Sequans Communications S.A.

Welcome to Siquon Communications' first quarter 2021 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kim Rogers of Hayden IR.

Thank you, Joe. Thank you to everyone participating in today's call. Joining me on the call from Sequans Communications are George Karam, Chairman and Chief Executive Officer, and Deborah Choate, Chief Financial Officer. Before I turn the call over to George, I would like to remind our participants of the following important information on behalf of Sequans. Sequans issued the press release this morning. and was posted to the company's website at www.sequins.com backslash investors under the news section. Before we start, I'd like to remind everyone that this conference 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 contained in this call, including any statements regarding future results of operations and financial positions, business strategy and plans, expectations for massive IoT and broadband and critical IoT sales, the impact of the coronavirus on our manufacturing operations, supply chain, and on customer demand, The impact of component shortages and 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 amended, and Section 21E of the Securities Exchange Act of 1934 as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now, I'd like to hand the call over to George Karam. Please go ahead, George.

Thank you, Kim. Good morning, ladies and gentlemen. Welcome to our first quarter 2021 financial results conference call. We hope everyone is healthy and safe. Sequence is cooperating globally with local regulations to ensure that all our people are safe. We continue to operate with efficiency and effectiveness despite the constraints we are facing because of the pandemic. Soon this crisis will be behind us as the vaccination is expanding worldwide. First quarter revenue grew by 40% year over year, driven by significant gains in our massive IOT business that offsets the decline in the mobile router business. At the same time, supply chain constraints that delayed approximately $2 million of massive IOT product shipments impacted our first quarter revenue, resulting in a 22% sequential decline. Model shipments were the most affected because of the PCB shortages and related lead time increase. As a result, we had higher percentage of chips sales in Q1, which lifted gross margin to 50.1%, up 500 basis points from the prior quarter. Despite the 22% sequential decline in revenue, our first quarter operating loss only increased by 7%, helped by stronger growth margin and lower operating expenses. On a year-over-year basis, the 40% revenue growth helped deliver a 25% improvement in our operating loss. Since the beginning of 2021, Sequence has seen momentum in our sales funnel. Our three-year lifetime product revenue pipeline rose by 20% to $600 million during the first quarter, which included a similar increase in design wins, growing to $240 million. Massive IUD represents 80% of this funnel, as it's currently the main growth driver of our business. We also had growth in the quarter from CVRS business, and we continue expecting CBRS to become an important portion of our broadband IoT business. Note that this pipeline does not include services revenue generated mainly by our large 5G strategic deal and vertical business that continues to develop. I will discuss in further detail the performance of each category in a moment. The buildup of our revenue pipe keeps us on track to achieve our stated goal of an average of 50% annual growth for the 2020-2024 period, even if 2021 growth will be below the average, in particular due to the supply chain issues. As we indicated on a prior investment event, we anticipate our served market to grow a little above 40% a year on average through 2025. We expect the additional growth to come from market share gains with our second-generation massive IoT products in the near term and our high-end 5G and R Taurus platform in the later half of the time range. Before I move on to cover the business categories, I want to discuss the recently announced financings. Earlier this month, we closed a $50 million private financing with Linnrock Lake comprising $10 million of equity and a $40 million convertible bank. We are pleased to have Linnrock team as investors whose long-term value-oriented investment strategy and investor experience in the semiconductor industry demonstrates confidence in our product offering and business strategy. The financing removes any concerns regarding our balance sheet and sequence viability as a long-term player in the market. We are now well positioned for the ongoing discussions with strategic partners, customers, and suppliers to maximize our opportunities in massive IoT and broadband IoT. Debra will provide in-depth commentary on the financial results and the impact of the financing in her commands to follow. We grew year over year and sequentially in massive IOT and vertical. As expected, the broadband category declined year over year and sequentially due to lower portable related revenue, portable router related revenue. For the remainder of this year, we expect the reduced demand for portable routers to be offset by the ongoing grump in massive IOT, a category we expect to be the primary growth drivers for sequence in 2021. New CVRS business and revenue growth from emerging markets within the broadband IOT category should also help compensate for the reduced portable router-related revenue. The vertical category is anticipated to grow year over year with the revenue contribution from our large strategic deal any new satellite contracts. A few key takeaways from the first quarter. Massive IUT grew by 30% sequentially and over 100% year-over-year. Both Cat 1 and Cat M and B categories are contributing to this growth. Broadband IUT decreased by nearly 70% from the prior quarter and 8% from Q1 last year. primarily due to lower portable router sales as we expected. The vertical category grew nearly 20% sequentially and 15% year-over-year. This category includes the NRE revenue from the strategic deal with the Fortune Global 500 company for three plus years that we signed in Q4 2019. We saw solid bookings with customers placing advanced purchase orders with some covering the whole of 2021 and into early 2022, improving our visibility and ability to address the supply challenges. The $2 million of delayed product shipments was due to supply chain issues that reduced some material availability. We anticipate recovering these sales in a future quarter. Supply challenges remain a concern for the whole industry, but we don't expect this to result in lost business, only potential delays. Let's take a closer look at each category, starting with massive IUD. In the first quarter, both Cat 1 and Cat M and B sales grew significantly. Most of the revenue here is driven by our first-generation Calliope and Monarch platforms, although we started shipping our second generation CatMNB Monarch 2 platform for some initial round. The Cat1 Calliope business is ahead of plan with good visibility for 2021. Talish Gemalto, our module partner in this category, is shipping to many end customers in the US and Japan for various applications such as metering, vending machines, security, and asset tracking. Also, our direct Cat1 business in fleet management and medical applications is exceeding our expectation. In Q1, we started the initial shipment for the European design win for a connected speaker. We expect this project to scale in the second half of 2021. As we explained previously, Cat 1 category is required for specific massive IoT applications where a guaranteed speed above 100 kilobits per second and or voice feature is needed. Functionality is not supported by Cat M and B. Such applications include specific security and metering devices. And consumer terminals such as wearable and hearable supporting voice and streaming music. Sequence is developing our second-generation Cat1 platform, Calliope 2, to better address this market segment and expand our Cat1 market share. Calliope 2 is highly optimized in cost and power with additional advanced and integrated features. Since the product announcement early this year, we secured Talish Jamal 2, and Renesas as our first module partners of Kali P2. Also, a large consumer electronics company is designing a connected hearable device powered by Kali P2, and we are pursuing other target customers and partners. The chip has taped out, and we should receive samples for testing this quarter, with sampling to customers in Q3. I remain confident that by year end, we will receive multiple design wins using CaliP2. This product is expected to fuel the growth of our Cat1 business in 2022 and beyond. On the other front, we have made progress in the CatM and B category of massive IoT with a growing revenue stream from Monarch, our first generation CatM and B platform. Monarch is now shipping to several design wind projects for various IoT applications, such as smart home, security, and asset and car tracking. Dallas Gemalto is one of our major CATM and B module partners serving this market. Renaissance now has its own Monarch-based module certified. thus accelerating sales engagement with new opportunities. Monarch 2, our second generation CAT-MNB, is now in production and shipping. We think a design win we secured in January is now in production with this smart body-scale device shipping in the U.S. The Monarch 2 platform is the primary driver of our sales pipeline and design win growth. Customer traction remains excellent, and the convergence rate from design-in to design-win is impressive, thanks to the advanced integration and power consumption advantage of Monarch 2. During the first quarter, we secured more design wins with Monarch 2, including two new projects with a major healthcare company. two new design wins in the metering segment and secured the recent design win for an air monitoring device. In the smart home and security space, design wins secured in January with Building 36, a wholly owned subsidiary of Alarm.com, and NAPCO are progressing nicely. We also won a new tracker design to provide buy here, pay here service for car retailers. Most of these design wins will be launching in Q4 2021. Also, the pipeline continues to grow weekly with the new opportunities with several deals landed in Q1 now in the advanced stage. Specifically, we are working on three new opportunities, two in the metering segment and one for any health application. On the go-to-market front, Thales Gemalto, a module partner on the first generations of both Cat1 and CatMNB products, has expanded the partnership, adopting our second-generation platforms. With the Skyworks, we are shipping a system in a package a tiny design integrating the Skyworks RF front end with Monarch. Now we are co-developing the second generation of SIP based on Monarch 2 to bring to market this year. The integration level we can achieve with such a SIP combined with its unique packaging characteristics makes this product ideal for water and gas metering applications. We continue to grow with our existing MCU partners, Microchip, NXP, and Renesas. And we are developing relationships with a few others. These partnerships and the several large distributors we added last year have delivered design wins and significant new business opportunities. They are a key growth driver, expanding our reach and better positioning sequence to serve the massive IOT market. In summary, our massive IOT business is ramping as planned in our targeted IOT segments. Metering, smart home and security, well-being and medical, asset tracking, and last but not least, wearable and hearable. In all these segments, we have tier one customers some currently shipping products, some designing products to launch in 2021 or next year, and others working on a closing. Most of this business has a long cycle before going to production that tends to be sticky, as most of it typically deploys over five years. Shifting now to broadband IoT. Our broadband CBRS business is ramping according to plan, And we expect this segment to grow sequentially this year, making CBRS a new growth engine for World Run IOT. In addition to the design wins we announced with Amit Wireless, we further expanded our CBRS revenue pipe with two new customers. Our CBRS customers are building devices to serve private networks for factories, utilities, campuses, stadiums, and transportation hubs such as airports, and train stations. Private networks for school districts facilitating distance learning is now a critical application in the U.S., where a few customers are already shipping products integrating our CBRS Cat4, Cat6 modules. Also, we are working with customers focused on mobile computing applications and building CBRS tablets or Wi-Fi devices. Our ODM customers building Cat4, Cat6 CPE are gaining traction in the emerging markets. As such, our revenue generated from this business should grow this year and has the potential to double from last year's low. Regarding the legacy broadband portable router business, we forecasted a sales decline at the end of 2020 due to excess inventory and an expected diminishment of demand from the COVID peaks of 2020. However, a new development this month may further impact this line. Verizon announced a voluntary recall of the Jetpack, the portable router manufactured by Franklin Wireless that includes a sequence modem due to a battery heating issue. At this time, we're not sure when shipments of the Jetpack will resume, and how sales to Franklin will trend in the second half of 2021. We're forecasting that the growth potential of our massive IOT and CBRS and emerging broadband IOT would offset the decline in portable router related business. Still, this new factor may impact 2021 revenue by up to $6 million. Looking ahead to the 5G broadband IoT front, we continue to progress on our 5G Taurus platform development. Our focus applications here are fixed wireless access and mobile computing, followed by high-end industrial IoT and private 5G networks. Our strategic partnership with the Fortune Global 500 company remains on track with NRE revenue forecasted to increase in 2021 over 2020. This revenue is currently recognized in the vertical category. We expect to sample this storage platform next year and begin generating 5G product revenue in 2023. We are also working with Renesas to optimize the 5G module solution as our partnership with them has been expanded from massive IoT to 5G broadband IoT. As you know, the French government selected Sequence to lead a consortium of seven French companies and was awarded a grant of approximately $6.8 million. The first payment of the grant was received on April 1st. A key takeaway that I want to leave you with. today is that the interest in our 5G solution continues to grow. Currently, there are ongoing discussions with potential customers and partners that we expect will deliver additional strategic deals as we approach the sampling date of the Taurus platform. Strategically, Sequence is well positioned in 5G, as evidenced by our partnerships, the numerous companies interested in being Taurus Alpha customers, and the French government grant. Sequence offers a unique solution in 5G, fully optimized for IoT applications, and the scarcity factor related to this technology strengthens our position. Switching gears to vertical category. As I stated, the NRE revenue from our large strategic partner is the dominant contributor to this category. This category also contains revenue from satellite, avionic, public safety, and military customers who rely on Sequence's ability to modify the software of our 4G and 5G platforms for their requirements. For the next few years, growth in this category is primarily from NRE revenue. But we will also have some product shipments, as is now the case with Lockheed Martin for the satellite project. On our last earning call, I stated that we anticipated winning a large satellite project. We won the business with the prime contractor. However, the prime contractor was not awarded the contract. While we are disappointed, we received a smaller satellite contract with EcoStar, and we are finalizing another vertical deal that can offset the missed revenue opportunity this year. Also, we are engaged in two new projects in the satellite and military space. As I referenced in my opening comments, the current snapshot of our pipeline of potential business in broadband and massive IoT has grown to $600 million in product revenue, assuming a three-year revenue cycle from the date the customer's device goes into initial production. Design wins increased as well and now represent 40% of the product pipeline or $240 million. We can add to this services revenue secured by design wins that exceed $40 million with more potential opportunities fueling the pipe every quarter. In summary, we have a record backlog, a growing pipeline, and increasing design wins. which we see contributing to revenue later this year, along with continuous strategic traction in our 5G. Overall, Sequence is well positioned to achieve our stated goal of an average of 50% annual growth for the 2020-2024 period. This vantage point, we are modeling revenue to approach or exceed $100 million in 2022 and to reach a scale on a quarterly basis in 2023. We continue to execute our long-term growth strategy on three fronts, continued growth in massive IoT and CBRS IoT, expansion of our go-to-market channels, and ongoing development on our 5G product line. I will now turn the call over to Debra to take you through the financial section.

Thank you, George. Good morning, everyone. I'll make some comments about the details of our first quarter 2021 results and other developments. Our revenue for the first quarter was $12.3 million, an increase of 40.5% versus Q1 of 2020. While this fell short of our revenue goal, the shortfall was primarily due to the delayed shipments resulting from the supply chain issues George discussed. Sequentially, revenue in the quarter declined 22%, primarily due to expected seasonality and lower portable router-related revenue, but as well due to the shipment delays from the supply chain constraints. Revenues from Massive IoT in Q1 2021 doubled compared to the first quarter of 2020 and increased about 30% from Q4 2020. Both Cat 1 and Cat M and B revenue increased in 2021, and Massive IoT accounted for over half of total revenue in the quarter. As expected, broadband IoT revenues decreased significantly from Q4, primarily due to lower revenue related to portable routers. The vertical category, which includes service revenue generated by our major 5G strategic deal, increased in Q1 2021 compared to both Q4 and Q1 2020. In the first quarter, we again had three greater than 10% customers, all are ODMs. Gross margin in Q1 2021 decreased slightly to 50.1% from 51.3% in Q1 2020 and increased from 45.1% in the fourth quarter 2020 due to the revenue mix. We had a higher proportion of chip sales and license and service revenues in Q1 2021 compared to Q4 and a higher proportion of chip sales but much lower proportion of service revenues compared to Q1 2020. IFRS operating expenses were $12 million in Q1, down from $12.5 million in Q4, primarily due to higher capitalization of R&D as we began capitalizing 5G development costs, lower fees related to convertible debt conversions, and a more favorable euro-dollar exchange rate compared to Q4, partially offset by higher staff costs. Non-IFRS operating expense, meaning without stock-based compensation expense, We're $10.8 million in Q1 2021, down from $11.7 million in Q4. Our first quarter operating loss was $5.8 million, compared to an operating loss of $5.4 million in the fourth quarter of 2020, and a $7.8 million loss in the first quarter of 2020. Our net loss in Q1 was $11.4 million, or $0.33 per diluted ADS, and included a non-cash loss of $4.1 million on the revaluation of the embedded derivatives related to our convertible debt. This compares to a net loss of $11.3 million or 36 cents per diluted ADS in the fourth quarter of 2020, which included a non-cash gain on the revaluation of the embedded derivatives of $111,000. And the net loss in the first quarter last year was $15.3 million or $0.64 per ADS, and that included a non-cash loss on an evaluation of the embedded derivatives of $5.6 million. On a non-IFRS basis, our net loss for Q1 was $5.1 million, or $0.15 per diluted ADS, compared to a non-IFRS net loss of $8.5 million, or $0.28 per diluted ADS in the fourth quarter, and a net loss of $8.7 million, 36 cents per diluted ADS in the first quarter of 2020. In Q1 2021, we had a foreign exchange gain of almost $1.4 million, or 4 cents per ADS, most of which was unrealized and non-cash, related to the revaluation of Euro-denominated net liabilities 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 derivatives related to the convertible debt can cause significant differences in net income or loss from quarter to quarter. And while the impact of swings in the value of the embedded derivative are excluded from our non-IFRS presentation, foreign exchange gains and losses, whether realized or unrealized, are not excluded. Cash flow generated by operations during Q1 was $9.2 million. compared to $1.4 million used in operations in Q4 and $7.7 million used in operations in the first quarter of 2020. We received a substantial portion of the $5 million strategic deal with Renesas as an upfront payment in Q1. The cash related to the grant from the French government will be paid over three milestones with 25% upfront, which was received on April 1st and therefore excluded from the cash balance at the end of March. On April 9th, we closed a $50 million hybrid equity and convertible debt financing in a private transaction with an institutional investor, Lynn Rocklake. Just under $19 million of these proceeds were used to repay the remaining amount of the existing convertible debt that was due on April 14th, as well as prepayment of the venture debt that otherwise would have been paid down through April 2022. Taking into account the new sources of cash received in April, and the repayment of debt, our cash and short-term deposits on a pro forma basis total approximately $46 million compared to $18.5 million at the end of Q1 2021. I'm sorry, compared to $13.5 million at the end of Q1 2021 and $18.5 million at the end of 2020. Turning to some other balance sheet items, Accounts receivable at March 31st, 2021 decreased to $7.1 million from $17.3 million at the end of Q4, primarily reflecting the fact that most of our service and license revenues in the quarter were prepaid, as well as an improvement in the on-time payment performance by customers buying product. Due to the prepayment of service and overall payment performance improvement, DSOs were 27 days compared to 73 days at the end of Q4. Inventories decreased to $4.6 million compared to $6.2 million at the end of Q4, reflecting lower finished goods and components due to the industry supply chain situation. Current trade payables decreased to $14.7 million versus $15.7 million at the end of Q4. Short-term debt from financing receivables decreased to $11 million from $14.2 million at the end of Q4. Our convertible debt, which is all classified as long term under IFRS rules, decreased to $16.1 million from $26.1 million, reflecting the partial conversions in January and February of the convertible note issued in 2015. Turning to the outlook for Q2, our pipeline and backlog continue to build, and despite the continued supply chain constraints and factoring the risk related to the portable router business, We are targeting an approximate 10% sequential increase in revenues. 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 of our OPEX and financial expense assumptions. We continue to expect that non-IFRS operating expenses should average $11 to $11.5 million per quarter in 2021, assuming a stable euro-dollar exchange rate. We expect non-IFRS financial expenses to be around $2.4 million in Q2, excluding any foreign exchange gain or loss. This takes into account the conversions and repayment of the previous convertible debt, the repayment of the venture debt with about $500,000 of remaining interest, and the issuance of the new convertible debt with interest accrued at the pick rate of 6%. Unless we exercise our option to pay the annual coupon on the new debt in cash to benefit from a lower rate of interest of just over 5%, we expect the quarterly cash payments of interest expense going forward will be minimal given the low rates of interest on our government debt and receivable financing. Finally, for modeling purposes, the number of ADSs outstanding today is 37,275,000. Before I turn the call back to George, I have a few housekeeping items to cover. First, in connection with the private placement with Lynn Rock Lake, we agreed to grant registration rights, so we will be filing a Form S3 registration statement within the next two weeks to comply with this obligation. There will not be any sale of shares at this time, nor any new equity issuance associated with this registration statement. 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. That's the same location where you can find the audio replay. Also, George and I will participate in the Needham Virtual Technology and Media Conference in May and the Roth Virtual London Conference in June. And we look forward to speaking with you sort of in person if you plan to participate. So now I'll turn the call back to George.

Thank you, Deborah. Operator, we are now ready to open the call for Q&A, please.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Scott Searle from Roth Capital. Please proceed.

Hey, good morning, good afternoon. Thanks for taking my questions. Thank you for the detail. A lot in there, George and Deborah. Maybe just to start, some quick housekeeping. I just want to make sure I understand fully where the balance sheet is today. on a pro forma basis. We have $40 million of the new converts, roughly $5 million of the August 22 converts, outstanding government debt or loans or grants with now cash on the balance sheet post the $50 million hybrid raise of $40 plus million in cash. Is that roughly where the balance sheet stands today?

Yes, and in the investor presentation that we'll be posting at the end of the call, we have a pro forma presentation as well that should health clarifying.

Perfect. And Deborah, interest going forward on a quarterly basis therefore should be less than a million dollars versus what we've seen in the past.

So interest expense includes a lot of different items. What we said is for Q2 we're expecting it to be $2.4 million. That includes a $500,000 cleanup with the venture debt. So it will be likely all in all to be $1.9 million on a non-IFRS basis.

Okay, great. And then looking forward into the second quarter, that 10%-ish sequential increase, what are you factoring in at the current time on the broadband front? You know, there's been headwinds just in general in terms of normalization. The surge worked from home demand. But on top of that, now we've had the Franklin battery issue. So are you factoring in any recovery there whatsoever? And just to clarify, George, I think you said 6 million potential impact from that, but being offset by, you know, demand in IoT. I want to make sure that you're seeing that Massive IoT demand is offsetting any of that potential annualized impact of $6 million related to broadband issues with Franklin.

I mean, Scott, obviously for the quarter, you know, our assumption excludes any portable router. You know, it would be, you know, I mean, but honestly, we don't know. I mean, we don't have, I cannot guarantee, maybe there is a little bit of chance of getting some upside, but it's negligible in my opinion for the current quarter. So that's why we are assuming zero shipment in the portable router in Q2. Still question mark for the second half. So this means the growth is coming. If we look to Q2, you could see a decline in the broadband because even if we have the emerging and the CVRS, in Q1 we did a little bit of broadband. We did more than $1 million for portable router that went to Franklin. And this will go away in Q2. And obviously this means massive growth from massive IOT and more than 10% growth in vertical as well, quarter to quarter. So this is, I would say, for the picture in the short term. If you look for the full year, you know, the $6 million is really the worst case, what I consider, because, you know, we always said, like, we could be, we are doing, you know, $8 million on a normal situation, which is like $2 million per quarter. on a portable router business. I mean, sometimes we were a little bit below, but sometimes a little bit above. So an average of like two. So the six reflects like two times three quarters, assuming this will not see any recovery. But still, you know, I'm hoping maybe in the second half we could see some of the recovery and maybe we'll not go to the worst case situation with all those $6 million less in revenue. And obviously, the growth engine in massive IoT, as I said, we are extremely pleased, whether Cat1 or CatM, and this is really much more than 10% per quarter, the growth which is happening, and obviously with the vertical going well, so all in all, you know, we are able to offset this loss of Porto Verde.

And lastly, if I could, and then I'll jump back in the queue, but You know, looking at the second half of this year, the pipeline is building really well. Convergence on that pipeline in terms of design winds up 20% in the first quarter. It sounds like you're incredibly, you know, positive in terms of what you're seeing going into the second half. You've given us a lot of the drivers. Can you talk a little bit about how you're managing some of the supply chain aspects of that? Because that seems like it's more the gaining factor than anything else from a demand standpoint or design wind standpoint where you're winning the business. You know, what you're able to do on that front and the recent financing, how that's impacting your ability to really execute against that. Thanks.

Thanks, Kurt. I mean, on the supply chain, obviously, the industry, I mean, it's really a very critical situation in the whole industry. Not only Sequence has impacted all our, I would say, even competitors. I'd have to say even from time to time we see some upside because some of the customers are realizing that they depend on some other competitor where their focus is not IoT. They come like second in the list, and they realize that they regret sequence and they come back for us. So we're seeing some positive, I would say, from design win potential. It's very hard to quantify it, but we're seeing very positive feedback from customer coming from this angle. For us, you know, the challenge is really on all angles, whether PCB, substrate was a major issue, and obviously the foundry. What I was struggling with in the short term was really PCB and substrate. And I mentioned that my challenge on the foundry is more in the second half. We're working daily with the TSMC to get a little bit of upside here and there. As soon as we see some free capacity, we take it. The gap is not that big on TSMC, and I'm moderately optimistic. I will say that I will not get all the shortage, and maybe some of it will be recovered in the second half with TSMC. And regarding the substrate, it's really a major issue because lead time went to kind of 300 days or so overnight, and we had to address this with second source. So we worked all the items, you know, all the chips where we have shortages and challenges, almost like four chips get impacted with the substrate, and we built second source for it. Three of them are behind me in terms of problems and solved last one. I'm fixing this now and I believe we should be fine based on the recent work we have done as a team. So, you know, it's a challenge. It's really shifting from quarter to quarter or managing, you know, priority between customers. That's how we're dealing with this. We're not losing business. I tend to say we are even gaining business because of the shortage because some customers realize that they need to bet on company focusing a hundred percent on IUT and can take them like top priority.

Great. Thank you.

Our next question is from Mike Walkley from Catena Corps Genuity. Please proceed.

Oh, great. Thank you. Just, just building on some of Scott's questions, um, for the, kind of non-product revenue or the other revenue line item, you know, with that large satellite customer not winning the end business. How are you thinking about growth in that line item this year relative to what it might have been with that contract?

Hi, Mike. Yeah, I mean, you know, as we said, first of all, the vertical, you know, what we count on the line, we have part of it. It's included inside as well, the 5G strategic NRE deal. And this alone is ensuring nice growth year to year, first of all. On top of this, obviously, we have a lot of opportunity in the vertical not going away. And what I mentioned on the call, yes, this deal not happening, reducing our forecast from one angle. But on the other side, I mentioned that we closed the deal with EcoStar. And we are closing now another deal. is not as large as the first one, but the impact for the year in terms of revenue is equal because it's happening at a shorter period. So all in all, we believe the vertical business will be in line with our, I would say, 50% growth year over year at least.

Okay, great. That's helpful. And just a follow-up question, I'll pass the line. On the supply chain issues, you talked about you know, spillover demand from customers coming to you as a second source. Are you seeing because your customers can't get their own components, any kind of push out in orders, or is it really just the order book staying pretty similar for the year? Thank you.

I mean, you know, we're getting the order. We were receiving our thing the same. We're not seeing any push out. Even people are pushing us to accelerate shipments. And, you know, as I said, we have the backlog is quite solid and we see we have order placed order for even beginning of 2022, just to cover this. So, again, you know, it's painful, the supply chain, in a sense, like managing delay, we're not able really, even independent of the financial reporting, I will say, that even with customer, you know, we Until the last minute, we could have a problem not shipping in the months. We need to ship second months. We have a delay of a couple of weeks here and there. But overall, you know, I'm not in a panic mode. We fixed a lot of issues so far with second source on the substrates, and TSMC is treating us fairly well. And I believe we can go through without any major, major impact.

Great. Thanks for taking my questions.

Thank you. Our next question is from Craig Ellis from B. Riley. Please proceed.

Yeah, thanks for taking the question. And, team, thanks for all the color in the prepared remarks and in the Q&A here. My first question is just a follow-up to the first quarter's strong gross margin performance. And the question is this. With the mix of business in the second quarter tilting significantly to massive IOT and with continued vertical strength, and with those trends seeming pretty predominant through the year, should we expect gross margins to remain there 50% as we proceed through the year, or would there be some gives and takes in the back half of the year? And if so, Deborah, to what extent would we see that?

So I think for the time being, we're still sticking to what we had said, I think, at the last quarter, which is overall for the year targeting at least a 48% gross margin. I think it's a little too soon to be sure we don't have other impacts in terms of mix or sort of side effects from the supply chain issues.

Got it. And then, George, nice to see the CBRS business gaining traction. The question is, as you look out to the fourth quarter of this year, can you help us qualitatively or even quantitatively scope, how big you think that business could be. And as we think about calendar 22, does, does CBRS hit that, you know, 50 ish percent growth level or, or would it be above that just given its base from calendar 21?

Yeah. Greg, well, I mean, you know, obviously we start shipping CBRS late last year. We had some shipment in Q3 and a little bit in Q4, I would say. But overall, the number were well below $1 million, I would say, for the year, last year's CBRS. And this year, I mean, we are, I mentioned at some time that we should be able to hit more than $4 million for the year in CBRS. And we have good visibility on this. We are working as well. We're seeing a lot of opportunity coming. I mentioned that during the quarter, we have another two customers. We have some opportunity as well, you know, with... with more and more application of the CVRS and let us feel like this market has nice potential. We could have more than four this year. I'm hoping, if you want, that we can beat this. Maybe get one or two million dollars more if things will converge. For the time being, I'll remain a little bit on my target. But next year should continue, and the growth, yes, I believe next year maybe it should have more than 50% growth, the CBRS. I mean, because we are at the beginning, so the growth should be much more than 50% year over year because we are at the beginning of the potential of this market.

That's really helpful. And then my next question is related to some of the strength that you're seeing in the design wind funnel, and it's great to see that move up so significantly through the first quarter. The question is this, to what extent is that being driven by things that are more on the Sequans side with the capabilities you've developed over the years? Or to what extent is it really driven by some of the newer ecosystem relationships that really came into the portfolio over the last 18 months with your distribution partnerships and with the MCU partnerships with Renaissance? Microchip and NXPI, any color on the degree to which that broader ecosystem is helping would be really useful.

I mean, obviously it's a combination of the two. We have a great platform, first of all, with maturity of the first generation and second generation really beating the competition in power consumption and other features that we provide that are unique, which is product ready and moving there. But we should not neglect at all what I would call the positioning of Sequence or the brand of Sequence getting far much better. Even if, by the way, even if we are winning the deal alone without even a partner, like an MCU partner or a distributor, just only the brand and the positioning, the viability of the company is improving every day. And last year, I believe, with all those relationships, this helped us a lot. And definitely in terms of new... I will say acceleration of the pipe, the go-to-market is a key element as well. Even if I look to the design wind conversions, maybe I don't have the same ratio, but if I look to the pipe and the number of deals, a lot, a lot are coming through our partner, whether on the distribution or the MCU partners. And I believe we will have more and more converging to design wind in the near future. So the two factors are very important, but if you tell me a year ago our product was great, I will say yes as well, but we were winning less. So I tend to favor like the positioning of the company was really instrumental and the go-to-market was really a key change in the company since last year.

That's great. And the last thing for me before I jump back in the queue, a follow-up to Scott's question to Debra. Deborah, I wasn't clear in the point on cash on a pro forma basis. Right now, $46 million. Does that include the $5 million payment that was agreed to with Renaissance around the time of the virtual analyst day, or does the benefit of that payment come in sometime later, and if so, when?

The Renaissance payment was predominantly Q1, so it's already in the balance at the end of March.

But no government... No French government.

That's right.

Okay. Got you, George. Thank you.

Thank you. Our next question is from Trish Angara from Baird. Please proceed.

Hi. Good afternoon. Just a quick follow-up question on gross margin. Some companies have talked about their expectations for higher material prices. that could impact margin in the second half and their plans to raise pricing. So the question is, how much is visibility TSMC is giving you in terms of wafer cost for the second half? You've mentioned that so far you're still holding on your gross margin target for the year, but I'm assuming you have already some visibility for the second half. And And what is your ability to pass along any type of wafer price increases with higher ASPs to customers?

All right, Christian. You know, I don't know if I should say this, but, you know, we appreciate a lot TSMC. I mean, to some extent, we don't see, we have good visibility on the cost structure with TSMC, and we don't see this an issue at all. It's more the capacity where I would like a little bit more help from them than really on the visibility on the cost. However, we're seeing cost increase on other components because when you go with... call it like more, you know, substrate, the relationship with those guys. It's not like as strategic as you can, as we have with TSMC. So obviously here we're seeing all people waking up and saying, if you want to get it now, then you pay that much more. I will give it to you. Otherwise you don't get it. You'll get in three months and so on. So we are buying sometimes some capacity and there is some increase. We're seeing as well in the module cost, some cost increase related to some you know, increase of the bill of material, for example, the memory. So we saw some component price increase, substrate challenges to repay for lead time, if you want, much less with the SMC, to be honest. And overall, obviously, this has some impact here and there on our cost structure that we are integrating, factoring in the target Debra was giving for the 48% at least for the year. But also, you know, regarding your question, passing this to customer, it's possible. You know, it's not like something – obviously, it's part of the policy that we adopted with some customers. For those placing order with good visibility ahead of time and covering the year, we're respecting our engagement in pricing. For those coming late to place orders, you know, we're reflecting some price increase, definitely. And we're passing some of it.

Great. That's good color. And then going back to the Cat 1 opportunities, and you've mentioned connected speakers. Sorry if I missed it. Could you talk a little bit about the revenue potential that you see from Cat 1 for the year? you know, growth year over year, and also how much of that higher bandwidth segments within Cat1, such as Connected Speaker, is expected to contribute over the next few years?

Yeah, I mean, first of all, the Cat1, you know, I mean, it's growing nicely. I mean, and we will hit our more than 50% this year, year over year, already with existing business. In this, for this year, you know, the Connected Speaker element is is not going to be, you know, that big. Maybe it will be like what I should say, you know, maybe a few percent of our massive IOT, if you want, globally, including CATM. Because the launch of the volume of this product is happening in the second half, and it's in the initial market, so it's still at the beginning. But this will continue next year. And I mentioned as well that we have a design win with another major company, making connected speaker but using Kali IP2 and this will be next year. So in general, we believe this segment will develop. There is a question mark obviously about the size of the market because why do you need cellular on a connected speaker and what will be the customer perception, the brand and so on. So we remain a little bit cautious. We don't want to be too bullish on this. But definitely, there is a demand happening there, and our product is ideal for this solution. And we see this helping the growth, what we are talking about, you know, the 50% in average year over year. Some contribution is built for the Cat1 as well there with this connect wearable, I would say, segment and hearable segment contributing to it as well.

Great. Thank you.

Our next question is from Dennis Piatchinan from Needham & Company. Please proceed.

Hey, guys. Good morning. I'm taking a question here for Raji Gill. So the first question I have for you guys is can you just speak a little bit more about how much of the broadband and that Verizon jetpack you're still seeing in Q1? Did I understand correctly that it's just $1 million in sales and it's nothing to Verizon anymore? It's just going to Franklin? Or did I misunderstand that?

No, I mean, you know, obviously, Dennis, I mean, I don't want to confuse you. When we talk about the end market, which is Verizon, obviously the portal router used on Verizon, this business is going to Franklin. And by the way, not directly to Franklin. It's going to an ODM, an EMS in Korea building a product and then going to Franklin. So we're talking about the same business. And this business in Q1, we did $1 million, which was, by the way, in line with our expectation because we ended the year with a little bit of inventory, so we expected Q1 to be low and start recovering in Q2, Q3 to go back to the normal level, which is, as I said, can reach around $2 million per quarter on average. And due to the recall, we're expecting zero in Q2, the current quarter. And then we will see what will happen in the second half of the year.

That's helpful. Thank you. And then just a bit of a bigger question around CBRS opportunity and the private 5G networks. Could you give a brief rundown of kind of what we can see over the next few quarters regarding either design wins or what's ramping up?

You know, in CBRS, you know, I have more than 15 customers already All of them, they have product, you know, currently. All of them. I mean, they have product ready, you know. I believe here what happened is that the market was well-known. The people were working on it, and we were waiting for the regulator to open the frequency band so people start shipping. And this is, as you know, get a little bit delayed last year. And towards the end of the year, towards Q4, then, you know, regulator opened the band, and people start shipping to this. And we're seeing product there. A lot of products, you know, around, as I said, providing an outer capability, whether to campus or, you know, I mentioned the situation of distance learning with the school district coverage. But we have an application, for example, for stadium. We have one guy where they have connected speaker all working in the National League, by the way, the Football League, they are using this product, and this product is composed there. So we have a lot of applications like this, and it's all tending by being high-speed connectivity like modem, could be dongle, could be router. But what we are seeing as well is a tablet, a recognized tablet, again for kind of application where We are in private networks, and they need a tablet connection or a portable router. So these are the kind of applications we're seeing there. And obviously today it's all 4G, Cat4, Cat6, and in the future this can evolve to support 5G as well.

Great. And then just lastly, could you please speak about maybe kind of the competitive landscape and how you're positioned against some larger players like

qualcomm or nordic or altair just kind of comparing product positioning yeah i mean you know as as we mentioned you know we the only guy who can really compare in terms of coverage of portfolio product portfolio is really qualcomm because they have the they have all the family of products when you go to nordic and out there we compete with them only in cat m and they are on their first generation product and and our Monarch 2 beat them, and they don't have Cat 1 either. CalIP is not there, so we don't compete with them. We compete more with Qualcomm with Cat M and CalIP and 5G and Cat 4, Cat 6. And as you know, the differentiation there is Qualcomm not focusing on IoT, and they don't have the best product for IoT application quite often, and that's how we differentiate our products in front of them.

Unfortunately, I think we're going to have to wrap it up at this point.

Got it. Yep, that's all for me. Thank you very much. Thanks, Dennis.

Ladies and gentlemen, we have reached the end of the question and answer session. I'd like to turn the call back to George Karam for closing remarks.

Okay, thanks, operator. Thank you all of you again for joining the call today. We look forward to catching up with you and again on our second quarter earning calls. Thank you very much.

This ends today's conference. Thank you very much for your participation. Have a great day.