Sequans Communications S.A.

Greetings and welcome to the sequence communications essay fourth quarter 2022 financial earnings call. At this time, all participants are in a listen only mode. A brief 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. It is now my pleasure to introduce your host, Kim Rogers, Managing Director of Hayden IR. Thank you, Kim. You may begin.

Thank you, Maria, and thank you to everyone participating in today's call. Joining me on the call today from Sequon's Communications are George Karam, Chairman and Chief Executive Officer, and Deborah Schott, Chief Financial Officer. Before I turn the call over to George, I'd like to remind our participants of the following important information on behalf of Sequon. 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'd like to remind everyone that this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and potential financing sources. All statements other than present and historical facts and conditions contained in this call including any statements regarding future results of operations and financial positions, business strategy and plans, expectations for future product sales, potential for future strategic licensing deals or other strategic transactions, the impact of the COVID-19 on our supply chain and on customer demand, the impact of component shortages and manufacturing capacity, our ability to convert our pipeline to revenue, and our objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the 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 fourth quarter and full year 2022 financial results conference call. I'm pleased to report that we ended 2022 with solid financial performance results showing $60.6 million of yearly revenue and 71% gross margin. Year over year, this represents 19% growth in revenue and 17.4 basis point increase in gross margin. Consequently, we achieved non-IFRS operating profit of $1.6 million for the full year 2022, compared with a non-IFRS operating loss of $13.2 million in 2022. These results are a particularly outstanding achievement given our industry's supply chain and inflationary challenges in 2022. In fact, the supply chain disruption was the principal cause of the delay we faced on our design wind project launches in 2022. A significant factor in achieving a year of growth and improved operating results was our ability to leverage our 5G asset, and its scarcity value to create a new IP licensing business that was able to compensate for product shipment delays and boost our gross profit. Looking back at the key highlights of 2022, there were three notable accomplishments that benefited our results, and more importantly, will position Sequence for sustainable long-term growth in the cellular 4G, 5G IoT market. As said before, the first milestone was securing 5G licensing revenue. We closed the multi-year strategic 5G licensing partnership for our Taurus 5G platform, valued at more than $50 million. The deal adds licensing revenue over three years and will transition to royalty payments for up to 10 years once the Taurus platform start shipping to customers. The licensing revenue from this deal supported our revenue growth, increased gross margin, and narrowed our net loss in the second half of 2020. The second key highlight was the growth of our product sales pipeline to over $700 million of three-year life revenue, with $350 million in design wins primarily driven by our LTM and BIUT Monarch 2 platform. These design win projects are expected to convert into $100 million in annualized peak revenue at full round. We also have further potential from the other half of the pipeline that covers the advanced design-in opportunities, which have at least a 50% probability of converting to design wins. The third key accomplishments was the continued innovation in our product line that positions Sequence with the comprehensive 4G, 5G portfolio optimized for IoT. The market reception of our second-generation Cat1 chip, CaliP2, has been incredible, and the platform is already adding new design wins and design ins to our revenue pipeline. In tandem, Innovation in our LTM and BIUT Monarch 2 platform added new features and improvements for furthering our leadership in this sector. Lastly, we made tremendous progress on our Taurus 5G platform and plan to sample the 5G NR platform this year. Let me go into each of these in more detail. Taking a closer look at the financial results, The fourth quarter revenue increased year over year by 15%, in line with our expectations. The contribution of licensing revenue and the mix of products between chips and modules lifted our gross margin to over 75%, significantly exceeding our forecast. The improvement in gross margin delivered a substantial improvement in our bottom line, improving our net loss by $2.8 million compared to the fourth quarter of 2021. For the full year, the primary growth drivers were the nearly 40% increase of massive IoT LTM revenue, despite project delays, and the over 50% growth in broadband IoT from our 5G licensing revenue. These gains were offset by the expected decline in our first-generation Cat1 product revenue, mostly due to higher than normal revenue in 2021 from this product line, as one main customer built over six months of inventory to avoid a potential supply shortage. Consequently, the net result is a nearly 20% total revenue growth in 2022, despite the various delays we had with customers' products launches that were expected in the second half of the year. The delays were mostly due to the supply challenges our customers were facing with their legacy products, which caused them to prioritize fixing shortages in existing all-generation products and reduce the priority of new projects with sequence. The good news is that none of these new projects was canceled. And as the supply shortage issue appears to be behind us, Customers are pushing to finish developing their new products. We expect the mass production launches to start in 2023 and early 2024. Turning now to look at the $700 million product sales pipeline and our success in various markets. Today, over 80% of the product sales pipeline is in massive IOT. The broadband IOT portion is expected to accelerate in the future with the launch of our 5G Taurus platform. Keep in mind that this sales pipeline KPI represents the sum of three years of revenue of all sales opportunities, starting from the market launch date of each customer product. Half of the sales pipeline is from secure design win projects with some in mass production already generating revenue and others in the design phase with revenue to come once our customers launch their products. The other half is about advanced design in opportunities we are working on to win. Note that we are not counting here all opportunities our sales team sees, but only those with at least a 50% chance to be won, and we call advanced. About 70% of the massive IOT design wind pipeline is dominated by our LTM and the IOT Monarch 2 platform, and the remaining is with Cat1. The fantastic market reception to Cat1 Calliope 2 platform is already adding to the design wind pipeline, and this will be our next product growth level, with design winds expected to accelerate this year. Calliope 2 has the potential to double our addressable massive IoT market. Given that sequence recognized early on that Cat1 would be required in many IoT applications and would complement LTM and BIoT, we now have a competitive advantage that will enable us to take significant market share in this segment. In terms of massive IoT applications, We have secured many customers and projects in smart city, specifically in the smart meter. These applications represent over 40% of our massive IoT design wind pipeline. The power consumption performance of Monarch 2 was a critical advantage in this segment, now estimated to be about 30% of the massive IoT market and expected to grow threefold in the next few years. Also, The Cat1 product category is required for some smart metering, specifically electrical meters in Japan. With nine customers in metering, mostly Tier 1 players, we should be able to grow our market share to over 40% and secure a sustainable revenue source for the next 10 years. That said, keep in mind that meter qualification can take at least a year longer than other IoT devices before deployment. Thus, the metering segment traveling around is slower than other applications. We are entering 2023 with a couple of metering projects in mass production, a few others planned to launch in 2023, and several more to launch in 2024 and even early 2025. Patience is the price to pay to enter this large and persistent market. Another key massive IoT vertical where we are having great success is asset tracking and telematic fleet management. Sequence platforms are ideal for these applications where both LTM and CAT1 are required. Today, applications in this vertical represent about 20% of our current massive IoT design wind pipelines. The balance is made up of wins in a smart home and security, both important segments, and other smaller vertical like medical and a few other industrial applications. Let's analyze how the three-year life revenue of our design win pipeline will convert to yearly revenue. Considering our massive IoT design win pipeline, we estimate that when all the customer projects are launched, the annualized peak revenue of in-hand design wins will exceed $100 million. Reaching this level depends only on the launch date and the ramp-up rate of each project. Currently, less than 20% of our design win projects are in full production. Based on customer's plan, we anticipate launching another 45% in 2023 towards the second half of this year and the balance in 2024. This gives us a high level of confidence that despite the level of product shipment we have today and the headwinds from excess inventory in the channel, we could attain the $100 million in 2025 just by supporting our current customers to move their projects into production. This would not include future design wins and more specifically, those currently in the advanced design in stage that constitute the other half of the $700 million in our sales pipeline. I haven't focused on this portion in past calls, but I want to call your attention to the potential this portion of the pipeline has for future revenue. If in 2023, we can move 50% of advanced design in projects to design work the design win portion of the three-year life revenue pipeline KPI would grow to over $500 million by year end. This would increase the design win annualized peak revenue to $150 million, mainly based on sales of Monarch 2 and Kalaipi 2. The success of Kalaipi 2 significantly contributed to our design in pipeline in 2022. About 60% of the advanced design in pipeline is Kala IP2, which also reflects the higher ASP of Cat1 versus LTM. We are uniquely positioned. There is a big Cat1 market, and we primarily compete with Chinese technology. Keep in mind that our channel partners have helped us grow our sales pipeline, and this will continue in 2023. specifically with Renesas, who will be launching new modules integrating our chips. The Renesas partnership has been highly successful for Sequence. They assisted us in increasing our market reach and solidifying our brand strength. Together, we can provide bundled technology to customers, combining Sequence cellular IoT products with other IoT technology from Renesas as they have a large product portfolio. Together, We closed many Tier 1 design wins and are working on many more potential wins for 2023. Our third key accomplishment in 2022 was our continued innovation and product launches. The most exciting news here was the Calliope 2 launch, and interest has exceeded our expectations. The goal was to expand our market share in Cat 1 beyond what we achieved with our first-generation Calliope platform, giving us a comprehensive massive IoT product roadmap that offers multiple cellular IoT variants for a broad scope of use cases. Ideal applications for Calliope 2 are in smart home and security that use video and voice, where LTM capabilities are limited. We also see an opportunity for Cat1 speed in some electrical metering and telematic applications particularly when mobility is required. Since the Cat1 standard was conceived as a derivative of the Cat4 category, most cellular networks have better coverage with Cat1 than LTM or NB-IoT, particularly in Europe. So to ensure better coverage, many mobile applications, even with low data rates, consider the small price premium towards the better coverage of Cat1. To date, we have secured three Tier 1 design wins with CaliP2 and are engaged in over a dozen additional advanced opportunities, some of which may close this quarter. CaliP2 positions us to become the market share leader in Cat1, and my confidence level in delivering returns on this investment is extremely high. Other innovations we delivered in 2022 include improving our Mark II platform offer with the new advanced features to maintain our leadership in the LTM and the IUT. Two new capabilities, GNSS and ISIM, have been added. With higher ASP, they bring 15% more revenue per unit, as well as improve the gross margin. Sequence GNSS supports most of the IUT tracking use cases and is fully integrated with Monarch 2 software. It provides a very competitive low-power GNSS solution, delivering accuracy on par with legacy GNSS chips. We have customers adopting this, and we'll have Monarch 2 shipments with GNSS enabled this year. Another key technology differentiator we released in 2022 is our iSIM-enabled Monarch 2, where a fully secured SIM IP is embedded directly into the chip. Sequence was the first to put this capability on a modem chip. We are working with several partners to bring an end-to-end solution to market with remote SIM provisioning for IoT devices. A few alpha customers are now engaged, and we should start shipping iSIM-enabled MARAC2 this year. We are also seeing strong interest in metering and other IoT applications that may remain in use for years and may need to change SIM provisioning during the device's lifetime. Another improvement on the Mark II platform was a 20% reduction of power consumption in connected mode operation, which is crucial for gas metering applications. Also, we have enabled the integrated low-power sensor hub feature, resulting in a lower cost solution. Last but not least, we have made significant progress in developing our 5G Taurus platform. We sampled the radio transceiver chip last year and are on track to sample the baseband chip this year. We have engaged many customers building various 5G broadband devices. And the feedback on Taurus specifications and cost structure is highly attractive to them. We are very excited about bringing this platform to market this year and start adding another growth lever to our sales pipeline. For 5G Taurus addressable market, will exceed $1.5 billion of chip sales by 2025, thus doubling the size of our massive IoT market. One last item I want to discuss is IP licensing, which is a new growth lever for SQLs. We successfully launched an IP licensing platform with our 2022 5G licensing and royalty partnership. This deal is progressing very well, and we met all deliverables and milestones as planned. Besides the three-year licensing revenue, we firmly believe this program will generate royalty revenue beyond the three-year period. Our partner has a substantial market share in two market segments where the sales of the Taurus platform should provide Sequence an additional $5 million to $10 million of yearly royalty revenue. Also, we are having new discussions with our partner to expand our collaboration on a couple of fronts. Particularly, we are discussing an exciting massive IoT opportunity with the product revenue to SQL. We hope to update you on this development in the near future. Now, from this first licensing win, we plan to scale this 5G IP platform to new applications and markets. Currently, we are engaged in discussions for several new potential IP licensing opportunities for our 5G tourist technology. Our discussions are advancing, and we are targeting to close at least one licensing agreement by the end of the second quarter. This IP licensing and royalty business is practically a full margin business that will add to our product revenue to improve gross margin and profitability. We are convinced that the scarcity value of our 5G IP can be leveraged to drive our growth and profitability, and this will create more value for shareholders. As we look to 2023, we anticipate product revenue growth to resume in the second half of the year. We are not experiencing a demand issue as evidenced by the significant increase in our sales pipeline over the years. The issue we face is a matter of timing related to our customer launches. Across the semiconductor industry, high inventory supplies are pressuring forecasts for the first half of 2023. We are also seeing this particularly with one key customer who was regularly buying $2 to $3 million per quarter. Industry consensus sees a bottoming of this effect in the second quarter and a resumption of growth in the second half of the year. Our outlook for the year and the first quarter, which has historically been a seasonally lower quarter for us, aligns with this market view. In summary, 2022 was a solid year in terms of our financial performance. significant growth of our design wind pipeline, the acceleration of our competitive position in the product landscape, and the monetization of one of our most valuable assets. We are tapping multiple growth levers. We have built a differentiated, innovative, and comprehensive product portfolio, covering all massive IoT market segments. We have a growing sales pipeline with tier one customers, The risk of losing design win projects is low. Our team and channel partners focus on bringing more opportunities into the pipeline. Siquance had significant wins in 2022, giving us a solid foundation to build over the next few years. Taurus 5G is a unique asset with great potential for both product and licensing revenue streams. Siquance has a well-defined diversified strategy to grow. In 2023, we intend to further monetize our pipeline, win new projects, close at least one more IP licensing deal, and sample our Taurus 5G solutions. Finally, let me stress that SQL's unique position in the cellular IoT space makes us attractive to many potential partners. We have numerous avenues open to us And the board has formed a special committee to explore strategic options as well. We will evaluate every tool in our toolbox to unlock shareholder value. My confidence level has never been higher for our enduring success. I'll now turn the call over to them.