Sequans Communications S A : Transcript Q3 2022 Results Conference Call

Sequans Communications S.A.

Third Quarter 2022 Financial Results Conference Call

November 2, 2022

Sequans Communications S.A. - Third Quarter 2022 Financial Results Conference Call, November 2, 2022

C O R P O R A T E P A R T I C I P A N T S

Kim Rogers, Investor Relations

Dr. Georges Karam, Chairman, President and Chief Executive Officer

Deborah Choate, Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Scott Searle, ROTH Capital

Craig Ellis, B. Riley Securities

Nicholas Doyle, Needham & Co.

P R E S E N T A T I O N

Operator

Greetings and welcome to the Sequans Communications Third Quarter 2022 Financial Results Conference Call.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kim Rogers of Investor Relations. Please go ahead.

Kim Rogers

Thank you, Vikram, and thank you to everyone participating in today's call.

Joining me on the call today from Sequans Communications are Georges Karam, Chairman and Chief Executive Officer, and Deborah Choate, Chief Financial Officer.

Before turning the call over to Georges, I'd like to remind our participants of the following important information on behalf of Sequans. Sequans issued the earnings press release this morning, which was posted to the Company's website at www.sequans.com, under the Newsroom section.

Before we start, I would like to remind everyone that this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and potential financing sources. All statements, other than present and historical facts, and conditions contained in this call, including any statements regarding future results of operations and financial position, business

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Sequans Communications S.A. - Third Quarter 2022 Financial Results Conference Call, November 2, 2022

strategy and plans, expectations for future sales, the impact of COVID-19 on our supply chain and on our customer demand, the impact of component shortages and manufacturing capacity, our ability to convert our pipeline to revenue, 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, subject to risks and uncertainties, and subject to change at any time.

We operate in a competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or 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.

Now, I'd like to hand the call over to Georges Karam.

Please go ahead, Georges.

Dr. Georges Karam

Thank you, Kim. Good morning, everybody. Welcome to our Third Quarter 2022 Financial Results Conference Call.

Before we jump into my comments, there are several highlights I want to emphasize: 1.We had a great quarter from a consolidated revenue and profitability perspective, 2.The new 5G strategic deal is going very well,

3.Our pipeline for Massive IoT products continues to grow, and we are landing design wins with new and existing customers,

4.Cat 1 Calliope 2 is off to a great start, and its future looks bright, and

5.Our MCU partnerships are doing well, particularly Renesas, who is introducing Sequans to the largest brands in the space.

Let's start with a quick look at the third quarter results

Third quarter revenue rose by 39% year-over-year and 16% sequentially, reflecting the significant increase in our licensing and services revenue, which included revenue from our new 5G strategic partner for the IP delivered in the quarter. The growth from licensing revenue in the quarter lifted our gross margin to 77.6% and turned the company to non-IFRS profitability of $0.01 per ADS on a fully diluted basis.

The higher licensing revenue offsets the lower product revenue in the quarter. But as we said last quarter, we expected our product revenue to be impacted by ongoing macroeconomic factors. Specifically, the lockdowns related to China's 'zero-COVID' policy and other supply chain challenges have hampered our customers' ability to ship or launch products on time. In a moment, I will discuss why the delay in our product shipment ramp will not impact our growth potential.

Turning to an update on our new 5G strategic partnership

As expected, we received the first payment of $13.5 million in October, net of withholding tax. In the third quarter revenue, we recognized a significant portion of this first payment milestone as revenue for the IP we delivered in September. This caused our licensing and services revenue this quarter to be higher than normal. In the following two quarters, revenue recognition from this deal will be lower but remains significant. In the future, the licensing revenue will continue at a ratable rate for the remainder of the

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Sequans Communications S.A. - Third Quarter 2022 Financial Results Conference Call, November 2, 2022

agreement. Our team and I are closely engaged with our partner, and I am happy to say that the relationship is very solid, with the potential for further engagement.

There has been a lot of press recently regarding the expansion of US restrictions on chip exports to China. As it stands today, based on discussions with our advisors and the scope of our deal, we do not anticipate our future revenue stream from this partnership being impacted by the new export control rules.

Now, let's discuss our Massive IoT business

Almost all of our products shipped in the third quarter were related to the Massive IoT business, which was impacted by the macro factors I mentioned earlier. The Cat M product family was particularly affected as it represents most of our design win projects ramping to mass production. Obviously, we would like things to be happening faster, but most of the elements regarding the timing of product shipments are beyond our control. In the metering segment, for example, where we have over a dozen design win projects, most of the launch dates have shifted to 2023. In other applications, we had several big projects that moved to production and started shipping in the first half of 2022, only to decelerate because of the manufacturing disruptions. We anticipate that once the roadblocks are removed, we will see the ramp resume in 2023, with expected growth over the next 3-5 years, at least.

Looking at the trend year-to-date, we can see that Cat M remains our strongest product category, driven by the success of second-generation Monarch products. And, year-to-date, Cat M has grown 62% despite the delays.

Largely, the Cat 1 business category is performing in line with our expectations as we are shipping to a variety of established projects in the US and Japan, one of which is for a metering product. The corresponding revenue was down this quarter, but this was related to the timing of some shipments and is expected to return to normal in the fourth quarter. We anticipate this product family returning to growth in the second half of 2023 once we start shipping Calliope 2, our next generation of Cat 1, enabling a significant product cost reduction with lower power and many other advanced features.

Sequans is uniquely positioned in the Cat 1 category as the only non-Chinese company that has invested in a next generation product. With the many Massive IoT applications requiring Cat 1 speed and performance, we believe our Cat 1 addressable market (i.e., which excludes China) will be well above $400 million by 2025. Based on the size and scope of the design wins I will discuss in a moment, we anticipate strong performance from Cat 1 in 2024 and beyond, where we expect to capture a significant market share.

Let me update you on the growth potential of our pipeline and why we are so optimistic about our future.

Our pipeline, representing an expected product revenue contribution over the first three years of each design life, continues to grow, and this has accelerated with the sampling of Calliope 2. We now have a pipeline of design wins, and advanced design-ins close to $700M, almost half of it in secured design wins. I remind you that our pipeline does not include services and licensing revenue.

The expansion of design wins reinforces our confidence in our outlook. The vast majority of the design wins are for Massive IoT applications with the Cat M Monarch 2 platform, and we added more this quarter. The strong reception of the new generation Cat 1 Calliope 2 allowed us to secure our first two significant design wins representing over $30M of three-year aggregate revenue. Currently, we are working on about seven additional big Calliope 2 opportunities that could add over $100 million aggregate to our Cat1 revenue pipeline. That means in the upcoming two quarters, we could see an acceleration in Calliope 2 design wins, adding a new growth lever to our Massive IoT business.

Of our key Massive IoT vertical markets, metering remains our strongest segment for design wins, followed by asset tracking, smart home, eHealth, and a few other industrial applications. We are confident we will increase our market share in these growing markets.

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Sequans Communications S.A. - Third Quarter 2022 Financial Results Conference Call, November 2, 2022

We are successfully leveraging our technology leadership in the Cat M and Cat 1 categories in large metering applications - Electrical, Gas, or Water. Given our engagement with the most prominent brands and the expected growth in these markets, we expect to significantly expand our market share in metering, the largest vertical, from around 10% today to close to 50% market share in the next three years.

To conclude on this topic, let me give you some more color on our design win pipeline. The top 10 customers in terms of revenue potential at full ramp represent only about $20 million in 2022, as most are still designing their products. However, they could generate over $80 million in annual revenue at full ramp. In addition, this business is highly sticky, with product life cycles of up to 10 years for most of the design wins, even longer in some cases. This level of growth potential from only ten secured customers gives us tremendous optimism about our future.

Shifting to the Broadband category

Broadband revenue grew significantly in the quarter, thanks to the increase in licensing revenue, primarily driven by the new 5G strategic deal. Looking ahead, the broadband product category remains promising, with the Cat 4/Cat 6 CBRS business expected to grow in 2023, followed by the Taurus 5G launch in 2024.

CBRS has yet to meet our expectations this year, partially because our two largest projects did not ship as planned due to the lockdowns in China. In addition to these two big projects, we are pursuing private network CBRS applications with utilities. Last quarter I discussed a new CBRS module we are designing that offers private networks connectivity with fallback to public carrier networks. This new Cat 4/Cat 6 CBRS solution, combined with our Cat 1 and Cat M/NB product categories, positions us with a comprehensive, differentiated offering that reinforces our leadership in the metering segment.

The future of Sequans' Broadband segment is our first generation 5G platform, Taurus, which is in development, and our new strategic deal has strengthened our execution capability. This development is progressing as expected, and we are on track to sample the full solution in 2023. Our new 5G licensing deal covers the remaining investment needed to launch Taurus.

The Taurus platform will target fixed wireless access, mobile computing, private networks, and high-end IoT markets. It is designed and optimized to deliver a cost-effective 5G solution with the performance required for these applications. The tremendous growth we see in connected devices is expected to rise dramatically with 5G IoT, an exciting opportunity for Sequans' Taurus platform. We believe Taurus will be the only 5G chip optimized for IoT, giving us a significant competitive advantage in a market that could potentially exceed $2 billion by 2025.

In addition to the Taurus regular product business, the new 5G strategic deal will expand the 5G SAM to China with licensing and royalty revenue. Beyond this deal, there are other potential strategic partners for our 5G platform in new market segments that make sense to address via such partners. Discussions are happening, but it is too early to define the longer-term outcomes of these talks at this time. What's important is that there is active interest, and we are following up with interested parties.

Our partnerships continue to play a key role in our growth

We are pleased with our MCU partners and the enhanced market access they provide for Sequans. Microchip released its Monarch 2 product platform, and this has received very good traction in the market. We see this generating more design win opportunities that will further support growth next year.

Our relationship with Renesas continues to deepen, and they now have a roadmap with all our products. They have launched their first LTE M module using our first generation of Monarch, and they will be

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

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