Sequans Communications S.A. American Depositary Shares

Q3 2021 Earnings Conference Call

11/2/2021

spk02: 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.
spk06: 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.
spk00: 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.
spk07: Thank you, George, and good morning, everyone. Our revenue for the third quarter of 2021 was $11.9 million. a decrease of 15.8% versus Q3 2020, and 7.5% sequentially. Demand for our products continues to be robust, despite our third quarter growth being impeded by supply chain constraints for materials. As George mentioned, we were not immune to the supply chain challenges that are impacting many businesses. Importantly, though, we have a backlog of orders in hand that are awaiting fulfillment. Revenue from massive IoT in Q3 2021 continued to account for over half our total revenue. Both Cat1 and CatM product revenue increased modestly quarter on quarter and increased exponentially compared to the prior year quarter. Revenue from broadband IoT increased from Q2 2021 as growth from CVRS private networks is starting to pick up. And there's no revenue from the Jetpack business in the sequential comparison. Compared to Q3 2020, as expected, revenue in this portion of our business declined due to the absence of jetpack sales. Our vertical category of business, which includes service revenue generated by our major 5G strategic deal, decreased as expected in Q3 2021 compared to Q2 as a result of the pattern of revenue recognition from long-term contracts. For the quarter, we had three customers and one channel partner that each represented 10% or more of our revenue. And as massive IoT design wins move into production, we expect the number of end customers served to diversify. Gross margin in Q3 2021 was 49.2%, up from 42% in Q3 2020, and down from 56.6% in the second quarter 2021. The year-over-year improvement was due to a shift in revenue mix that included higher service revenue and a higher level of TIF sales versus modules. Sequentially, our gross margin declined as a result of higher product percentage versus services in the revenue mix. It's expected to have quarter-to-quarter fluctuations in our gross margin due to shifts in revenue mix, but we feel confident that the overall gross margin for 2021 will be above 50%. IFRS reported operating expenses were $10.9 million, up 2.6% from $10.7 million in Q2. The second quarter of 2021 benefited from a one-time net reduction in R&D expense of approximately $1.2 million due to an R&D grant. Year over year, IFRS operating expenses decreased 7.6% compared to $11.8 million in Q3 2020. Non-IFRS operating expenses, which exclude stock-based compensation expense, were $9.9 million in Q3 2021, up from $9.6 million in Q2. Our third quarter operating loss was $5.1 million, compared to an operating loss of $3.4 million in the second quarter of 2021 and a $5.9 million loss in the third quarter of 2020. Our net profit in Q3 was $192,000, or less than one cent per ADS, and included non-cash gains of $7.7 million from the revaluation of the embedded derivatives related to our convertible debt. This compares to a net loss of $1.3 million, or four cents per diluted ADS, in Q2, which also included non-cash gains on the revaluation of the embedded derivatives, as well as on the reimbursement of debt which totaled $6.6 million in aggregate. The net loss in the third quarter of last year was $9 million, or 30 cents per ADS, which included non-cash gain on the revaluation of the embedded derivatives of $1.5 million. On a non-IFRS basis, our net loss for Q3 was $5.3 million, or 14 cents per diluted ADS, compared to a non-IFRS net loss of $5.6 million, or 15 cents per ADS, in the second quarter. and a net loss of 8.4 million, or 28 cents, for diluted ADS in the third quarter of 2020. In Q3, we had a gain on foreign exchange of $409,000, or about 1 cents per ADS, primarily related to the revaluation of Euro-denominated net liabilities on the balance sheet. This compares to a foreign exchange loss of $964,000, in Q2 2021 and a loss of $885,000 in Q3 2020. Investors should be aware that possible changes in foreign exchange rates related to balance sheet items and the marking to market of the embedded derivative related to the convertible debt can cause significant differences in net income or loss from quarter to quarter. While the impact of swings in the value of the embedded derivative is excluded from our non-IFRS presentation, foreign exchange gains and losses, whether realized or unrealized, are not excluded. Cash and short-term deposits totaled $15.2 million at the end of Q3, compared to $30.3 million at the end of Q2. Cash flow used by operations for the third quarter of 2021 was $10.5 million, of which $5.2 came from working capital needs from increases in accounts receivable and inventories and a decrease in trade payables. In addition, short-term debt from financing receivables decreased to $9.4 million from $10.8 million at the end of Q2. As George mentioned, we are actively exploring options to finance our 5G investment to minimize its cash burden and to reinforce our balance sheet. Turning now to the outlook for Q4, we are targeting 15% sequential revenue growth for the fourth quarter which takes into account the anticipated impact the supply chain challenges are expected to have on fulfilling our customer orders. Our current backlog gives a high level of confidence in our outlook. We continue to expect that non-IFRS operating expenses should average around $11.5 million per quarter in the coming few quarters, assuming a stable euro-dollar exchange rate. And we expect non-IFRS financial expenses to be around $1.2 million in Q4 excluding any foreign exchange gain or loss. For modeling purposes, the number of ADS outstanding today is 37.5 million. At the conclusion of this call, we will post a written version of our formal remarks in the investor relations sections of our website on the webcast and presentations page, the same location where you will find the audio replay. And now I'll turn the call back to George.
spk00: Thank you, Deborah. Operator, we are now ready to open the call for Q&A. Please.
spk02: Thank you, George. And 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. And our first question is from Scott Serra with Roth Capital. Please proceed with your question.
spk04: Hey, good morning. Thanks for taking my questions. Nice job, guys, in terms of the outlook, starting to build that visibility and supply chain in addition to just seeing that backlog and pipeline of opportunities growing. Hey, maybe for starters, just clarification in terms of the supply constraints in the current quarter. How much was left on the table? And just want to clarify, as we're looking into 2022, it sounds like that 50% growth number, so you're targeting mid-70s kind of coming out of the gate here. I'm just kind of wondering what the visibility is in terms of what you've got with design wins in the backlog and the pipeline right now that gives you that sort of comfort. I know we're supply constrained.
spk00: Yeah. Hi, Scott. Thanks, Scott. For being on the call. Well, on the first question on Q4, you know, obviously the question is never easy if you want to be, because, you know, we are planning, we anticipated already some limitation in our stuff and we moved some of the order we received more towards Q4 and not to Q3. But typically, you know, in the last, in every quarter, we are leaving easily, you know, kind of $1 million. And even sometimes in the last minute, we're leaving half a million dollars or so. that we were thinking we'll be able to do it and we're not doing it. So this is what happened in Q3. Q3 was very tough. From the beginning, we knew that many of the order will not be able to serve them and we moved them to Q4 and Q1. But despite this, we left on the table a little bit, I would say, small $1 million in this quarter. And regarding next year, definitely, I mean, you have two pieces of this question, our comfort level for next year. Big piece of it is really the backlog, the backlog and record level, as I said, not only for the quarter, but we didn't enter yet in 2022. We've never seen this before, where end of Q3, we have this strong visibility for an order to serve customers Q3 next year, if you want. So we have backlog covering not only the first quarter and second quarter, but even going towards the second half of next year from existing customer. So obviously this is moving very well. The piece of existing customer growing, this is one piece of it. And the other one, which is all the design wind that we have them in hand and they are ramping. And I mentioned, like we're talking about, you know, a few of them, even some of them with orders. In other words, we have order from customer to whom we shipped, but also we have order from customer to whom we didn't ship yet big volume just because they want to secure like, half a million units in advance for next year that we have it in hand. So the two angle of it, if you want the design win, we have it in hand and the progress of those design win moving to initial order pre-production and some of them production order adds up and give us the confidence to talk about this growth year to year.
spk04: Hey, George, just to follow up on your comment related to TSMC in the fourth quarter of next year. So you're starting to get good allocation for the end of next year. So Given what you're seeing from a demand standpoint, at a minimum, that's where we should see a meaningful inflection as we go from, you know, fourth quarter of 22 into 23. Is that the correct interpretation?
spk00: Yeah, I mean, you know, the TSMC, to be honest, we have an allocation. I mean, I want to have the people understand how they work. You know, they work with everybody like this. You have a minimum allocation reserved to you. In other words, even if you don't have order, because I hear... Here some people say they secured with order and so on. It's not because you are small or you are big that you can get this, right? I mean you have your allocation. So I have a reserve allocation for Q1, Q2, Q3, Q4 next year. The picture how it looks if you want is very manageable for Q1. It's good in Q4. It's weak in Q2, Q3. And the whole game with them if you want is to pull in some of our capacity allocated for Q4 to Q2 and Q3. And very honestly, we are making a lot of progress with them. And I feel at least like we're heading into the right direction. It takes time because you need to work on this weekly based on other customers not taking their order, some allocation freeing here and there. This is how we can get our allocation. And keep in mind that sequence allocation is really very small versus the big players in this industry. So any small variation here and there can give us the ability to secure our capacity. So that's why I remain, you know, comfortable, I will say, managing this. I'm not panicking at all. But obviously, I could not say, like, I don't have at all problem in Q2, Q3 as I'm speaking today.
spk04: Gotcha. And if I could, in terms of following up on the financing opportunities, so to break that down a little bit, if we were to take out 5G investment now, is the massive IoT opportunity approaching? break-even results as we get into the fourth quarter and the first quarter. And then as it relates to some of the strategic opportunities, it sounds like there are some other things that are percolating there. I'm wondering if you could kind of wrap that into how you're thinking about that with the financing and any other elements that you could provide in terms of timing, magnitude, or otherwise.
spk00: If you consider the company with, obviously, the legacy, which is mainly driven by massive IOTs, Unfortunately, you know, the broadband weakened a little bit this year. This is really one of the challenges that we spoke about, mainly related to the jetpack business. But if you take all the legacy outside of the 5G investment, the company is in good shape to be cash flow positive. Obviously, we could get it faster if we didn't have the supply chain challenges, but I'm expecting that for next year we should be able to overcome all this and be in a cash flow positive situation for this business Taking into that account, obviously, all the cost burden of the company, right? I mean, being public and all the element of spending. As far as, you know, we are able to finance the 5G. So the only piece which is really, you know, the cash burden in the company is really the 5G, which is big piece of it is finance, but still some more to figure out there. So if the rest of the business is able to generate cash, we'll be in very good shape. If it's just only cash flow positive, which is the scenario I'm working on, I need to help the 5G financing. And honestly, the unique position that we have there is attracting a lot of partners around, and we believe we should be able to find options. So the board took the decision to consider this seriously, and we are working on it and on a couple of options.
spk04: Great. And lastly, if I could, coming out of Mobile World Congress last week and some other trade press articles, really starting to talk about the opportunity for Cat 1. You alluded to that earlier in terms of the opportunity this year of 50 million units, largely China, but growing to 100 million units in a couple of years. and you are well positioned now with the Kelly Opie 2 solution starting to come out. So I'm wondering if you could dig in a little bit more on that front. It sounds like NB-IoT has been really marginalized, and Cat1 is gaining a tremendous amount of traction, and you guys are the only solutions vendor with a new part that's coming available that really hits kind of the price points and the performance. I wonder if you could dig in a little bit more on that opportunity, how quickly that ramps for you, and what we can be expecting in 2022 and 2023. Thanks.
spk00: Yeah, I mean, Scott, indeed. In Cat1, first of all, we are an established player and we have a very nice market share, two digits at least, no matter how you take the numbers. In the market, we are working on outside of China. And the way when we look to the IoT, you still have a lot of applications where the people have preference for Cat1. Even just people could be surprised by this, but it seems that some of the metering applications, the high-end metering applications, I call high-end more the main meter, the electrical meter. People like to see Cat1 as a solution for this. And obviously, Sequence is the only vendor capable of bringing latest generation on both CatM and Cat1, and obviously, and be part of the CatM offer that we have it there. So that's why it's really a good angle for us to increase our market share with this new platform, which will hit two objectives. One, reduce the cost, bring down the platform price, I would say to high single digit or low two digit if you want pricing at the module level and be able to offer a comprehensive offer to our customer because we have many of our customers taking the metering space. They need CAT-M but they need CAT-1 and obviously having Sequence playing with the two products that they have the same interfaces, the same software environment and so on makes it very appealing to our customers and help them driving their business. And the other angle of it is really some application where you need a voice. And here you have even some applications that need low power because you can use it on wearable application. So all those segments and all those applications are really requiring Cat1. We are very happy with the decision that we took like a year, more than a year ago, to develop this and invest in this Cat1 platform. We have the chip working, as I said, last quarter we have it in hand and it's in the lab under testing and now we have the module ready under testing and we should start sampling this to our customer in Q1. So this should be an engine of growth for us next year. Obviously, that should start generating revenue more towards the end of the next year because you need to factor and take into account customers taking the product, developing their product and take it to market So we should maybe ship this new platform in Q4 next year and obviously a lot more in 2023.
spk04: Great. Thanks so much.
spk00: Thanks, Scott.
spk02: And our next question is from Craig Ellis with B Reilly. Please proceed with your question.
spk05: Yeah, thanks for taking the question. And, George, congratulations on the growth you're getting in the pipeline. and the visibility that's provided. I wanted to follow up on Scott's question on supply and maybe pose it this way. As you look at the way the supply dynamics will unfold with your partner at TSMC, when would you expect to get more visibility on 2Q and 3Q? Would that be after Lunar New Year or before then or sometime thereafter?
spk00: No, I believe on Q2, very honestly, I should have more visibility, you know, end of this quarter, hopefully. You know, obviously, there is no straight, you know, every day there is work on this. I can tell you, we had a long weekend in Paris yesterday, and I took one day off a little bit to relax. And during this day, I got a call from TSMC asking me and working with me, the guy, to improve the Q2 and work on Q2s. No, they are working very seriously with us. And honestly, it's not like we are missing, you know, we're missing more to support the growth, if you want. The challenge that we have, that the company is growing, as you know, we're targeting 50% growth. So by definition, we need at least 50% more wafer. And, you know, when TSMC is making the allocation, they are making this fairly flat, or let's say they can give you 5%, 10% growth. And this is my challenge. And the way I'm getting this is not, you know... securing Q4, but not Q2 and Q3. So I feel, I don't know for Q3, it will be too early for towards the end of the year, but I'm hoping at the end of the year, I'll start seeing much better Q2, at least.
spk05: Got it. And then as a longer-term consideration, do you have the ability to think about other front-end FAB options or just given the IP and other requirements, process-related technology that TSMC offers, is that not an option for Sequence?
spk07: I didn't get it correctly.
spk05: Do you have other options that you could pursue, or do you feel like you need to stick with TSMC laundry term exclusively?
spk00: I mean, obviously, we're not exclusive, so we have the choice to make a If this supply situation continues like this with... I mean, to be honest, TSMC is very, very helpful and very supportive. And indeed, we can go and make another foundry, make the dual sourcing on the wafers. But this takes time. It's not a question of IP. It's not a machine impossible. But you will not be ready. It doesn't deliver the results before one year work, if you want. So on this basis, I felt like at least assuming that... those challenges will go away in 2023, that better to work more closely with TSMC on fixing next year and keep relying on them as a key partner, not exclusive, but key partner. That's how we see it.
spk05: Yeah, and I understand all the complexities in making a FAB change, and certainly the feedback we're getting from others is that TSMC has been very engaged in trying to grow output. Moving on to another point in your prepared remarks, when you were talking about CADM Gen 2, I think you mentioned that there were multiple 100-unit customer opportunities. I was hoping you could provide more color on those maybe types of applications and when those might be able to convert to design wins and pre-production production work potentially.
spk00: I mean, what I said is that we have a few number of them that there will be more in the million unit per year, you know, order. Obviously, you know, it's industrial space, and I'm sure that the people are now familiar that massive IoT is not about tens of millions per customer. You don't see those kind of profiles, at least per project, to say it. Maybe you could have a customer who has many projects and they add up, but if you take one application, one project, the big project is a million units per year, and we have... a few of them like this, and they are very advanced to be ready next year and generate those kind of revenue. And obviously we have a lot more in the few hundred thousands of units per year, and those are what we call them smaller volume customers. In terms of application, without really talking who's who here, because I would like a little bit to keep things under confidentiality a little bit for our customer and for us as well, but Obviously, we are very successful in the metering space. This is a space where Sequence is really making great success, thanks to the low power nature of those requirements that we have on Monarch 2, because when you go to gas meter, water meter, and obviously electrical meter, they don't have the same challenge. But once you are in a shop, you can get all kind of projects, because it becomes competition on the other type of performance. So metering is really a key segment for us. The medical as well, we're quite excited about a few opportunities there. And then, you know, we spoke about all the tracking device, mainly in car and automotive-related projects. Here we have a few, you know, a couple of them big size. And last but not least, obviously, the smart home, smart city applications. So we remain really on those four segments, penetrating each. We see many projects in each of them, and we have a lot of wins there, and this is really helping us to win more and increase our pipe.
spk05: That's helpful. And then one last one for me before I hop back in the queue. So appreciate the fact that 5G is very R&D intensive. So the points made about looking for funding options is understandable. But can you talk about one, from a timing standpoint, when do you think something might occur? And based on your preferences, George, what would an ideal solution look like in your view? Thanks.
spk00: Thanks. I mean, you know, there is no ideal solution. The ideal solution is really to shake hands with a partner who's an ideal partner for you and it's a win-win situation. Obviously, the challenge there is really to have someone helping in this financing and obviously you need to give him something which is fair to let him in because he offered to take the risk. So it can scale from customer to a technology partner and it can take different form. So we are very, very open-minded on this. Keep in mind, very important, you know, that the 5G for us is key to invest into the 5G because when you talk about the 5G, we're talking about the 5G technology in the company because this can develop even to massive IoT. Maybe you're hearing the terminology like Red Cap, which is really taking the 5G down into speed and so on. So the investment of the company, there is no doubt that we need to invest into the 5G and push this. Now, obviously, for this high-end platform that we are developing on Taurus, And it's, you know, a lot of demand of cash there, and we are working on it. And we have a lot of support, as we said, because we have already a strategic partner there. We have the French government. But we believe, like, adding one or two more, this will be great. Which one is the ideal? Very honestly, you know, anything where sequence can keep control, if you want, will be the ideal one. And in terms of timing, there is no exact timing for this. I would like to enter next year with this solved, if you want. Let me say it like this as a goal for me.
spk05: That's great. Thanks, George.
spk02: And our next question is from Toystein Jara with Bayard. Please proceed with your question.
spk01: Hi, guys. Going back to the TSMC wafer allocation, so you've mentioned that Q4 and Q1 align with your current target shipments. My understanding is that you were probably shipping 70% of demand in the prior quarter. So does that mean that for Q4 embedded in the guidance, you're basically shipping to 100% of demand, or are you still constrained even though you know, and does that mean that there is any some type of catch-up shipments, you know, in Q1 before you potentially get tight with capacity again?
spk00: I mean, you know, we are not, let me say it like this. We are good versus our guidance, if you want. But obviously, if I look to the demand, the demand is higher than what we are getting. But we are not anymore tight at 70% if I have to qualify it. I mean, maybe... Maybe we are in the region of 10% if I need to, if I'm not limited in supply, if you want. So this is how I look to it. And again, you know, it's really, we feel good to serve the guidance more than we have extra volume of a lot of things because if I have much more than I need, then I can use it to serve my Q2, if you want, because I can build inventory much more on this. That's how it is.
spk01: Okay, that's useful. And then You know, how do you look at the opportunity for Taurus? I mean, is that jet pack only type of applications, or is it really going to be something that has potential in applications, whether it's industrial 4.0 or automotive, you know, anything that's non-smartphone? If you could characterize that opportunity relative to what you saw with your 4G modem.
spk00: This is a very good question. Obviously, we are developing this 5G Torus platform, which is really supporting what we call the new radio 5G high-end capable of going to more than seven gigabits per second. And obviously, you can scale down this technology to serve even the one gigabit per second. So once you develop the technology, you are able very quickly, I would say, to have more than one product, by the way, to the market, depending on the segment. And here, in terms of target, That's exactly all what you mentioned. Our target is really, our position is clear. We are on every device, what we call an IoT device, which means not a smartphone. And obviously, we're attacking this based on the go-to-market and the readiness of the market, the timing, and so on. The first market that we believe really is happening and will be happening is more the 5G for fixed wireless application. Here you are talking about gateway router, whether at home or enterprise. So this is really the straightforward target. You can go, obviously, to portable router like Jetpack. This is, again, an easy target. And then industrial is a very important one, the 4.0 that you mentioned. This is really key for us. Automotive will work, but Automotive will require a little bit other partners, I would say, to help us on this, at least for the time being. So in a nutshell, this platform is capable of addressing all the markets you mentioned there. It's just a question of the go-to-market that we have and the ability of the company to take this technology to a given segment. And obviously, some of them are easy. They are in hand of the company today and accessible. Some will need more work or more partnership to work on to attack.
spk01: Great. Thank you very much.
spk02: And just as a quick reminder, if you have any questions, you may press star 1 to ask over the phone. And our next question is from Rajvendra Gill with Needham & Company. Please proceed with your question.
spk03: Hi, guys. Good morning. This is Dennis on for Raji. So I just want to ask a couple questions. The first one is going to be, I mean, you guys talked about this 50 to 100 million unit opportunity for Calliope 2. Could you explain whether that's your expected sales for Calliope 2 for China, or is that kind of like a total temp? Could you just provide some more color, please, on those numbers?
spk00: Yeah, I mean, Dennis, this is what I mentioned. It's the total market. Today, the Cat 1 market, if you look this year, was around 50 million units. I mean, you can look to many reports, depends, you know, it varies a little bit, 10, 15% between the various guys. And based on our analysis as well, bottom up, we believe it's around 50 million units, where half of it is, more than half, by the way, it was like 60% this year was in China. And this will be growing to 100 million total addressable market. Obviously, sequence will be taking some percentage of... market share there. Today, I believe we are in the Cat1 business. We are somewhere between 12% and 15% market share outside of China. This is what we have. And we believe Calliope 2 will increase our market share because it gives us the differentiation and the uniqueness with this platform because practically there is almost very limited competition. The only new platform Cat1 coming to the market is a Chinese platform. And outside of China, no one has developed this next-generation platform, and SeekOnce did this.
spk03: Thank you. And then my second question is about relates to wafers and TSMC. So TSMC has recently increased prices by roughly 20% for wafers. Are you planning to pass on these price increases to customers? And if so, when will you be doing so?
spk00: No, we did, obviously, you know, we could not keep absorbing those price increase. I mean, in the past, we absorbed some of the price increase when it was about substrate and so on. I mean, we managed, you know, to stay with our commitment to customers. But obviously, since this price increase of TSMC, which was worldwide at large and so on, 20%, we reflect this price increase as well to our customers worldwide as well, obviously globally. Customer by customer, there is some work on this, but in general, we recover our margin, if you want. We're not losing on our margin.
spk03: Got it. That's it for me. Thanks.
spk02: And our next question is from Craig Ellis from . Please proceed with your question.
spk05: Yeah, thanks for taking the follow-up. George, I just wanted to look a little bit beyond the fourth quarter to the first quarter. And I'm not looking for specific guidance here, but I think typically we would think about the business having a seasonally down first quarter. But given what's going on with the supply chain, given the strength in the pipeline and the pipeline's conversion capability, I was just wondering if you could provide some color on what we might expect for the first quarter, just in high-level terms rather than specific guidance. Thank you.
spk00: Yeah, I mean, Craig, you know, obviously we have some of our business which is usable like everyone, but as you said, as you mentioned, I mean, there is some, yeah, there is some, today we don't see this down. And let me say it like this. We don't see it down versus Q4 because in any case, our Q4 was low and we see it at least flat.
spk05: That's helpful. Thank you very much.
spk02: And we have reached the end of the question and answer session. I'll now turn the call back over to Dr. George Karim for closing remarks.
spk00: Yes, thank you again for joining the call. We look forward to catching up with you next year on our fourth quarter earning call. By the way, we are presenting company in the upcoming Roth Capital Virtual Technology Conference and are hosting one-on-one meetings on November 17th and 18th. And also in January 2022, we are participating in the Needham Growth Conference. So we look forward to connecting with you at one of these upcoming events. Thank you very much. Thanks, operator.
spk02: Nick, you're going to just conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-