Sequans Communications S.A.
Q3 2012 Earnings Call Transcript

Published: 26 Oct 2012

[Operator:]

Ladies and gentlemen welcome to Sequans’ Third Quarter 2012 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, today’s 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 on behalf of Sequans. This call may contain projections or other forward-looking statements regarding the 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, plans and our objectives for our 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 the risk factors 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. Good morning everybody, this is Georges speaking. I’m with Deborah Choate, our CFO and we are pleased to welcome you to our third quarter 2012 results conference call. First let me say that we are pleased to report that Q3 was another quarter of significant progress in several areas. On the financial front, we reported revenue in line with our guidance and by controlling our operating expenses. We were able to report earning results that were significantly better than our guidance. More general on the business front, we continue to gain additional traction in several LTE markets. We have added new customer design wins during this quarter. And also we strengthen our relationship with several key operators and passed important certification milestones. Last but not least, we have brought innovative new products to market even as we manage to keep tight control of our expenses. So with all these good news happening, why aren’t we guiding higher for Q4, two reason for this, the primary one is the low visibility on WiMAX HTC revenue. As said in the past, this continues to be lumpy and we don’t expect to have meaningful WiMAX shipment to HTC in Q4, while in Q3 we have a decent level of revenue coming from this front. The second reason is the slope of our LTE revenue from going a bit slower than expected. Although we expect a sequential increase in LTE revenue in Q4, we see some delays in network launch with commercial service by the BWA/Greenfield carriers. As you know, this is a segment of first focus for Sequans and there we have our customers sampling product for test and trial. And the first revenue should come from this segment. Not also that in some cases we have some minor project delay. Obviously these delays are related to our solutions. In fact this is not unusual in case of emerging technology like LTE, although I’m pleasant for our short-term outlook. As this creates quarter-to-quarter lumpiness during a technology transition as we are facing hereto from WiMAX to LTE. I want to insist here that, although it’s a challenge to manage through these delays, we are not seeing any fundamental change in the market. Our confidence is growing as we continue to see progress in key areas and we expect to ramp in LTE revenues to accelerate during the second half of 2013. To review in more detailed update, I will discuss now the various segments that we focus on. first, in the BWA/Greenfield segment, we are ready with our customers such as Genentech and Greenpacket plus we are still gaining more traction in this market with more design wins. In India, which is a big market of this segment, Reliance industries is building a Greenfield network. They are progressing well, but this is taking more time than originally predicted. Our revenues in India are coming from initial trials as they are not yet in full launch mode. Reliance is now expecting to launch commercial service in Mumbai and Delhi during the first half of 2013. Our assumption is that it will be in Q2, closer to midyear. At that point, we should see revenue from India pick up significantly. We are well positioned to address this market with design wins from data devices for data devices from top tier international manufacturer, as well as local ODM and we hope to capture a significant share of the market as it develops. Outside the India, we continue to see a number of opportunities in Brazil, Russia, Middle East, and Southeast Asia. These deployments are not moving very fast for variety of reasons, but we expect to see things pick up as we move through next year. On the dual-mode opportunity with operator planning a transition from WiMAX to LTE, and here as you know, we have a unique position. Greenpacket has been sampling our solution to few carriers including Packet One, a leading operator in Malaysia and the feedback continues to be very favorable. We see many other operators from several regions moving in that direction as well. And while things may seem to be moving slowly, the opportunities are very real and some of them can trigger significant volume to us. We believe we will begin to see more dual-mode revenues over the next couple of quarters. Now on the second segment of focus, which is China where China Mobile is moving ahead on Phase 2 trials for their TD-LTE network. the important milestone we achieved during Q3 was MIIT certification. We did this as you know with our second generation silicon. And we were among a small handful of companies to have their chips certified to participate in Phase 2 trials and we believe that through our partners, we’ll have a strong positions. China Mobile continues to indicate it will deploy 200,000 TD-LTE base station in 2013, up from 20,000s this year. Many of them will be upgrades to existing sites, obviously. Most analyst expect most of this infrastructure deployment to take place in the second half of next year, which means devices for expanded large scale trial will likely be on a similar timeline. This remains an important market for us, although unpredictable because the frequency allocation decision hasn’t been yet finalized by the Chinese government. However recently, we saw positive sign on this front, as the Chinese government has opened the full 190 megahertz of Band 41 for allocation. This opens the way for other operators than China Mobile to deploy TD-LTE in China, and maybe interpreted as the license allocation timing is not far off anymore. In any case, we should keep in mind that the China market is a long-term opportunity that requires a long-term commitment. We are actively engaged there, shipping quantity to feed the large-scale trials, demands to our local ODM, OEM partners, and we continue to work on improving and expanding our partnership position in China. On the third segment, which is the CDMA segment where we focus on. As you know this is a major segment for us and it includes the CDMA operators such as Verizon and Sprint in the U.S. and KDDI in Japan. This segment is a high priority for us and we are pleased with the progress we are making there. We are encouraged by the positive feedback on our solution, our vision and our roadmap, that’s clearly with respect to our advanced features and capability. We continue to add design wins for data devices, targeting this segment. At the same time, we have deepened our relationship with key operators. We’re making very good progress with Verizon certification process. Verizon aggressive deployment of LTE towards 100% coverage parity with the CDMA network, we will put them in a unique position and open to us many interesting opportunities with single-mode LTE solutions. We see similar trend happening as well in Korea and Japan, where LTE is being deployed aggressively. We have a shared vision with operators like Verizon, that are moving quickly in the direction of near 100% 4G coverage with a view toward more and more single mode devices. As part of this vision, we have been working for more than a year on a new line of LTE chips, specifically optimized for consumer electronics devices, such as cameras and e-readers, as well as machine-to-machine application. We refer here to the Internet of things. For competitive reasons, we have been very quite about this until now. Today, we announce the first product of this family. We believe that we can expand the LTE device market we serve and accelerate it’s growth by making available chips with the right price to performance ratio needed for consumer electronics and machine-to-machine devices. The key idea here, is to optimize the set of feature required for this market and to eliminate the ones that are needed only in high-end devices, such as tablets and portable routers. To distinguish this new product family, we are calling it StreamliteLTE and will now be referring to our primarily high performance LTE product family that we announced early this year, as StreamrichLTE. To conclude, I would like to say, that the delay we are experiencing in the LTE revenue run is a bit frustrating because it’s beyond our control, but this timing issue, that we can deal with. Overall, we are very optimistic, because as LTE becomes more widely deployed. Market dynamics are shifting in our favor. In markets where 4G coverage is expanding rapidly, interest is already building in new opportunities to leverage 4G centric devices. Thanks to our longstanding leadership in 4G, we believe that we will be able to capture a significant share of the developing LTE connected device market in addition to the high-end market for better devices and handset that we currently serve. Industry analysts estimate that up to 30% of the overall LTE units, will be non-handset devices. Solutions like the one we introduced today will accelerate the growth of a portion of this market. With the addition of the new product family, we are now able to offer fully optimized LTE solution for all device types, from the most high-end Smartphone to the simplest machine-to-machine device. And I’m sure this will materialize in business success. Now before we turn it to questions, I will turn the call over to Deborah to discuss the financials and our guidance for Q4. Deborah.

[Deborah Choate:]

Hello everyone. I would like to add some details about our Q3 financial results and the outlook. Revenues in the third quarter were inline with our guidance at $8 million for the quarter, and this is a sequential increase of 13% quarter-on-quarter and a 70% decrease compared to the third quarter of 2011. In the quarter, we shipped about 700,000 units, compared to over 400,000 units in Q2. And we had two 10% customers in Q3, HTC and as well Huawei. We realized an overall IFRS gross margin of 48%, this was below the 54.2% we reported in Q2, as well as a 53.6% gross margin in Q3 of 2011. The difference in gross margin primarily reflects changes in revenue mix, including our hybrid portion of product sales versus licenses. Product gross margin was 44.9% in the third quarter compared to 47% in the second quarter and 53.2% in the third quarter of 2011. The decreases in gross margin reflected continued low absorption of fixed costs and a less favorable product mix in Q3 2012 versus prior periods. The full benefit of the headcount reduction implemented in the second quarter was apparent in our operating expenses in the third quarter, which were $9.8 million compared to $11.8 million in Q2 and $12.2 million a year ago. Operating loss in the third quarter, which includes stock-based compensation expense were $6 million compared to operating loss of $8 million in the second quarter and an operating profit of $1.9 million in the third quarter of 2011. To facilitate comparisons, we have asked to report our results on a non-IFRS basis which excludes stock-based compensation expense from operating profit or loss. Non-IFRS operating loss was $5.2 million in Q3 2012 compared to an operating loss of $7 million in Q2 and a non-IFRS operating profit in the third quarter of 2011 of $3.1 million. Basic and diluted loss per share was $0.17 in the third quarter compared to basic and diluted loss per share of $0.24 in the second quarter and $0.09 basic and diluted earnings per share in the third quarter of 2011. Non-IFRS diluted loss per share was $0.14 in the third quarter compared to a diluted loss of $0.21 in the second quarter and diluted earnings of 8% in the third quarter of 2011. Non-IFRS results were better than our guidance as a result of our success in controlling expenses. Cash used by operations in third quarter was $3.3 million compared to $6.4 million in the second quarter. And we also used $1.3 million in CapEx for the quarter. Our cash position at September 30, 2012 was $36.4 million compared to $40.7 million at the end of Q2. Accounts receivable at September 30, 2012 decreased to $4.8 million from $7.5 million at June 30, 2012, reflecting DSOs of approximately 62 days compared to 97 days at the end of Q2. The significant improvement in DSO reflected in more even trend in invoicing over the course of the third quarter. And our inventory decreased significantly in the quarter to $8.3 million at the end of September down from $10.5 million at the end of June. Looking forward we expect revenues for the fourth quarter 2012 to be in the range of $4 million to $6 million with non-IFRS gross margin around 48%. We expect non-IFRS net loss per diluted share to range between $0.22 and $0.26 for the fourth quarter of 2012 based on approximately $34.7 million weighted average diluted shares. Our guidance for non-IFRS net loss per share excludes stock-based compensation expense, which we expect to be similar to the third quarter. As you heard we expect the ramp in our LTE revenues to accelerate mainly during the second half of 2013. We continue to be encouraged by our progress in gaining design wins and as LTE revenues accelerate, we expect much less customer concentration. We will continue to keep our expenses under tight control while sending critical development projects. And we believe we have adequate financial resources to reach cash flow breakeven. And now we’ll be happy to take your questions. Trisha?

[Operator:]

Yes. (Operator Instructions) And our first question is from the line of Quinn Bolton with Needham & Company. Please go ahead.

[Quinn Bolton:]

Hi Georges, hi Deborah. I think I have a few questions, first just wanted to look at sort of the WiMAX business obviously, it looks like you had some decent revenue from HTC in the third quarter but not expecting much in the fourth quarter. Can you just give us some sense of what the emerging markets WiMAX business is doing and how you see that business trending. I think that was a segment that you thought might be more stable than the HTC WiMAX Stream?

[Georges Karam:]

Well, I mean as you see, we have one, we reported by the way two customers for this quarter HTC and Huawei. And Huawei is one of our main customers addressing this emerging market, we have others as well. And Joe, you’re right; yes absolutely you are right in the sense that this market is stable. It’s also evolving from WiMAX 20 when I talk about the dual mode, portion of this is evolving from WiMAX 20 and we are actively engaged there. Some of them that obviously slowed down a little bit in the phase of transition, so it’s – you add some slowdown of this, but still active. and I believe it will go, it will continue next year, I would say ramping up back when the provision for WiMAX 20 is happening. So we have in Q4, we expect some WiMAX revenue to continue coming; I will say from this market but then possibly we new to this HTC portion, which is big in our revenue, this makes the lumpiness much perceivable I’ll say when we have one quarter, the quarter the following quarter lesser order but this makes the change for us.

[Quinn Bolton:]

Okay. And I guess sort of on that note with WiMAX to HTC being insignificant in the fourth quarter and in emerging WiMAX revenue probably soft as well in Q4. Is LTE revenue or will LTE revenue in the fourth quarter actually exceed WiMAX revenue?

[Georges Karam:]

Yeah. I mean this is what we said. we believe that our plan our target that LTE is ramping even slower than that we would like to see, because this ramp is not compositing for the lumpiness of WiMAX what we are seeing from HTC, but definitely, we see the percentage and absolute number growing in Q4 versus Q3 and Q2 whatever.

[Quinn Bolton:]

Just to clarify LTE revenue, you’d expect it to be greater than WiMAX revenue in the fourth quarter?

[Georges Karam:]

Yes.

[Quinn Bolton:]

Okay, great. Second question just wanted to ask on the Verizon certification, I believe on the last quarterly conference call, you have thought that you might be able to keep that certification of Verizon either late in the third quarter or early in the fourth quarter. can you give us an update on that certification and when you expect to receive it?

[Georges Karam:]

Absolutely, first of all, the certification inside Verizon, it’s a process where we have various steps. So we completed very important step now, which is we call it step two in this, which is essentially, major step before you are ready and we are in the last step of certification. So we are in the process. we have and we should exit from this in Q4. So we are not able to announce it and we didn’t finish out in Q3, we have sometimes dependent on the lab availability and all this process. So it’s not related to our readiness, but this should go out in Q4 definitely.

[Quinn Bolton:]

Okay, great. And then just my last question, George, you went through sort of the three targeted markets for LTE sort of the Greenfield, BWA operators, China Mobile and then lastly the CDMA operators. Can you sort of give us a rank order of which of those three, do you think will be the largest, which will be the smallest in 2013? it sounds like India may be at the top of the list and trying to figure out whether a Verizon or the CDMA operator is a bigger opportunity in 2013 and China Mobile, but just trying to get some relative ranking of those various opportunities in 2013?

[Georges Karam:]

I mean the ranking I believe when you’re asking about our portion there not the size of the market itself, because China Mobile obviously is a huge. but definitely, the market share we expect there will be less than other places. So, if I’m just talking here about our ability to achieve our timings in those markets and the size of our share in those markets. So I intend to say, today BWA will be the first market that will materialize for us, because we are ready and product is ready, and we open up on the energy there specifically India and as this will be ramping we’ll be going there. The CDMA, this is a market that we see there is more the second half next year materializing, because it takes time to finish all the certification and this is a market that we start engaging with just only in the last nine months, I would say at the end of the last year, and China Mobile, because next year, it will be only extended trial that is there will be some different volume coming from there, because personally I believe to test 200,000 base station you need some devices and hopefully we’ll get some market share participating to this test. But relatively for us it will be the third portion will be China Mobile next year and between BWA and CDMA I don’t know it’s almost at parity I will say, because CDMA will be bigger, but it will materialize more at the second half of the year. BWA is smaller, but we can realize revenue even in the first half of the year. So BWA is a full year business, while CDMA we see it as a half year business in 2013.

[Quinn Bolton:]

Great. Thank you very much.

[Georges Karam:]

Thanks, Quinn.

[Operator:]

Your next question is from the line of Jay Srivatsa with Chardan. Please go ahead.

[Jay Srivatsa:]

Yeah, thanks for taking my question. Georges I’m sure you saw the announcement of SoftBank investing in Sprint. SoftBank is typically played in the TTD space versus Sprint you just talked about FDD. What is it due to your relationship with Sprint and how do you hope to leverage your expertise with this investment by SoftBank?

[Georges Karam:]

Thanks Jay for the question. Well, I mean it’s absolutely important. I mean many things happen around the TD-LTE echo system by the way. On one side I mentioned this in my brief talk here, talking about the China Mobile also decided to open the full band 190 megahertz, this band is exactly what’s Clearwire on in the U.S. In other words if you look to the spectrum available in the world today, what Clearwire has it’s exactly what the China government, not China Mobile. The China government is opening and very likely maybe another player other than China Mobile will get a portion of this to play. And now as SoftBank, which just to be as well has a TD-LTE player, even if we self buying they have, they are part of the 3GPP, UMTS, 3G role. They have TD-LTE spectrum that they’re launching in Japan and the fact that they are coming to this game with the Sprint behind its Clearwire, this creates really a much larger ecosystem in the TD-LTE, which as I see the positive sign for us. Specifically as well you know the fact that we are collaborating with the Clearwire and the Sprint for all this TD-LTE and FDD handover how to handle the two bandwidths together. We have engagement as well with Softbank even we’re not mentioning this, but we have some activity going on. We have good relationship with the SoftBank as well. So we see all this positive obviously in the near-term it’s very hard to see any impact you know, but down the road we see it positive to the industry in general and to Sequans in particular as this address reinforce the TD-LTE ecosystem, where we are quite strong and many of the players are not able to address this today.

[Jay Srivatsa:]

All right, in terms of the new product that you announced this morning. What’s the impetus of that? Do you expect some of these devices will ramp up sooner than some of your revenue contribution from the handset and tablet side? Is that the rational, can you kind of set the stage for what was the thinking behind introduction of these products?

[Georges Karam:]

Yeah, I mean the thinking is obviously you see that point that Sequans our strong point is the 4G, this is where we are and I believe we are the best with our technology here in comparison to all what we see in the market. The challenge we have and you know it which is that we lag the 2G, 3G, the legacy component and in some of the devices where you need to combine all this, it position us somehow in a weak position versus the competition able to offer a comprehensive solution with Legacy and 4G. Obviously on our side, what we were trying to do as a team is really to look to the segment where the 4G alone can play primary role and give us enough market there, where we can play and grow our business and grow this company. In this segment not neglecting I will say the multi-mode because we are playing in multi-mode specifically in China Mobile and so on with partners, but rely at least on some segment where only Sequans alone can execute and deliver there and win and a success of our business that depends on our technology only. And part of those segment obviously when you talk about BWA and other segment this is one of them, but we realize that in the developing country and here we are not talking about emerging country. We are talking really about U.S., Europe and so on. We realizing that the consumer electronic there is a tendency today, if you look to the carriers for example, they are more and more opening, what they are call shared data plan. Shared data plan in other words, if you are the subscriber, you have your Smartphone subscription, but if you pay $5 or $10 whatever the carrier decide to do more they allow you to use the same plan you have it for data on two more devices, three other devices, and this could be your camera, this could be your gaming console, this could be anything. What's the challenge here is that you want to introduce LTE technology to those devices that should not cost much, so you need really to optimize the cost because there is a barrier if you are below this barrier you can enable this market to happen. Discussing with carriers and so on we had understanding, we understood a little bit what they are looking for, the enabler for this market to make it happen and from there we started working on it a little bit, we didn't talk about it, but we are working on this as we said for one year already. To understand this and how to optimize the solution where the price target could be, the price could be low and deliver really what you need in terms of performance anything extra that you don't need take it out from the solution. And here we introduce a new product family not only by the way a chip, it’s a family of product because we believe will deliver in the future a new generation of this product and introduce the first chip this year to go and test the market with it and so on. So this is very serious, we believe we should see a ramp up from this. We are seeing positive reaction to this product, so with talking with carriers, consumer devices M-to-M guys that they have similar challenges also in the M-to-M. And we expect to see revenue from this in 2013 obviously all this introducing the product now and so on, we don't see it in the first half, we see it more in the second half, but this is something that we rely on next year definitely.

[Jay Srivatsa:]

All right. In the past you have talked about looking at partnerships and the like to get 2G and 3G expertise, can you give us some update on what things are related to that?

[Georges Karam:]

We successfully did this by the way in China without I don't call it a partnership at the silicon level, but through our local Chinese partner nationally for example, the solution we are delivering we have three, four products going in China mobile

[Jay Srivatsa:]

All right. Last question for Deborah in terms of operating expense clearly, if cut it down quite a bit. Is this the run rate we should be looking at going forward or are you expecting further reductions in Q4 and beyond?

[Deborah Choate:]

We are not expecting to fundamentally change in the near-term. The run rate for the third quarter was perhaps a little bit low because we had a lot of vacation period. But we definitely continued to see this as a baseline and in Q4, we’ve got a few product development expenses that may come in. So, we can see, could see Q4 coming up a little bit, but I think this is definitely the target baseline going forward with some variability depending on what kind of one-off expenses relate to products that might fall on the quarter?

[Jay Srivatsa:]

Thank you, good luck

[Operator:]

(Operator Instructions) We will open the line of Daniel with the Daniel Marquardt with Baird. Please go ahead.

[Daniel K. Marquardt:]

Hi, this is Daniel on behalf of Tristan Gerra. Could you give us an idea of what you mix LTE shipments to WiMAX Shipments was in the quarter?

[Deborah Choate:]

In the third quarter, the shipments were really dominated by WiMAX in particular to HTC and LTE was probably closer to about 10% of our revenues in the quarter.

[Daniel K. Marquardt:]

Okay and then on when, so I mean if I understand correctly, expect kind of your significantly Greenfield ramp to be in India, and how are you guys sizing that market in terms of not only the size, but also the share you would expect to get? May should we be thinking this as like a 100,000 units less more just kind of curious about the opportunity that you guys see?

[Georges Karam:]

And it will be relatively bigger than this, I mean definitely it’s not 100,000 since you have many, many small guys to give you an idea in the BWA segment in general, when I was referring to carriers across the world. All of them they are around in 100k units. You can say 100k units, 200k units carrier like this starting, but in India is much bigger, because obviously looking to the size of the country and Reliance deployment there, and but honestly we are well positioned we have tier 1 international guys with us with variety of devices. We have as well local Indian guys developing product with us to address India as well to address the lands. So I believe we are building everything there to get decent market share from last we have good relationship with the carrier as well. Its oldest to say we believe, we should have decent market share now obviously in orders that should we say that how much will be successful we will make 20% or 30%, its – I don’t want to give you and its depends on what will happen, but we are in a very well position you know that’s all I can say there. And the market should be bigger than we talk I believe India in general I was expecting more than kind of $1 million, $1.5 million unit in a year driving.

[Daniel K. Marquardt:]

All right. Thank you. That’s it.

[Operator:]

And at this time there are no other questions in queue, please continue.

[Georges Karam:]

Okay. So if there is no question thank you very much guys for your presence and for the questions obviously. Thanks very much and give you hope to see on the next conference call in a quarter from now. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.