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.