Sequans Communications S.A.

Ladies and gentlemen, good morning and welcome to the sequence communication Q1FY23 earnings conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Kim Rogers, Investor Relations for Sequence. Please go ahead.

Thank you, Ryan. 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'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.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 our future results of operations and financial positions, business strategy plans, including the ability to enter into new 5G strategic agreements, the exploration of strategic options expectations for massive IoT sales, our ability to convert our pipeline to revenue, and our objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now I'd like to hand the call over to George Karam. Please go ahead, George.

Thank you, Kim. Good morning, ladies and gentlemen, and thank you for joining our first quarter 2023 financial results conference call, and welcome. Our first quarter revenue was $11.9 million in line with our guidance with the record gross margin of 78.5%, reflecting the contribution from high margin licensing revenue. Product revenue this quarter reflects the factors we discussed on our Q4 earnings call when the impact of a large customer's inventory rationalization and two, delayed LTM project launches. Before I dive into discussing the business details, I would like to update you on a few important strategic developments. Following the quarter's end, we strengthened our balance sheet with a $20 million private placement with several existing shareholders. Note that despite the challenging market environment, we were able to close this deal very rapidly and reinforce the company's position in our ongoing strategic discussions. The strategic committee appointed by the board is actively evaluating the various options, and we expect to share more on this subject on our second quarter earnings call. In addition, we are making strides towards sampling our 5G Taurus chipset later this year. and are actively engaging with customers eager to get a 5G NR platform optimized by design for broadband IoT applications. Our progress on Taurus is highly beneficial in our ongoing discussions regarding 5G IP licensing, and we are optimistic that we will be able to reach a new licensing agreement before the end of the year. Our newest 5G strategic partnership, which began last year, continues to evolve and deepen, which is very encouraging. I am delighted by how closely our teams are collaborating. We are confident in our ability to deliver outstanding results, and I'm excited about the future potential of this partnership, including the possible expansion of our relationship. Before delving into the dynamics of each IUT category in the first quarter, let's look at our pipeline. I provided a detailed overview of this topic last quarter, and now I'd like to give an update on our pipeline composition. As you may recall, we measure the revenue potential of our pipeline on a three-year life revenue basis. But many of the projects, could remain in the market for over five years, and in some cases, up to 10 years. The largest portion of the revenue pipeline build is with leaders in IOT, addressing various market segments, such as smart metering, smart home, tracking devices, and medical. I'm excited to share that in the first quarter, our total pipeline increased to over $750 million of three-year life revenue, mainly driven by the contribution of the recently launched Kali P2 and the initial interest in the 5G Taurus platform, which will begin sampling later this year. Almost half of our pipeline represents business that has been awarded as design wins, and the other half is advanced design in that we are working on to secure through the remainder of the year. While some of these design wind projects have reached mass production, most of these projects are still under development and are expected to reach the production phase in the second half of 2023 and for some in 2024. Over 85% of the design winds are for massive IUT. mainly Monarch 2 and Cali P2 projects. Eight new design wins have been secured this quarter, mainly in smart city, smart home, and tracking applications. Also, we are very close to sealing a large deal with a module partner. Market traction for Cali P2, as shown by the number of designs secured or close to be secured in the last six months, is particularly exciting. LTM Monarch 2 is still the largest contributor to the massive IoT design wins, but Cat 1 is catching up thanks to the large deal sizes and CalIP2's higher ASP. We expect this trend to continue. Advanced design in projects reflect opportunities where we have a high level of engagement with customers with a greater than 50% probability of converting to a design win. Since the launch of CalIP2, this platform has also had a significant impact on growing the advanced design in portion of the pipeline, where the size of Cat1 opportunities is now approaching those for LTM. In addition to Cat1, CalIP2 growth and continuous success with CAT-M Monarch 2, I'm excited about the number of new Taurus 5G project engagements that are beginning to feed into the design-in portion of our revenue pipeline. The 5G Taurus platform will ultimately be the biggest contributor to our future pipeline, and I anticipate seeing a significant increase in the pipeline around the time we start sampling Taurus to market. to illustrate our near-term growth potential. And as I mentioned last quarter, we see a path to $100 million in annualized product revenue starting in 2025 from only the current design wind portion of the pipeline. At this time, we estimate that over 20% of this annualized revenue target is already secured by projects in mass production and in shipment mode now. Just by adding the DesignWin projects forecasted to launch during the remainder of the year, we should start 2024 with around 70% of this revenue target secured. The balance of the $100 million run rate will be achieved with the DesignWin projects launching in 2024. As a reminder, this run rate figure is only for product and does not include licensing or NRE revenue. Let's look at the revenue dynamics of our massive IOT and broadband IOT categories this quarter and see how we can continue to grow. SIGWAS has several developments in progress that position us for a rebound in the second half of 2023 and to continue the revenue acceleration in 2024, as I just outlined. This lays the groundwork for a robust year-over-year growth recovery as delayed Monarch 2 projects move into production and our design wins with Calliope 2 start to run. Let me walk you through some details. First, on our massive IUT segment, as predicted, The sequential decline in our massive IoT segment this quarter was due to lower Cat1 revenue related to our customers' inventory rationalization that carried over from 2022. This customer is expected to resume ordering in the second half of 2023. CatM and B revenue grew sequentially, although it was impacted as guided by the delay of project launches last year. However, What's crucial at this point is to assess the progress made on these customer projects and ensure that we are on schedule to meet our production and shipment targets. I'm pleased to report that three customers are confirmed to resume production in 2023. One customer has received certification on their tracking device and is now ready to move to production in Q3. Another large tracker project for buy here, pay here automotive business, which was delayed by the China shutdown last year, has now obtained product certification and approval. Shipping will resume in Q3 as the customer consumes the carried over inventory from 2022. Finally, a significant medical industry customer whose production was disrupted by internal challenges last year intends to resume operations in Q4. Also, we are on track for the other forecasted product launches in the remainder of 2023. The most important ones are for smart metering application, where four new projects are planned to launch in the second half of the year. This is a fast-growing IoT segment where we have strengthened our position with numerous design wins and with more expected to be secured this year. Keep in mind that these are multi-year projects, and when launched, they will generate steady revenue for more than five years. Also, we are making great progress on our first CalIP2 design win projects, and we expect the first CalIP2 shipments to start in Q4. In 2024, we expect more Monarch 2 projects to move into production, leading to a surge in CAT-M momentum. Additionally, the launch of CalIP2 projects into mass production will provide us with an extra boost in 2024 and 2025. Now on to the broadband segment. 5G licensing revenue made broadband our strongest category in the first quarter. However, we expect lower licensing revenue in Q2 simply due to the revenue recognition structure of our largest licensing deal. On the broadband IoT product front, we have several interesting Cat4, Cat6 engagements. This quarter, we announced a partnership with Enterix to introduce an LTE Cat4 multi-band comms module using our Cassiopeia platform and addressing the private LTE networks for utility companies. We already have several customers engaging in design with this module. Also, we announced a design win with Sky5 for an air-to-ground terminal, which is being used by flight cell in Australia. In addition, New CAS-UP opportunities for video surveillance applications requiring CAT4 speed are in the works. However, the future of our broadband category and the biggest potential kicker to longer-term growth is our Taurus 5G platform, as this will expand our addressable market by an extra $2 billion in 2025. We expect to begin testing our Taurus chipset platform by the end of Q3 and start engaging alpha customers later this year. With our Taurus 5G IoT solution, optimized for cost and performance, we can address a wide range of broadband IoT applications, including fixed wireless, mobile computing, private networks, and high-end IoT industrial applications. Although it has not yet been formally launched, Taurus has generated significant interest from many Tier 1 customers. I'm excited about the number of Taurus engagements we already have feeding into our revenue pipeline since the Mobile World Congress show in February. We have a strong conviction that Taurus will be the key driver of substantial growth for Sequence commencing from 2025. Let me provide an update on our channel partners. Our partnership with Renesas continues to deepen, and we remain highly engaged. Renesas has consistently added to the design win and design in revenue pipeline, and we are fortunate to have them as a second source to solidify our supply capability. They have recently announced the expansion of their activities in India, a new market for us with a focus on NB-IoT technology, leveraging our Monarch 2 technology. Our other MCU partnerships continue to be valuable to Sequence as well, as most of the IoT projects require the use of an MCU in addition to our 4G, 5G cellular connectivity solution. Finally, we continue developing our partnership with module vendors, increasing our go-to-market strength. We are working on two new deals, As I mentioned previously, one of them is very advanced and should close soon. This would allow us to secure a new channel for our massive IoT products, capable of generating orders of several millions of units per year, starting in 2024. In summary, I couldn't be more excited about the future of Sequence, given our expanding pipeline, positive developments on existing design wind projects, Progress on 5G licensing deals. Another important, and in some cases, transformational strategic opportunities being executed. Sequence is well positioned to increase its market share with the plans to return to revenue growth in the second half of 2023 and ultimately achieve profitability. We extend our gratitude to our shareholders for their commitment to Sequence, and I would like to thank our global team for their hard work and dedication. I'll now turn the call over to them.