Sequans Communications S.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, with Hayden IR. Thank you. You may begin.

Thank you, Melissa, and thank you to everyone participating in today's call. Joining me on the call today from Sequence Communications are George Karam, Chairman and Chief Executive Officer, and Deborah Choate, 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 under the newsroom section. Before we start, I would 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 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 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 first quarter 2022 financial results conference call. CQAS is off to a strong start in 2022. First quarter revenue grew by more than 12% year over year, and when adjusted to exclude the $1.1 million of the Verizon Jetpack contribution from the first quarter of 2021, revenue grew by 23.7% year-over-year. The main revenue growth driver was our LTM and BIUT business with our Monarch products family, which grew more than 24% sequentially and 125% year-over-year, driven by design wins moving into mass production. Also, the broadband category grew 35% year-over-year, attributable to increased services and licensing revenue from our existing 5G agreements with our strategic partner NRS. This increase in service and licensing revenue significantly boosted our gross margin in the first quarter to 68.1%, from 50.1% in the same quarter last year and 57.1% in the prior quarter. The increased margin contribution narrowed our operational loss and reduced our non-IFRS net loss to $1.8 million from a non-IFRS net loss of $5.1 million in the first quarter of 2021. Massive IUT and specifically The Monarch LPM products family remains the primary near-term growth lever for SQLs. Our product revenue pipeline now exceeds $320 million of design wins with over 80% for massive IoT applications. Keep in mind that our pipeline represents expected revenue contribution over three years of design life. with several large projects having longer lifetime spans, in some cases up to 10 years, which is not reflected in our pipeline number. In March, we completed a $20.9 million equity raise, which improved our balance sheet and enhanced our position for negotiating a new 5G strategic agreement. Let me start by providing an update on the 5G strategic initiatives we launched late last year and referenced on our last course. We successfully executed an MOU with a new strategic partner that once finalized is expected to fully fund the balance of our 5G investment in the Taurus platform. The diligence has been completed and the definitive agreement is currently being finalized with the goal of closing by June 30th. In parallel with this new strategic partnership, our strong position in 5G has led to other additional, non-exclusive, high-potential strategic discussions. These are opportunities that would further expand our addressable market by increasing penetration in existing markets or providing access to new ones that we don't currently serve. We expect to have further clarity on these initiatives over the course of the year. Switching now to our massive IUT and broadband categories. Typically, we see seasonality in our first quarter product revenue, and that was the case with all our product categories this quarter, except for our LTM and BIUT category. that help to compensate for such effect and allow us to deliver over 12% sequential growth in terms of total number of units, all categories shift in the quarter. Massive IUT revenue represented around 45% of our total revenue in the first quarter. The varied performance of ASN and ASP of the Cat 1 and Cat M and B categories of the massive IUT resulted in flat revenue sequentially. As I started in my operating commands, the LTM and the IUT category once again delivered strong revenue growth, both sequentially and year-over-year, reflecting the layering in of a number of new design wins that moved into the mass production and shipment phase in the quarter. The growth in Cat M and B offsets the contraction in the Cat 1 category related to lower module sales to a new health customer, which saw shipments spike last year in the first quarter related to COVID, and the buildup of inventory levels by another customer in 2021 that affected the sequential growth in Q1 2022. That said, Calliope Cat 1 demand remains solid. We expect this platform to return to growth over the balance of the year, with the growth acceleration in 2023 driven by the ramp of our second-generation platform, Calliope 2. On our last earnings call, I outlined our prospects in several massive IoT markets. Three large segments, smart city and specifically metering, asset and car tracking, smart home and security, and two smaller segments, medical and fitness, and people. In each of these growing markets, Sequence is well positioned to expand, and in some cases, double our market share with both our massive IoT platforms in Cat M and Cat 1 products. During Q1, we made measurable progress towards this goal by adding design wins in metering, the largest segment, with more projects moving to mass production. We are one of the few pure plays in cellular IoT in terms of the breadth and depth of our portfolio, with all the advantages of our solution in terms of power, cost, security, and category coverage, and are now partnered with leading MCU vendors. Thus, we anticipate increasing our market share to 30% of our addressable market on average in each of these segments as they expect. Put another way, we believe that our growth rate in the cellular IUT can exceed the 40% five-year CAGR forecasted for the industry. Our broadband category showed modest sequential growth this quarter, but increased by 35% year-over-year. When adjusted for the Jetpack revenue in the first quarter of 2021, annual growth for broadband rose by 66%. The significant growth in services and licensing revenue offset the seasonal decline in the product revenue we typically experience in this category in the first quarter. In CVRS, we are experiencing a delay on one big project, and the demand on other CVRS projects remains lumpy with the private networks market still developing. As a result, CBRS revenue will be muted in the first half of 2022, but we expect this business to pick up in the second half of the year. Although flat, the Cat4, Cat6 emerging market business remains productive. While our differentiated CBRS offering helped us re-establish our broadband IoT business, Our focus for this category remains on a private networks application where we are progressing on a key strategic initiative creating new design opportunities that we could secure this year. We'll talk more about this initiative in the near future as it could boost our revenue growth in the legacy Cat4, Cat6 business. The new 5G Taurus platform is the major long-term growth driver of our broadband IUT business. We are addressing a significant opportunity, potentially exceeding $2 billion by 2025, that could triple our addressable market. The 5G Torus platform development, which is the largest segment of our R&D spending, is progressing at full speed. We expect to have our RF chip back for testing by the end of May, and we are on track with the development of the other Taurus platform components. Our goal is to begin full product sampling in 2023. Given the progress we are achieving with strategic partners, we are highly optimistic about the next major growth lever for Sequence, our cellular IoT 5G product line. Looking at our backlog and pipeline, We entered 2022 with a record backlog of non-cancelable orders that continued to grow in Q1. Also, our business pipeline keeps building with new design wins and new opportunities. It's now well above $650 million of three-year product revenue with around 50% in the design win stage. Over 80% of our design wins are for massive IoT application, predominantly for the Monarch 2 Cat M platform. The broad success of our second generation Monarch 2 platform has been a significant driver of pipeline growth, along with the Renesas LTM NB-IoT module product line. We continue to expand our pipeline in metering and expect to see a continuous inflow of new engagements in this large growth sector. We added three new metering design wins in the first quarter, two of which are with the new customers. Our existing Cat1 business is very solid with a strong backlog, and our next-generation Cat1 CalIP2 platform continues to receive substantial interest as evidenced by the successful launch of Kalaipi 2. The positive market reception and ongoing interest are creating a strong revenue pipeline for Kalaipi 2. We expect to close several new deals in the near future as we turn to mass production on this product. Given the reception, we are confident that Cat1 Kalaipi 2 will be a new growth lever in 2023. If we analyze our pipeline, we still have a majority of the design wind projects in the development phase with modest revenue contribution. Many of these are anticipated to move into mass production later in 2022. We have three significant projects potentially having an annual run rate of over 1 million units each. This quarter, we began shipping one of them and have secured a backlog for the second one that will move to production in Q3. However, some of the design wind projects are moving into mass production slower than had been initially planned due to supply chain issues our customers are experiencing and other execution challenges they are facing. This may affect our 2022 growth target for massive IOT as some shipments could push into late 2022 or early next year. These possible delays are not expected to impact our 2023 revenue growth forecast. Overall, our backlog continues to grow and our potential sources for future revenue streams continue to expand. This is expected to accelerate further once Calliope 2 starts to add to our pipeline. As more projects progress towards mass production, we'll see an expansion in our revenue even if some external variables could affect the timing of certain projects in 2022. Let's switch now to our MCU partnerships. Our MCU partners considerably strengthen our go-to-market strategy, and they value Sequence's contribution to their offerings. Sequence brings cellular technology to each of them who need this expertise to have a competitive, comprehensive IOT solution. Each partner has its unique strategy for working with us, which removes the need for exclusivity in our agreements. This broadens our addressable score, giving us access to opportunities we would not have otherwise. The expanded partnership with Renesas has been successful on both the business development side, as evidenced by the growth and revenue pipeline, as well as on the second sourcing of manufacturing options to solidify our supply capacity. Our other MCU partnerships continue to be valuable to Sequence as well, and we have numerous exciting projects under discussion with them, with design wins in the pipeline. Yesterday, Microchip launched a tiny cellular IoT platform Arduino compatible integrating our Monarch 2 based GM02S module with a microchip AVR MCU. The platform will be distributed via microchips extensive distribution network and as a result could further expand our design pipeline. Let me provide a quick update on our supply chain. We are closely monitoring potential business hurdles for the remainder of 2022, including the recent lockdowns in China, the upsurge in the Russia-Ukraine war, and our wafer supply from TSMC. Regarding the lockdown in China, we have managed to limit the impact on our shipment in Q1. That said, we continue to monitor this closely, as this could impact the delivery of modules in Q2 and affect our customers' manufacturing devices in China. In terms of our small R&D team located in Ukraine, they continue to work and successfully meet their deliverables. The impact of the Ukrainian crisis on our execution was minimal. Lastly, with the help of TSMC, we have sufficient wafer supply to meet our customers' demand for 2022. Sequence has a close working relationship with the team at the SMC who supports our goals and our cellular IoT strategy. So, in summary, Q1 was strong with growth in Monarch, NTM, and the IoT, and a high interest in Calliope 2, both of which remain important sources

Operator? Ladies and gentlemen, it seems we're having some technical difficulties. One moment, please. Ladies and gentlemen please continue to stand by. Thank you, Kim. Please go ahead.

Hi, everyone. Sorry for the interruption there. I'm just going to finish George's section. In summary, Q1 was strong with growth in Monarch LTE-M and NB-IoT and high interest in Calliope 2, both of which remain important sources of future product growth for Sequon. We do have some fluidity in the timing of a few projects moving to mass production later this year. but we remain on track to deliver nice growth in 2022. Our 5G services and licensing delivered strong growth in the quarter and helped narrow our operating loss. With the new 5G strategic engagement expected to progress close to closing in Q2, we should have the vast majority of the funding for the remaining development of our Taurus 5G platform, a key long-term growth lever for Sequon, This agreement would also bring high margin revenue for the next few years, which will improve our financial performance and strengthen our balance sheet. Today, with a growing pipeline and the new 5G strategic deal under discussion, we have increased confidence that we can deliver sustained long-term growth. SeekWons is in an excellent position to expand market share, grow revenue, and improve profitability. I'd like to thank all our shareholders for their ongoing commitment to Sequons, and I'd like to thank my global team for their hard work and dedication.

I'll now turn the call over to Deborah.

While they're working on getting Deborah and George back on the line, I will continue with Deborah's section and read the CFO comments until she's joined back in. Our revenue for the first quarter was 13.9 million, an increase of 12.7 versus Q1 2021 and up slightly compared to 13.8 million in Q4 2021. The quarter includes an increase in service and licensing revenue, primarily driven by revenue recognition under our 5G deals with Renaissance and our existing strategic partner. product revenue accounted for 43 percent of total a 14.4 percent decrease versus q4 reflecting lower product sales of cbrs and cat1 modules that have higher asps revenue from massive iot t in q1 2022 accounted for approximately 45% of our total revenue with CAT-M and B growth compensating for the lower shipment of CAT-1 modules. Revenue from broadband IoT increased from Q4 2021 as service and licensing revenue generated by our 5G strategic deals increased sequentially and year over year. As expected, compared to Q1 2021, product revenue from this portion of our business declined due to the absence of Jetpack sales. For the quarter, we had three customers that each represented 10% or more of our revenue. One of these is a channel partner with multiple end customers. Gross margin in Q1 2022 was 68.1%, up from 50.1% in Q1 2021, and up from 57.1 in the prior quarter. I'm just going to pause here for one second. Operator, do we have George and Debra back on the line? Yes, they're connected back in.

Yes, okay. Debra, I'll take those.

So just taking in what Pamela asked off, the improvement was primarily due to the increase of services and licensing in the 5G broadband category. and the increase in the product mix of chipset revenue versus module revenue compared to prior periods. IFRS operating expenses were $11.4 million, down 4.1% from $11.9 million in Q4 2021 due to a decrease in R&D expense of $264,000 and a decrease in general administrative expense of $405,000. which was partially offset by an increase in sales and marketing of $179,000. Year-over-year IFRS operating expenses decreased to $581,000 compared to $12 million in Q1 2021. Non-IFRS operating expenses, which exclude stock-based compensation expense, were $10.1 million in Q1 2022, in line with $10.1 million in the prior quarter. Our first quarter 2022 operating loss was $2 million, an improvement compared to an operating loss of $4 million in the fourth quarter of 2021 and a $5.8 million loss in the first quarter of 2021. We posted net income in Q1 of $2 million, or 4 cents per diluted ADS, which included a non-cash benefit of $6.4 million from the revaluation of the embedded derivatives related to our convertible debt offset partially by $1.2 million of non-cash interest expense. This compares to a net loss of $7.7 million, or $0.21 per diluted ADS in Q4, which included non-cash charges of $2.4 million from non-cash interest expense and the revaluation of the embedded derivatives. And the net loss in the first quarter of last year was $11.4 million, or $0.33 for diluted ADS, which also included non-cash charges totaling $5.2 million on an evaluation of the embedded derivatives and non-cash interest expense. On a non-IFRS basis, our net loss for Q1 was $1.8 million, or $0.04 per diluted ADS. Again, an improvement compared to a non-IFRS net loss of $3.5 million, or $0.09 per diluted ADS in the fourth quarter, and a non-IFRS net loss of 5.1 million, or 15 cents for diluted ADS, in the first quarter of last year. In Q1, we had a gain on foreign exchange of $370,000, primarily related to the revaluation of Euro-denominated net liabilities on the balance sheet. This compares to foreign exchange gains of 135,000 in Q4 and 1.4 million in Q1 of last year. Investors should be aware that the company's results are subject to certain market risks, and as a result, our net profit and loss may fluctuate quarter to quarter. Specifically, the financial income or expense category on the income statement, which is below operating results, includes foreign exchange gains or losses and the marking to market of the embedded derivatives related to the convertible debt, which can cause significant differences in net income or loss from quarter to quarter. These fluctuations may be more extreme during periods of increased market volatility in foreign exchange rates or in the company's share price. While swings in the value of the embedded derivatives are excluded from our non-IFRS presentation, foreign exchange gains and losses, whether realized or unrealized, are not. And please remember that our IFRS net loss includes significant non-cash interest expense related to our convertible debt, much of which is excluded in the non-IFRS presentation. Turning to the balance sheet, cash and short-term deposits total $26.3 million at the end of Q1, compared to $4.8 million at the end of 2021. The Q1 2022 closing amount reflects the proceeds from our equity raises during the quarter. Cash used by operations for the first quarter of 2022 was $2.8 million, and improvement over the $4.7 million used by operations in the fourth quarter of 2021. Short-term debt from financing renewables increased modestly to $9.7 million versus $9.5 million at the end of Q4. As George mentioned, we successfully executed an MOU with a new 5G strategic partner effective March 31st that, once executed, is expected to fully fund the balance of our 5G investment in the first tourist platform and minimize its cash burden while reinforcing our balance sheet. Thanks to equity deals completed in Q1, we believe we have sufficient resources to fund our operations even without the new 5G deal, but we would likely invest in our 5G development at a slower rate. Regarding the outlook for Q2, we are currently targeting sequential growth in the quarter, although we continue to monitor the potential impacts on revenue of China's pandemic lockdowns and a supply chain disruption on the timing of product shipments and project advancement. We expect service and licensing revenue to continue to be a large part of the revenue mix in Q2, and therefore we expect gross margin to be above 55% in the quarter. We expect the non-IFRS operating expenses, which exclude stock compensation expense and assume a stable euro-dollar exchange rate, will average close to 10.5 million per quarter over the next few quarters. And we expect IFRS interest expense in Q2 to be approximately $2.6 million, and non-IFRS interest expense to be around $1.4 million, meaning that we expect our non-IFRS net results to have lower interest expense by $1.2 million. We are not providing guidance on any impact of revaluing the embedded derivatives, nor possible foreign exchange gains or losses, given this is largely determined by market conditions. And for modeling purposes, the number of ADS outstanding today is 47.7 million ADS. We plan to update our outlook once we finalize the strategic 5G agreement, as this is expected to have a significant positive impact on our future revenue and gross margin profile. As George mentioned, we are targeting a closing fund by the end of the quarter. At the conclusion of this call, we will post a written version of our formal remarks in the investor relations section of our website. on the webcasts and presentations page, the same location where you will find the audio replay. And now I'll turn the call back over to George.

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

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd 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. Our first question comes from the line of Scott Searly with Roth Capital. Please proceed with your question.

Hey, good morning. Thanks for taking my questions. George, Deborah, congrats on getting the 5G MOU to this point, and it's nice to see the way for progress at TSMC. Maybe real quick. George, firstly, to dive in on the 5G strategic MOU, it seems like your level of confidence is high. I was wondering if you could expand on that a little bit, what the gating factor is. And also, just broadly speaking, are there any exclusivities here? And to clarify whether or not there's any equity component in terms of how you guys are approaching the deal now.

Yeah, Scott, I mean, obviously, the deal is really a business deal. There is no equity component at all. It's a licensing deal opening a new application for sequence. That's what I could say for the time being in terms of expanding the market. So it's really a plus from the angle of the market as well. You know, it's not limiting or taking anything off the table from sequence. It's to the counter expanding sequence business. And as I said, it's pure licensing deal. And I rather don't comment much yet on the amount and so on, but obviously it From that all, when I'm talking about covering all the complementary spending of 5G, you could imagine that this is a sizable deal that will be, in terms of amount, that will cover completely the financing missing on the 5G, and at the same time obviously give us some improvement on the gross margin as well on the balance sheet as we explained. The deal is very advanced. If I have to qualify it from MAMU, you would be diligent, and we are really finalizing this deal like any other deal, and hopefully we can close it in the quarter.

Hey, George, just quickly on TSMC front from a wafer standpoint, it sounded like previously third quarter was the area where you were a little concerned, but I guess 90 days ago you thought you were about 90% covered. You're pretty confident that you've been able to fill in that third quarter gap from a TSMC wafer standpoint?

Yeah, I mean, we feel good. Obviously, we don't have extra capacity. In other words, absorbing some unpredictable upside or some acceleration in the business will have a limit. So it's not like we have access to any wafer we want. But versus where we were at the beginning of the year, on our demand, we feel very good for now. And no other, you know, no impact so far, even the Ukrainian crisis. I mean, all All the checks we have done, everything seems to be moving positively. We remain cautious because no one knows, but we feel very good versus last call.

Very good. And lastly, if I could, it sounds like the CAT-M momentum is continuing to build, particularly in the near term, but CAT-1 seems like there's a lot of design traction momentum. I'm wondering if you could dive in there a little bit more in terms of the magnitude of the impact as we get out into 2023. What kind of win rate you're seeing in kind of Cat 1 coming back into the forefront a little bit more, given what Calliope 2.0, you know, delivers in terms of performance, price, power. You know, what's that doing to the landscape and market share on that front? And then I'll get back into Q, but congrats again on the MOU. Looking forward to the definitive conclusion of that agreement. Thanks.

Thanks, thanks, thanks. I mean, on the Cat1, you know, we have already a very good business, quite solid, and good even visibility for next year, you know. Our current Cat1 business, we continue to ship in Japan. We have visibility on some metering project, as you know, there. We have big project, at least one big project in metering using our existing Cat1, and we have visibility at least towards the end of 2024, if not 2025, you know. So just to say that we are in a good position on the Cat1. We have many a strong customer as well in the tracking, feed management, and so on. And our market share currently is in the low teen, you know, with existing Caton. However, the new platform where we add all the improvement in terms of power, opening new market, but also improve the customer solution globally is opening for us now the game to win a new skew with this solution. because it has really no equivalent, I tend to say, outside of China in terms of competitive landscape. And we have a lot of traction around it for security application, for new metering application, and many projects. We talk about projects in the smallest one. We talk about 300,000 units a year, and we have many projects that will be above 1 million units a year. So this is really... We are quite happy about what we have done there. The pipe is very strong. I don't qualify. We are in a very advanced stage with many deals. I don't qualify them yet, DesignWin, because I'd rather wait for the full shipment of the mass production product of Sequence that we are planning to do in Q3. And by then, you know, we could talk more about DesignWin. And I'm expecting the pipe to increase in DesignWin just only before the end of the year, driven by this platform.

Great, thank you.

Thank you. Our next question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Great, thank you, and best wishes on finalizing that 5G MOU. I guess, George, just for you, given we all know about the tough supply environment out there, and it sounds like some of them are impacting your customer timing for ramps in 2022. how should we think about maybe second half 2022 product revenue versus first half of 2022? And then the follow-up would be, you said it's not going to impact your 2023 growth rates. Could you remind us how you're thinking about product revenue growth in 2023?

Yeah, I mean, hi, Mike. You know, obviously, our visibility, the way we're looking to this, that we'll be growing every quarter in terms of product revenue towards the end of the year. You know, this is This is my target. We have growth on product every quarter. And this is really related to the fact that we have a lot of those products turning to mass production and accelerating. It's very important as well, you know, when you look to the product, that they don't behave all the same way. You imagine that the growth is really driven by the CAT-M category, which is where we have the majority of the design when turning with the projects turning to mass production. And obviously this category is adding the growth. The cat one, the existing cat one is more or less stable. I don't qualify it like major growth. It's very solid. We have backlog and so on, but the growth is not expected to be big, you know, minor growth every quarter because we have existing customer and we continue shipping to them and, and we can have fluctuation around, around those quarter. The growth on cat one needs to come from the Cali P2 platform and, and this is more towards the end of the year, maybe we see some Calliope 2 shipment in Q4, but in any case, next year, definitely. And obviously, the other element, which is a little bit, can give different perspective, which is the CBRS business, where this is going well, you know, and we have even some opportunity. I hint a little bit on the call by talking about the new initiatives there with the new deal. We have a very unique and a strong position in the CBRS space, The market is moving, but, you know, it's like we get big order, then it slows down a little bit until all this is consumed. So it's very hard to predict if you want quarter-to-quarter growth on the CBRS. But in any case, we see second half much better than the first half. So, again, you know, even if the product revenue could look – weak if you want in Q1. We're expecting this to go back to growth in Q2 and beyond Q2 definitely with acceleration in Q3, Q4. And maybe, Mike, the last one about 2023. Very honestly, today we continue strong on 2023. Obviously, I'm not talking about any supply or any situation out of control. But if I look to the demand and the number of projects we have in hand, we have a little bit of fluidity this year because, you know, a project assumed to be originally launched in Q2, shift to Q3, will impact our revenue in the short term. But once it's shipping in Q3, it's shipping in Q3, it will continue in Q4 and next year. So we have much better, I would say, confidence if you want about 23, just only looking to the design win in hand. turning to production because even if they could have some slippage here and there, the slippage remains under control, I mean, for the majority of those projects today. And some of the slippage I mentioned, you know, we have, for example, some customers that are not able to get an MCU part. So we can ship to them, but they miss other components. So we have those kind of challenges delaying some of the, you know, the ramp of some of the projects for our customers. But nothing really there could scare us for the future because this is really recovering. It's just only a quarter, and it will recover, and we'll continue ramping from there.

Great, thanks. And just for a follow-up question, the services and licensing revenue, really strong. Should it stay at these levels in Q2? And if you sign this MOU, does it go to even higher levels in the back half of the year? Or any color you can... give us in modeling that higher margin business. Thank you.

Yeah, in Q2, I think it may be not quite as high as it was in Q1, but still a significant portion, so that's why we're saying the gross margin will still be quite high in Q2. Absent the new deal, we would expect it to be lower in the second half of the year. With the new deal, we would expect that that would add quite a bit to the top line. But again, we'll provide a more precise update on that once it's executed.

Great. Thanks, Dave. My question is, I hope your employees in Ukraine stay safe.

Thank you.

Thank you. Our next question comes from the line of Craig Ellis with B. Reilly Securities. Please proceed with your question.

Yeah, thanks for taking the question and echoing the congratulations on the MOU progress. Just great news there. George, I wanted to move over to the product side. You've talked in your prepared remarks a little bit in Q&A on the success you're seeing in metering, but that seems like it's something that really is kind of a tipping point position for your technology and your solution. So I was hoping you could provide a little bit more color on the breadth of winds that you have across different metering customers and add a little bit more color on some of the new winds that you saw in the quarter so we can calibrate what's possible as we look out to 2023 and 2024 there. Yeah, I mean, hi, Craig.

I mean, definitely this is a segment where we are quite excited about, you know, and we believe we are very comfortable to say that we can project 30% market share you know, to happen in this market, if not more. We have all the big names, you know, tier one engaged with us, and many of them have projects with us. Even in this quarter, as I said, we added two new customers, and one existing customer added one project. So we are talking about maybe more than 10 projects in metering, you know, today for SQLs, all using this CATM platform. and some, by the way, in the future will be as well requesting CAT-1. And the solution that Sequence is able to provide from CAT-M to NB to CAT-1, even in some situation they request CAT-4 and CBRS for private, you know, utility for private network application. All this puts us in a unique position, you know, and we are developing this. Also, the relationship with some partner like Renaissance helps as well and Skywalks. in some of the accounts. So all this let us feel like, you know, if I have to bet, you know, why not even being above 40% market share in this segment? And this is what we hope if we conclude all those, the execution of those design wins, because the design are in hand, just a question of execution and turning them to share that. In the quarter, I mentioned, as I said, three new design wins, but three new projects, but also One of them, we did the first shipment to this customer. It was a design win, and it turned to production this quarter. So quite excited about the opportunity there.

That's very helpful. The second question is related to manufacturing supply and the Renaissance Agreement. Can you comment on whether or not you will have supply from that partnership? later this year, and if not, then how would you handicap the prospects for supply from them in 2023?

Yeah, I mean, definitely, we are, you know, and this is one of the important relationships we have with Renaissance, is really to provide second source for our customer, by the way, and second supply capacity, I tend to say, for sequence and Renaissance combined. leveraging their buying power and their position in the market. Today we are implementing all the manufacturing path through RENESAS. So in other words, we'll be able to get, to have them buying from TSMC wafers, building their chips, building all the parts, and even going down to the module, all built by RENESAS in parallel to sequence. And this is today, call it into the NPI stage. In other words, they are just only cleaning the process, checking that everything is fine, and making the Q&A of this, I would say, path of manufacturing. And this should be ready in the second half of the year. I don't know how much we will use it this year. We'll have maybe a little bit of production going through them this year, but definitely next year with the, you know, it seems to be the tension on terms of supply is going to continue, so this could be very helpful for knowing that next year we'll have as well the ramp of Kalaipi 2 and the ramp of the pipe of Renaissance themselves, right? I mean, they have as well a pipe of design wind not yet turning to production this year, and this will add as well more demand next year. So definitely it's a good strategic move that we are happy about, and I'm sure it will help us next year.

Very helpful. And then finally, before I hop back in the queue, Very encouraged to hear that with the new partner that you're engaged with under the MOU could offer a new application for the company. My question is this around that partner, and I know you can't identify who it is, but can you provide any color on whether this was an entity that was known and kind of in your ecosystem before or net new and any geographic color and any color on the applications, et cetera, so that we can get a fuller picture of what you're seeing there?

You know, I mean, obviously it's a known entity, and it's part of the ecosystem that we used to know, I would say. It's not like a discovery. It's not coming out of the blue. But, again, you know, what's very important to keep in mind, I spoke about this MOU, but, you know, I stress as well the fact that since we launched this initiative, we have more than one deal under discussion. If I have to shortlist, I would say I would shortlist four. including one in December. So we have three other initiatives going on. And what's interesting is that we are able, with our unique position in 5G and the scarcity of this technology in the world, to be really like the center of many guys looking for this technology in one way or another. And Sequence plays really an important role there to expand, again, the access to go-to-market. And what's also interesting is that those deals, at least on the surface, they don't look... requiring exclusivity, if you want. In other words, nothing prevents Sequence from making four deals like this, you know, if I have to project. Obviously, there is a limit of what you can do in a given time frame as a company, but on the principle, nothing prevents us from doing more than one deal, closing this MOU deal to full definitive agreement and close another one maybe towards the end of the year. So which is, again, the interest there, maybe even in the short term, was really to find someone helping us funding the R&D. But if you exclude this on the side and you look to the real picture, it's really expanding the market of sequence. And this matters more, I tend to say, because this will be future growth for the company with more business that you can get thanks to this investment into the 5G.

Thank you. Our next question comes from the line of Tristan Guerra with Baird. Please proceed with your question.

Hi, guys. I know that you're still not really guiding for the full year given all the uncertainties, and you've talked about the design wind pipeline, which is very encouraging. My question on this was really more about in terms of the real demand. So if we exclude the potential disruption from the lockdowns and some, you know, disruptions in terms of the supply of certain components. How do you see the real land demand shaping up, you know, in this type of environment? You know, is the higher uncertainty actually having an impact on the timing of deployments of IoT projects? Or is that the opposite, that, you know, a shortage of labor is actually accelerating those projects? So if you could touch on how, you know, you're seeing the actual timing of those IoT initiatives relative to your expectation, let's say, you know, at the beginning of this year or exiting last year, and also touch maybe on the maturity of the ecosystem, what's left behind. that needs to be done to eventually get to a higher time for IoT in general and for your products.

Hi, Tristan. Thanks for the question. I mean, it's a very interesting question that you're raising here, Tristan. We are not we need to keep in mind that IOT is not really a consumer business. So we see, obviously we're nervous about the macro condition in general because, you know, at some time if there is a big war in Europe, you know, I don't know, something will happen, right? I mean, you could not say we'll not feel anything about all this. But if we look to the demand and the variable, we are in industrial environment, industrial initiatives, right? where the guys are not questioning every day if this project is needed or not. To the contrary, I tend to say the more you have disruption, the more they see nervosity, I will say in the world, the more they are convinced that IUT is a must-have, and you need to deploy your network to control it over distance and improve the efficiency of your service and so on. So very honestly, even if you take a Q1 where you have like the crisis in Ukraine and so on, and we have a new deal, new project, new customer signing on for new project. So the demand is there and no one is questioning this. Now, practically in terms of execution, we could face some impact because related to the, I'll say the consequence of executing on a project. The guy are working, they get the product. If they are missing one component, obviously it creates some problem. If they are locked in Shanghai and they cannot get the prototype and they lose two weeks on this, we see those impacts. So we're seeing those, if you want, micro-impacts, and definitely this impacts our growth because the project, instead of being ready to move to full production in nine months, it may take one year or it may take maybe even up to one year and a half if I want to exaggerate the impact. and this will impact us. But in none of this, you will see, like, our pipe reducing and a project canceling or deferring, and you see that our pipe keeps building, and this is really the indication that demand is there, and specifically for IUT, there is no question on it. Now, if I go to the maturity of the ecosystem, and very honestly, the picture is getting more and more clear on this, and people are getting, you know, now... CAT-M is well established in the U.S., well established in Japan and some places. We have in Europe, I will say, some holes between CAT-M and NB because you need to switch between the two technology. And CAT-1 is available everywhere. So from network point of view or readiness of this, there is no question on this. Still, you know, cellular IoT remains complex technology to take it to market because you have the operator involved to provide SIM connectivity and so on. and you have a lot of initiatives making a lot of progress with the MVNO, with the ISIM. We're doing a lot of stuff on our side as well to accelerate, I would say, the adoption. This is really moving positively, but I consider that the ecosystem is ready. There is no one questioning the technology now. Sometimes the implementation of this technology is taking a little bit longer than having a Wi-Fi project or a Bluetooth project or a ZigBee project because it's cellular, but at the end, The value that cellular can provide, which is global coverage, none of the other technology can provide. And when the people, they need global coverage, they have no choice. They move on this.

Thank you. Our next question comes from the line of Nicholas Doyle with Needham & Company. Please proceed with your question.

Hey, this is Nick Doyle on for Raji Gill. Can you hear me okay?

Yep.

There's been a lot of questions about supply. questions and you chatted about on the call. I was just wondering what process node is the highest volume product and then also if you could remind us the node for the upcoming 5G Taurus platform and if you have capacity in place to support the program.

Yeah, I mean, you know, we ship today our product all, majority is 40 nanometer. This is really the node where we need the most. We have a little bit in 65. But the biggest node in terms of product to ship today is 40 nanometers. And when you look to the capacity build that the SMC is building and so on, they are building more in the 28 and below. They build a little bit on the 40. The demand is really, you have a big problem on 90 and down a little bit to 65. On 40, you still have a problem, but not at the same level in terms of supply, you know, the ratio between demand and capacity there. the good news on the 40 as well that you have a lot of design at 40 will be moving to 28 and 22 because people this is what they do typically some of those big companies and can freeze some capacity on the 40 nanometres so it remains a little bit of concern the 40 but not as a big problem as you can see it for higher nodes like the 90 and others and for the 5G we are at 12 nanometres And 22 and 12, we have two technologies there. So it's really, there is no supply problem at all on the 5G today. To the contrary, you have more capacity.

Okay, thank you. And lastly, just how do we think about the mix of services and products as we progress through the year? You talked about 2Q, but maybe a little more color on the second half.

As we said, excluding the MOU deal, the deal and new deal, if we stay with the original guidance, let's say it like this, obviously we're expecting services to go down. We have a peak in the services related to some revenue recognition deals, and because we closed the Renaissance license at the end of the year, this was impacting Q1 mainly and a little bit of Q2, and this will go back to more normal in Q3, Q4. which we used to see last year, if you want. If I have to compare services, you know, we should go down in Q3, Q4. Now, obviously, if we add this new deal, this will have a major component of licensing, and it will impact not only the service for the second half, but also next year and the following year. But, you know, it's still early to comment on this. We'll be providing outlook on this once the deal is there. and explain all the detail about it.

Thanks a lot.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Dr. Karam for any final comments.

Thank you, operator. Thank you again, all of you, for joining the call today. We look forward to catching up with you during our second quarter 22 earnings call in August. Please note that you are participating in the B. Reilly Institutional Investor Conference on May 26th in L.A. We look forward to speaking with you soon. Thank you very much.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.