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.

Thank you, George, and good morning, everyone. As we expected and roughly in line with our guidance, revenue for the first quarter of 2023 was $11.9 million. This compares to $13.9 million in Q1 2022, a decrease of 14.3% year-over-year, and to $15.9 million in Q4 2022. As George has stated, our first quarter revenue reflects the impact of inventory rationalization with a key customer, delayed product launches, and seasonally lower activity in the first quarter. Revenue from massive IoT in Q1 2023 accounted for approximately 28% of our total revenue, with Cat1 driving the sequential decline caused by the inventory issues previously explained. Revenue from broadband IoT accounted for 72% of our total revenue, as license and services revenue generated by our 5G licensing deals increased year over year, but declined sequentially, as expected, due to the structure of the most recent 5G strategic agreement. For the quarter, we had two customers that each represented 10% or more of our revenue, and one of these is our 5G strategic partner. Gross margin in Q1 2023 was an historic high of 78.5%, up from 68.1% in Q1 2022, and up from 75.3% in the prior quarter. The improvement was primarily driven by the higher proportion of licensing revenue in the revenue mix. IFRS operating expenses were 13.3 million, up a modest 2.9% from 13 million in Q4 2022, due to an increase in R&D expense of $127,000, and an increase of $472,000 in sales and marketing expense. This was partially offset by a $222,000 decrease in general and administrative expense. Year over year, IFRS operating expenses increased by $1.9 million compared to $11.4 million in Q1 2022. Non-IFRS operating expenses, which exclude stock-based compensation expense, or $11.6 million in Q1 2023, up slightly compared with $11.2 million in Q4 2022. Our first quarter 2023 operating loss was $4 million compared to an operating loss of $1 million in the fourth quarter of 2022 and a $2 million operating loss in the first quarter of last year. Net loss in Q1 2023 was $5 million, or $0.10 per diluted ADS, and it includes a non-cash benefit of $2.3 million for the revaluation of the embedded derivatives related to our convertible debt, offset by $2.5 million of interest expense. This compares to a net loss of also $5 million and $0.10 per diluted ADS in Q4 of 2022, which included a non-cash benefit of $1 million from the re-evaluation of the embedded derivatives And compared to net income in the first quarter of last year of $2 million, or 4 cents per diluted ADS, but that included a net non-cash benefit totaling 6.4 million from the revaluation of the embedded derivatives. In Q1, we had a loss on foreign exchange of $165,000, primarily related to the revaluation of Euro-denominated net liabilities on the balance sheet. This compares to foreign exchange losses of 1.5 million in Q4, and a foreign exchange gain of $370,000 in Q1 2022. On a non-IFRS basis, our net loss was $4.2 million or 9 cents per diluted ADS for the first quarter of 2023. This compares to non-IFRS net losses of 2.8 million or 6 cents per diluted ADS in the fourth quarter and 1.8 million or 4 cents per diluted ADS in the first quarter 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 from quarter to quarter. Specifically, the financial income expense category on the income statement, which is below our operating results, includes foreign exchange gains or losses and the marketing 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 derivative are excluded from our non-IFRS presentation, foreign exchange gains 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 totaled $5.3 million at the end of Q1 2023, compared to $10.7 million at the end of 2022. The Q1 2023 closing amount reflects the cash used in the quarter primarily for capital expenditures related to our internal development expenses, as well as debt service costs. The March 31st, 2023 cash balance does not reflect the $20 million proceeds from the private placement, which was funded on April 11th, 2023. Cash provided by operations for the first quarter of 2023 was $3.5 million, compared with cash used by operations of 2.7 million in the first quarter of 2022. Presently, we are exploring alternative non-diluted funding avenues in the form of market rate loans from the European government and research project financing from the French government, which would be a combination of grants and zero interest loans. Sequence meets the eligibility requirements for both. We are currently initiating the European loan process, and a proposal for the French financing has been submitted. It's possible for us to secure funds from both sources, which could provide up to $50 million or more in total. Regarding the outlook for Q2, as a result of our primary 5G IP agreement structure, licensing revenue is expected to normalize to a lower quarterly level beginning in Q2. And as product shipments are not expected to accelerate before Q3, we expect revenue to be in the range of $9 million to $11 million, with gross margin expected to be around 65%, for the quarter ending June 30th, 2023. We expect non-IFRS operating expenses in 2023 to average about $12 million per quarter, assuming a stable euro-dollar exchange rate. We expect total interest expense in Q2 on an IFRS basis to be approximately $2.8 million. This comprises the contractual interest expense component of about 1.1 million, and the IFRS adjustment of about 1.7 million that we deduct to come to our non-IFRS net result. Most of our interest expense is PIC interest related to our convertible debt and is not paid in cash. We are not providing guidance on any impact of revaluing the embedded derivatives nor possible foreign exchange gains or losses given that this is largely determined by market conditions. Finally, for modeling purposes, the number of ADSs outstanding today is 58.3 million, reflecting the private placement in April. 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 presentations page, the same location where you will find the audio replay. And now I'll turn the call back to George.

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

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.

At this time, we will pause momentarily to assemble our roster. Our first question comes from Scott Seale from Roth MKM.

Please go ahead.

Hey, good morning. Thanks for taking my questions. Hey, quick clarification and a couple of questions. On the cash front, Debra, just wanted to know whether or not I think there was a $7 million scheduled payment that was supposed to come in from the China relationship. Did that happen in the first quarter? And I believe there was another one scheduled in the second quarter. Is that remaining on track? And then wanted to clarify the comments around European and or French alone, did you say $15 million, $1.5 million, or $5.0 million? And then, George, on the 5G front, it seems like the timeline in terms of product development sampling is on track for later this year, but it sounds like the discussions in terms of the near-term strategic may have slipped a little bit. I was wondering if you could clarify that and any sort of issues around it. I think you also talked about three customers or potential strategic partners that were lower in the funnel. Is that still the number we're talking about or has the number of relationships there expanded?

Hi, Scott. So just with respect to your questions, the payments that were scheduled to come in in the first quarter did in fact come in and we are on track for the scheduled payments at the end of Q2 as well. In terms of the European and French financing options that we're pursuing, If everything came in at the high end, it would be in excess of 50-5-0 funding, which would probably come in over a couple of years. A couple of years.

Okay. Thank you.

Yeah. Scott, just on the other question, indeed, you know, the 5G execution is on track. You know, as I mentioned, we'll we started engaged customer around MWC. We didn't announce yet the product publicly, but it's, you know, you will hear about it in the course of the year. We, but obviously under NDA, we engage with many customers. Traction is really great. And we obviously from the beginning of the year until now, at the beginning of the year in our pipeline, we had only some strategic customer, as you know, that they are engaged with us. And obviously we, Their number in the pipeline was integrated. But since end of Q1, we had more than half a dozen of very, very serious customers with whom we have very advanced discussion and opportunity. And those now, they start to be part of the pipeline and we start adding more new deals in the pipeline. Obviously, they are not in the design win portion yet. Those are new deals that we are talking about. as all those customers are waiting for the product to sample and we conclude the deal. But the traction is tremendous. People, they love this product. The way we're positioning in terms of performance and cost. And obviously, when you factor in the competitive landscape, it positions us in a very good shape to win, hopefully, a couple of new deals towards the end of the year and continue next year. And regarding the strategy, Obviously, this development is on the, you know, the progress we make on the chip is very positive for our strategic discussion that we continue to have. I tend to say, I don't want to say it's slipped because you mentioned this is, we're still confident about closing this year. But, you know, we have a lot of strategic discussion ongoing in the company globally. And you could imagine that some of them are connected and related. So that's why we're, I mean, I didn't want to give a closer timeline, but we're still positive about closing something this year. It's taking a little bit more time, but I don't call it slipping. It's more developing and taking more complex relationships.

Gotcha. And lastly, if I could, George, the product ramp, I think in the release, you talked about a clear step up in revenue in the second half, and you referenced that again, growth in the second half this year. I was wondering if you could clarify that a little bit more. It sounds like you've got some large module opportunities out there that don't actually contribute to the revenue. These are existing design wins. But I'm wondering if you could provide a little bit more clarity when you talk about that step up in the second half of this year. It sounds like you're talking about growth on a year-over-year basis in the second half of this year. Is that in each quarter, or is that collectively for the second half of this year? That would be very helpful. Thanks.

Obviously, Scott, I'm talking about the product because when you compare year to year, we need to factor in exclude the licensing because you have some variation. Last year in the second half, we did a big number with the strategic deals. So you need to normalize this to have the fair comparison if you want on the product. And definitely on this basis, we expect growth in the second half versus, you know, year over year. I don't want to say quarter every quarter, but in general, the two quarters should be coming up. And this is coming from two things. And this is what I wanted to insist on the call. Obviously, the pipeline is developing, and it's developing by having a new opportunity that's coming in. And they call them not yet one, but there's more and more opportunity engaged, specifically, as I mentioned, Kalaipi 2 and Taurus. We have more opportunities secured and designed in one. In other words, we can take it to market and generate product. But the other really focus that really will drive revenue this year and beginning of next year is the design wins that we have in hand since last year. And we are waiting to see those products turning to mass production with the customer. I mentioned that in Q1, just only in Q1, three products, they were forecasted to become secure the product. They are now in the green. And they are not really contributing to revenue immediately because most of them, if not the three, have some initial shipment that we did last year and we were stuck. But this is now consumed because the product is qualified and moved to shipment. And we expect those products to generate revenue in the second half. But also, all that we have planned for the second half to turn to lunch, it's on track. I could not guarantee 100% is going to happen on time. But from the execution we have done at the beginning of this year, all of them are on track. And specifically, we have four metering projects. nice projects, they are developing well, and as we are speaking, still plan to enter into production in the second half. So obviously factoring all this in, and we have as well the initial shipment of CalIP2. We have a major design win that we should ship in Q4, the first shipment. If you bring all this together, definitely the product revenue should come back to growth, and this should help the second half of the year, and definitely will be in very great position for a full year in 2024.

Great. Thanks so much. I'll get back in the queue. Thank you.

Our next question comes from the line of Greg Ellis from B Riley Securities. Please go ahead.

Yeah, thanks for taking the question and for all the color. Deborah, I wanted to follow up on Scott's question regarding the potential European and French government grants. Can you just talk a little bit more about when you would expect to know if those are successful and what the qualification or other conditions are for grant receipt in each case.

Yeah, so in both cases, they are basically funding what are considered to be strategic projects. And in particular, the European financing is related to the European equivalent of the CHIPS Act. that's provided an additional pool of resources. The European process, it's a longer one. I don't think we'll know for sure before probably the end of Q3 or even early Q4, but it could be a very large amount, and it's basically unsecured debt And it's based on the future projects that we're planning to do. And the French project has already been submitted. It's in the process of being evaluated. This is more of a typical kind of project that we've done many times. And where it's a portion is grant, a portion is zero interest loan. And the only difference is it's a bigger amount than we've gone after in the past. But I'd say both items are in process and progressing, but they're big amounts and we're dealing with government. So it will take a few months to finalize.

Got it. That's really helpful. And then George, on Taurus, so great to hear the broad customer interest. As we look out at the landscape and one of the big things coming off of Mobile World Congress was all the enthusiasm around fixed wireless access, and we're seeing that show up in a lot of carrier subscription ramp trajectories. So the question is this, given that we're into sampling exiting 3Q and 4Q, Is it possible to see revenues materialize in calendar 24, or is the real material ramp really starting in calendar 25? Any color on the timing of revenues conversion and the breadth of customers that might initially start to hit would be helpful. Thank you.

Hi, Craig. I mean, we, you know, real revenue is really for late 2024 because in terms of product revenue, Obviously, we could have some, what you call it, licensing, not really to license of use. When people get access to technology like this, they pay some lump sum to get access to the technology and get the support that could be factored in in Q4. So we could have some money like this in Q4 this year. But really, the product revenue is more towards second half 24, late 24, and much more 2025.

Got it. That's helpful. And then, Deborah, I'll come back with mine to you and then hop back in the queue. So we've had just stunning gross margins over the last couple quarters, and they're still really high in the first quarter. I know mix is going to take margins back towards the 60s, but can you provide some color on the expected mix between chips and modules in the second half? And while not providing guidance, just give us some help, maybe qualitatively, on where you'd expect gross margins to be as we exit 23 and head into 24. Thank you.

With the product ramp, I think we're still expecting that to be more weighted toward modules. So as we have, we're expecting, you know, license revenues to be lower in the mix. So I think we should expect to end the year going back to more normalized revenues. a gross margin that's somewhere in the 45 to 50% range.

Got it. Thank you. Thank you.

Our next question comes from the line of Raji Gill from Needham and Company. Please go ahead.

Yes, thanks for taking my questions. Just on the $350 million design pipeline that you've been speaking about, In the past, you talked about it's based on kind of orders. And I think you had described that, you know, the orders in terms of the timing, normally it's for shipments three to four months out. And then you kind of adjust the backlog number based on kind of your judgment of that. So I wanted to get a sense of that design pipeline now as we sit into going into the, you know, middle of the part of the year. You know, how do you kind of assess this pipeline? You know, some of these designs come with supply agreements, but they're not guaranteed shipments. So just curious how you're kind of characterizing that design pipeline now.

Yeah, absolutely. I mean, you know, some of those, I mean, first of all, you know, I need design win. What we qualify design win, let's say it in the first phase, obviously at some time the guy is buying from us and he has product in the field. But before reaching this mass production, the design win is qualified by us when we are obviously awarded officially by the customer that he kick off a project. We're invited for the kickoff. We launched the kickoff for the customer. And we see first hardware from him when our product is on it. In other words, otherwise, we keep it as advanced design in the company until really we are reaching 10% assurance that the customer has allocated resources and people on his side, and he has product under development that we can see and touch. And obviously, we need to support him on this product to get there. Now, obviously, this means all we have to get the guarantee is the customer is working with us to bring product to the market. And to generate revenue after this, the customer needs to execute on this phase. And obviously, once he has his product delivered, certified and shipping, he started buying from us. Now, some of those deals, they come just on the basis of, you know, they buy prototype and there is no supply agreement. Some they enter in the same time with a big supply agreement where they guarantee really the, you know, the relationship over many years. And it comes with more complicated term, if you want more sophisticated term for the relationship. But both of them, you know, it's not like... binding order. The only binding order you get when you receive real order to ship product, and this becomes binding in a sense that we have in the backlog order and we need to ship to it. So when I'm talking about my pipeline, obviously some of those customers, we could have backlog for them when they are in mass production, but I'm not counting committed order in a sense like it's really binding. But it's you know, 99% sure that the project is real and it's happening. There is maybe a risk in the quantity because we have an estimate based on the discussion with the customer, how much you will buy in the first year, the second year and third year of production. And there is obviously a risk in the timing because we could say, okay, he's ready the end of the year, and then finally he shifts by one quarter or he's ahead of time one quarter, and we have more or less some, you know, risk relative to the revenue ramp or advanced revenue ramp, depending what's happening there.

And just for my follow-up, and just along the lines of the pipeline discussion we were talking about, and I know you don't guide... beyond one quarter. But when we're kind of looking at calendar 24 and kind of reconciling that with the pipeline, you know, you've talked about in the past that, you know, of kind of about a $700 million total pipe and 80% of that is related to massive IoT or about $600 million. And then you talked about about half of that or $300 million is based on design wins. And if you've entered into, I guess my question is what percentage of those design wins are now entered into production? And how many of those designs will go into production in 2024? So we can get some sense of what the actual revenue ramp would be and trying to reconcile that with the kind of the design momentum that you're talking about. Any color that would be. Thank you.

There's very, very good, you know, this is very good question, Rajeev. I mean, I appreciate it, but let me, let me, you know, exactly what you said is right, right? I mean, so we have a pipeline, half of it is design win, and big percentage of this is related to massive IoT. Now, once, and this is there, you go down, you know, to somewhere in the $300 million, I would say, of massive IoT, a little bit less of massive IoT design win. But this is over three years, right? Now, the question is, If you look year one, year two, year three for every project and you look to the maximum ramp of those projects, you realize, and that's what we said, we exceed $100 million only considering this portion, annual revenue. In other words, if I look to those projects and I look to the peak of those projects in one year between those three years, we are well above $100 million. I'm staying cautious by saying We are around beginning of 2025. We will be there achieving this close to this, but really we exceed $100 million when we look to this. Now, okay, so this is, we know where we can go with this ramp on a yearly basis. The question, which is you're raising where we are today. And if I look to this amount of dollar, you know, like 20% of this amount is already with the project that they have passed the certification and the qualifications. and they are really now in shipment mode. It doesn't mean they are buying maybe today, because they could be, maybe they have inventory in Q2 and they will buy in Q3, but they are not a project where there is any risk on execution. It's just only a project where the customer will be buying from us and will be around 20%. Now, if I look to the remaining projects, which, in other words, the 80% remaining are happening between the remainder of 2023, and let's say 2024, let's say first half of 2024. If we focus on 2023, we believe we exit 2023 with more than 70% in total, like 20% plus 60% extra, there will be in, sorry, plus 50% extra, there will be in a mass production mode. In other words, if all those products planned customers on execution to be ready between Q2, Q3, Q4, they come on time, we'll finish the year where we have 70% of those design win already in mass production. And all what's missing is having those guys buying simply because they need the product. There is no more execution risk, nothing there. And as I said, you know, This is really, we can go customer by customer and list them project by project to come this number. In other words, we should exit the year with the $70 million annualized revenue secured. It does mean we'll do $70 million in 2024. I'm not giving guidance on this, but if you take those projects and you take them to their peak revenue, they do $70 million, only those projects. And this will continue at the beginning of next year to reach the remaining 30% will come in 2024 to exit 2024 with 100% of those projects in mass production. So once you say this, this means this $100 million, there is no more risk if you want on any execution related to the customer. The only or timeline, the only delay after this will be the only risk after this could be a you know, an underestimation or overestimation of the potential of the project. But the risk on this is very, very minimum, at least to the downside, because we know often those customers are big customers. They have existing business. We know how much they are shipping per year. Obviously, they promise us some number. We make our, you know, own estimation by factoring in maybe some risk there. And we come with the number I'm mentioning to you with the 100 million number.

Thank you. Appreciate the details.

Thank you. Our next question comes from the line of Christian Guerra from Baird. Please go ahead.

Hi, guys. My first question is really macro related. I think there's been clearly admissions in the industry that the adoption rate of IoT node generally has been well behind what the expectations were five years ago, and some of that has been the ecosystem versus the type of forecast that Ericsson had four or five years ago. So now we're seeing, obviously, a slowdown at the macro. There's been some pushout. There might be a recession. How should we look beyond just your design win and the company specific traction at your business medium term, particularly if there is a recession? What's the risk that there could be more project delays? Also, is there any particular infection point that you would expect? You've talked about you know, some design wins, including in smart metering. Those are the traditional applications for IoT. But is there something that you think could really create kind of an inflection point in your demand? And, you know, when could that be?

Hi, Christian. I mean, you're absolutely right, you know, on the, I would say, let's say the projection the industry has for IoT nodes, by the way, combining everything, what they call IoT and counting every device to be connected. I believe the idea is still correct. If you manage managing all your assets, connect all your assets, this is what's about IoT. Makes sense. If you count all those objects, you come to billions of units and big numbers that they didn't materialize in the meantime. First, I still believe that we are, this is going to happen sooner or later, because I don't believe that demand is wrong there. It's really related to services and a movement in this industry, which is not stopping. It just only, it's more complex to reach, you know, this level of penetration as predicted by Ericsson, I would say five years back. However, on all that I'm talking about, and this is what you mentioned, we're not really, and this is what happened to the company. If you want in the early, launch of our massive IoT product, we're engaging many, many customers, which I could say coming out of the blue, not necessarily small customers. Sometimes they are big customers, but they didn't have experience in cellular or didn't have experience at all in connectivity, IoT. And just only they thought that they can launch projects, obviously, and extend their business, leveraging this IoT. And many of those projects failed or they get delayed and so on. And this, by the way, impacted all the industry, including us. However, in the last couple of years, the focus of Sequence, by the way, was really on what we call them traditional businesses. Where we are today is really smart metering. There is no doubt that this is happening big. First of all, it was there. Nothing new, you could say, because smart meter is not something that has been invented yesterday. But the arrival of low power technology expanded the market because now you have water and gas and the low cost of cellular enabling to have more penetration of cellular versus regular mesh technology. So that's why we have a lot of projects in metering engaged. We have nine customers Sequence has today in the metering with maybe more than 20 projects with those nine customers. And in the pipeline, I have As I'm speaking, I have at least five. I'm hoping I will close now if you want. I'm watching every day. I'm talking with those customers. So there is really huge demand in this business, in this market, and it's really happening. You can doubt about the speed of those guys they execute because qualifying a meter takes time. We could be wrong. We could say this quarter, that quarter. This is what happened to us last year with COVID. But there is no doubt that this is happening. If you go to the smart home, similar situation. All those devices exist, and we are coming with our Cali P2 product, which is an aggressive product to the market, kind of unique. Customers as well in this space, they do want to avoid the Chinese technology somehow and giving us better position to win with Cali P2, and we have big names there. And when you go to fleet management, when you go to buy here, pay here service, all those services are existing service since years. Nothing new there except the development of the technology of cellular, making cellular cheap and low power and expanding a number of points, but it's not like the application which has changed. So, and we rely our business on all this. Now, obviously you can tell me there could be a recession in the market and some macro condition impacting some of those companies and for whatever reason they delay their project or their new platform. We suffered from this during the COVID days last year As we are speaking, honestly, all those projects, they are industrial customers. They are not sensitive to consumer, and they have no other choice other than moving forward for their business. It could be sometimes impacted slower than faster, but we're not seeing major impact in the development. And as a matter of fact, all what we have planned on the progress in Q1 happened on time. I didn't see any bad news in Q1.

Great. Well, thanks for the color on that. And then as my second question, and as you prep up the ramp of 5G, if you could talk about first the type of ASP uptake relative to units that we could expect in the medium term, the mix between licensing and actual product revenue, and also the potential that you get some of the key customers that you had with 4G in the past with 5G.

i mean uh obviously 5g i mean what's exciting in the 5g first of all the application of fixed wireless mobile computing uh all this is happening and there is real demand and that network are developing so there is the first phase went well but if you look to the number and so on and you start talking with the customers with the carrier all of them they see the cost of the 5g is too high to really make this really mainstream if you want and for There is no doubt that over time, between now and 10 years, you are going to see less 4G, even sometimes switching 4G network and everything becomes 5G. And that's why we are surfing with the storage platform, which is really coming at optimized cost, dividing by a factor of two the current cost structure that you can see it in the 5G. That's why we have a lot of excitement from many customers. Now, for us, the impact on our business model is really major. because when you are talking about chipset level, let's talk, not to talk about the module chipset level between CAT1 and CATM, you are talking single digit, you know, three, four, $5, this is the ASP that you will be talking about. And when you are moving to Taurus 5G, you are without giving a price, open price now because the product is not launched, but obviously a few tens of dollars if you want. So by definition, you have a factor of almost 10 between what you can do on CAT-M and on Taurus. So selling 1 million units on CAT-M, you could do chips at $3, $4 million. On Taurus, you could do $30 to $50 million. So obviously, the difference is big for us, and that's why you know, as soon as we are going to start getting real customer there, our pipeline is going to explode with those numbers.

Great. Thanks for the call. Very useful. Thanks, Christian. Thank you.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back to Dr. George Karam for any closing remarks.

Thank you, operator. Thank you again. Thank you again for joining the call today, all of you. We look forward to catching up with you during our second quarter 2023 earnings call in August. Please note that we are participating in the B. Reilly Institutional Investor Conference on Wednesday, May 24th in LA, as well as the Roth MKM London Conference on Thursday, June 22nd, obviously in London. We hope to connect with you at one of these events. Thank you very much for all your time. And thank you, operator. You can close the call now.

Thank you. The conference of sequence communication has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.