Sequans Communications S.A.

Welcome to Sequon's second quarter 2021 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Kim Rogers of Hayden IR. Ms. Rogers, you may begin.

Thank you, Maria. Thank you to everyone participating in today's call. Joining me on the call from Sequon's communications are George Karam, Chairman and Chief Executive Officer, and Deborah Schott, Chief Financial Officer. Before I turn the call over to George, I'd like to remind our participants of the following important information on behalf of Sequon. Sequon's issued the earnings 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 portable router sales, the impact of COVID-19 on our supply chain and on customer demand, the impact of component shortages and manufacturing capacity, our ability to convert our pipeline to revenue, 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 Security 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 second quarter 2021 financial results conference call. Massive IOT was the primary driver of growth in the second quarter. This category increased 14% sequentially and 120% year over year, despite the order fulfillment delays we face in the quarter due to supply chain challenges that are impacting industries in many sectors around the world. Broadband's CBRS business and the new vertical deal have also contributed to our growth in the quarter. Supply chain issues limited our ability to achieve our quarterly growth target, but Normalizing our revenue comparison for the absence of any contribution from the Verizon Jetpack portable router, which we believe shows the true performance of Sequant's current business, our second quarter revenue increased 14% sequentially and 88% year-over-year. The increase in service revenue in the quarter lifted our gross margin, which, along with the benefit of a one-time net reduction in R&D narrowed our operation loss this quarter. There are a couple of key growth drivers that I want to discuss, primarily products and partnerships, which are expanding our penetration into the many IoT markets. Let's drill down into products performance, starting with massive IoT. The considerable momentum in massive IoT with tier one customers is fueling our growth. We are having continued success with our first generation products and our second generation products are getting fantastic traction. We continue to build out a robust massive IOT pipeline with 10 projects this quarter moving from engagement phase to design wins. And more than 10 of existing design wins approaching the manufacturing stage with the customers placing pre-production or production orders. Demand continues to increase. In Q2, we added well over a dozen of new interesting projects that we have anticipated securing this year, including projects from our MCU and module partners. Our first-generation Cat1 Calliope business is exceeding our plan. and we are shipping to tens of end customers in the US and Japan. Calliope 2, our second generation Cat1 chip, is now sampling and undergoing testing in our labs. Calliope 2 is our 5G compliant single chip designed for low power and cost effective support for IoT applications that require voice over LTE and or data rate above CAT-M speed, give or take more than 100 kilobits per second, like wearable and smart city or smart home IOT devices. CaliP2 reduces the solution cost versus the CAT-1 first generation by over 30%, and it brings a lower power advantage on par with CAT-M and B technology. We are seeing excellent customer traction and the Kali P2 platform has started contributing to our pipeline with more than half a dozen customer opportunities currently in advanced engagement. The Kali P2 software and module footprint are compatible with our Monarch 2 LTM and BIUT platform, which enables easy migration among CAT1, LTM, and NBIUT low-power cellular IoT technologies. With the CalIP2 and Monarch2 platforms, Sequence has the most advanced, comprehensive, and unique offering for the massive IoT market. In the Cat M and B category, shipments of our first generation Monarch are tracking to our plan, with the majority of them in the US. Since launching our second generation Monarch2 last year, The majority of our new CAT M and B design wins are based on this new platform. In addition to cost improvement, Monarch 2 brings many advanced features, including over 50% reduction in power consumption that enables ultra-long battery life, essential for most IoT devices. We have already secured many Monarch 2 design wins in numerous innovative IoT applications, including metering, health care, smart home, tracking, and environmental monitoring. In each application, we have multiple customers with at least one being a major player in such a space. We are happy to say that Monarch 2 production is ramping, and we are shipping in volume to our earlier design wins. Monarch 2 design win projects are progressing as expected. with almost no exception, and all the projects are placing orders for either the production ramp phase or for full production and building our backlog. I'm pleased to see that we continue to add new customers in all the market segments of MassiveIoT. This quarter was rich with new opportunities in metering, tracking, and wearables. Monarch 2 is now the primary drivers of our sales pipeline development and fueling our future growth. Switching to broadband IoT. Overall, the sector of our business had a mixed performance profile. On one side, Jetpack is a headwind, but CBRS and Torus 5G are doing very well. Starting with the legacy Cat4, Cat6 business, Jetpack is a significant headwind for year-over-year growth with a greater than $20 million decline over last year that we are making up with the growth in massive IOT, broadband CBRS, and verticals. Our business in emerging markets is flat with our existing ODM customers in Asia. However, we recently won a new customer in the region that we believe can deliver growth and increase our market share. In addition, We are pursuing new Cat4, Cat6Ds in the U.S. and Europe that could bolster growth next year. CVRS continues to be an attractive market for us. It offers a short-term driver to strengthen our broadband IoT business in the U.S. and gives us the ability to expand our broadband business to the enterprise space, making it less carrier-centric. we are making progress with educational institutions for remote learning applications, and large public and private facilities and campuses that require private networks. Sequence CASIOPIA Cat4, Cat6 CBRS modules are optimized to accelerate broadband IOT deployment on private CBRS networks. And we have the leading product in this category for these applications. Overall, we are making considerable progress in our CBRS business with increasing volumes and several customers now in production. We expect to exit the year as planned with a quarterly run rate of more than $1 million in revenue. We are especially excited about our recent headway with one customer building a recognized CBRS tablet that's moving to full production. For sequence, The long-term growth of broadband IoT will be driven by our 5G Torus platform, which is under development and remains on schedule for product revenue to begin in 2023. Mobile broadband and fixed wireless access continue to be the primary focus, which will be followed by high-end industrial and private 5G applications, with potential extension into other markets through partnerships. We are on track with our major strategic 5G partners and fully engaged with Renesas for 5G modules development. As we approach the Taurus platform sampling date in 2022, we anticipate attracting more strategic partners and customers to support us even during the development phase. The vertical category performed well in the second quarter. 5G, 4G over satellite projects are the main driver of this business category, with contribution from other projects for public safety, military, and avionics applications. I'm pleased to announce that we have closed a new deal with Sky5, whereby we are adapting our Cassiopeia platform for a specific use case in satellite and avionics. Please remember that the revenue report for this category also includes the over $35 million NRE deal from our major 5G strategic partner that we recognized over the period of Taurus platform development. Let me move now to our go-to-market partnership. Partnerships are becoming a significant growth driver for Sequence as they are key for our massive IOT business. We continue to develop a close working relationship with Renesas, NXP, and Microchip, and are now also engaged with a few new MCU partners. Our current relationships cover up to 60% of the MCU market and give us tremendous market reach. These partnerships also strengthen our position with Tier 1 customers, providing access to larger projects. Meaningful progress has been made by our teams on various projects and design opportunities with our partners. In particular, we launched the Renaissance Monarch-based module in May. The sales pipe generated by the launch looks very promising. RearSS has already landed a few design wins and attracted several deals with meaningful revenue potential. Thales Gemalto is an outstanding module partner on both Cat1 and CatMNB platforms. The business from them in both categories is growing, and we are eager to begin shipping to them our second-generation platforms, Monarch 2 and CalIP2, for future modules. We are engaged with other module partners looking to differentiate their product offering with Sequence second-generation platforms, and we anticipate extending our relationships and securing new projects in the future. Our Skyworks relationship continues to develop. We previously announced a joint offer for a tiny form factor CAT-MNB system in package, featuring special packaging to sustain harsh environment found in water and gas meter applications. This first-generation SIP, or system in package, was based on Monarch and is now shipping to a few customers who are in production. We are now developing with Skyhooks a second-generation SIP based on Monarch 2 with the goal of achieving the full benefit of power and cost improvement brought by our newest CAT-MNB technology. This new system and package has been selected for a major metering design win project with substantial revenue potential. Our product and go-to-market strategies are delivering notable results as evidenced by the high massive IoT growth and advancements in our CBRS business. Our next generation products are advancing and gaining solid traction in multiple markets. The highlight in 2021 has been the success we've had with our partnerships that are allowing us to scale our sales capability and expand penetration in this large fragmented market with many enterprise and industrial customers. These growth levers will continue to work together to strengthen our market position and are expected to drive our growth for the remainder of this year and for the future. Let's shift gears to talk about the supply chain challenges that are impacting the semiconductor industry and end market across the globe. I'm sure you're familiar with this theme and have heard this from other companies. For Sequence, this is obscuring the magnitude of our performance and masking the acceleration in the massive IOT demand. We are a leader in the IOT cellular market. We are moving forward with discipline and energy toward our goals, confident that we have a meaningful long-term opportunity to radically grow our business. If we did not have the headwind from the supply chain challenges, we would be covering more ground faster. Long lead time components that we use to build our Cat1, CatMNB, and CBRS modules are having the biggest impact on our module business. Unfortunately, these challenges are increasing in Q3, specifically for our massive IoT modules. Sequence operations team is working with our suppliers to expedite what we can this year and anticipating our 2022 production to limit future impact. With TSMC, we have secured most of the wafers we need through the end of the year. We are now shifting focus to the challenges we could face in 2022 as the semiconductor supply constraints environment may extend one more year. We continue to stay close to TSMC with regular dialogue and are optimistic that the industry will have some relief in the second half of 2022. Last but not least, let's address the substrate shortage. In addition to some price increases, lead times have gone from 60 days up to more than 300 days. We did qualify various sources to have more options for our chips, but this was not enough to cover all of our demand for the second half of 2021. This major issue is specifically limiting Q3 chip production. We have placed purchase order to cover a large portion of 2022 production and we are hopeful that you will receive our allotment for H1 2022, putting us back on track. Orders are not being completely fulfilled and we are delaying shipments until we can get the items manufactured. That said, The year-on-year growth outlook for massive IOT remains strong for the second half of 2021, despite supply chain headwinds. Thus far, we have been able to support new customers in our pipeline with allotment of chips or modules needed to support their production RAM, despite the overall demand for material exceeding the available supply. We do not believe the supply chain issues are putting us at a competitive disadvantage. The dynamics driving our growth are still in place and Sequence is emerging as category leader. Our top 10 massive IOT customers could generate annual revenue close to $50 million next year and grow 50% per year in the next two years. Importantly, given the robust demand we are experiencing, We believe our overall growth trajectory and investment thesis for our business remain intact. And we anticipate achieving our medium and longer-term growth objectives as industry-wide supply challenges subside. Let's now transition to the most compelling aspect of the Sequence story, our pipeline of future business. This quarter, we have grown our sales product pipeline to well over $600 million, with the design win portion accelerating, increasing by 18% to $280 million. We are now working on nearly 100 design win projects, with over 40 projects in the production phase, primarily in massive IoT application, as well as several CBRS products. The remaining 60 design wins are advancing to revenue generation as customer projects move to manufacturing, and 15 of them place pre-production and production orders in the second quarter. Although demand currently exceeds the availability of material for chips and module, we are managing our capacity to serve new customers who are in the design phase and requesting chips in preparation for the production run. Our bookings are building up, and we have good visibility on the projects, not yet in production phase, where some customers are securing their supply in advance and replacing production orders. In summary, we have a record backlog, a growing pipeline, and increasing design wins. many of which began contributing to revenue this year, along with continuous strategic traction in our 5G. We have a sound balance sheet with over $30 million in cash at the end of the quarter. Our significant progress in massive IoT and broadband CBRS and our growing relationships with modules and MCU partners position sequence for continued leadership in cellular solutions for massive and broadband IoT. The development of our revenue streams in the past two years demonstrates that our business is evolving from being a majority carrier-centric business to being dominated by massive IoT and CBRS, both of which are about enterprises and industrial businesses. This evolution is expected to result in a larger base of diversified customers with customer projects tending to have five to 10 years lifetimes. Our current analysis of our sales pipeline indicates that absent supply issues, we could approach $100 million in revenue 2022 and grow on average of 50% per year for the following few years. With tremendous confidence, We continue to execute our long-term strategy on three fronts, continued growth in massive IoT and CBRS broadband IoT, expansion of our go-to-market channels, and ongoing development on our 5G product line. I'll turn now the call over to Debra.