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