Sequans Communications S.A.

Welcome to the sequence conference call to discuss the company's agreement to sell its 4G IoT technology to Qualcomm and the preliminary second quarter 2024 financial results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Kim Rogers of Hayden IR. Ms. Rogers, you may begin.

Thank you, Laura. And thank you to everyone participating in today's call. Joining me on the call today from Sequon's Communications is George Karam, Chairman and CEO. Before I turn over the call to George, I'd like to remind our participants of the following important information on behalf of Sequon. Please note that a joint press release was issued today announcing an agreement for Sequon to sell its 4G IoT while retaining a license for its ongoing use and development for $200 million in an all-cash transaction to Qualcomm Technologies Inc., to be referred to as Qualcomm on this call, a subsidiary of Qualcomm Incorporated. In conjunction with this announcement, Sequon's also released its second quarter 2024 earnings press release, Both press releases were posted to the company's website at www.sequins.com under the newsroom section. A transcript of this call will also be posted to the company's investor relations website under the investor materials section. Before we start, I'd like to remind everyone that this conference call contains forward-looking statements, including statements regarding the sale of the company's 4G IoT technology to Qualcomm, with the retention of a license for ongoing use and development. All statements other than present and historical facts and conditions contained in this call, including any statements regarding the sale of the company's 4G IoT technology to Qualcomm, with the retention of a license for ongoing use and development, our business strategy and plan, and our financial outlook, 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 precautions, 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 place undue reliance on these forward-looking statements. Actual events or results may differ materially from those projected or implied in the forward-looking statements. More information on factors that could affect the sale of the company's 4G IoT technology to Qualcomm with the retention of a license for ongoing use and development and 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, everyone.

Thank you for joining this conference call today. In the press release issued just before the start of this call, we announced the execution of an agreement to sell our 4G IoT technology to Qualcomm for $200 million in all cash transactions while retaining a license for its ongoing use and development. The transaction is expected to close by the end of October 2024 and is subject to customary closing conditions, including French, regulatory approval. We are delighted to enter this strategic and significant transaction with Qualcomm. The transaction validates the value of sequence 4G IUD technology and provides substantial capital to solidify our financial foundation. Importantly, under the agreement, we will retain a perpetual license to use and advance our 4G IoT technology and product portfolio. Additionally, Sequence will maintain full ownership of its 5G assets and related technologies. Consequently, we can support and develop our 4G IoT business, primarily relying on Monarch 2 LTM NDIoT and CalIP2 Cat1BIS platforms, while advancing our 5G eRadCap and eRadCap products. This will enable us to expand our next generation of 4G, 5G IoT chips and modules, ensuring ongoing innovation in cellular IoT solutions for our customers. It's important to note that this transaction will not affect the company contractual obligations or operations with customers, suppliers, and industry partners. should see continuity in our relationships with this strengthened financial and business situation and enhance capabilities to expand our partnerships. Under the terms of the agreement, Sequence will retain around 230 personnel dedicated to the 4G, 5G massive IoT market, with about 75% of them focused on R&D and customer support. This structure will ensure best-in-class customer service and ongoing product innovation development while maintaining controlled operational expenses. In return, Seacomps will receive $185 million in cash, $175 million is payable at closing, and up to an additional $10 million is payable following the completion of a one-year warranty period. $15 million received under the pre-transaction manufacturing license agreement executed in June 2024 will be credited toward the $200 million purchase price at closing. There are numerous immediate and long-term benefits to the agreement. Let me highlight some of the most important ones. First, the transaction proceeds will enable us to repay all outstanding debts. and accounts payable that are currently due. The company will be practically debt-free with around $3 million of low-interest government debt remaining on the balance sheet and approximately $80 million of cash at closing after debt suppliers and deal fees pay them. Second, our improved financial standing will allow us to reinforce our customer support and accelerate the development of next-generation 4G, 5G technologies, positioning the company for long-term growth. We'll continue improving our product roadmap with existing 4G chips and modules, including the Monarch 2 and Calliope 2 platforms, and expanding our portfolio with the new chips and modules, specifically 5G RedCap and 5G eRedCap solutions, enabling the path towards 5G for IoT. Third, this deal fully aligns with our business strategy announced last June, where we committed to focusing on our massive IoT business segment and reoriented our product roadmap towards 5G variants for IoT. With a team of about 230 people dedicated to massive IoT, we'll be able to continue expanding our IoT business while reducing our expenses as part of the company's plan towards profitability. Lastly, this transaction endorses our 4G IoT technology. Solutions based on Sequence LTE and NB-IoT and Cat1Biz are now positioned to become industry cornerstones. This will accelerate our business and provide best-in-class technology to massive IoT markets. This event marks a new chapter for Sequence, and we are extremely excited to collaborate with Qualcomm to execute this agreement. In a market as complex and demanding as cellular IoT, long-term investment and deep technology expertise are essential. Sequence is now one of the few companies with a comprehensive 4G, 5G product portfolio and a strong enhanced capability to address the specific needs of the cellular IoT market, especially considering recent geopolitical changes and market shifts. Let me take a moment to update you on our second quarter results and current business. Our revenue in the second quarter was $9.7 million, an increase of 60.5% compared to the first quarter of 2024, and an increase of 5.6%. compared to the second quarter of 2023. Product revenue was $2.4 million, flat compared to the first quarter of 2024, and an increase of 144% compared to the second quarter of 2023. Service revenue was $7.2 million, reflecting a large portion of revenue from the Monarch II manufacturing license agreement announced on June 18, 2024, which was a pre-transaction deal with Qualcomm. Note that as the fees paid under this license agreement will now be folded into the overall deal with Qualcomm, the preliminary Q2 2024 results presented here are subject to change based on the final allocation of the larger deal purchase price. As the transaction may close in the third quarter of 2024 or early fourth quarter, We are not commenting on the expected impact of the deal on our revenue in the second half of the year. However, focusing on our product revenue, we anticipate a modest increase in the third quarter and a stronger performance in the fourth quarter. Overall, due to the anticipated increase in the numbers of customer projects moving into mass production over the coming quarters, we anticipate higher product revenue for full year 2025 compared to 2024. Despite the challenges following the termination of the Renaissance Acquisition MOU last February, we have continued to deliver on our customer commitments. Our key customers have appreciated our focus on massive IUT and have continued their development using our products toward mass production. Our design pipeline has continued to gain momentum, particularly with our Cat1 Biz product. However, finalizing design wins has been challenging, as several customers have been waiting for our financial issues to be resolved. Now, with a stronger balance sheet, we expect the situation to accelerate design win activities. In the second quarter, we achieved several significant milestones, including In April, we announced that Sequence CaliP2, the first Cat1BIS module approved by AT&T and FirstNet. A few weeks later, CaliP2 also gained T-Mobile certification. This demonstrates the progress on our LTE Cat1BIS technology for the North American market where we expect significant growth. I would like to remind you that LTE Cat1BIS is a cost-efficient technology universally available for applications like vehicle telematics, security and alarm systems, payment systems, and metering applications. Since the launch of this platform, we had many design wins. As an example, Geotab, a global leader in connected transportation solutions, chose our Calliope 2 for its compatibility with any LTE network, making it ideal for fleet management applications. In May, our sequence CA410 module achieved industrial certification and successfully completed field testing with one of the largest electricity providers in California. This milestone underscores the maturity of the CA410 which supports both private networks bands and Terex NCVRS and public network operator bands.

This integrated solution is specifically designed for the utility market in North America.

Lastly, in June, we announced that ITRON, the global leader in smart metering, selected our Monarch 2 LTM and BIUT technology for its next generation of Intellisys W-Source water meters. The Monarch's low power consumption extends the life of battery-powered water meters by up to 15 years, significantly enhancing operational efficiency. We are very excited to extend our collaboration with ITRON and address the connected water metering market, a new area of growth for low-power cellular IoT. This new design will strengthen our leadership in smart metering, where we have a strong presence with multiple tier one and smaller customers. Sequence continues to build strong momentum with industry leaders in smart metering, fleet management, and asset tracking. We have consistently provided best-in-class support to our customers, developed a unique portfolio of products and technology, and maintained a highly experienced team. As we improve our financial standing, We expect several pending design wins. We'll reach completion, accelerating our future pipeline growth. Let me explain our 5G REDCap and eREDCAP opportunity. Over the next few years, we anticipate 5G to expand significantly in the IoT segment, encompassing a wider range of applications and device types beyond smartphones and fixed wireless access. The new 5G reduced capacity, or REDCap, operates on 5G standalone networks and will be utilized in IoT devices such as cameras, wearables, and gateways that currently use 4G LTE Cat4. These devices will migrate to 5G for better network efficiency, longevity, and performance as the 5G networks will evolve from non-standalone to standalone. Following this, the 5G Enhanced Reduced Capacity, or eREDCAP, further decreased the 5G complexity with a single antenna, introducing a low-cost, low-power 5G solution to address low-speed and low-power IoT devices currently using LTM NB-IoT or CAT-1, CAT-1bis 4G technology. We anticipate that 5G eREDCAP and eREDCAP will present sequence a unique market opportunity to develop innovative 5G solutions tailored for IoT use cases, leveraging our extensive experience in cellular IoT. To conclude, I would like to state that our decision to enter into an agreement with Qualcomm was carefully considered and structured to best serve our shareholders and support our customers and the IoT market. Given the promising long-term prospects for Sequence business, we believe this transaction will secure a robust future for the company, enabling us to reach our full potential and deliver the best outcomes for all our stakeholders. For over 20 years, Sequence has consistently invested in 4G and 5G technologies for IoT. This strong foundation has enabled us to navigate challenging times and emerge stronger. Today's announcement to Qualcomm recognizes the value of our R&D, the performance and reputation of our products, and the talent of our engineers and staff. I want to thank each of you for your continued support and dedication to SQLs. I also want to express my sincere appreciation for the support we have received from our customers and partners. With a solid financial foundation, best-in-class technology endorsed by industry leaders, a comprehensive 5G, 4G IOT portfolio, and a seasoned team fully committed to IOT, TQAN stands to remain a trusted partner for all our stakeholders. We now distinguish ourselves as one of the few companies capable of addressing the specific needs of the cellular IOT market. We'll keep you updated on any significant developments through this process. I'm looking forward to our next investor call where I will share more insights about the future of Sequence. I will now open the floor for any questions. Operator, we are now ready to open the call for Q&A, please.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the number two. If you are using a speakerphone, please lift your handset before pressing any key. Again, should you have a question, please press star, followed by the number one. One moment, please, for your first question. Our first question comes from the line of Scott from Ross Capital. Go ahead, please.

Good morning. Good afternoon. Thanks for taking my questions. George, congratulations. Absolutely incredible deal and validation of the technology that you guys have been developing over the past decade. Thank you, Scott. Maybe, George, just for starters on the deal, given that it's Qualcomm, I'm going to get the question about antitrust issues with HSR. Can you give us your early thoughts on that? It sounds like you've been very careful in terms of the process and otherwise. So, you know, what's going on on that front?

I mean, Scott, absolutely. I mean, you know, this is an important element, as you can imagine, part of globally in the deal. But when you think, when you look about the transaction at the end of the day, CICMOS is getting stronger after this deal. We continue its business. So all has been structured where the market will benefit. At the end of the day, think about it, the technology is available in the hand of two companies. Obviously, Qualcomm will have its own roadmap and development and improvement and so on. Sequence as well will continue on its way, developing its product portfolio with this technology and improve it. And this is possible with no impact, with no notion of limiting competition. It's the reverse what's happening in this deal. You're creating more options for the end customer. So I believe all is in line with the antitrust tools.

Okay. And, you know, maybe quickly on the 4G front, you've been building a huge pipeline or opportunity pipeline on the front with, I think, hundreds of millions of dollars in design wins as well. It sounds like that continues to expand, but I'm wondering if there's a number that goes along with it. And also, look, in the interim, as you guys have been managing through this process, some customers have tapped the brakes a little bit. It sounds like that logjam will now break and we'll start to see some of that acceleration of the wins you've already had. I wonder if you could provide some color on that. And also in the interim, will Qualcomm actually OEM chips from you before they start producing their own silicon based on you know, Monarch 2 and Calliope 2 designs?

Well, I mean, you know, on the last question, I don't want to commit too much, you know. I mean, at the end, you know, think about if Qualcomm have all the capability to go there and whether there is something, you know, at the beginning, this will never be material, will not be material for Sequence. I believe the market should not plan on this. Sequence, Qualcomm, all this technology, and we go on their path, and they are capable to you know, to go fast to the market. I have no doubt about it. So, no, I believe really what we take from Qualcomm is really the validation of the technology and definitely the cash and fixing the financial problems of the companies. That's the best things we are getting on our side. And from there, we go on our road and they continue on theirs. In terms of design wind pipeline, let's face it. I tried a little bit. not to develop it for the time being, because, you know, I'm sure that everyone can imagine the station of the company since February during six months of challenges, where in the same time, obviously we have big pipeline, a lot of customers. And again, I reiterate my appreciation to all those customers and many CEOs were calling me, getting updates and believe and keeping their trust in me just only on a simple word, because they have no clue what I'm doing and how I can fix my situation. Knowing the decision was complicated, as everyone knows, after the termination of the MOU. Obviously in this condition, our focus was really mainly maintaining existing customer and keep them happy. So we didn't have any miss there, I could say, because all the existing customer continue whether buying and moving towards production and as well, you know, continue their design. I'm sure that all of them were thinking about maybe second option plan or whatever. And I have no doubt that they have this in mind. But definitely the financial situation of the company created a lot of trouble, you know, and now we're coming out of it. I don't want to comment much more on the pipeline. Give me a couple of months just to go out of the water, go on the field again, meet my customers again, reevaluate the situation to assess that. But definitely we continue executing from R&D and you saw that just only in the tough quarter of Q2, the progress we have done in terms of, on CalIP2 specifically, certification and bringing the product to market. And we tried not to take any delay because of the financial troubles that we have. In addition, supporting customer and last, getting, keep building the momentum where we had, honestly, the pipeline didn't diminish. We had a lot of design issues in activity, customer interested in our platform. I tend to say the convergence rate from design in to design win was not great, but no surprise because many of them literally they said, it's great, we will select you provided you fix your problem. And hopefully when I will come back on the street in a couple of weeks, they understand that they can make full selection and move forward with us. And we can talk about it, you know, later on in terms of pipeline scope.

Okay, fair enough. And then maybe just quickly on 5G, it sounds like a lot of your commentary is focused on REDCap development. I'm wondering, you know, you had mothballed some of the more complex 5G development. Is that still the case at the current time, or will you be looking for other partners to continue along that path? And then as it specifically relates to REDCap, it's a technology I think people don't fully appreciate yet. but is about to kind of burst onto the cellular scene in the next 12 months. What is the timeline that we should expect you starting to introduce samples and chipsets into the marketplace? Thanks.

Yeah, I mean, Scott, I mean, obviously, let me start with the question about the broadband. You know, we put a lot of energy in, and we have even prototypes in-house that can do, call it like high-end 5G, not maybe the super high-end that Qualcomm can get. It's like mid-range, you can say, for fixed wireless access, because we target this application. And it remains, this market remains interesting, you know, for Sigmoz. Unfortunately, we are in the middle of it. We have prototype not going to mass production yet, and it's going to take time to take it to mass production, so then you can start questioning the timing of our development. But the IT is in-house, and we have partner using it, and from there, we could decide at any time to resurrect it or do something with this with other partner. For now, I have nothing on the table I can share, but obviously, it's an option for the company. We have this option. It's valid. we can go tomorrow this side and go back to full fixed wireless access and invest there. In June, we took the decision really to be a little bit more call it cautious decision to focus on the market we are in and we have customers to serve them with the, which is the massive IOT with the product we have to continue shipping and serve the top line. But obviously this product roadmap needs future development, right? And, And the future is, as we see it always, is evolution from 4G to 5G. If I'm still live, we will be talking the evolution from 5G to 6G. And this, each time it happened the same way. It starts with the phone, followed with other application towards the IoT. Because as you know, the IoT takes much longer to change. But there is no escape from this. Market will evolve to 5G. And one day, no one, everybody stopped talking about 4G. Obviously, is it going to take 10 years, 15 years? I don't know. But it's not for tomorrow. It takes longer. Now, our job on our side is really to prepare the future and the evolution there, and then be ready when the market will evolve. If you ask me about the evolution of RedCap eRedCap, as I said, it requires 5G network running as a standalone, while most of the network in the world today, they are non-standalone. Over in North America, the carrier, they already started, and you will start seeing next year standalone. Now, the full coverage will not be there. So maybe at the beginning, it will not be suitable for IoT application. It could be suitable maybe for different kind of devices. But give it like two, three years, and North America will catch up. You will have standalone. China is pushing the standalone faster. Europe will be always late. So if you ask me about the timing, It's not like timing when you can sell REDCap or eREDCAP because this is almost now you can sell REDCap or maybe next year. But if you ask me about full mass market and so on, I give it two, three years in my estimation. And obviously, in line with this market, sequence roadmap will be positioned there. And we have this development moving on eREDCAP because we started this almost after the termination of the MOU. We didn't do, honestly, accelerate much because, as you can imagine, the financial situation put us a little bit delayed this program. But now, with this behind us, we can accelerate and move on, and we can talk about it on next calls, what will be our roadmap in terms of timing on this.

Okay, great. Thank you so much. Congratulations again. Absolutely incredible deal. And I'll get back in the queue. Thank you.

Thanks, Cliff.

Again, ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchstone phone. There seems to be no further questions at this time. Apologies. We now have our next question coming from the line of Karin Beginke from Auto VHF Management. Go ahead, please.

I was just wondering, are there any other regulatory jurisdictions that are required besides HSR and the French?

Indeed, it's just only the French. There is nothing more.

It's just the French, so you don't need HSR?

I had understood from the previous question that that was required.

Honestly, Debra is not with me. I need to check this, but the most important one is the FDI regulatory entrance.

Okay. Thank you. Thank you.

And there seems to be no further questions at this time. I'd now like to turn the call back over to Dr. Karam for any final closing remarks.

So thank you again for joining the call today, everybody. Following this call will be focused, obviously, on internal communications and discussions with our customers and suppliers. Then we will make ourselves available to connect with investors. Please get in touch with Kim Rogers, our IR consultant, to schedule a call. Kim's contact information is at the bottom of today's press release. Thank you very much. Operator, we can close the call.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.