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.