Sequans Communications S.A.
Q3 2016 Earnings Call Transcript

Published: 27 Oct 2016

[Operator:]

Welcome to the Sequans Third Quarter 2016 Results conference call. 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. Before I turn the conference over to our host, Mr. Georges Karam, I would like to remind you of the following important information in behalf of Sequans. This call contains projections and other forward-looking statements regarding future events or our future financial performance. All statements other than present and historical facts and conditions discussed in this call, including any statements regarding our future results of operations and financial positions, business strategy and plans, sources of funding, 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 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. Please go ahead, sir.

[Georges Karam:]

Thank you, Mitchell. Good morning, ladies and gentlemen. This is Georges Karam speaking. I am with Deborah Choate, our chief financial officer. Welcome to our third quarter 2016 results conference call. We are very pleased with the progress during Q3 in all aspects of our business. I will mention a few highlights before getting into specific developments. The third quarter revenue grew 26% sequentially, to around the mid-point of our guidance, and our non-IFRS loss was smaller than we expected . . . so, it was better than our guidance. If we assume the mid-point of our Q4 guidance, we are on track to grow revenue about 40% in 2016 versus last year. And we continue to expect our growth to accelerate in 2017, driven by the growth of Cat 4 and Cat 6 routers and the continued ramp of the Cat1 shipments for M2M and IoT market and again the year after as more solutions for more applications continue to ramp on a growing number of global LTE networks, including Cat M1 and NB1 for IoT applications. We have now the balance sheet to support our near-term growth after a successful equity offering in September. As discussed on our last call, we had been evaluating a variety of options for removing the funding gap, being mindful of our shareholders’ concern over dilution. Ultimately, the decision was driven by business matters, i.e. the importance of removing the balance sheet discussion from our business interactions and avoid impacting our leadership position in the IoT space. Given the excellent reception and high level of interest in the offering from both new and existing institutional investors, we are convinced it was the right path. We now have a fully-funded business, and our strategic relationships can proceed as pure win-win partnerships. On this front by the way, we continue to be engaged on various strategic opportunities and we made good progress on one of them in particular during third quarter. Deborah will discuss the financial side in more detail and now we will move on to a few business highlights. Existing projects in both the broadband and IoT businesses moved forward during the quarter, and we are on-track for several product launches in the coming weeks and months. I am also pleased to report that, during the third quarter, we gained new design wins across all our platforms and products, Cat 4, Cat 6, Cat1, and Cat M. The breadth of our design wins continues to demonstrate the success of our strategy of offering a variety of solutions that are optimized for specific applications as well as leading in time-to-market and technology. We continue to get excellent feedback from the market, and we are seeing current customers come back to us with new projects they want us to work on with them. Continuing to cultivate these relationships is key to our future success. We are actively engaged on more initiatives with carrier relationships, a clear indication that we are building confidence in Sequans from multiple perspectives – technology leadership, ability to execute and, more recently, a stronger financial position. We are expanding our strategic relationships with several partners to bring differentiated solutions to market, specifically in the IoT space where our leadership is largely recognized. Finally, we are continuing to invest in product development and planning to bring more advanced solutions to the market in 2017 and beyond, in order to preserve our leadership position. In the U.S., our Verizon JetPack mobile router business continues to go well, and we continue our work on the following version that will come in the future. We also have received initial orders for a new unannounced Cat 4 devices that are scheduled to be launched on the Verizon network in first quarter in 2017 and this will boost our Verizon-related broadband business next year. Our pipeline of new opportunities in the U.S. continues to expand and we are happy to see a few opportunities even outside the Verizon network for broadband data devices using single mode LTE, in other words, no need for 2G/3G fallback any more. This is particularly encouraging as this expands our addressable market for our StreamRich LTE portfolio. In the emerging markets, by this I mean the carriers in Southeast Asia, Brazil, Australia, Middle East, to some extent some European carrier providing broadband access. Our broadband device business continues to grow as the new OEMs and ODMs we’ve added gain traction. We keep enjoying a nice market share thanks to our time-to-market advantage with some unique features supported by our StreamRich product line. Examples include our unique support for the 3.5 GHz band and the availability of CAT6 solutions supporting carrier aggregation and other features. Our platform was selected by a another new ODM during Q3, in addition to more than a half-dozen OEMs and ODMs we are already shipping to. Each of them is working with multiple operators in various emerging markets. Last quarter we announced that we have won two designs for two new major carriers. In fact, both have finished product certification and expect to start shipping in fourth quarter to these two carriers that they are based in the Asia Pacific region. We understand that there is ongoing interest in large-population markets like India and China. As you probably read in the media, Reliance Jio in India has made a commercial launch of their LTE network and we think this will put pressure on the other carriers in India to move as well. We continue to see potential upside from India, but our near term expectations are quite modest because the initial focus of the operators seems to be on smart phones rather than data devices, similar to what we’ve seen during the initial phase of other LTE network deployments. Similarly, in China, we continue to see some opportunity in broadband data devices, although they have mostly been focused on dual-mode TDSCDMA/LTE solutions. During the third quarter, we identified an opportunity in China with one of our partners, but we remain cautious about the near-term prospects for both China and India, so we are looking at these opportunities mainly as upside to our core business forecast. To recap, we continue to believe the Broadband Data Device business can reach a revenue run rate exiting 2017 that exceeds $10 million per quarter. As we see our pipeline of opportunities growing, we have growing confidence that this business has the potential to become a $100 million dollar business in the medium term In the Vertical Markets segment, we are capitalizing on our work in Public Safety with Motorola and with Thales Avionics to pursue new opportunities that will add to our portfolio of solutions for mainstream applications. During third quarter, we made additional progress in this space, and we expect to finalize at least one more deal this quarter. Meanwhile, our pipeline of vertical market opportunities continues to expand to include several potential new projects in 2017. Turning to the Internet of Things market segment, we are very excited about our progress in capitalizing on our technology leadership in this space. We had a record number of meetings at CTIA in September and the list of active engagements with operators and customers continues to expand. Our reputation as the de facto leader in 4G/5G technology continues to grow and it is particularly gratifying that the customers and partners who know us best, the ones are already working with us, are approaching us about new products for more operators. As we pointed out on the last call, these relationships and the scarcity factor represented by our technology, have tremendous value for shareholders. We are now in a much better position to capitalize on this value, having removed the near-term balance sheet issue. Since Cat1 solutions will account for most of our IoT revenue for the next year or so, I’ll focus first on our progress in Cat1. We continued shipping to Gemalto in Q3 and they are beginning to move ahead on some nice design wins on Verizon’s network and on NTT DoCoMo in Japan. Growth via Gemalto next year will come from the continued ramp of current design wins, new design wins on Verizon and DoCoMo, as well as modules for AT&T and T-Mobile. We have an important strategic partnership with Gemalto for Cat M as well, and we will discuss that in a moment. Regarding the direct Cat1 module business, after some minor project delays that were discussed on the Q2 call, we are pleased to report that these projects are either completing certification, or are in the certification process and most are expected to launch before the end of the year. A few of them, such as the D-Link industrial router, the Wivity industrial IoT modem, and the Autonet tracking device are ones you are aware of from pre-launch announcements. We are looking forward to several additional announcements of other Cat1 devices using our Calliope platform this quarter and in Q1. These will include tracking devices, OBDII devices for cars, and a new consumer device. Probably the best indication of the strength of these relationships is the fact that several of the OEMs close to launching devices for Verizon’s network are already moving ahead on projects with us for other U.S. operators’ networks next year. Perhaps the most important recent development for our Cat1 business in third quarter was being chosen by an additional module maker to use our Cat1 platform to pursue opportunities in the U.S. market and capitalize on their longstanding M2M customer and operator relationships in the U.S. We expect this relationship to add to revenue beginning next year. Meanwhile, we continue our ongoing conversations with the remaining module makers who are not current customers. Those conversations mainly center around Cat M1 and/or NB1, which I will discuss next, but there are also some specific opportunities for Cat1 business which could contribute next year as well. As a footnote for some of our newer shareholders, we basically “invented” the Cat1 market because competitors did not see the opportunity for a single-mode LTE solution with 10Mbps throughput as a 2G/3G alternative. When we announced our Cat1 platform and they began the see the amount of interest in it, competitors scrambled develop something. In most cases, our larger competitors used an old Cat 3 multi-mode chip, modified it via software, and rebranded it as a “multi-mode” Cat1 solution. These are complex solutions that can’t possibly achieve the same cost and performance benefits of a fully-optimized Cat1 product. In the meantime, we announced our next generation Monarch platform, based on the Cat M1 and NB1 standard optimized by design for low throughput IoT applications that require low cost and ultra-low power consumption. Again, we surprised the market by announcing a fully-optimized Cat M1/NB1 solution at Mobile World Congress in February and demonstrated the finished solution running live at CTIA in September. In an attempt to differentiate their solutions and keep up, we suspect some competitors rebranded the same old Cat 3 chip again with further software modifications to emulate CAT-M1 and NB1 solutions. Some said their Cat1 solutions would be “upgradable” to Cat M1 or Cat NB1. This has confused some investors by implying that Cat M1 or NB1 would replace Cat1. This is not the case and for applications such as telematics, video surveillance and other security applications, as well as certain types of consumer electronic devices, Cat1 modules will be the solution of choice even after the Cat M1 and Cat NB1 solutions are shipping in volume a year or so from now. To be sure, over the long term, demand for Cat1 solutions will not equal the eventual demand for Cat M1 and NB1, it will be a smaller potential market, but the Cat1 business will be the primary driver of our accelerating growth during most of 2017 and will continue to be a market in 2018 and beyond. Turning to recent developments related to our leadership in Cat M1, NB1, and 5G, we have more progress to report in addition to the live Cat M1 demo at CTIA. To remind some of our new investors, we have several very active strategic initiatives related to LTE-M and 5G. With Verizon we are working together with their network infrastructure vendors to ensure that Cat M1 devices will be interoperable with the network and we are also working closely with several early- adopter device makers to be ready to test, trial, certify and deploy the first group of Cat M1 devices as soon as the Verizon network is ready. Verizon is targeting the end of this year to have a soft launch of the network and we expect there will be several pre-launch device announcements from the early-adopters using our platform. We are likely to be shipping small quantities beginning in first quarter for trials, but we expect it will be well into the second half of 2017 before we see a meaningful ramp of Cat M1-related revenue. In addition to Verizon, we are very actively engaged with AT&T and T-Mobile and with relevant OEM and ODM partners to prepare CAT-M1 trials and testing. Also, during third quarter, we initiated similar engagements with the operators in Japan as they are also looking to deploy Cat M1 or NB1 next year. In Europe, the operators moving most aggressively seem to be more focused on NB1 initially and we are engaging with several of them to support their plans to deploy in various countries at various times during 2017. Note that some of them will deploy Cat M1 devices as well. We also see Cat NB1 opportunities with operators in China. This brings me to my next positive development. In addition to the five OEMs and ODMs that had decided to work with us on Cat M1 or NB1 as discussed in our last call, we have signed agreements with three new device OEMs and two module ODM/OEM. Also, the pipe is building and we are very confident that we will conclude more customer agreements in this space. In fact, given our acknowledged leadership, it’s not unrealistic to think that nearly all the OEM and ODM interested in CatM1 or NB1 should be going with our platform, though perhaps not all of them will be working with us exclusively. Our competitors, so far, appear to be modifying an existing platform via software to support Cat M1, which makes it impossible to realize all the benefits of a fully-optimized solution. So, we take pride in the fact that we are not only first to market, but we are also offering the most optimized solution available for the specific market segment. Our collaboration with Skyworks combines our Monarch chip with Skyworks RF front end module to create a highly-optimized LTE platform for IoT applications as a single worldwide SKU. This partnership is also going extremely well. We are also working with strategic partner Foxconn/Socle on an SoC solution that will be available for sampling next year. We expect to renew our 5G collaboration agreement with TCL, since both parties are pleased with the progress and it’s an excellent working relationship. So, we are very pleased with all our strategic initiatives. Without being specific, I can tell you that we are making progress with another strategic partnership that we hope to close this quarter. Given all these encouraging developments, we continue to believe it is realistic to expect the IoT segment to approach a run rate of $10 million per quarter exiting 2017, with further acceleration in 2018 and beyond. So, to summarize our overall message, in third quarter we managed to have more of everything

[Deborah Choate:]

Thank you George and hello everyone. I would like to add some details about our Q3 financial results and the recent equity offering and also discuss the outlook, including our guidance for Q4. Revenue in the third quarter of 2016 was $12.5 million, a 26% percent sequential increase from Q2, and a 33.1% increase compared to the third quarter of 2015. The sequential improvement represented across-the-board strength on all platforms. Our JetPack business continues on track and revenue increased somewhat from Q2; revenue from emerging markets increased, and our Cat1 ramp continued. We had one 10% customer in the quarter which technically accounted for 40% of revenue, but this is a distributor serving a growing group of Asian ODMs who each represent multiple operators. Our customer concentration is actually beginning to lessen overall. Chip sales were similar to Q2 levels, but we had a significant sequential increase in module sales, which impacted our product gross margin. We realized non-IFRS total gross margin of 46.8%. Operating expenses were $9.8 million in Q3, a slight decrease from the neighborhood of $10 million per quarter, where we expect to remain with only gradual increases over the coming quarters. Our third quarter operating loss was $4.0 million, compared to an operating loss of $5.7 million in the second quarter, and $4.2 million in the third quarter of 2015. Net loss was $5.1 million in Q3, the same as in Q2 and compared to $2.4 million in the third quarter of 2015, which had included a large non-cash gain on the fair value of convertible debt embedded derivative. Basic and diluted loss per share was $0.08 in the third quarter of 2016, based on 61.6 million average shares outstanding, compared to net losses of $0.09 in the second quarter based on 59.3 million shares, and $0.04 in the third quarter of 2015 based on 59.1 million shares. The increase in weighted average shares outstanding reflected the equity offering in September. I will give you the relevant figures on that in a moment. To facilitate comparisons, we have also reported our results on a non-IFRS basis, which excludes from net loss the non-cash items related to stock based compensation expense, and the non-cash fair-value and effective interest adjustments related to the convertible debt and other financings. As the conversion prices are now fully fixed for both convertible debt issues, the fair value is now fixed and so beginning in Q3 we no longer have the revaluation of the convertible debt embedded derivative. Non-IFRS net loss was $4.3 million in Q3 2016, compared to net losses of $5.8 million in Q2 2016 and $4.6 million in Q3 2015. Non-IFRS basic and diluted loss per share was $0.07 in the third quarter, compared with non-IFRS net loss of $0.10 in the second quarter, and $0.08 in the third quarter of 2015. The per share amount for Q3 2016 would have been the same if the effect of the September capital increase were excluded. Cash used in operations in Q3 was $9.5 million, compared $4.2 million in the second quarter of 2016 reflecting changes in working capital items. Specifically, we increased inventory to accommodate higher expected volume and improved our payment practices with suppliers. Cash and short-term deposits at September 30, 2016 totaled $24.7 million, compared to $7.5 million at the end of Q2. This reflected $23.4 million in proceeds from the equity offering in September and we also received the 2015 research tax credit from the French government as expected, but one of the grant payments we expected in Q3 we now expect will be received in Q4. Accounts receivable at September 30, 2016 were $14.3 million, reflecting DSOs of approximately 100 days due to a concentration of shipments at the end of the quarter. As I mentioned, inventories increased by $3 million to $7.0 million. Short-term debt from financing receivables increased $3.5 million in the quarter to $5.6 million at September 30, 2016. Looking forward, we expect revenues for the fourth quarter of 2016 to be in the range of $13 to $15 million, reflecting continued growth from emerging markets and the ongoing ramp of Cat1 solution in IoT. In Q4, we expect non-IFRS gross margin to be above 40%, and non-IFRS net loss per diluted share to range between $0.05 and $0.07, based on approximately 75.0 million weighted average diluted shares. The current shares outstanding are 75,022,678, reflecting the shares issued in the equity offering plus the partial exercise by the underwriters of their over-allotment option this month. Our guidance for Q4 non-IFRS net loss per share excludes the impact of non-cash stock based compensation, effective interest adjustments related to the convertible debt and other financings, and any other relevant non-cash or non-recurring expenses. We continue to expect our overall revenue growth to accelerate in 2017 as the broadband data device business continues to grow and our Cat1 platform for IoT continues to ramp, with some possible contribution from Cat M1/NB1 toward the end of next year. At the conclusion of this call, we will post a written version of our formal remarks in the Investor Relations section of our website on the Webcasts and Presentations page the same location where you will find the audio replay. Now, I’ll turn the call back to Georges to sum-up before we move to questions.

[Georges Karam:]

Thanks, Deborah. So to recap now our call just three points so the first point is - as I said the quarter was very good in all aspects. So whether, in terms of design win, preparing the future, as well executing all say on the projects and further going in the current quarter. So, really a buzz quarter for us and in summary when you look to two businesses where our strategy of single mode as we play is really delivering results on the two segments. In the broadband business this is moving very well. Strong market share, the vast is growing in the emerging market definitely is going in the right direction. But on top of this more opening in the U.S. market beyond Verizon and more and more still to come. We are very, very confident and more confident that the expectation for the revenue that would be generated from this segment. Next year is really kind of secured, I’ll say beyond very, very limited risk on this segment. So this is really nice cash cause developing for the $100 million, I’m promising there in the mid-term. And if you go to the IoT business segment, this is really very excited segment with potential, I will say financial growth there for the company obviously everything is emerging that happening now, but when you look to the situation. Sequans is the leader of this space, with no doubt we proved this not only in Cat 1, but as well now with Cat M1 and NB1. We have more than I will say many design win on the Cat 1 space as one on the Cat M now. Huge pipe of customers and module makers selecting our platform, engaged not only with the number of carriers, but all the carriers of theirs in Japan, in Europe more opening even some other places like China. So this is really very, very promising and we feel we are in a good position as to have the revenue growth from the Cat 1 business, support to the Cat 1 business happening in 2017 and accelerating in 2018. Thanks to the business coming from M1 and NB1 category. So with this, I would like to thank you all for listening. And I will turn now the call for question. Operator.

[Operator:]

[Operator Instructions] And our first question is from line of Quinn Bolton with Needham & Company.

[Quinn Bolton:]

Hi, Georges thank you and congratulations on the nice results. And Georges, just wanted to ask, it sounds like a number of your competitors you said are rebreeding Cat 3 devices and so they are not optimized. Can you talk to us a little bit about are they coming in them with the higher price, because of the larger dye size or are they trying to match say Sequans pricing, but therefore must be taking a much lower margin. Just talk to us a little bit about the pricing dynamics which your competitors not having optimized solutions?

[Georges Karam:]

Yes, hi, Quinn. I mean always when we think about the solution and with this solution not to think about the chip itself. But there is a total solution obviously, if you have an architecture bill to deliver given [Indiscernible] on the chip, you cannot change this by putting software inside the chip. So you are still holding all the I would say the cost material of the other components. So if I look to the situation today, obviously the competitors are trying to price the chip very close to all our chipset pricing otherwise it will not be competitive and they are doing this with to the expense of their gross margin or maybe leveraging their buying power or whatever they have there. But it doesn’t power because when you look to the total solution, they will end by being more expensive, far more expensive then a solution using Sequans technology. So to some extent this is even better for us, because net-net we don’t have real pressure on the pricing of our chip, because our chip is very optimized and we are pricing this as we should. And the other guys has to fight with us on the same price, but from the point of view of the customers when they end with a final solution the solution is much more expensive so this is what is happening.

[Quinn Bolton:]

And you said that's it looks like AT&T had enough and out earlier this month about their Cat M1 trial network and I think they named a couple of your competitors Qualcomm and [indiscernible] suppliers into that initial trial. Your script said that you are well engaged with AT&T and just if you can sort of give a little bit more background on that trial, is that a large trial or do you think you will have opportunity to participate in that trial ahead of the commercial launch of AT&Ts network next year?

[Georges Karam:]

Yes, I mean on a Sequans there is a lot of positioning in the market happening. All that I can say that the naming that was there I would say competitive solution there I'll give my view on this which is using existing platform with software and this is not ideal versus what we have. But on top of this, as I reconfirm that our engagement with AT&T is moving very well as well and I believe we will be part of that could go for AT&T as well. I don’t want to see more, just everything is - some of the stuff is under R&D, but obviously I'm not having much, but our first move was with Verizon, because there is some timing and some relationship playing there. But it doesn’t mean that we are not moving with the other guys and today there are carrier that would like to move with whatever solution available and obviously if you have solutions like Sequans solution quite optimized, you cannot be ignored from those kind of pilot test.

[Quinn Bolton:]

And just one last one for George and one for Deborah. George you sort of in the script you talked about the home router, portable router business approaching 10 million of revenue by Q4 2017. And I think you gave a similar metric for the IoT business, just as we look forward in thinking about our models out into next year, it sounds like you are sort of targeting around the $20 million run rate exiting 2017. Just wondering if there is any other revenue stream that weren’t included in either the 10 million for emerging markets or home portable router and 10 million for IoT or is 20 million kind of the rate target to be thinking about is as we look to 2017?

[Georges Karam:]

I mean obviously, just so to be short then the answer of how I positioned is, I consider that all mobile router will be always higher than IoT next year, because as we said we have something in the good shape today and growing and the other one is really emerging. So we will be exceeding 10 with home mobile router and we are approaching the 10 on the IoT. But obviously in this we didn’t include what I would call it other revenue or non-product revenue which is some [indiscernible] and some licensing as you know that we have always kind of couple of million dollar in average per quarter. Sometimes we have even a little bit more or little bit less but this is not included [indiscernible].

[Operator:]

And your next question is from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

[Michael Walkley:]

Great, thank you very much. Just building on Quinn's last question, when you look at kind of your run rate and all those things that you guys talked about it in your pipeline. How should we think about your growth investments to support all these different products and then kind of cash flow break even targets as kind of that end of Q4 2017 when you are over 20 million in revenue or you will see cash flow breakeven. Thank you.

[Georges Karam:]

Hi Mike. Obviously we have the lot of good news and we feel really the mood is very, very positive on company and we have a lot of demand and I tend to see that push us somehow to maintain to push more our OpEx. So believe we will need - as we are going in 2017 we will be increasing a little bit some hiring here and there to support the increasing number of customer and the new business we have. But obviously at the same time, we will maintain our set out investment in new platform and new next generation chips to maintain the leadership. So our way of thinking about it is that, until the first half of next year, we are going to stay more or less flat versus what we are doing today. And we will need to start to really increasing our OpEx in on the business of supporting to growth when we feel it like it’s really accelerating farther to go beyond may be where we are today. But it's not guided to be expediential, we should think about may a 10% increase in the second half in terms of OpEx. And from there in terms of breakeven point. Obviously, we need to factor in the gross margin a number here. The gross margin view, we remain confident that in terms of chips will be between 50% to 45% worst case. So this is under control and we feel good about it. And the margin we already said that this is something around 25. So the only variable is that we have some business coming from the IoT and the module element of the sale, because there you see will be mix, it will be half of it we could say coming from chip. The other half or may be less will be coming from module and overtime we will even less and less modules. Because with the Cat M1 and NB1 will be more and more chip business in my opinion. So all this can you know take us towards a 40% gross margin. So if you want to think about breakeven point on the basis of between 40% to 45% on average. Just think as a little bit above 20 before you think about the pure breakeven points.

[Michael Walkley:]

Great, that's helpful. And George juts building on the new Cat 1 module win. Can you update us on the major module suppliers just how you see their business practices, couple of module suppliers have pointed out Intel’s short coming causing them not to be able the ship their Cat 1 shift as expected earlier this year. so do you think a lot of this module suppliers are going to dual source and if so in how do you feel about your position work with somebody other modules suppliers in addition to Gemalto?

[Georges Karam:]

One, as I said on the call, I mean we had two module guys in this quarter. One is more focusing on Cat 1 first it will come may be more. And I believe he will be coming in an addition to Gemalto in the market. And another one more going with Cat M, NB1 selection. Now going in Gemalto and when you look to the existing module guys. They made their choices around the Cat 1. Many factor their choice were they didn’t want to invest R&D by getting new platform. So they find easy to stay on the existing Intel or Qualcomm platform and just on the previous software to go to this market. Which is I can’t agree is not huge may be in terms of size. Obviously, they have some issue, they were not competitive, no matter what they are trying to figure it out of their side and in front of other guys who did better choices, but I tend to believe that it's somehow too late for those guys to come with double source on the Cat 1. However, their discussion is much more open in the Cat M and NB1, because obviously it’s much bigger market and here it from the start so they can make the right decision this time and this is what I mentioned, have secured one and we have another one in the pipe as well under discussion. So things are going very well for us on this front.

[Operator:]

[Operator Instructions] And from the line of Tom Sepenzis with Northland Capital Market. Please go ahead.

[Thomas Sepenzis:]

Hey congratulations. Just curious in terms of the run rate moving forward, which we still do expecting some traditional weakness and seasonality in the March quarter or do you think that you can run this right through?

[Deborah Choate:]

Typically we are believing that the first quarter continues to be seasonally slow. So we are expecting it to be fairly flat compared to the fourth quarter.

[Thomas Sepenzis:]

Great. And then in terms of Cat M, Georges, given your competitors particularly someone like Qualcomm that has much better ability to source components at lower prices and fact that Cat M is going to be not going to rollout until the end of next year. How confident are you, that you are going to be able to continued to under price their solution when its available?

[Georges Karam:]

Yes, Tom I mean my game is not really underpriced solution, I’ll be the last guy to enter into this game, because I don’t believe it’s even useful for us or for them by the way. They are forced to previous game they are late and they are optimized solution and they are working on optimized solution for 2017 in any case. So the advantage I have is more on the other component, in other words, something that Qualcomm doesn’t send. To give you an example, this in your solution you have a big memory, because your design has been optimized to support 2G, 3G whatever platform and you need the big size memory in the chip. And your memory there comes to you $3 or $1 when my solution is costing $0.20 this is where you get the advantage. When you have a solution, which is the frontend is optimized with the Skyworks, we have a single [Indiscernible] So this is what we said and by the way its publically known, we’re talking about bill of material on the Cat M solution using Sequans that this is in $6, which is all the components you need. Not only the chip of Sequans, the chip of Sequans and all the other chips of Sequans. The other guys seems to be still higher, little bit more higher than this and even if they price the chip equal to Sequans price. So for this they have very little leverage on this, because even if they have to drop more the chip price, that’s really selling below cost at the end the rates will match the total cost of the solution of Sequans and we have leverage to reduce our chip price, so this is their only gain. At the end of the day people are looking today existing platform, we have obviously the advantage of someone like big player like Qualcomm who is there and so on. They have an existing platform, they have existing relationship, they have lot of good things and they are playing and they have a good solution. I don’t argue at all they are coming with something that works. On our side, we play advantage of not only time-to-market, but come with the right solution to the market and obviously the customer they see the advantage of going with Sequans. I don’t expect 100% market share and hopefully we’ll not get 100% market share, because maybe that attracts too much competition against us. But the market is a big and huge that even if some of the guys decide for whatever reasons to stay with other guys and the guys going with us, they know they are going with the good solution, optimized controlled and costs. And by the way, I'm not sitting and doing nothing in the mean time, you can expect that we are working for 2017 for another farther optimized solution to maintain this leadership even when the other guys will be coming with better solution as well. And we believe with the time-to-market advantage the performers, relationship they are building with the carriers and the customers. This will protect a nice market share for Sequans in the IoT space and this market share on which had a building growing our business plans today. And maybe there is much more upside if the other guys [Indiscernible] but even if we execute fairly goods on our side, we are confident that this business will be big business for the company.

[Thomas Sepenzis:]

Okay.

[Operator:]

And there are no further questions. Thank you .

[Georges Karam:]

Okay, with no more questions. Thanks very much for all your questions and listening and hope to see you on certain time in the future if not I'll give you an appointment for our next conference call in February beginning of February. Thank you very much.

[Operator:]

Ladies and gentlemen this conference will be available for replay after 10