Sequans Communications S.A.
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Sequans Second Quarter 2013 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will a question-and-answer session with instructions 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 on behalf of Sequans. This call may contain projections or other forward-looking statements regarding future events or 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 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 risks and uncertainties, and subject to change at any time. We operate in a very competitive and highly 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. And, please go ahead, sir.

[Georges Karam:]

Thank you, Dave. Good morning ladies and gentlemen. This is Georges speaking. I’m with Deborah Choate, our Chief Financial Officer. And we are pleased to welcome you to our second quarter 2013 results conference call. Our results in the second quarter were consistent with our guidance about in the middle of the range, although total revenue increased only slightly compared to the first quarter. Products revenue increased significantly. We believe the first quarter represented the low-point for product revenue and we have enough visibility to expect sequential increases for the next several quarters, as our LTE revenue continues to ramp. Let me give you now some business update and I will do this as usual following the four segments we are focusing on. First, let's start with the emerging operators. I'm pleased to here to let you know that we are seeing the emerging operators moving forward, and we are beginning to see very nice orders from our early LTE designs win. After a frustrating period during which our customer had product ready for the market, but operators were hesitating with the launch of their LTE networks. Now that things are moving, we are in position to capitalize on our strengths, such as the maturity of our solution, and certain unique features tailor to this market. For example, support of the 3.5 gigahertz frequency and the dual-mode WiMAX/LTE platform to support the smooth transition of the 4G technology. And as you know, we are really unique providing those kinds of features. We also enjoy an excellent longstanding relationship with several OEMs serving this market, and we expect to have a significant share of the available business. Similarly, it appears that Reliance in India is moving ahead with launch of commercial service in certain cities towards year-end. As we've mentioned in the past, we have six customers addressing Reliance, at least two seems particularly well-positioned. And we expect volume to begin to pickup in the preparation for the commercial launch. Meanwhile, we are making excellent progress with testing and trail of LTE robust technology specifically, the eMBMS feature that stands for evolve multimedia broadcast multicast, with key infrastructure vendors in India. With emerging operators moving past the trial stage, we have a base of LTE business developing. On top of the revenue from emerging operators, we expect to be ramping revenue from the recent design wins related to more established operator, specifically in the U.S., Japan, and Korea. Turning to these operator, on our last conference call, we mentioned four recent design wins, two of them in the U.S. and here on those two one of them is with an American OEM for a specialized handset for a public safety application, which we expect to contribute to results next year. We can now elaborate to the other U.S. design win and this is in reality related to our Easy Link LTE family of modules, which we introduced in the second quarter. Based on our SQN5120 chip, the module integrates a complete RF front-end and key interfaces in a single compact solution, for application requiring embedded LTE connectivity. We expect to begin shipping for this design win in Q4. Our primary business is filled chips but we decided to supply the models to accelerate customer's time to market and reduce their investment risk. The model will be pre-certified at key operators, which will speed the approval process for the front-end device. We expect the lower cost; reduced risk, and faster approval will accelerate adoption of LTE only solutions and help increase our market share. We do not intend to compete with models OEM and expect that customers will either go directly to a model OEM or integrate our chips themselves, once volume develops and customer action becomes increasingly important. Recently, we also noticed strong interest in embedded LTE-only solutions from several large well known manufactures of laptops, ultrabooks and tablet for the U.S. market. These discussions are progressing and we're moving closer to several design wins. Thanks in part to our decision to introduce our own LTE model. The availability of pre-certified model and its strong advantage in addressing the LTE-only requirement of Verizon. Supplying models to these more key customers would be incremental to the two U.S. design wins we've spoken about. While we don't have the business in hand, we have excellent potential for sharply increasing our revenue in a short period of time by having our solution embedded in some very popular devices. These opportunities are causing us to view the U.S. market as the most promising source of outside potential in the near-term. After the U.S., let me turn it to the other region, we consider, which is Japan and Korea, and here South Korea as you know is the second region where LTE coverage has nearly reached clarity with 3G in a network. Last week, we issued a press release identification high motion as the ODM selecting us in the first quarter for a machine-to-machine project with one of the three main operators in South Korea. We mentioned this design win on the last call, noting that we expect initial revenue in the fourth quarter growing in 2014. We are now pursuing additional projects with high motion and certain OEMs for other Korean operator. We continue to be very active in Japan as well. We have executed very well on the dual-mode WiMax/LTE project with a longstanding customer we mentioned on the last call, and we expect the revenue contribution to begin in the third quarter and increase in the fourth quarter. In the second quarter as well, we completed some important field tests of our interference rejection technology with Softbank. In the trial, we were compared to devices from other competitors and showed a fourfold gain in throughput in an environment with heavy interference. We believe this impressive performance moves us closer to being awarded business since interference is a major challenge for this particular operation. Turning now to China, here we were disappointed in the outcome of the second China Mobile headquarter bid, even though the volume are still relatively small, because the products using our chip and submitted by our OEM partners were not selected. However it's important to understand that the product they submitted were the same ones submitted in the first bid, which have been already approved by China Mobile after the first bid. We are working with our partners on new product version to better position ourself in the next bid. Meanwhile, the fact that our existing version are already approved by China Mobile is significant because they can be purchased directly by China Mobile regional operations after commercial service begins. So to recap, the development in this last quarter, we have seen improving momentum from emerging carriers and the pipeline of immediate opportunity in the U.S. and elsewhere is continuing to expand. So much, so that by mid-2013, we have already identified various specific opportunities around the world, totaling more than 7 million potential unit for us in 2014. We see this roughly split 40/60 between emerging carriers and China Mobile on one hand and established carrier in the U.S, Japan, and South Korea on the other hand. And we expect the pipeline to continue to increase. Here let me discuss the fact that these are specific design wins we are going after. With assigned resources, it's not some top down numbers exercise. We have very specific targets to pursue over the coming quarters, and our technology leadership in tailored LTE-only solution will be an important advantage for us. Let me now turn the call to Deborah to take you through the financial discussion.

[Deborah Choate:]

Hello, everyone. I'd like to add some details about our Q2 financial results and the financial outlook. Revenues in the second quarter were $2.3 million, which was flat with the first quarter, and a 67% decrease compared to the second quarter of 2012. We shipped about 180,000 units compared to about 100,000 units in the first quarter. In the second quarter, we had four customers representing more than 10% of our revenues, which starts ranging from 11% to 33%. The largest customer was Huawei, who is our longstanding customer primarily for WiMAX products. We realized an overall IFRS gross margin of 41.1%. This was better than the 31.3% we reported in the first quarter, reflecting better absorption of fixed cost from higher product revenues compared with Q1, but below the 54.2% gross margin for the second quarter of 2012, primarily due to the impact of fixed costs on a lower revenue base this quarter compared to a year ago. Our variable cost margin continues to be close to 50%. Operating expenses were $10.2 million in the second quarter roughly the same as Q1, which included a provision for doubtful accounts receivable of $770,000. Operating expenses in the second quarter of 2012 were $11.8 million. Our second quarter operating loss, which includes stock-based compensation expense was $9.2 million compared to an operating loss of $9.3 million in the first quarter, and $8 million in the second quarter of 2012. Net loss was $9.1 million in the second quarter compared to a net loss of $9.4 million in the first quarter, and a net loss of $8.3 million in the second quarter of last year. Basic and diluted loss per share was $0.20 in the second quarter compared to basic and diluted loss per share of $0.24 in the first quarter as well as in the second quarter of 2012. To facilitate comparisons, we have also reported our results on a non-IFRS basis, which excludes stock compensation expense from net profit or loss. Non-IFRS net loss was $8.6 million in the second quarter of 2013, compared to a net loss of $8.8 million in Q1, and $7.4 million in the second quarter of 2012. Non-IFRS basic and diluted loss per share was $0.19 in the second quarter, compared to $0.23 in the first quarter, and $0.21 in the second quarter of 2012. Cash used by operations in the second quarter was $8.1 million compared to $6.4 million in the first quarter. The difference was due to the timing of customer collections and supplier payments. We also used $600,000 for CapEx investments. Our cash position at June 30th, 2013, was $24.9 million compared to $34 million at the end of Q1. Accounts receivable at June 30th, 2013, were $4.4 million roughly the same as at the end of Q1 reflecting DSOs of approximately 120 days compared to a 105 days at the end of Q1. The DSO level continues to reflect the combination of slow paying customers with a concentration of revenues at the end of the quarter. Inventory decreased slightly in the quarter to $7.9 million at the end of June from $8.1 million at the end of March. Now, looking forward, we expect revenues for the third quarter 2013 to be in the range of $3.5 million to $4.5 million with non-IFRS gross margin of at least 30%. We expect non-IFRS net loss per diluted share to range between $0.18 and $0.20 for the third quarter based on approximately 44.7 million weighted average diluted shares. Our guidance for non-IFRS net loss per share excludes stock-based compensation expense, which we expect to be around $400,000 in Q3. It is important to note that gross margin is extremely sensitive to the mix of revenues as well as the revenue level. The revenue category we call other is the highest margin because it typically includes the license and maintenance revenue, which is nearly 100% gross margin. Then within the product category chip gross margin is going to be higher than module gross margin and it's very difficult to actually forecast the revenue and the mix since the other category tends to be lumpy. From a business point of view, it's very encouraging to see product revenues growing into repeat business and we continue to expect the ramp in our LTE revenues to accelerate during the fourth quarter of 2013, which will significantly lower our loss. Now, I will turn the call back to Georges.

[Georges Karam:]

So, just to conclude our presentation here and before turn it to question, let me highlight, I mean, essentially three points what I wanted the rule to take it from here. The first good news I have is that we are seeing after really waiting for longtime, the emerging carrier business for which we were ready even since end of the last year with real products from our customer finally moving and moving seriously with all others with many, many emerging carrier across the world. And this is really a good news for us. And the second one, all what I announced in the previous call regarding the design wins we got in the U.S., Japan, and Korea, are really moving in the right direction in terms of the institutional point of view with our customers and operators, and we believe that those deliver revenue as expected in the third quarter and in the fourth quarter of this year. And more important, there is really and this is really, the way the forward-looking I will say for 2014 that we are seeing lot of design win activities with Tier-1 OEM oldest for single mode LTE devices and targeting established carrier either in the U.S., Japan, or other places, and this gives us more and more confidence in our ability to keep ramping up our revenue in 2014. And specifically, as I said previously, we are working on a clear identified opportunity around or totaling more than 7 million units for us in 2014. So this is really my conclusion here. I thank you all for listening to us. And I will turn it now to question. Operator?

[Operator:]

Certainly. (Operator Instructions) First, we will go to the line of Quinn Bolton with Needham. Go ahead please.

[Quinn Bolton:]

Congratulations on the continued design progress. George just wanted to take a little bit more detail on the U.S. design win. As you talked about the Easy Link module, it sounds like you instead of just supplying the chip you're going to be supplying a complete module that includes all of the transceiver and RF functionality. And just kind of wondering how does that change your revenue and gross margin relative to selling chips only?

[Georges Karam:]

Hi, Quinn. This is a good point. Well, honestly, obviously when you're selling a module you don't do, I'll say you don't target the 50%, the gross margin that typically a chip business does. And you're more I'll say, if you consider a model in itself more in the region of 30% instead of 50% in terms of typical number. But the way we see it, but also, we don't see this as major change in our business, because we believe that this business is going, it's just kind of cheating the market, so we're not keeping this design exclusive. It's somehow addressing, accelerating the market and making things, pre-certified models, so allowing the people to go quickly to this LET only business. Launch a product to market, many product to market with very minimum investment. And we expect, soon may be the initial order will go to us very likely as soon as the order are significant, we'll have pressure on the pricing for those modules and we will be orienting those customers to auction whether to design it themselves by giving them all the files so they can produce it somehow, not to the redo the design but kind of take ownership of the design and produce it. And the other option, which is quite often will happen, you can imagine those product -- that those models are manufactured by Taiwanese vendor or Chinese vendor. And we own the design, so we can just only reorient our customer to those ODM, so they can purchase directly from them the models and we'll stay in a position where we're selling chip. So in a brief, we don't expect really long-term change in our business and we still consider our business more chip business. We could have may be some exception quarter-to-quarter in the initial phase of the market. But in the long run, I will say medium, medium term, we believe all this will be reoriented and customer will go straight to the ODM to purchase those unit without affecting our revenue nor our margin.

[Quinn Bolton:]

And I guess obviously, if you're selling a complete module you're probably selling at a higher total ASP than what you sell it the chip only. So perhaps, just if can you make any comments on a gross profit basis that if you're selling the module at 30%, are you collecting at least the same gross profit dollar that you would, if you would sell the chip only?

[Georges Karam:]

Yeah, definitely yes. I mean Quinn and we cannot see it otherwise I believe, but even we do a little bit more margin on the extra added value I will say of the models. But obviously, we're not able to maintain, take the same margin on this extra component as we have it on our own chip.

[Quinn Bolton:]

And second question is, you mentioned the opportunities that you're pursuing for 2014, that collectively totaled 7 million unit opportunity. Are those five designs exclusive of the four designs that you had announced last quarter or are some of the designs announced last quarter included in that 7 million units?

[Georges Karam:]

No, the -- obviously, the design we have in hand it's more than identified opportunities and opportunities we have within hand and we have an idea how much revenue we can collect from it, so they are included. And obviously, on top of this we have other opportunity, we call them any design in phase currently, quite engaged, and identified that we believe we can add them to make our number.

[Quinn Bolton:]

Can you give us some sense, how much of the 7 million units are already sort of backed by design wins versus how many of that 7 are certainly in the design in phase?

[Georges Karam:]

Interesting question. I will surely comment on this. But obviously, some of it is dead.

[Quinn Bolton:]

And then, just lastly, it sounds like there are number of opportunities that you are pursuing with the major OEMs of laptops, cameras, ultrabooks for embedded modules. Is that design work taking the Easy Link Module or would that be more of a direct chip sale and you're working with a module partner for the LTE-only modules?

[Georges Karam:]

Well, it depends on the device itself. For example, the easier example, for everything which is notebook, PC and so on we have very nice modules which essentially is plug in, the guys that can get our models and plug it in on the motherboard and get it ready. So, in the earlier phase customer, they could have the intention, okay; give me the first 50k, 100k unit like this. But obviously I think it's sort of comprising at the same time and just push it so they can buy directly. When you go to business which is more I tend to say tablet or when you go to more M2M and so on those guys they tend to keep the model form factor because this is more convenient looking through the volume behind so the volume is kind of medium range. But once you go, for example, to tablet you could have people going at the beginning thinking the model was just only for time to market reason but obviously the volume justify enough to plug in this model on the motherboard, to take it and put it on the motherboard and save may be $2 extra bomb related to the fact that you have two packaging housing. So, they can take the chip directly in this case. So, essentially, it's a mix the situation depending on the product itself and in the long run and in the early phase you could have some people that logically they should go with the chip but they may decide to go with the model form factor just because they accelerate time to market and also certification process and any else, I would say.

[Deborah Choate:]

Which is the whole objective of the module?

[Georges Karam:]

Yeah.

[Operator:]

Thank you very much. Next we will hear from the line of Nick Clare with Robert Baird. Go ahead please.

[Nick Clare:]

Hey, guys, can you hear me okay?

[Georges Karam:]

Yeah, sure.

[Deborah Choate:]

Yeah.

[Nick Clare:]

So, I guess, first, back to the 7 million unit opportunity in 2014, if you were to look at that can you weigh that at all based on, I mean, even as high level of geography of which opportunity is the most significant in terms of kind of achieving that potential?

[Georges Karam:]

First of all, let me say, it's not the pie what I'm giving, when I saying 7 million unit, it's not the pie that on which can we work. This is something that we see really addressable. Obviously, it doesn't mean that we don't have -- we'll make it all, we'll make a portion of it. We think by region what I mentioned, I said, I believe U.S. and Japan specifically, this will be more than half; it will be around 60%. And then the emerging markets, which is all the emerging carrier, India plus and China Mobile, this is around 40% for the next year obvious.

[Nick Clare:]

And then did I hear you correctly when you said all four of the -- all the design wins that you talked about in the 1Q call are going to be contributing sales in 3Q and then and 4Q, and is it fair to assume a pretty significant pickup in kind of shipments or revenue in the fourth quarter versus the third quarter?

[Georges Karam:]

Well, I cannot comment on this in terms we -- or I would not like really to give a number on this projection for Q4 today. But obviously we are and because you know part of it will be starting in Q3 moving to Q4 and some will be starting in Q4. So, Q4 to some extent could have some new design just entering and it's very, very hard to get an idea about the amount of the first order that you will be collecting in Q4. We see more rounding off more the following quarter to stay kind of linear growth instead of exponential as soon as Q4.

[Nick Clare:]

And then for the kind of the notebook opportunity, it's no business in there, but you mentioned it could be sharp revenue upside if it exists there. Would that be something that you could potentially see if you were to win it in first half of 2014, second half of 2014 or is it even beyond that for the real opportunity what's in kind of that notebook, ultrabook market?

[Georges Karam:]

No, but honestly we're hoping it is the first half of 2014.

[Operator:]

Thank you. And next we will hear from the line of Scott Searle with Diker Management. Go ahead please.

[Scott Searle:]

Just a follow-up on a couple of other questions, may be first off from a China perspective, George, if you could comment on the timing of the Phase 3 trials. Phase 2 had lagged a little bit, it finally got done in July, but it sounds like Phase 3 was kind of bolt forward, may be your expectations for the timing of that and overall awarding of licenses for TDT in China? Are you expecting that in the third quarter or at least by the end of this year?

[Georges Karam:]

Well, in terms of licensing, Scott, we still see it -- I mean, whether the license is officially announced or not, it's kind of moving with pre if you want unofficial move. Obviously, there is some delay here and there that in terms of deployment and then what matters there is really to track what they are doing on the 200,000 base station. This shift a little bit by granting, by awarding the business to any of the vendor and deploy it. But we still expecting a kind of commercial launch to be at the end of this year or beginning, at the end of this year, latest may be first quarter next year. So they are moving on their side, I mean that's how we see it.

[Scott Searle:]

And the fees to outcome or words, has no impact on your ability to sell into the marketplace?

[Georges Karam:]

I mean it's just let me clarify one thing. I mean all those, what we call them bid one, bid two; there is another bid three coming. It's just only a headquarter bid where essentially they select, they say I'm going 100k units and they buy 100k units. And once your device has been certified because you go through a certification process and so on, then you go and sell it to the region. I mean the OEM will go and sell it to the region to make more business. So obviously we have three products that have been part of the bid one. They are certified and we ship to the headquarter the quantity and we're now engaging or our partner, engaging with the region to sell those in. What happened absolutely for us in bid two and let me little bit clarify in the position there. What came for us on the bid two that the bid two came with a big chunk of the request there that's come from (inaudible) unit coming from one device, which is almost 75% of this was part of a router. And to be honest with you, with our partner the product they have on the part of a router was not really the best product from construction, they build. It has nothing related to our chip, to the LTE portion, but when they put around it, they had something which is would be very hard to compete, nothing integrated. So we initiated work with our partner to build something new, much more optimize, but this was not ready for bid two. So when they used the bid two, essentially our partner just only bid for 25% of the bid. So we started by losing 75% from the zero chunk, and because they were focusing on all this work and so on they didn't put energy by doing another flavor of those products. So they submitted exactly the same product and they lost the interest of being reselected because they are selected, so smaller quantity to give them in the headquarter. We were hoping honestly to get maybe 10k or 15k units from this bid. So not big business, but still hoping to get this and we were really disappointed by hearing that they didn't get selected. That’s what happens on bid two. But obviously moving forward it's another step and this will not, has nothing to do with our ability to go for the commercial launch with the products and so on.

[Scott Searle:]

And just a follow-up on the 7 million unit commentary, it sounds like a lot of that you've got the actual design win for and then it's up to your partners to actually deliver the units. But its sounds like there is another grouping of design in phase, you're quite engaged with those potential OEM customers. So is there a number that we can think about beyond the 7 million in terms of that actual pipeline, if you look at 2014 of other potential engagements. Is it 2x that number. Is it 50% higher than that 7 million. How should we be thinking about the other opportunities that are percolating? And may be as part of that your commentary on the notebook side as well, are you building that into that 7 million figure?

[Georges Karam:]

Yeah, I mean let me, obviously it's called the biggest question on all, by the way all the challenge of the company moving forward in LTE, is coming from one challenge which is I'm sure that all of you noted this, which is we're playing in a single mode LTE only. Hence we need to be sure that the carrier, they finish their network, and only once when they finish there, the part of that would, expect for the emerging carrier, which is they don't have this problem at all. For all those established carrier, if their network is not ready, they will not take the risk on going with any device as single mode only. As soon as they have their network ready, they start turning opportunity for single mode because it has all that identities of the cost reason and all this stuff. So in other words, when you look forward for 2014, obviously the right step about is that already in 2013 we see opportunity like this happening in the U.S. and Japan, specifically Verizon, but as well I mentioned the operator in Japan as well. And we hope this, that obviously those carrier will be adding more and more opportunity, because once their network is ready they are open for any device, they have all kind of devices. They need them to be connected and it's opening really. This is what's happening for us, a kind of dealing with a lot of people, all of them, they are interested on plugging in an LTE Solution and take it to market and sell it on Verizon or sell it in Japan. So this is where the opportunity we're referring to. But obviously there is an upside on this that could happen when other operator will be catching up that we're not really today defining as what I would call it opportunity on which we know, we talk about it, and we are working on it doing. So there is that entry if you look for the potential available market for single mode LTE, is much bigger than this number if we consider it that next year AT&T will be ready then they start opening those opportunity and sell. But for us, we're not counting on this. I mean we are really talking about the existing carrier, if you want me to say the existing carrier with whom we have engagement, following all the description when I go on our update, my update, the five segments and so on. With those carrier we have opportunity with OEM addressing those carrier and here we count, we make the math and we come with something around 7 million unit as a nice target addressed next year. And obviously, not the 7 million unit are in hand, I don't want you to be confused with this, obviously a portion of this 7 million unit is a design win that we have it this year in hand and hopefully this will go smooth next year. But we still have to work in the coming, in 2013, I would say in the third quarter and fourth quarter to collect more design wins, to capture as much as possible for unit from those 7 million unit and win that. And obviously, an Easy Link Family was kind of a nice strategy from our side, because it's shortening time to market. This is the family of, we have announced one models and we will have, it's a family, so we will have other models coming in and announce to market. It will be pre-certified, reduced time to market to our customers, and this is was really, I believe it's really paying back for us to help initiating the single modality business now and evolving in 2014 next year.

[Scott Searle:]

And lastly, if I could, just on the other operator front, has there been any progress on Sprint now that we're starting to move beyond, who their ultimate tutor is and they have the Clearwire spectrum that they kind of come back into the dual mode camp a little bit? And also, just may be quickly on the competitive landscape. It's interesting yesterday that to see Broadcom talking about problems and/or push out on the LTE front from the first half next year, second half next year, is that creating any sort of incremental opportunity for you guys or you guys were just kind of operating irrespective of what's going on there? Thanks.

[Georges Karam:]

Well, on the first question, regarding Sprint obviously, I see this very positive for us and also I don't know if you commented, I read some articles, obviously, now for them see now that Verizon decided obviously to switch off at some time the CDMA network then it is reducing the size of the CDMA potential. Then Sprint has to figure out their strategy as well. And all this, very hopefully, will see more and more opportunity in the U.S. across many carriers all interested in single modality and this creates more potential for Sequans I mean, this is absolutely a positive. It's too early today to say okay we have something because we can imagine all this organization, all this change. We are really at the beginning of catching up after the new all good challenge that they have today. So I don't have any updates on this. I see just only positive and hopefully this will give us potential next year and the following 2015. Regarding the competitive landscape, definitely Sequans is today still, I mean you see many people struggling, you mentioned one name, but you saw other guys shutting down their business as well in Japan, Renaissance and so on. So this needs the room more and more and more for us, more time for us. Obviously, we should not sleep in this time we need to win designs and get business and keep -- keep pushing our technology for better technology, because we will have new product to market with advanced LTE and more features, that today we're leading with some and we need to keep leading. We see this -- it is very hard to assessing. Okay, is it -- are those guys coming and talking to me because they don't have option with the Broadcom or so, definitely may be yes, but this is -- I mean, we -- well, this is not how we're running our business. I mean, we're selling our solution, our solution people like it. We have good ASP, good feature set, and we're working on almost getting this market a single modality happening and catching the first opportunity that they are open in the world so we can grow our businesses.

[Operator:]

Well, thank you. We will go again to the line of Quinn Bolton with Needham. Go ahead please.

[Quinn Bolton:]

Hi, two quick follow-ups. Deborah, just on a cash flow basis, for the third quarter or perhaps the second half, I think there was some government grants that you were thinking that you may collect in the second half that could help the cash flow either in Q3 or Q4, is that still the case?

[Deborah Choate:]

Yes. And in fact, it's quite significant, it's the -- principally, the research tax credit from last year, which we announced to about $4 million, we're expecting to collect in the second half of this year. And otherwise, in terms of cash flow, we're expecting to obviously maintain a very tight control on operating expenses and also expect CapEx to be maintained at a low level. So obviously, the top-line part of it is more the variable but we're expecting the collection of the $4 million to happen in the second half.

[Quinn Bolton:]

And then, for George, just a quick question on the carrier aggregation solution. I assume but may be this is a bad assumption that a lot of the current design and efforts are around sort of the prior generation solution, not the carrier aggregation solution, but just wondering if you can give us an update on customer activity around carrier aggregation and how that looks heading into next year?

[Georges Karam:]

Absolutely. Yeah, obviously, when dozen design win all (inaudible) expect the previous or whatever, the demand, the generation which is currently in mass production. But as you know, we announced already our carrier aggregation engineering sample and I realize that we didn't talk about it in my presentation, but we could mention this because we had excellent results that we've done in terms of testing with one major vendor and we're even engaging with one carrier in terms of testing the solution. And just to recall that we've a carrier aggregation solution that supports 20 megahertz, which is really ahead of all the competition on this. So we're able to groom 40 megahertz bandwidth on our chip. So we are very, very happy of the engineering samples and we've absolutely no but nothing and we're moving now as you know for the chip for mass that will be ready for mass production. This is in the pipe and the last phase of before takeouts; we'll announce this at the right timing. But we're preparing as well for our what you call release 10 and 11, the chip that will be definitely in mass production next year without an issue, and we'll be engaging new design with this next year.

[Quinn Bolton:]

So the 7 million unit opportunity that you've talked about, that is probably all on a prior generation and carrier aggregation designs would be incremental to that 7 million units?

[Georges Karam:]

Well I mean, with the 7 million units are really opportunities outside Europe. So obviously the majority of this, if we're talking about something that we know today should be coming from the existing products. We may have I believe portion of those 7 million. I will attempt to say at the end I expect in terms of really a revenue shipment, not the availability of the design. The new generation will enter in revenue in end of 2014, Q4. We will not see revenue from this generation before Q4 because from our mass production sampling, design win with customers, building new product, I believe its more Q4. So this will take us to that your conclusion that more or less the majority of those 7 million unit will be on the existing platform and only small portion will be of the new platform for next year.

[Quinn Bolton:]

Thank you for the clarification.

[Georges Karam:]

And just to comment, one on the technology side, we didn't -- we're really today perceived as a leader with a carrier aggregation, this one point, that as well another feature, which is really, two other feature, which is creating a lot of attraction. One I mentioned which is interference reduction that not only in Japan, many other guys like calling for them and so on, to see this value and the third point which is the eMBMS enabling video services. Sometimes in some emerging carriers as I mentioned in, with Reliance for example, but other guys as well in the U.S. And here again we're leader with eMBMS. So it's a kind of three advanced feature that the people position you versus others and we have them well ahead of everybody today. That's also showing the leadership on the technology side.

[Operator:]

All right. Thank you. (Operator Instructions) All right. There are no further questions in queue. Speaker, so please continue.

[Georges Karam:]

Okay. Thank you. Thanks everybody for listening and the questions, and see you as soon as possible. Many thanks Dave. Thanks very much. Bye, bye.

[Operator:]

Thank you. And ladies and gentlemen that concludes your conference today. We appreciate your participation, and your using AT&T Executive Teleconference. And you may now disconnect.