Sequans Communications S.A.
Q4 2015 Earnings Call Transcript

Published: 4 Feb 2016

[Operator:]

Welcome to the Sequans Fourth Quarter and Full Year 2015 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.

[Georges Karam:]

Thank you, Telisa. Good morning, ladies and gentlemen. This is Georges Karam speaking. I am with Deborah Choate, our Chief Financial Officer, and we are pleased to welcome you to our fourth quarter and full-year 2015 results conference call. I’ll start by saying that things are going extremely well, and we are looking forward to strong growth as the single-mode market continues to develop. After saying a few words about the fourth quarter, I’d like to put a more strategic focus on the business discussion. Our Q4 revenue was up 18% sequentially and 68% compared to the fourth quarter of 2014. Contributing to the improvement in Q4 was strong growth from the JetPack mobile router at Verizon as well as growth in demand from emerging markets, augmented by NRE revenues from a new public safety design win and projects with strategic partners. Disappointing sales of the Nextbook tablets caused product revenue to be a little lower, putting us at the midpoint of our guidance range. Nevertheless, it was a strong finish to the year. Revenue ramped from $4.8 million in the first quarter to $11 million in the fourth quarter 2015. Revenue for 2015 as a whole was up 45% from 2014. In the quarter, we saw new Sequans-powered products launched included the first CAT 6 CPE supporting 2-carrier aggregation from Gemtek and a CAT 4 vehicle telematics product from Zubie. Gemalto’s first CAT 1 module has been certified by Verizon and is now ready for shipping. Other M2M and IoT customers made excellent progress toward certification during the fourth quarter and remain on track to launch products during the next few months. Our new design wins during the fourth quarter were mainly in the M2M and IoT market, including several tracking devices. We also expanded our pipeline of potential new business with new opportunities in each of our markets during the fourth quarter. Another important element, during the last quarter, we completed the ADAPT certification for our CAT 4 Colibri platform, as well as moving forward toward certification of our CAT 1 Calliope platform with AT&T, T-Mobile and other carriers outside the United States. Finalizing several key commercial and strategic partnerships was probably our most important achievement of the fourth quarter. Some have been announced and others will be disclosed soon. Today, we announced a strategic partnership with Verizon for CAT M. We will work closely with Verizon to accelerate the availability of CAT M-capable chipsets and earlier this year we announced a different type of strategic partnership with Foxconn’s subsidiary, Socle, for specific products aimed at the IoT market also based on CAT M technology. A third strategic partnership agreement, again related to CAT M, has been signed and we are waiting for our partner’s approval to announce it. In addition to the new strategic deals we’ve signed, we expect to renew our agreement with TCL for 5G development in the first quarter. The combined impact of recently signed or renewed deals on the company is above $10 million, not counting at least $2 million of expenses that our partners will absorb that we would otherwise incur. We ended the year with $8.7 million in cash and equivalents on our balance sheet and we expect over $7 million to be added to our balance sheet in the first quarter from new partnerships signed in the fourth quarter and the TCL renewal. These long-term win-win relationships validate our technology leadership and demonstrate confidence in our future. By the way, we still have other strategic partnership deals under discussion complementing the signed ones and we are optimistic about closing some of them. We believe this approach is the best possible alternative for closing any potential short term funding gap from the perspective of the company and shareholders. I’ll speak more about the substance of the partnerships later, but for now, I’d like to recap some of our most important strategic initiatives during the past year and explain how we see them evolving during 2016 and beyond. Let’s focus first on the M2M/IoT market. This is our most strategic market since it offers the highest potential growth over the next decade or more. A year ago, we announced an addition to our StreamliteLTE family, a CAT 1 solution, designed to be well-suited to both traditional M2M applications and new IoT devices capable of running on the existing 4G networks. We were confident that there would be demand for CAT 1 solutions, but it was impossible to know in advance how quickly this new market would develop. We initially cooperated closely with Verizon on the whole CAT 1 concept and, during the past year, AT&T and T-Mobile, as well as operators in Europe, Japan, China and Australia have embraced CAT 1 technology. This growing interest from operators attracted the attention of the major module makers because their M2M customers are evaluating their options as the shutdown of some major 2G networks is becoming imminent. Gemalto, one of the top module makers, was an early adopter of our CAT 1 technology, and the relationship has been an outstanding one. Gemalto is moving as rapidly as possible to introduce a whole family of CAT 1 modules for various operators around the world. Their first module, recently certified by Verizon, was designated the Most Innovative LTE Application and Service at the recent LTE North America Awards. The M2M market is very fragmented and Gemalto’s historical large global market share, with customers in 180 countries, enables us to address the market worldwide. We expect that Gemalto’s CAT 1 design wins will be an important source of revenue growth for us, with the ramp beginning this year. This M2M business tends to be very sticky and, unlike consumer applications, the business you win typically remains in place for several years. Our CAT 1 solution was selected by a second well-known module maker in the second quarter of 2015. This customer is focusing initially on home security applications and we expect to be able to identify them when their first product launches mid-year. During the fourth quarter, we continued our ongoing discussions with other module makers and we are pleased with the progress of these discussions. Our own CAT 1 chip and related module have also prompted interest from OEMs and ODMs considering new types of devices and applications. During 2015, we accumulated a good list of design wins that tend to be related to three types of applications

[Deborah Choate:]

Thank you, Georges, and hello to everyone on the line. I’d like to add some details about our Q4 financial results and discuss the financial outlook, including our guidance for Q1 2016. Revenues in the fourth quarter of 2015 were $11 million, an 18% sequential increase from the third quarter and a 68% increase compared to the fourth quarter of 2014. We had four 10% customers in the quarter

[Georges Karam:]

Thanks, Deborah. So before turning the call to questions, essentially as we’re standing at the beginning of 2016 and looking a little bit backward for 2015, I can summarize 2015 by saying it was a good year from revenue point of view, but it was an excellent year when we look to all what we have done by implementing the IoT strategy and position the company where we stand in the IoT space. So now, as we are looking forward to start – started already 2016, so our objective really is to monetize the IoT strategy that we have implemented last year to move forward and faster growth during 2016 and accelerate this growth in preparation to 2017 where we expect to have a huge year in my opinion, because there we will be able to benefit from full year business in the IoT space and also the adoption, the large adoption of carriers worldwide of single-mode LTE. So the mission for me and my team is really clear. We intend to keep execution and maintain our product leadership, specifically in the narrow-band LTE technology required for the IoT market and we’re working on now, but also to keep executing expanding our strategic partnership for more scale and better access to market. With this, I conclude the presentation from our side and I’ll turn it to questions. Many thanks for listening. Telisa?

[Operator:]

[Operator Instructions] We have a question from the line of Anthony Stoss with Craig-Hallum.

[Anthony Stoss:]

Georges, maybe you can talk about design activity either on CAT 1 or if you’re seeing increasing interest on the CAT M side, just to try to help us quantify maybe second half of 2016 number of design wins versus where you might sit right now. And then secondly, the fact that Sony has bought Altair, I’m curious if you can share your views on how that might help you of either some of Altair’s existing customers already showing up at your doorstep? And I have two follow-ups.

[Georges Karam:]

On the first point in terms of design activity, obviously I didn’t go through details because honestly the pipe is big and what we have in hand is really large and I tend to confuse the people when I start to list them. But mainly the CAT 1 activity, as I said, where the revenue, that will support revenue on 2016 and going forward, obviously one, you can qualify it aggregating a big chunk of them to our markets through Gemalto where they are already with the Verizon version, but also expanding for other carriers. So this is one big angle. We mentioned as well another module maker in hand that should enter into production as well this year and we will announce about them later on. But to mention as well that we have direct customers, so far some of them got launched in last year, the most important one other than – really we have a bunch, more than four, five tracker design win and we have a couple of home security alarm panels and so on. And we have other industrial routers to come, our connecting machine of your own devices. And we are seeing this really continuing. We still work on new deals to come. There is really a strong traction on this and obviously all this driven in the US by the reforming of the 2G on AT&T, because no 2G network will be on January 2017. So all the guys need to move forward for something else and something else today is definitely clear, there is no question mark in the mind of anyone in the market this will be CAT 1 solution. And this is obviously helping us and we’re seeing the same traction as well with, for example, the customer of Gemalto adopting designs as well. So this is really the main IoT, the main CAT 1 business. And we should not forget as well the home router, portable router where we have some router even in the US design win that we secured last year and they are in the pipe to come to revenue this year. So those as well will contribute to our growth this year. And on the CAT M, obviously we are in different phase, so I’m not expecting what I will call product revenue of CAT M this year obviously because network is not ready and we expect this to see in 2017, because 2017 in the IoT space will have a full year of CAT 1 design delivering revenue, plus the introduction of CAT M accelerating design win for M2M as well IoT type wearable or even consumer oriented device on the CAT M. So this is how we see it. And for now, for us, the CAT M is really executing to make this happen with the partnership we announced, as you’ve seen we said we signed three deals really related to our leadership on CAT M and two announced and one which is now clear for you related to Verizon, essentially with the intention to lead the world with CAT M the same way we did on the CAT 1. Back to the question on the acquisition of Sony Altair, all I can say that this really has all the good news for Sequans. I mean, it was really very good for us. I was even dreaming about it, if you will, from my angle. On one side, we see them defocusing in the home router, portable router space because this is not really the business of Sony, so this open for us an avenue to capture more design win and collect from others. And on the IoT space, honestly I see it’s more going to vertical space where maybe the competition should be less aggressive than dealing directly with Altair. But in any case, this doesn’t change the leadership we have because as we said before without really naming any special competitor here, we remain the only guy shipping CAT 1 and leading with this. And I’m sure on CAT M we’re going to have a minimum similar leadership. So acquisition or not, this will not help catching up with our execution.

[Anthony Stoss:]

And then as a follow-up more for Deborah, your accounts receivable being at $16.6 million, I know you talked about the billing cycle occurred late in the December quarter. And if I heard you correctly, $5 million of the potential $7 million in strategic [indiscernible] if you take a look at what you would expect cash collection cycle-wise in March, you include the $5 million of the $7 million, where do you think your cash balance ends say March 31 or a range of where you think your cash balance will be? And then the follow-up also, Georges, if you don’t mind give us a bit more on the Foxconn partnership, when you think that to generate revenue?

[Deborah Choate:]

We don’t give projections on the cash range, but I can say that with the dollar sources that we talked about, we’re expecting to not burn much cash at all in the first quarter.

[Georges Karam:]

On the Foxconn revenue, obviously, Foxconn is related to the CAT M and I’d like really maybe to stress a little bit the relationship here, Sequans, we’re coming with our first product CAT M to market alone, on our own, with our own technology, but this is attractive to Foxconn to partner with us to make derivative of this product to address other application in the IoT space where we add more IT, more SoC function and so on that can address wearable or other devices in more optimized way. And so this helps us to bring faster to market derivative of this product and have a portfolio which is expanding [very optimally] and this will help us to stand in front of big guys who could have a large portfolio, larger than what Sequans is able to execute on its own. But also give us access, privilege access to some extent to the market that will be driven by Foxconn directly because they will have privileged relationship on this. And in terms of revenue, we see it not happening obviously in 2016. All this should be coming in 2017.

[Operator:]

We now have a question from the line of Jaeson Schmidt with Lake Street Capital Markets.

[Jaeson Schmidt:]

Georges, just wondering with the M2M IoT business becoming an increasing part of the overall business this year, do you have a sense of what portion of overall revenue you think the M2M IoT segment will make up exiting this year?

[Georges Karam:]

The complexity is really on the ramp. So in other words, I hope that in Q4, if you want this year, at the end of the year, if I look on a quarterly basis that to have maybe IoT doing at least 40% of the total business. So this is what I see. Now, on a yearly basis, it’s a little bit complicated as you understand, because we are adding new devices, Gemalto is ramping and all this, so this makes it a little bit – increase quarter-to-quarter and hopefully in Q4 be around 40%. And maybe depending – even if you project this in 2017, again, we’re talking about a market where for us we can go and do couple of hundred million dollar easily in this space in two or three years down the road and we expect down the road that IoT markets will be bigger than the home router, portable router. So if you look today, obviously our revenues are coming from the traditional home router, portable router and it’s doing well and it will continue and it will grow. And we’re happy about it. But today, based on what we saw, the adoption of CAT 1, the narrow band technology coming to market, I’m convinced that this market on the IoT will be much larger than our home portable router and we should execute – get nice market share coming to – become much bigger business for us than the home router down the road.

[Jaeson Schmidt:]

And then looking at the Gemalto opportunity, how should we think about the scale and timing of that ramp throughout this year?

[Georges Karam:]

As I said, Gemalto, they have another product on Verizon, so it’s certified. And again, thanks to our leadership, they are the first guys to certify and we have things going extremely well with them. We saw a lot of design win they got, some of them are big deals and so on. So obviously they secured a deal and the deals they turned to production with their customers and so on. So it takes time to ramp, but they have really nice stories of design in hand already and few others that they are well positioned to turn to design win on their side. And in addition, all this using, I tend to say, the Verizon network. In addition to this, they have other few going to market for other carriers without being too specific, but few others chose other carriers around the world. And again, they will be happening this year and turning to mass production. So if you look potentially down the road, Gemalto do 5 million units on a yearly basis and big chunk of this is 2G. When you [indiscernible] they use 2G and we expect maybe minimum 50% of those 2G to disappear and be replaced by CAT 1. So if we looked at all those math, definitely I see Gemalto being a strong market for us, a strong partner and customer for us next year with CAT 1, with few million units at least converting from the 15 they have from 2G to CAT 1 and they will be with us. And they are really in a good shape and things are going in this direction. Obviously the ramp during 2016, we remain and they remain and altogether coaches, because we’re adding all the cycles you need from design win on their side, certification of the end customer on their side and so on, so it’s ramping up slowly quarter-to-quarter. We should see significant number in Q4 this year as well, even on a yearly basis maybe could look not the – from the top, I will say three customers, maybe [indiscernible] because this will be ramping slowly. But I see it on Q4 a good number.

[Jaeson Schmidt:]

And last one from me, Deborah, how should we look at OpEx ramping this year? And is the breakeven revenue levels still kind of in that $17 million to $19 million depending on mix?

[Deborah Choate:]

Currently we are expecting that we’ll be able to keep OpEx fairly flat, so we’re not expecting to see a big increase or actually any significant increase compared to the fourth quarter. So that means that the breakeven level stays at about that same rate, assuming that the overall gross margin – depending on the revenue mix. If we stay at around the 40%, then yes, we’d be in that $18 million, $19 million range.

[Operator:]

We’ll now go to the line of Quinn Bolton with Needham & Company.

[Quinn Bolton:]

Just wanted to come back to the announcement this morning that you signed a strategic collaboration with Verizon around CAT M. I guess, the first question is, is that around both CAT M-1 and CAT M-2 or is it going to focus first on CAT M-1? And then second, it did look like the OpEx ticked up in the fourth quarter relative to the third quarter and I’m just wondering is that higher OpEx in Q4 and projected to be flat Q1, does that reflect some of the acceleration in your CAT M development? And then I got a couple of follow-on questions.

[Georges Karam:]

On the Verizon CAT M, obviously, I don’t want to be too specific [indiscernible] of the information we have and so on. But it’s clear that Verizon is pushing – and to some extent, all the carriers in the US, the information today that CAT M-1 is happening before M-2, so the – and M-1 allow you not only to address, if you want, sensor, because you can do sensor with M-1, but you can do as well a smart watch and you can do other wearable where we need a few hundred kilobit/second. If you go to CAT M-2, it’s going to be really pure sensor. You cannot do mass, because it’s 10 kilobit/second, 20 kilobit/second, 30 kilobit/second, that’s all what you can get in terms of speed. So on this basis, because the maturity of the CAT M-1 is before the CAT M-2, without getting anything special here, the work – the first focus is really on CAT M-1. And as a company, what I could say from our angle, we are focusing on the 2. In terms of product portfolio, we are not really ignoring M-2, I’m just only saying we’ll do M-1 and we’ll see what will happen on M-2 later on. We are preparing ourselves to be ready for M-1 on time and ahead of everybody and M-2 on time and ahead of everybody as well.

[Deborah Choate:]

And in terms of the OpEx, first [indiscernible] third quarter was usually low because we had the seasonally low time and also we had some unusual items coming into our R&D tax credit that brought down OpEx in the third quarter. On top of that, the fourth quarter, yes, we did have some additional spend related to the different projects we’re working on. We also had a one-time provision for risk related to some tax items in the tax credit in the UK that affected the R&D line. So that’s a one-time item. So we’re expecting that Q1 should not continue to grow, be probably slightly – either flat or slightly down.

[Quinn Bolton:]

And then just as a follow-up on the CAT M-1, M-2 discussion, is there a significant change to the architecture of your chip that you would need to make to be able to support CAT M-2 or is it a fairly easy migration from CAT M-1 to CAT M-2? I just don’t know if there is a major overhaul that you need to do to your architecture to be able to get all the way down to the CAT M-2 within very low power spect?

[Georges Karam:]

We are able to support essentially M-1 and M-2 with [change of] software only. This is how our designing is. Now, obviously, if you – in other words, first generation we’re addressing the tool. We believe that overtime depending on the size of the market, depending on what the carrier will be adopting, it’s not clear yet, once the carrier – if a carrier has made a deployment with CAT M-1, how fast he will move on CAT M-2, the real value of moving it to CAT M-2, because the delta between the two in terms of power and cost is not major. There is some incremental gain always you can get, but it’s the stuff like – you’re changing the equation of what you can do with this device or not. So today, the focus as I said is really on CAT M-1 because the maturity is related to this and M-1 offered extended application set some wearable to sensor. And down the road, depending on the size of the market of the sensor and so on, we could imagine a dedicated chip just only to address M-2 to save $0.50 more, that’s what we’re talking about. It’s not really a major change like it’s happening between CAT 1 and CAT M, if you want.

[Quinn Bolton:]

And then just lastly, you mentioned work with AT&T, you had the ADAPT certification for CAT 4. If you look at over 2016, can you give us any sense on timing when you think you might get these additional CAT 1 certifications, will they come in over the year, or will it tend to be a little bit more back half loaded, any thoughts on those additional CAT 1 certifications?

[Georges Karam:]

We are moving, in other words, we didn’t talk to some of the process. Again, ADAPT certification last year we delayed intentionally. I mean, we could do it much faster, but we delayed because we were looking more to optimize spending versus opportunity and timing, the right timing of our spending. But now, we’re not stopping, we’re going full speed. We are committed to CAT 1 AT&T and T-Mobile and the process is moving. So without being too specific, just only in terms of months and so on, I can tell you that this will happen in the first half of the year.

[Operator:]

We’ll now go to the line of Aaron Martin, AIG Investments.

[Aaron Martin:]

A question for Deborah. This quarter there was a lot of, call it, other non-product revenue, are you going to break that down between licensing or NRE? I’m trying to get a better feel for how much of that revenue is individual projects or some licensing that might be going forward. How should we think about that?

[Deborah Choate:]

There was some licensing revenue in there, but most of it was NRE from both the initial strategic work we’re talking about as well as other new design wins. For example, Georges mentioned public safety which typically has an important NRE component related to it.

[Aaron Martin:]

On the strategic, as you’re getting paid up front, are you then recognizing the revenue on a percentage of completion, what’s going on there or is it truly as the money come in you recognize it, how is the strategic money going through the P&L?

[Deborah Choate:]

For the most part, the NRE is recognized on percentage of completion. In terms of the cash, most of the times there is an upfront payment, so we usually have cash even before we recognize the revenue to some extent. But yes, it’s on a PSE basis.

[Aaron Martin:]

So at the end of the year, how much revenue, how much cash you’d taken in in advance of recognizing the revenue?

[Deborah Choate:]

You can see actually we have the deferred revenue portion on our balance sheet, let me just confirm the exact number, it’s $3 million at the end of December.

[Aaron Martin:]

And lastly, in terms of the money that’s going to come in in the first quarter and the $5 million that’s come already, is any of that already accounted as receivable or not yet?

[Deborah Choate:]

Yes, it was signed in the fourth quarter, so it was accounted as a receivable.

[Aaron Martin:]

So that’s included in the $16 million trade receivable?

[Deborah Choate:]

It is, yes.

[Aaron Martin:]

Can you quantify a little bit, you talked about after the first quarter in terms of cash coming in from – for the collection of 2015 tax credit [indiscernible] balance sheet and then hopefully on the 2016 credit, can you quantify the amount of cash coming in after Q1 from those items?

[Deborah Choate:]

Yes. The tax credit which is on our balance sheet, we’re showing $2.8 million, the French tax credit is collected typically in the third quarter. That’s when we received it in 2015. We also have a number of French and European Union funded R&D projects that contribute typically at least a few hundred thousand dollars per quarter and in some cases we have much higher – larger ones coming in that are closer to $1 million. So we expect between $1 million and $2 million from that during the year.

[Operator:]

There are no more participants queued up for Q&A.

[Georges Karam:]

Thanks, Telisa. Thanks everybody for listening and for all your questions. Again, looking forward to stay in touch and [indiscernible] that we’ll be doing good job as well in 2016. Thank you very much.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. This conference will be made available for replay after 9 AM today until March 4, 2016 at midnight. You may access the AT&T executive playback service at anytime by dialing 1800-475-6701 and entering access code of 382913. International participants may dial 1-320-365-3844. Again those numbers are 800-475-6701 and 320-365-3844. Thank you.