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spk01: Greetings and welcome to Sequon's communications essay, second quarter 2022 financial results. 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. 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. Please proceed.
spk04: Thank you, Maria. And thank you to everyone participating in today's call. Joining me on the call today from Sequans Communications are George Karam, Chairman and Chief Executive Officer, and Deborah Choate, Chief Financial Officer. Before turning the call over to George, I'd 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.sequins.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 the ability to enter into and close a new 5G strategic agreement on presently negotiated terms, and the expectation that the potential agreement will fully fund the development of our first 5G platform, expectations for massive IoT sales, the impact of COVID-19 on our supply chain, and 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 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 links made with the Security and Exchange Commission. And now I'd like to hand the call over to George Caron. Please go ahead, George.
spk07: Thank you, Kim. Good morning, ladies and gentlemen. Welcome to our second quarter 2022 financial results conference call. Once again, in the second quarter, our growth was boosted by our monarch, CAT-M product family, which grew 13% sequentially and 122% year over year. Notable because CAT-M's first quarter annual growth was also triple digits. Revenue for the quarter increased 11% year-over-year, with massive IOT growing 12% and the broadband category growing 9% due to services revenue. Broadband's sequential decrease was due to the timing of services and licensing revenue generated by our existing 5G agreements and was fully compensated by the growth in our massive IOT CAT-M and CAT-1 businesses,
spk02: which have driven our sequential product revenue growth.
spk07: This increase in second quarter service and licensing revenue delivered year over year improvement in gross margin of 430 business points to 60.9%. The increased gross margin contribution and a reduction in our operating expenses narrowed our operating loss versus last year. This, along with the benefit from foreign exchange, helped to reduce our non-IFRS net loss to $1.1 million compared to a non-IFRS net loss of $5.6 million in the second quarter of 2021. Let me start by giving an update on the new 5G strategic partnership. I'm pleased to announce that we finalized all the terms of a licensing agreement with a new strategic 5G partner as we had planned. Execution of the deal is expected within a few weeks. A few final logistical steps experienced delays beyond our control, but they are now moving forward to the completion stage. We'll provide more details once the deal is announced but I can share with you today that the agreement is expected to generate more than $50 million of licensing revenue in the first three years, followed by a royalty revenue in the future. This deal is anticipated to fund the balance of the development of our Taurus 5G platform and to turn our operations to cash flow breakeven or better going forward. I appreciate your patience This last stage has taken more time than anticipated. Please stay tuned, and we look forward to updating you with the full details in the coming weeks. Now let me give you some more business updates, starting with our massive IUT. The massive IUT category delivered year-over-year growth of 12% and sequential growth of 36% with the Monarch CATM platforms, being the primary driver as more design wins move to mass production and shipped in the quarter. Our Monarch CAT-M products family has delivered eight sequential quarters of growth, and we anticipate it will continue to ramp through 2023. We continue to have solid and steady shipments of our first-generation CAT-1 product category, and our new CalIP2 CAT-1 platform design wins are advancing at an increasing rate. We expect this new product to add growth to our Cat1 business starting in 2023. We continue to advance our business in our key massive IoT target markets, as evidenced by the new design wins we added this quarter, including two for application in Smart City, two for tracking, and a few others for industrial. Almost all of these wins are with our CAT-M and B Monarch 2 platform, except one with CAT-1 Calliope 2, which represents our first design win with this new platform. We are successfully leveraging the potential of our CAT-M and CAT-1 products and increasing market share with our massive IoT platforms. We also made progress with several design win projects, moving them towards mass production and we are happy to share that we started volume shipment to a new sizable project. However, the shutdowns in China have impacted customer execution on several projects, delaying their run by two to three months. Also, the shutdown have impacted some of our customers that have not finished their build-out as planned and are holding sufficient inventory levels for now. Although this is limiting our product revenue run In the second half of 2022, it's not impacting our growth potential. Our business pipeline keeps building with new design wins and opportunities. It has now close to $330 million of three-year lifetime of product design wins. Note that this does not reflect services revenue and specifically our existing 5G strategic deals, and the new one we believe we are close to signing. This gives us good visibility of our revenue growth for the next few years. Currently, over 85% of the design wins are for massive IoT application, predominantly for the CAT-M Monarch 2 platform. In addition, positive reception of our new CAT-1 Calliope 2 solution is creating an incremental and growing revenue pipeline for applications requiring throughput that exceeds the maximum CATM speed. Being unique in the market with a new non-Chinese CAT1 platform, fully optimized in cost and power, we expect to win a large portion of new CAT1 opportunities and increase our market share in this category. We anticipate that CAT1 Calliope 2 will be a growth driver next year and beyond as design winds move to mass production. Please note that our pipeline represents an expected revenue contribution over three years of the design life. There are several large projects that may have a design life exceeding three years and sometimes reaching 10 years, which would be incremental to the $330 million figure I just mentioned. The design wins are in alignment with our key verticals in massive IOT. Smart city and metering remains our strongest vertical, followed by asset tracking, smart home, e-health, and other industrial applications. Shifting now to the broadband category. Broadband as a percentage of revenue was impacted in the quarter by lower contribution from licenses and services as expected due to the timing of revenue recognition, along with lower CBRS revenue. In general, the demand for CBRS projects remains lumpy as the highly fragmented private network market is still developing. We had anticipated acceleration with one major CBRS project that moved to mass production late last year. The lockdowns in China have impacted production and delayed the next phase of the deal. Another similar project is also impacted by these lockdowns, and its SRAM phase is now delayed to 2023. As a result, the outlook for CBRS revenue is expected to remain variable during the second half of 2022. The good news is that we have a number of items in the CBRS fire for exciting enterprise and IoT applications. Several metering customers are exploring Cat4 CBRS as a complement to CatM and Cat1 categories. We expect these opportunities to develop further in 2023. We also expanded our licensing agreement with Renaissance to cover our Cat4, Cat6 broadband modules, and this should strengthen our go-to-market in this category. A new development in our Cat4 category is our partnership with Enterix for utility companies in the United States. For those unfamiliar with Enterix, it's a large holder of 900 mega spectrum in the U.S. and provides private wireless connectivity to critical infrastructure. Enterix is reselling this spectrum to several utilities to deploy private networks. TICOS is working on a module supporting enteric spend to address this market. With this new module, we'll have a comprehensive, differentiated offering for the utility segment with the three modem categories, CAT4, CAT6, CAT1, and CATMNB, supporting all frequency bands required, specifically the frequency for MNO or CBRS or the CBRS band. The most significant long-term growth driver of our broadband IoT business remains our Taurus 5G platform. 5G will transform and broaden the use of cellular connectivity in IoT, and Taurus is uniquely positioned as a leading 5G solution, fully optimized for fixed wireless, enhanced broadband, and critical IoT applications. The Taurus 5G platform will meet the throughput performance and low latency required for these market segments, allowing Sequence to address a meaningful market opportunity that could potentially exceed $2 billion by 2025, tripling our addressable market. The pending 5G strategic deal will strengthen our execution ability to achieve this goal. The 5G Torus platform development, which is the largest segment of our R&D spending, is progressing as expected. We received the engineering sample of our RF chip in May, and we were pleased with the results. The team remains on track to sample the full solution in 2023. Let me now give you a quick update on the progress with our MCU partners. Our MCU partnerships continue to deliver new opportunities and exposure for the sequence product portfolio. In June, Microchip launched a new platform incorporating our Monarch 2 GM02S cellular module. The launch received tremendous media exposure to its large social media audience and customer base. We expect this platform to generate a new flow of design opportunities and to contribute to our future growth. On another front, Renesas is promoting a cellular IoT roadmap with a comprehensive portfolio of modules featuring our LTM-NB and CAT1 solutions. This quarter, they have added our CAT4, CAT6 technology, and they are fully engaged with our 5G Taurus. This makes Renesas an important go-to-market partner as they are promoting all our 4G, 5G portfolio to address a broad range of cellular IoT opportunities. We have a number of ongoing projects with Renaissance worldwide, and they have already secured many design wins. We see a tremendous level of engagement from this partner, and we are confident that they will be driving a significant portion of our massive IoT revenue in 2026. Lastly, I would like to update you on our supply chain and other macro challenges impacting our operations. I'm happy to report, first of all, that our Ukraine-based R&D team continued to successfully meet its deliverables. So, so far, so good on this front. However, the Chinese COVID lockdowns affected our customers' manufacturing of devices in China and impacted our business, as explained before. We are watching this closely, but the zero tolerance approach to COVID imposed in China creates a cycle of disruptive shutdowns and reopening that makes it difficult to determine with any certainty when this situation may end. Lastly, regarding our wafer supply from TSMC, we have sufficient wafer supply to meet our customers' demand for the remainder of 2022, and our allocation for 2023 looks good as well. As you may know, TSMC announced a price increase of 6%, and we anticipate passing this price increase on to our customers. So in summary, the second quarter was a solid quarter with continued strong growth in Monarch, LTM, and DIUT, and a strong interest in Calliope 2, both of which we expect will be future growth drivers. Today, with a growing pipeline, and a new 5G strategic deal. Soon to close, we are confidently managing through the complexity of the current environment to deliver sustained long-term growth. SIGMAS remains well positioned to expand our market share, grow revenue, and improve profitability. Thank you to all our shareholders for their ongoing commitment to SIGMAS. Our global team is working hard to execute our strategy, and I appreciate their loyalty. I WILL NOW TURN THE CALL OVER TO THEM.
spk03: THANKS, GEORGE, AND GOOD MORNING, EVERYONE. OUR REVENUE FOR THE SECOND QUARTER WAS $14.2 MILLION, AN INCREASE OF 10.6% VERSUS Q2 2021, AND AT 2.4% COMPARED TO 13.9 MILLION IN Q1 2022. PRODUCT REVENUE, WHICH ACCOUNTED FOR 54% OF TOTAL REVENUE, INCREASED 29.5% SEQUENTIALLY VERSUS Q1. reflecting primarily higher product sales in our massive IoT categories. License and service revenue decreased 17.8% versus Q1 as expected, mainly due to one-time license fees recognized in Q1 that were not repeated in Q2. Revenue from massive IoT in Q2 2022 increased 36% quarter-on-quarter and accounted for approximately 59% of our total revenue. Revenue from broadband IoT decreased 25% from Q1 primarily due to the expected decline in one-time license revenue. For the quarter, we had three customers that each represented 10% or more of our revenue. As massive IoT design wins move into production, we expect to diversify the number of end customers served. Growth margin in Q2 2022 was 60.7%, up from 56.6% in Q2 2021, and down from 68.1% in the first quarter of 2022. The improvement year over year was primarily due to the increase of services and licensing in the broadband category and the increase in the mix of chipset revenue versus module revenue overall compared to prior periods. IFRS operating expenses were $10.7 million, down 6.1% from $11.4 million in Q1 2022 due to a decrease in R&D spend of $539,000, a decrease in G&A expense of $141,000, and a modest decrease in sales and marketing of 22,000. Year over year, IFRS operating expenses were essentially flat at $10.7 million in Q2 2022 and Q2 2021. Non-IFRS operating expenses, which exclude stock-based compensation expense, were $9.5 million in Q2 2022, compared with $10.1 million in Q1 2022. Our second quarter 2022 operating loss was $2.1 million, an improvement compared to an operating loss of 3.4 million in the second quarter of 2021, and an operating loss of 2.1 million in the first quarter of 2022. We posted a net loss in Q2 of $3.2 million, or 7 cents per deleted ADS, which includes a non-cash benefit of $653,000 from the revaluation of the embedded derivatives related to our convertible debt and 1.5 million of non-cash interest expense from the IFRS accounting for convertible debt and other financing. This compares to net income of 2 million or 4 cents per diluted ADS in Q1, which included a non-cash benefit of 6.4 million from the revaluation of the embedded derivative and 1.2 million of non-cash interest expense. The net loss in the second quarter of last year was $1.3 million, or $0.04 loss per diluted ADS, which also included non-cash benefits totaling $5.4 million on the re-evaluation of the embedded derivatives and non-cash interest expense and the impact of the debt reimbursement. On a non-interest basis, our net loss for Q2 was $1.2 million, or $0.02 loss per ADS, Again, an improvement compared to a non-IFRS net loss of 1.8 million or 4 cents for diluted ADS in the first quarter and a non-IFRS net loss of 5.6 million or 15 cents for ADS in the second quarter of 2021. In Q2, we had a gain on foreign exchange of $1.2 million, primarily related to the revaluation of Euro-denominated net liabilities on the balance sheet. This compares to a foreign exchange gain of $370,000 in Q1, and foreign exchange losses of 1 million in Q2 2021. 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 and expense category on the income statement, which is below our operating results, includes foreign exchange gains or losses primarily related to the measurement of Euro-based balance sheet items, and the market-to-market of the embedded derivatives related to the convertible debt. And these 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 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 that is excluded in the non-IFRS presentations. Cash and short-term deposits totaled 16.8 million at the end of P2 compared to 4.8 million at the end of 2021. We had expected to receive a $3 million payment of a government grant in the quarter, and this was actually received on July 1st. With the grant payment, cash at the end of the quarter would have been 19.8 million if the payment had been received a day earlier. Cash used by operations for the first six months of 2022 was $7.7 million, compared with cash generated by operations at 6.5 million in the first six months of 2021 due to the timing of some large working capital items in both periods. Short-term debt from financing receivables increased 12.1 million to 12.1 million versus 9.5 million at the end of 2021. Regarding the outlook for Q3, given the impact that the 5G strategic deal is expected to have on revenue and gross margin, we will update our guidance when the pending 5G strategic agreement is announced. We expect that non-IFRS operating expenses, which excludes stock compensation expense and a stable Euro dollar exchange rate, will average close to $10.5 million per quarter in the coming few quarters. We expect IFRS interest expense in Q3 2022 to be approximately $2.9 million and non-IFRS interest expense to be around $1.3 million, meaning that we expect our non-IFRS net loss to have a lower interest expense by the difference $1.6 million. We are not providing guidance on any impact of regarding the embedded derivative nor possible foreign exchange gains or losses, given this is largely determined by market conditions. Finally, for modeling purposes, the number of ADS outstanding today is 47.8 million. Finally, a few housekeeping items. We expect to file a Form S8 registration statement in the coming days related to our new equity plan. French regulation requires that equity plans be approved by the shareholders annually. And therefore, following the recent meeting in June, we will register our new plans again this year. 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 webcast and presentation page. That's the same location where you will find the audio replay. And I'll turn the call back to George.
spk07: Thank you, Deborah. Operator, we are now ready to open the call for Q&A, please.
spk01: 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 that 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. Our first question is from Scott Searle with Roth Capital. Please proceed with your question.
spk05: Hey, good morning, good afternoon. Thanks for taking my questions. George, Deborah, congratulations on getting the 5G deal to the finish line. Hey, just to follow up quickly on the 5G opportunity, George, I want to make sure I understand in terms of how the revenue recognition is likely to work, understanding that you'll update guidance when it becomes available, but It's going to be licensing, so we'll be recognizing somewhere in the ballpark of $50 million ratably over a three-year period. Is that correct? And I'm wondering if you could update us as well on other strategic opportunities in the pipeline.
spk07: That's good. Yeah, I mean, your understanding is right. I mean, this is obviously you could give you more color, you know, on this one when we announce. You could have... Some lumpiness as well in the early phase, I tend to say. Later on, it will be more smooth because of the nature of the deal. But absolutely, this is revenue and licensing, at least $50 million to recognize over three years, and followed by royalty, obviously, that we should not neglect in the future. So it's really a long-term business that we have here. Regarding other deals, obviously, I don't want to... you know, to give more specific color on this, but we are in the same, you know, in the same spot. The scarcity of the 5G technology makes Sequence really unique player with the flexibility that we have on one side and the IP that we own in hand. And it's attracting a lot of partners for different application that they are interested to deal with Sequence. So, and we have many discussion that continue to be active, not in conflict with the one we have, And, you know, somehow part of our plan as well to develop this business that we are coming now a little bit more seriously with this deal, create like some kind of flow of IP and revenue licensing to continue over time. And I believe you could see a similar deal in the future coming from Sequence as well.
spk05: Gotcha. But it sounds like there's nothing mutually exclusive here in terms of what's in the pipeline versus what's at the finish line.
spk07: Absolutely not. Okay.
spk05: Hey, and George, if I could, on the supply chain front, it sounds like near-term the wafer availability issues have moderated a little bit, I guess in combination with some of your customers, just some mild push-outs. But looking to 2023, I was wondering if you could give us some color in terms of what that supply situation looks like. It sounds like you're starting to work on that now. You're feeling good. But is there anything that you could do to quantify in terms of, you know, how the increased availability is what you guys could support as you're getting into 2023?
spk07: I mean, Scott, I mean, the real worry that I had, if you want, is that, you know, we're coming with a new platform or a new fab. And as you know, Monarch 2 is accelerating. I mean, you see the level of growth that we have. So we're not projecting like 50% growth or 30% growth on the Monarch. But it's really, you know, doubling, tripling, hopefully, depending on the ramp. And that's why we have demand on this platform. And on top of this, the challenge that we have on CalIP2, a new platform coming where we have zero, if you want, wafers this year. And we need more wafer next year to start serving the early customer. But honestly, I feel good on this. The allocation that we had, we managed to convince the SMC from the position that we have that this is special. You cannot compare year over year and give us some linear growth. And so far, so good. And then we have the established business on other fab You know, here they are kind of giving us more kind of flat, and we have some discussion with them a little bit to improve it. But globally, when I look to the picture, it's much better than, you know, relatively speaking, when they announced to us 2022, I was completely unhappy. For 2023, I feel much better.
spk05: Great. And lastly, if I could, and then I'll hop back in the queue, but last week, you know, there was some big news in terms of the module business as it relates to Telet and Thales. I'm wondering if you could give us an idea about how that impacts you. You've had a strong relationship with Jamal Tothalis over the years. Good, bad, how do you see the consolidation of the industry impacting you? Thanks.
spk07: Yeah, I mean, obviously I don't want to comment on the deal as such, you know, but in general, this consolidation is normal to happen. You have a lot of players playing the module and the module is somehow squeezed and having less player, I believe it will be for the benefit for the market and as well the players staying there. We have relationship obviously very advanced relationship with Thales because it's a big customer for us. So we are happy to see them. I will say, you know, supporting and maintaining the business with Thales and we have good relationship with Thales. You know, we are working with them on the CBRS originally. So obviously all this at minimum, it will be positive. That's how I look to it for Sequence. And they announced to us the partnership officially and and we don't see any disruption, at least in the short, medium term, and we see more upside to come in the future with a partner like Telet and Cinterion now to play with.
spk05: Great.
spk02: Thanks so much, and congrats on the 5G strategic. Thank you, Scott.
spk01: Our next question is with Craig Ellis with B Reilly Securities. Please proceed with your question.
spk06: Thanks for taking the question. I'll echo the congratulations on the new strategic deal. George, I wanted to start just by trying to quantify the impact of the different supply chain dynamics that are at play. Obviously, that's something that's impacting most tech companies, but for Sequance and 2Q, can you quantify the impact that you think those supply chain impacts had? And as you look to 3Q, given that it sounds like there's something that's impacting both Massive IoT and CBRS. If you could quantify the impact, that would be really helpful.
spk07: Hi, Craig. I mean, you know, really for Q2, the main impact, if I have to qualify it, is really on the broadband. You know, I mentioned that if you look to our broadband business, this quarter was really mainly services, very little product. Really, Massive IoT supported the growth of the quarter. And this is good, by the way. This is really... gives you an indication about the nature because we have a new project moving to production and we start shipping. So all this is positive. Unfortunately, the CVRS where we had a very successful project and there is no problem at all there, we were expecting the second phase to accelerate if you want. And because of the supply challenges, the guys, they didn't move to the second phase of production. And this delayed a little bit some revenue for Q2. I will quantify it in the order of half a million dollars, not more. The impact for Q2 was contained somehow. The issue we are seeing a little bit for Q3 and Q4, and depending on this, was really more with the, obviously the CBRS is one element, the broadband. Unfortunately, if I look to the broadband projection at the beginning of the year and where we see it now, mainly the CBRS, it's much less than what we thought. Even if relatively speaking, the CVRS was small business. It's not big. But still, we were hoping CVRS doubling this year. And unfortunately, I don't know if we'll end by being flat or a little bit down to flat because of the delay we saw there. But if I look to the massive IoT, which is the most important piece there, we have, as I mentioned, delay, even not only with the project shipping, but even with the project in the design phase, customer waiting for their prototype to come back, delay of one week here, two weeks here to come out of Shanghai and so on. So this is creating some trouble and delaying a little bit the ramp. But if you dig in, there is nothing. I mean, we're not losing any business. We are not missing any opportunity there. It continues to be building out. And just only some of the ramp of the projects. We have, for example, one customer to start moving to production we were expecting this guy will be more in june to be in mass production now it's september and we ship to them end of q2 the first patch so we have like couple of months like this all related to this uh trouble we are seeing on the supply chain uh and uh you know obviously in the order of magnitude of this for us is really reducing the ramp but we expect to continue ramping in the second half versus the first half in the product revenue with massive IT.
spk06: That's very helpful. And then as a follow-up to one of Scott's questions on supply, can you just clarify what you'd expect from Renaissance, both in the back half of this year and next year on the supply side?
spk07: Yeah, I mean, you know, Renaissance, I mean, by the way, we're shipping to them this year, you know, not yet a million, but we can talk about some significant number. And obviously this, we use our own capacity. They are building the FAB, if you want the qualification of their, not completely new FAB because they are obviously using TSMC, but that the backend services to run it in their process with all the Q&A and so on. So this is happening. And they should be ready towards the end of the year. So this will be something that they can use next year, definitely. For this year, we are making, if you want, just preparation of the fab. And obviously, they have the ability, if we are missing, if we are short by 500 wafers, that they can give the priority on their product line versus other products to get it for them. And this can help us to reserve the capacity we have on our side for the customer, direct customer, and have RSS serving their customer with their own FAP. So this is really nice upside. For the time being, it's still early, I tend to say. But definitely, they have the ability. It's just a question of priority for them. They're just only assuming they have, let's say, whatever number in 40 nanometer. Let's assume they have access to 20,000 swafer in a year. it's easy for them to dedicate $1,000 to the cellular business, obviously prioritizing this on other business they have. But because it's emerging a new business for them, so they could be putting priority on this versus other established wholesale customers.
spk06: Got it. That's helpful, Kalar. And then my final question before hopping back in the queue is to Deborah. Deborah, we had expected that we'd see rising module mix in the second half of the year. And then we had real strong gross margins in the second quarter. What should we expect for module versus chip mix as we go through 3Q and 4Q this year?
spk03: So in the second half of the year, we are expecting there to be, I'd say, more weight on modules than chip sets. So that will have an impact on gross margins compared to the first half of the year.
spk06: Got it. Yeah, and then I know gross margin will change once we get the third quarter guidance update on the closed strategic, but any color on the magnitude of gross margin change as we look to what would happen pre that deal in the third quarter?
spk02: I think it would be a significant positive impact, but I'm not prepared to quantify it at this point. Yep, got it. Okay, thanks, team.
spk01: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Mike Walkie with Canaccord Genuity. Please proceed with your question.
spk00: Great. Thanks for taking my question and my also congrats on the 5G strategic deal. I just wanted to clarify a little bit more on the product revenue in the second half of the year versus the first half of the year. just given some of the supply issues and a little bit of delays, are you kind of signaling product revenue flattish with Q2 results in Q3, Q4, or would second half of the year be a little stronger than kind of the run rate in Q2?
spk07: You know, if I compare first half to second, you know, I'll say Q2, let's say second half to the first half, I'm still expecting product to be up, you know, because the massive IOT will be coming. If anything on the product, maybe it will be in the broadband shifting on the CVRS because this is also the product revenue, but massive IOT will continue growing. And this is mainly product revenue, you know, so this is how it is. Now we could have like, you know, quarter to quarter that could look a little bit not really accelerating like Q3 a little bit low and then re-accelerating in Q4 because of the delay I mentioned because we had a couple of projects delayed by a couple of months and we have some inventory with one customer that we shipped to them in Q1, Q2 we're not shipping in Q3 so we could have some lumpiness in Q3 but totally if I look the second half, we should see growth when I consider massive IUT, and massive IUT is a product. And any impact on the rest of the product will be coming from the broadband, maybe, if the CBRS doesn't come back as expected in Q4.
spk00: Okay, that's helpful. And, George, just on the CADM family product ramps, you know, any more color? You know, is this broad-based, or is it just a couple large projects right now? Maybe you can just talk about some of the use cases that are driving that ramp, especially as you look into next year.
spk07: I mean, you know, we essentially, but honestly, we have two, two major one, you know, making, making most of the business today is really, if you remember at the beginning of the year, I spoke about three major projects, what I qualify them more than 1 million units a year. Two of them are in production today. uh when i mentioned that one is a little bit they have a little bit of inventory but there is no issue you know it's just only shanghai delayed one move to production and when i mentioned that this delayed almost for next year even if this third one is continue building with the customer with more more projects and it's very successful unfortunately it's taking longer time and we have another series of medium-sized projects moving very well you know the production it's really We are at the beginning, if you want, of all those ramps. So sometimes we don't see the continuity quarter to quarter. You shift one quarter, then second quarter a little bit, maybe slow, and then you accelerate in the following one, you know, like plus two. Because obviously when they are ramping their production, they could be a little bit consuming, you know, the production, not in a smooth way. But, again, you know, smart metering remains a key segment for Sequence, and we have many, many design wins there, and we are bullish about this segment. Tracking, mainly fleet management and related to cars, we are in very good position. We have big projects, and we have even in the medical few projects there or e-health, and one of them is a major one as well. So this is, you know, a kind of color. So let's continue building up. And the other news, by the way, which is on the CAT1 I mentioned, CalIP2 platform, we are very excited about this. We feel extremely good about this platform since the launch. Obviously, we are not yet shipping, I tend to say, the full solution to our customer. If you want, our software is not yet in certification level. This is the work of Q3, Q4 that you are doing. But even with this stage, I can say we have a short list of four or five major design, very advanced stage to consider them as turning them to design wind soon. And one of them has converged this quarter already. So we're quite positive about this success with the CAT-1 as well, adding to the CAT-M.
spk02: Great. Thank you very much.
spk01: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back over to Dr. Kearns for closing remarks.
spk07: Thank you. So thank you again for joining the call today. We look forward to catching up with you with the update on the new 5G strategic deal, and then during our third quarter 2022 earning calls in November. Please note that you are participating in the Canaccord Annual Growth Conference on August 10th. Please contact your Canaccord representative if you would like to book a one-on-one meeting. We look forward to speaking with you soon. Thank you very much.
spk01: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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