Sequans Communications S.A.

Greetings. Welcome to the Sequence Communications Third Quarter 2021 Financial Results Conference Call. 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. Please note, this conference is being recorded. I'll now turn the conference over to your host, Kim Rogers of AD&IR. Mr. Rogers, you may begin.

Thank you, Shamali. And 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 Schott, Chief Financial Officer. Before turning the call over to George, I would like to remind our participants of the following important information on behalf of Sequans. Sequans issued the earnings press release this morning, which was posted to the company's website at www.sequans.com. 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, including financing alternatives for our 5G business, expectations for massive IoT and portable router sales, the impact of the 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 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 third quarter 2021 financial results conference call. We are building momentum across all our lines of business. validating our strategy to focus on 4G and 5G for Internet of Things. Year to date, our revenue is up 6%. However, like the second quarter, we face external challenges in the third quarter that are masking our progress with our massive IOT and CVRS businesses. We stated on the prior quarter earnings that we anticipated an increased impact from these factors in the third quarter and this uncertainty has also affected shareholder value. We believe it's important to peel back the effect of the external factors to evaluate sequence performance and provide evidence that customer demand is building and our massive IOT and CBRS revenues are growing significantly. Stripping out the impact of Verizon Jetpack, we have a grown total revenue, 86%, and a product revenue, 123% year-to-date, amid supply chain challenges that limited our ability to meet all our customers' demand. The main growth drivers continue to be massive IoT, which increased 113% year-to-date, and broadband CBRS, that replaces almost half of the jetpack business that was originally expected this year. We have significant competitive advantages across all our lines of business, where we bring material value to our customers and strategic partners. The growth of our pipeline and the increasing percentage secured by design wins are a testament to our technology, team, and vision. Looking to the supply situation impact, we feel confident that the impact of supply chain constraints in the fourth quarter of 2021 and the first quarter of 2022 are to some extent under control. And we are actively working to secure our supply for the remainder of next year. Our operations team has done a great job working with our suppliers and qualifying second sources. I will discuss the specifics of our supply chain challenges in further detail shortly. But I would like to emphasize that the supply chain situation impacts the entire industry and has not created a competitive disadvantage for SICMOS. On the contrary, our customers appreciate our unique focus on IoT market and our ability to address their demands objectively with no distraction caused by prioritizing other market segments. We remain the category leader and the market dynamics of 5G, 4G cellular IoT are creating a sizable opportunity for our future growth. We continue to have a strong backlog and are entering 2022 with another record level. This visibility gives us a path to return to robust year-over-year growth next year in line with our 50% CAGR target. Turning now to review the third quarter. As I have stated, external factors in the third quarter hampered our overall financial results and obscured the performance of our business. The biggest of these factors is the absence of sales for the Franklin Wireless Jetpack This continued by Verizon in the second quarter of 2021. Our Jetpack sales peaked in the third quarter of 2020, making this quarter a particularly challenging comparison year over year. Stripping out the loss of Jetpack revenue reveals the strength of our business as Sequence continues to ride a wave of growing IoT adoption for increasingly diverse applications. Looking at our financial results this way, Sequence achieved another quarter of outstanding growth, up 106% year over year, and secured new design wins in all our primary industry segments. The increase would have been even higher if the supply chain constraints had not curbed our ability to meet all the demand. Our outstanding performance this quarter in massive IOT up 118% compared to the same quarter last year, and a growth in the broadband IoT driven by CBRS and up 135% year over year. If we exclude Jetpack, supports our strategy to leverage our core strength in 5G, 4G cellular connectivity and focus on IoT applications. These gains achieved in the face of a challenging supply chain environment are a testament to the strength of our technology, strong demand for our products, and excellent performance of our operations team. Let's look at the performance of our product categories, starting with Massive IoT. Our Cat1 Calliope continues to demonstrate building demand. It's shipping in the US and Japan and has excellent visibility and backlog for next year. The development of our second-generation Cat1 CaliP2 platform is advancing, and we are on track to sample the CaliP2 module to our initial customers in the first quarter of 2022. I am particularly encouraged by the continued expansion of customer engagements for this platform. SQ1's Cat1 CaliP2 platform adds to our CatMNB technologies, making our massive IoT product portfolio very comprehensive and allowing us to address all IoT application segments and uniquely positions us in this market. While many applications can be served with CatMNB, a great number still require Cat1 for higher speed and or voice support. This year, we believe the Cat1 worldwide market will be approximately 50 million units, with more than half of this in China, and expect this to grow to over 100 million units by 2023. Addressing this market segment with our Calliope 2, a new optimized Cat1 platform, will allow us to add a new growth lever and further accelerate our massive IoT growth and increase our Cat 1 market share. On Cat M and B, we are still shipping our first-generation Monarch platform to many customers. However, the primary driver of our sales pipeline growth is our second-generation Monarch 2, which we believe will significantly contribute to future growth. We added more design wins to our pipe in the third quarter, with two of them in the metering segment and one in medical, and continue to strengthen our position in these two segments. In addition, we continue to build market share in smart home, smart city, and attracting applications with many current design wins. Monarch 2 platform is shipping in volume to numerous customers this year. and we are making excellent progress on the design wind projects we have in hand that are expected to launch next year. We are confident that in 2022, we'll have several key customers, each capable of potentially ordering over 1 million units per year, in addition to many smaller volume customers. Monarch 2 will be the main growth driver of our revenue in 2022. Now turning to the performance of broadband IoT, CBRS Cat4Cat6 business is the main growth driver of this category. Thanks to the nice growth of private networks, this business is performing according to plan. The significant progress we continue to make in this market, where we are shipping to various customers, is very encouraging and supports our belief that will make inroads into this large but fragmented market segment. Recently, we announced the JAX tablet, a recognized device serving many private applications, which is starting shipping in the third quarter. This is a new and a promising device category. The pipeline keeps building with new opportunities in CBRS, and we expect to see growth continue next year. Our legacy Cat4, Cat6 emerging markets business is flat, but we have secured a new design win that will move to mass production next year, adding growth to this category. Lastly, we are working on new business opportunities for high-end IoT application that we anticipate launching at the end of 2022 or early 2023. This should bring further growth to this legacy product sector. A quick update on 5G Taurus. The company continues to invest extensively in 5G, a strategic growth priority given its unique opportunity for our game-changing IoT technology. We are making good progress with our 5G Taurus platform development and are still targeting next year for sampling the technology. Also, the engagement we have with our Fortune Global 500 partner is on track and progressing very well. The investment in 5G is strategic for long-term. However, we recognize that rather than receiving credit for the long-term value being created, the cash burden related to this investment negatively impacts the company's valuation. We are actively exploring options to finance Sequence 5G investment to minimize its cash burden with the goals of upholding our leadership in the massive IoT and maximizing value for shareholders over the long run. Given the immense market traction we have on 5G Taurus, we remain incredibly excited about our prospects in 5G. Lastly, comment on vertical and strategic business. In brief, the vertical software services category has grown 31% year-to-date compared to the same period last year, despite quarter-to-quarter variability. Note that this category includes all revenue generated by the contract with our Fortune Global 500 strategic partner. We are progressing on all the vertical projects, including the one we signed last quarter. We are engaged with the new satellite opportunities where we aim to secure more design wins. Now I would like to provide further clarification on the status of our supply chain. In the last two quarters, we faced managing the dramatic increase in lead times for substrate. We now feel this is under control thanks to the second sourcing strategy and order anticipation. Also, we have been in regular communication with TSMC and can confirm that our wafer allocation for Q4 and Q1 2022 aligns with our current target shipments. We remain attentive to managing critical components required for our modules as some of the suppliers may operate at 70% for the remainder of the year to deal with the recent China power crunch issues. Wafer allocation for Q2 2022 and beyond remains in flux. We believe the supply chain will begin to improve in Q4 2022. Hence, our primary focus is securing adequate supply for Q2 and Q3 to fulfill all the products moving to mass production in 2022. We feel confident that we can work through this challenge and continue to communicate closely with TSMC to ensure adequate wafer supply next year. Shifting to our go-to-market strategy. The pivot in our go-to-market strategy to expand our distribution with MCU and channel partners has been a catalyst for our growth this year. We continue to advance our relationship with all our MCU partners. I'm pleased to say that we are making headway with more engagements that we believe will be beneficial to further expanding our pipeline and our future growth. Renesas has proven to be a valuable partner as evidenced by their success reselling modules based on our Monarch platforms. Given the traction with the launch of the Monarch 1 module, Renesas is now working on launching a Monarch 2 based module. In the third quarter, we delivered to them our first volume orders. In 2022, we anticipate making Renesas a critical go-to-market partner for us. Thanks to their global presence, they are playing a crucial role in addressing markets and customers that were otherwise not accessible to us. Looking to the future, our product pipeline continues to build. In the third quarter, We added new design opportunities and converted some of them to design wins. While we are not formally revising the $600-plus million pipeline size shared previously, we are now well over this amount. With the new awards this quarter in metering, medical, asset tracking, and other industrial applications, The portion of our pipeline secured by design wins increased to almost $300 million, representing nearly 50% of the pipeline. Massive IoT makes up the most significant portion of our pipeline, and there are many promising opportunities in our broadband IoT category. On a final note, this quarter we advanced on numerous design wins, giving better visibility on their move to mass production in 2022. In summary, we continue to execute our long-term strategy on three fronts. Increasing growth in massive IOT and CBRS broadband IOT. Two, continued expansion of our go-to-market channels. And three, ongoing development of our 5G product line. Many existing design wind projects continue to move forward, We continue to move toward a 2022 product launch. We are ramping with several customers on products with a potential run rate of over 1 million units per year. We continue to see new, exciting opportunities coming into the pipeline in massive IoT and broadband IoT. Our pipeline growth is also benefiting from projects coming from our MCU and channel partners like Renaissance. we continue to believe that absent any major supplies issues, we are on track to grow on average of 50% per year for the following few years. As the CEO and a significant Sequence shareholder, I'm frustrated by the impact of the external challenges I discussed today on the company this year. Sequence has created a solid competitive position, and today we are better positioned in the IoT market space than ever. The entire team at Sequence is working tirelessly to develop our technology, grow our sales, and expand our market presence. We appreciate your commitment to Sequence, and thank you for your continued confidence and trust. I will now turn the call over to Deborah.