared to Q3. Non-IFRS operating expenses were $11.4 million, basically flat compared with $11.3 million in Q3. Our fourth quarter operating loss was $5.4 million compared to an operating loss of $5.9 million in the third quarter and a $4.6 million loss in the fourth quarter of 2019. Our net loss in Q4 was $11.3 million, or $0.36 per diluted ADS, and included a non-cash gain of $111,000 from the revaluation of the embedded derivative arising from the March 2020 amendments to the convertible debt agreements. This compares to a net loss of $9 million, or $0.30 per diluted ADS, in the third quarter, which included a non-cash gain on the revaluation of the embedded derivative of $1.5 million. The net loss in the fourth quarter of last year was $8.1 million, or $0.34 per ADS. On a non-IFRS basis, our net loss for Q4 was $8.5 million, or $0.28 per diluted ADS, compared to a non-IFRS net loss of $8.4 million, or $0.28 per diluted ADS in the third quarter, and net loss of $6.8 million, $0.29 per diluted ADS in the fourth quarter of 2019. In Q4, we had a foreign exchange loss of almost $1.9 million, or $0.06 per ADS, most of which was unrealized and non-cash, related to the revaluation of Euro-denominated liabilities on the balance sheet. Adjusting for the foreign exchange loss, our non-IFRS net loss was lower than expected. Investors should be aware that possible changes in foreign exchange rates related to balance sheet items and the market-to-market as 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 Q4 was $1.4 million compared to $7.9 million in the third quarter. Our cash and short-term deposits at December 31, 2020 totaled $18.5 million compared to $25.3 million at the end of Q3. As noted during our investor event, we expect to receive a substantial portion of the $5 million strategic deal with Renaissance as an upfront payment in Q1. Also, if the final decision is reached on the vertical deal, the satellite project, and is made soon, We could also expect to receive a substantial upfront payment during Q1 or early Q2. The cash related to the grant from the French government will be paid over three milestones, with the first one upfront also expected late Q1 or early Q2. Considering that we also have more strategic deals that would likely have some upfront payment as part of the terms and more vertical deals that could provide additional cushion, we are feeling good about our cash situation. Turning to some other balance sheet items, accounts receivable at December 31, 2020 increased to $17.3 million from $14.2 million at the end of Q3, primarily reflecting invoices related to the new strategic project with Renesas. DSOs were 73 days compared to 91 days at the end of Q3, after excluding the impact of this new strategic project, which distorts the picture. Inventories increased to $6.2 million compared to $5.8 million at the end of Q3 due to product revenue growth. Current trade payables decreased to $15.7 million versus $17.2 million at the end of Q3. And short-term debt from financing receivables also decreased slightly to $14.2 million from $14.4 million at the end of Q3. Our convertible debt, which is all classified as long term, decreased to $26.1 million, reflecting the conversion of $12.4 million in principal and accrued paid-in-kind interest in Q4. In January this year, Nokomis converted an additional $5.5 million in principal and accrued interest related to the notes issued in 2015. As George explained, we entered this year with our highest-ever level of orders on hand, and we're expecting strong overall demand to continue. Q1 tends to be seasonally lower than Q4 even in a normal year, and we would expect to see the same pattern this year. However, we are not giving specific quarterly revenue guidance or revenue target for 2021 at this time due to the lack of visibility regarding the impact of various bottlenecks in the supply chain, which could delay some shipments and related revenue. Excluding the potential for some ongoing impact of the industry-wide sourcing challenges, We would expect to grow revenues sequentially in Q2 and throughout the remainder of the year. For those of you developing financial models, you can make your own top-line assumptions, but to help you with your modeling, we'll share some margin and OPEX assumptions based on an assumed revenue level similar to the average of analysts' current revenue estimates, which is $71 million for 2021. On this basis, we assume non-IFRS gross margin in 2021 will average about 48% for the year based on our assumed mix. Non-IFRS operating expenses are expected to average 11 million to 11.5 million per quarter in 2021 as we begin to capitalize 5G R&D expense in Q1, and this assumes a stable euro-dollar exchange rate. We expect non-IFRS financial expenses to be around 1.3 million per quarter in 2021, excluding any foreign exchange gain or loss. And we expect about $600,000 per quarter of that interest expense to be in cash payments. Finally, for modeling purposes, the exact number of ADSs on January 31st, 2021 was 34,362,005. 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, the same location where you will find the audio replay. Also, George and I will be participating in the virtual Roth Conference in mid-March. We look forward to speaking with you if you plan to participate. And now I'll turn the call back to George.

Thank you, Deborah. So to wrap up, I would like really to stress a key point, I mean, a few key points here. The first one, which is really to keep in mind that we are really entering 2021 with very, very positive momentum and very confident about our future and our ability to grow this company at 50% CAGR, I will say, for the coming five years period, at least. This is really... Based on two remarks there, the two drivers of this growth is coming from one, which is massive IOT is now ramping. And as I said, we see very strong demand. The company of the company is very, very strong with the technology, from technology point of view, second generation of product on LTM and Cat1 and strong acceptance by the market. Our design wins accelerating. and I don't know if you realize but when I when we spoke in January I spoke I announced almost all what we had in hand already as a design win for Q4 and since then just on in a four weeks time I had more five six new deals that we landed in January period and I mentioned this in my on the call previously so all this to say the pipe of MassiveIoT is building with marquee customer and in the diversified markets, I mentioned at least five strong markets where we are strong there. All this really make the massive IOT a major engine of growth for many years with the sticky business. And the other angle on which our assumption of growth is coming is really the driver of the 5G. Our 5G position, our position in the 5G market is very unique. we are attracting many partners and you see many of them are helping us financing our R&D investment and with this also those partners are going to be potential customers for us in the future so this really accelerate the time to market of this product line Taurus that we are building so again second engine of growth and will help the company to reach the scale and extend beyond the scale in 2024. So this is really on the long term, on the average picture. If we focus on the short term, as we said, we're entering 2021 with very strong demand, really a record versus the previous years we've seen in the past. All this coming from a lot of demand in the massive IOT, by the way, despite the weak jetpack, I'll say level versus last year. We feel very good about the year in terms of demand. But in the same time, we are facing the supply constraints issue, many issues there in the market, but we are handling this as we are progressing. But in any case, any supply issue, the way we see it, it will be a slippage of revenue and not loss of business. So this will not impact, I would say, the potential of the company and the business we can generate, even if from quarter to quarter, we could see some slippage related to this. At the same time, we're working very hard not to get impacted as we are speaking. So this is really my concluding remark. I will turn it now to questions. Many thanks for listening.

Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will now take our first question from Scott Sorrell from Roth Capital. Please go ahead.

Hey, good morning. Good afternoon. Thanks for taking my questions. George, Deborah, really nice job in a very difficult operating environment. And I hope you, your family and your teams are doing well in the current COVID environment. Hey, George, just for a quick clarification, make sure I heard everything correctly. You're still looking for the 50% compound annual growth of the next five-year period. You've got comfort with the current existing street expectations, and the pipeline has grown from when you hosted the analyst event in early January. Is that correct? Absolutely.

Yeah, hi, Scott. All right.

Good. And quickly, just a clarification on the interest commentary. Deborah, do you say $1.3 million in interest average over the course of this year? Just want to make sure I heard that correctly. And on the vertical market deal, George, It sounds like you're very close. Your confidence levels continue to increase. That is very close. Are there any numbers you would put around it at this point in time? And then I had a couple quick follow-ups.

On the interest, that's the expected interest in Q1. Yes, $1.3 million on a non-IFRS basis. And that would obviously go down later in the year if the rest of the convertible debt is converted.

And on the vertical question, yeah, indeed, you know, the satellite deal, we remain very bullish, and I could say, you know, things are accelerating every day, and we feel like 99.9% a deal done. Obviously, nothing is done before official awards, so we're waiting for official awards. And the amount of this project remains, as I said, it's a project where it has a service component that will go over almost two years. with more than $12 million with some upfront, obviously strong upfront, and every quarter we'll have some cash in if you look to the cash. But revenue-wise, we'll be recognizing this over around two years. And in addition, after those two years, we enter into the production phase, we'll have product revenue for almost 10 years after this that could go up to $1 million per year. So it's a big deal.

Great, perfect. 99.9% percentage is a nice one. Hey, George, looking to the massive IoT pipeline later in this year, it sounds like you're seeing demand kind of across the board from a product standpoint. It sounds like Monarch 1 is ramping up. You're seeing a recovery in Cat 1, but also Monarch 2 has had a lot of design traction. I was wondering if you could kind of provide a little bit more color on that front, particularly around Monarch 2. It sounds like that's a game-changing next generation leap forward for you guys ahead of the competition. So what are you seeing in terms of the design opportunity there when that starts to contribute? And lastly, just to throw in as well, CBRS, it sounds like the tone and the outlook from an industry standpoint continues to improve pretty dramatically. You've talked about a million per quarter over the course of this year. I was wondering if you're starting to see that creep up now in terms of The orders that are starting to filter in. Thanks.

I mean, on the massive IoT, absolutely. What we are seeing is really strong demand on existing platforms. So, I mean, somehow the ramp is happening. You know, we waited very long to start feeling this, and it's happening. I don't know if it was the COVID was delaying this a little bit last year. And finally, post-COVID, even if we cannot talk about post-COVID, but let's say COVID, The new normal, but we're seeing demand. But the good news there as well is what you mentioned, you know, our Monarch 2 platform is getting very, very strong reception in the market. If you remember, you know, we spoke like in Q4 about more than a dozen of projects engaged with this. And if you look to those projects, 90% of them are design win today. And we have new project engagement. So I have two feelings, if you want. On one side, I'm feeling like the customer making decision quicker and moving to their project faster, which is if I compare it to last year. I don't know if it's them moving faster or just only because we have a greater product and they jump on it quicker, but the two are contributing to make things to move faster. and in terms of timeline of the revenue of this obviously some of them will remain longer run which is more revenue next year you know all those big projects they tend to take more than 12 months to get the product ready because big customers big company and they want to go through all the qualification process however we have some of them generating revenue already you know we mentioned that we have order already for shipment in Q2 on Monarch 2 so Monarch 2 will be shipping to one customer at least in Q2, and others will follow in Q3, Q4. So we'll see revenue from Monarch 2 this year, definitely, in addition, obviously, to the Monarch 1. And on CBRS, really the traction and demand remain the same. I could not give more, you know, I cannot say more than, you know, we mentioned the $1 million per quarter. I have the feeling that we could have some upside there. Give me one more quarter, I will say more about it, if really it's in hand or not. but for the time being I would like to stay a little bit conservative saying it's developing and developing great and we're seeing a lot of opportunity every day by the way. It's developing with a new demand but I need a little bit more time to see if this will convert to the size the order of magnitude of customer will be the same.

Great. Thanks so much. Nice water. Thanks Scott.

Thanks Scott. We will now take our next question from Mike Walkley from Canacorta Genuity. Please go ahead.

Great. Thanks, Jake, for my question. Great quarter, and I hope everybody's healthy also. Just want to touch a little bit. You shared so much good detail on all the design ones. Just on the short term, I guess, George and Deborah, Given the well-known supply constraints in the industry, did it impact at all your shipments in Q4? And how much do you think it could impact maybe your first half of the year? Sounds like it would just be a slippage, but any thoughts on the supply constraints impact in the immediate term?

Hi, Mike. I mean, you know, in Q4, you know, we had some impact already integrated somehow. So I could not say that we had real impact. Thank you very much. We're seeing two angles. On one side, TSMC, obviously everyone knows that they are really receiving more than 25% of the capacity. We have our allocation, so I'm not nervous in a sense like saying, okay, it's a mess. No, TSMC played a partnership very well. They are a very long partner with Sequence, and I have my allocation, if you want, there. Obviously, it's an allocation that I don't like. I would like to have more and more flexibility and so on. But I'm working this daily and every month with them to get my capacity. But what we had on top of this in the industry, all the OSAT, you know, all the substrate, the PCB, you have a lot of factory, as you heard, they get under fire and created another stress in the market other than the extra demand or the reduction of capex that we saw last year now impacting Impacting the industry. So all this to say it's a very complicated situation because it's not only one angle, one component, many, many components really impacting the module level, not the chip. We have some impact on the chip, but we have as well an impact on the module. And we have a lot of demand, very honestly. Even we went to our customer by saying you need to place order for the full year to get so Sequence can secure. So we entered into official notification to our customer and one by one, Thank you very much. I have a constraints where I'm working around two, maybe $2.5 million, if you want, what I consider unchallenged. It doesn't mean that we will not be able to serve it, but like in revenue, I have booking, if you want, I have $2.5 million that I'm working on to see how to minimize the impact on this.

Okay, great. That's helpful. And just my follow-up question, I'll pass the line. Yeah. Just on 5G development.

And also, you know, just to say we're working as well. We're working sometimes with customers to give them other flavor of product. So it's not only capacity, but, you know, I give you the example of Cat1. You know, for example, Cat1, we have many operators. So we could be better on one line versus the other line for whatever reason. And we're working as well with some customers to change order so they can still get what they need. and so on. So that's why it's a little bit complex to answer if you want to address it.

Okay, great, thanks. And just a quick follow-up question, I'll pass the line. Just on your 5G development, given how important that is for the 50% TAGR over this next several years, can you just share with us the milestones you've hit to date that you highlighted in your script, the key milestones and anything we should look out for in 2021 in terms of key milestones just to track the progress?

You know, I mean, to share a little bit, obviously, when we enter into this strategic deal, you know, we enter into with the blank sheet of paper, you know, at the beginning. So you could imagine the first year has a lot of milestone, which is confirming that Sequence is able to scale and get this product up and running. So obviously, today we're approaching the, you know, the design phase. is very advanced and we are approaching the milestone of tape out. So tape out will be this year. So when you look to the detail to reach tape out is obviously all the specification, all the readiness and so on. So this is where the milestone where our partner was looking to check if we are really progressing on time, if you want. But in general is all the development to reach tape out towards end of this year as we planned and we are on track for it. And for 2021, We don't expect, if you want, risky milestones. If the question, in 2020 we have more risky milestones than in 2021, in a sense, milestones you need to hit at the beginning of the project, otherwise the relationship could be challenged. But now we're entering this, obviously we need to continue executing, and if we execute, we can recognize the revenue within a few percent versus our target. We know how much we are going to do on this deal this year.

Great, thanks for taking my questions, and best wishes for success with the big pipeline this year.

Thank you. I need to speak. We want to take our next question from Greg Ellis from B. Reilly Securities. Please go ahead.

Congratulations on the momentum in the funnel and the momentum with the various partners as you start the year. I wanted to start just by getting some insight on Monarch 2 and Calliope 2 because it sounds like the customer interest in both of those products is very strong. The question is this, how do you envision the ramp of those products kind of picking up as we exit 2021 and move into 2022? And Deborah, is there a meaningful gross margin differential between Monarch 1 and 2, and Calliope 1 and 2 that we would want to be aware of.

Well, I mean, hi, Craig. In terms of, you know, time, you know, ramp of revenue, obviously Monarch 2, as I mentioned, will start this year and has started. You know, I could say that even in Q1 we shipped some Monarch 2. I mean, obviously small quantity, you know, in thousands, but at the beginning for initial projects they are launching. We'll accelerate a little bit with Q2 because I know that we have one project so we'll be moving and we have a lot of pressure to supply the demand there. And in Q3, Q4 we'll have more than one project coming and as you saw as well even Gemalto will be adopting Monarch 2 so we could have more demand. So we should, I believe we should exit on Monarch 2 this year where almost all the new design becomes Monarch 2 and Monarch 1 will be just only on the older product if you want. It will be like phasing out Not from revenue because you could have still customers going with Monarch 1 for a while, but all new designs will be all going with Monarch 2. That's how we are seeing today because it's a great product and optimized and so on. Calipi 2, you know, will get the product to market in Q2 and sampling in Q2 and we have existing customer waiting for it. So even we have one customer want to have a launch in Q4, I do know very honestly, If we'll be ready with the customer to launch in Q4, otherwise it will be Q1. But any high level, I don't believe Cali P2 will generate revenue this year, but we'll start ramping next year in terms of revenue. So for this year, if you want, in other words, Cali P2 in 2022 will be like Monarch 1 this year, if you want, and we'll start ramping from there. and all this will obviously continue to add up on the existing platform of Kalaipi One as well. That's how it is.

And in terms of margin, we're expecting similar margins on both chipsets.

We will now take our next question from Tristan Gira from Baird. Please go ahead.

Hi, good afternoon. Just looking back at the commentary about Supply shortages. Is there the potential for wafer price increases later this year that could have some impact on your gross margin?

Hi, Preston. Yeah, you should not say this loud. I mean, so far, I'm not expecting this, at least with my contract with TSMC. I'm not expecting this, to be honest. From at least the wafers pricing, I don't know if TSMC In the past, I had similar phases, similar situation with the SMC, and I didn't see an increase. So this is what I'm hoping. But your question still valid for other stuff, like when you go on the module, when you go on other components like the substrate and so on, when you start having very long lead time, if you want to accelerate lead time for a period of time, for a short period just to get the serve, we could have some money to pay a little bit more to to get some hot run to some acceleration and secure our customers and could impact a little bit the gross margin. But we're not expecting major impact. It will be in the noise. That's at least from today's feeling.

We will now take our last question from Ajit Gill from Needham and Company.

Yeah, thanks and congrats on good momentum. Georges, just talking about the CBRS opportunity for you, I was wondering if you could talk a little bit about what are some of the end markets that you expect to kind of move to this technology? And secondly, how do you Think about your modules. I know you've been talking about that your modules are based on tech for LTR technology, and you've been developing that for a decade. Wondering how you're positioning your technology to kind of benefit from this trend.

Hi, Rajee. Well, you know, obviously, on the CBRS, you have, in general, Three ways where you can see CBRS. People talk about CBRS and you get a little bit, you know, big picture. The first one, which is, I don't believe it's a new business, is like Verizon getting the CBRS bandwidth and just only the extra bandwidth for Verizon. In other words, the business of Verizon remains, the market of Verizon is the same, but those guys obviously they use CBRS to offload their, the capacity they have on the regular network when CBRS is available. So having the CBRS with Verizon is like a nice feature that can help you win a design win, but it's not like a new market, not at all a new market for us or for anyone. The other market where really there is a new market, you go to the second category, which is the cable operator, like big guys. where they have access technology. They provide MVNO typically wireless. Wireless is MVNO. Now having CBIR-S allows them to expand more their access last mile over wireless in a cheap way by using their own network when they develop it. Now those networks are developing. They are not there yet, you know, when you talk to Charter and Comcast and so on. I don't have the good feeling about the timing to get those available, even if they spend a lot of money to acquire the CBNS. But this is definitely a new market. The third one, which is we are seeing really development now, is what we call the private network, which is essentially really a private network independent of the carriers to provide last mile access. We saw a lot of activity in the schools, where the schools They put a small access point in the school connected to the cable they have and then suddenly all the school district can get connected to CVRS and the student when they are in a school they are connected on CVRS or Wi-Fi but when they are at home they can stay connected on their VPN school network and they don't have to pay anything to to the MNO, because they are on the school network, it's for free, and so we see a lot, a lot of business there, and this is where we saw a lot of deployment, if you want. We saw, for example, as well, some private application in the stadium. The Football League, the National Football League, has a business with us today, and they started this, which is in the, on the stadium, you have, like, private network between all the training and so on, to communicate between themselves using CBIRS. We saw a lot of business as well there with the like jail, you know, to connect the jail, to connect enterprises. So these are the kind of businesses. That's why, by the way, it's very complicated to look to the complete the size of this opportunity. Very, very hard. You know, I saw many studies there. None of them is really clear, you know, to go and say there is 3 million units. and more. So it's a little bit complicated. We're seeing this a little bit bottom up. We have a lot of demand with customers coming to us where they talk maybe about 50,000 units a year, but some of them they talk about 300,000 units a year. And it's too early to assess the credibility of each number to factor it in. And that's why I came by saying this year we should be doing a $4 million minimum because I feel good about it. but hopefully we'll get some upsides because they see some opportunity much bigger that they can drive much bigger revenue for us. So this is about the market and about our technology there, the Cat4, Cat6, what we have unique there, Raji, is that The CBRS, you know, our biggest competitor, when they add this frequency band, they add it on the high-end platform. So if you want CBRS using Qualcomm solution, you are going to get it on CAT 12, CAT 16, CAT 18 product, which is expensive. You are getting a module which is in the $80 plus module. While what sequence we had, we had the CBRS frequency since ever, not to address the CBRS because the 3.5 gigahertz It's a frequency used in the emerging market that Sequence used to have in the WiMAX days and we maintain this in our product. So obviously we were able to provide a low-cost Cat4, Cat6 product that can have big difference between a module at $80 or module at $20. You could see the gap a little bit. Attracted many customers where they don't care about high-end speed on CBRS because you don't have a lot of bandwidth and you're happy with the Cat4, Cat6 and that's how we capture a lot of customers.

That concludes today's question and answer session. I'd now like to turn the conference back to the management team for any closing or additional remarks.

Thank you all for all the questions and for listening for the time and looking to see you in the near future. Hopefully, face-to-face maybe, it will happen in three, six months with all those vaccines. Thank you very much, guys, and thanks, operators, for handling the call.

This concludes today's call. Thank you for your participation. You may now disconnect.