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Edited Transcript of SQNS earnings conference call or presentation 13-Feb-18 1:00pm GMT

Q4 2017 Sequans Communications SA Earnings Call

Paris Feb 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Sequans Communications SA earnings conference call or presentation Tuesday, February 13, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deborah Choate

Sequans Communications S.A. - CFO

* Georges Karam

Sequans Communications S.A. - Chairman, CEO and President

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Conference Call Participants

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* Craig Andrew Ellis

B. Riley FBR, Inc., Research Division - Senior MD & Director of Research

* James Boyle

* Nathaniel Quinn Bolton

Needham & Company, LLC, Research Division - Senior Analyst

* Scott Wallace Searle

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Thomas Michael Walkley

Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst

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Presentation

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Operator [1]

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Welcome to the Sequans Fourth Quarter 2017 Results Conference Call. (Operator Instructions) 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 contains projections and other forward-looking statements regarding future events, our future financial performance and potential financing sources. 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, expectations for IoT and broadband sale, 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 and 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 rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission.

Please go ahead, sir.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [2]

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Thank you, Gilie. Good morning, ladies and gentlemen. This is Georges speaking. I'm with Deborah Choate, our Chief Financial Officer. Welcome to our fourth quarter and full year 2017 results conference call.

We're entering 2018 in a strong overall position despite some recent challenges in our broadband business, and this promises to be a pivotal year for Sequans. Before I get into a detailed discussion of the fourth quarter, I'd like to review the major achievements of the past year and how they position us for further success in the future.

During 2017, the ramp in CAT 1 product shipments led to our first year of meaningful IoT product revenue and set the stage for CAT 1 product revenue to double again in 2018.

After being certified by the major carriers in the U.S. and Japan in 2016, CAT 1 took a bit longer to start moving than we'd initially hoped, but the demand is there. And with the CAT M revenue contributing ahead of schedule, total IoT revenue grew 43% in 2017 and accounted for 25% of our total revenue. We are continuing to identify new CAT 1 projects even now that CAT M is available, as CAT 1 technology is still needed for many IoT applications where speeds above 300 kilobit per second are required.

In retrospect, it's apparent that because we're inventing something totally new and different, CAT 1 was not widely anticipated the way CAT M1 and NB1 have been. Therefore, some operator were a little slower to move on CAT 1, and the traditional M2M customers spent a little longer with fill trials before switching over from 2G since they already had a working solution. But that situation is behind us now. We are shipping since mid-last year, and we are excited to have good visibility on very strong growth in IoT CAT 1 business during 2018.

Carriers' attitudes towards LTE-M and NB-IoT are a totally different story. They had been quick to recognize the opportunities afforded by the narrowband cellular standards and have been moving aggressively on software upgrades to their networks. At the beginning, we saw a kind of marked split where some operators choose LTE-M and others choose NB-IoT-only deployment. Not realizing that the NB-IoT is not able to address all IoT use cases, most of the operators around the world, who initially decided to deploy NB-IoT only, have decided to add LTE-M. This is initial validation of the decision we made several years ago when we began to develop Monarch platform to support both LTE-M and NB-IoT. We've been the only vendor with a fully optimized single-mode CAT M1 and NB1 solution certified and shipping for more than a year now, and we are viewed as leader in LTE for IoT. Therefore, we are engaged with nearly every major carrier in the world.

As a result of the reputation we've been building, during 2017, operators not only approached us to test our Monarch chip, but a number of them choose to engage in formal partnerships whereby they would contract with us to have them accelerate the rollout of LTE for IoT. These relationships are more than valuable. They are priceless. Having a team of smart engineers come up with a working solution that complies with the standard is only the beginning. The mutual trust and confidence that comes from years of working closely with partners and carriers to discover, analyze and address the endless list of challenges inherent in the evolution of LTE into IoT and 5G is something that cannot be quickly or easily replicated.

In addition to cultivating more carrier relationships, during 2017, we solidified our strong base of OEMs, ODMs and module partners to support a go-to-market strategy suitable for a global IoT business. Because there are vast differences in end customers and their experience with cellular technology, it's a very different challenge than selling to a short list of highly sophisticated smartphone makers. Hence, the importance of our engagement with module partners, who help us to address the fragmented IoT market on a global basis. Our module partners have been working with our Monarch chip for more than a year now, and all of them have completed or are well along in the certification process with multiple carriers in the U.S., Japan and Europe. As such, end customers building IoT devices have a wide choice of OEM and ODM module partners that will help them accelerate time-to-market and reduce development and device certification costs. Our work with various carriers around the world in preparing to launch their CAT M1 or NB1 networks this year also means expanding the ecosystem and supporting various module partners and certifying their solutions in Europe, Japan, Korea, Australia and even China.

Another achievement during 2017 has been the further diversification of our customer base. On our results call a year ago, we said we had around 40 active customers at the end of 2016. At the end of 2017, the comparable number is around 60, not counting operators or multiple projects with 1 customer.

In terms of technical accomplishment, during 2017, we continued to demonstrate our leadership by introducing various derivatives of Monarch, including development kits and application-specific platforms. We introduce Monarch SX, which is sampling now the world's first single-chip LTM and NB-IoT SoC, with an embedded processor optimized for IoT. Monarch SX eliminates the need to add an external application processor and integrates all IP blocks required to support voice, music and graphics display. It's also highly optimized for power and integrates a sensor hub, making it very suitable for applications such as wearable.

At Mobile World Congress Americas in September, we introduced CLOE, a tracker platform to connect and locate objects. CLOE results from a close collaboration with STMicro to create a production-ready tracker design with out-of-the-box connectivity. CLOE has received a very enthusiastic reception, and we already have a number of customer projects in the pipeline. Let's remember that Monarch was introduced almost 1.5 years ago. And you can be sure, we haven't been sitting still. We have been working for some time on additional derivatives of the Monarch platform to address size, power and cost requirements, and we'll be providing more details about these new innovation soon.

Our strategy is to continue to innovate in cooperation with our best-of-breed technical and strategic partners like Skyworks, STMicro and others to ensure that by the time competitors reach parity with us, we'll be moving the bar even higher. Although we are pressing here our advantage in LTE for IoT, we should not forget that we continue to innovate outside IoT as well. We are expanding our roadmap for StreamrichLTE family to provide very high performance, feature-rich solution for cities, mobile hotspot, gateway and set-top boxes as well as vertical market applications. And we'll be announcing a new generation chipset this year.

2017 was also a year of great progress with our vertical market business. We expanded our relationship with blue-chip companies, like Thales and Motorola, added new wins, such as Lockheed Martin, and made good progress with some others. We have now a solid revenue stream from this business with a great visibility for 2018.

We also have some existing strategic partnerships that have expanded and grown over -- grown even stronger during 2017. This is certainly the case with Foxconn, STMicro and Skyworks. Also, we are entering our fourth year of 5G collaboration with TCL, and this partnership has been very fruitful so far with many 5G patents filed, including some which are standard essential.

As we mentioned on our last call, we are in active discussions with respect to additional strategic partnerships. Some of these discussion are at a very advanced stage for at least the first phase of the relationship, and we are quite optimistic. Also, we continue to believe that -- here that some funding element can be related to those relationship. However, the pace that things have been moving did not provide us with enough confidence that we could receive the funding before we started to have an issue with the optics of our balance sheet. Therefore, we decided to reinforce the balance sheet with the recent actuaries and avoid putting pressure on these strategic relationships and risk affecting the outcome.

So to sum up the big picture, we are extremely well positioned to capitalize on the global adoption of LTE for IoT, with our CAT 1 collaborative platform as well as our CAT M1/NB1 Monarch platform and related application-specific solution we are developing with our technology partners. We continue to see very attractive opportunities in the broadband market and view its potential very favorably. As we expand and deepen our relationships in the vertical market, we see many more highly attractive opportunities there as well. So with our leadership position in LTE and 5G, we continue to believe we have the necessary ingredients to drive strong growth well into the next decade.

Let me now give you some details on the development during Q4 2017. Our Q4 revenue was toward the lower end of our original guidance mainly due to a delay in finalizing 2 agreements with new vertical market customers. One has since been signed and the other is still on track. Moving forward, as our product revenue continues to run, the timing of such agreements will have less noticeable effect on the overall quarter.

Revenue from IoT continued to grow as CAT 1 products were shipping in volume in the U.S. and Japan. Also, Q4 revenue included more than $1 million of CAT M1 product revenue, and several of our module partner landed a new CAT M design wins during Q4. Some of them represent multimillion dollar opportunities for us.

In addition, we now have 3 carrier branded IoT design wins planned to launch in the second half of 2018. We expect very strong growth in IoT in 2018 supported by the continuous shipment of CAT 1 products and the ramp of CAT M, particularly during the second half. Using the average of the current analyst estimates as the assumed level of total revenue for 2018, IoT could account for more than half of our revenue this year.

As expected, the broadband business was weak in Q4, and we expected to remain so in Q1. While we are making cautious assumption for the remainder of the year, there are some good reasons to believe we could see gradual improvement beginning in Q2 as excess inventory is worked done and newer broadband customers continue to ramp with new operators in emerging markets.

We also have several promising new opportunities outside the emerging and Verizon markets. These could become design wins later this year and contribute to return to growth for the broadband business next year and beyond as we evolve toward 5G service.

We spoke about a portion of the vertical market, but it's worth noting that both Thales and Motorola projects are in a deployment phase and the Lockheed Martin program has also started. As I mentioned earlier, we have some opportunities to expand with the existing vertical market customers, and we have won some new business as well. So we believe that revenue from the vertical markets can grow gradually, although it's still apt to be lumpy between quarters.

To summarize, although the optics of 2017 were not that great, with a low growth here, it's important to note that we had very strong revenue growth in IoT, as I mentioned, 43%. This is the portion of our business that we expect to be the strongest growth driver for several years to come. Our momentum there is excellent for all the reasons I described. We still see the broadband business contributing to profitable growth over the long term, and we already have a number of exciting new opportunities we are pursuing in that area. Therefore, we enter 2018 with the confidence that our technology leadership and excellent relationships with both customers and carriers will enable us to make significant progress, recover with exponential growth and create value for our shareholders.

Now I'd like to turn the call over to Deborah to take you through the detail of the financial presentation.

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Deborah Choate, Sequans Communications S.A. - CFO [3]

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Thank you, Georges. Hello, everyone. I'd like to add some details about our Q4 and annual financial results and discuss the outlook, including our guidance for Q1 2018.

Our revenue for the full year 2017 was $48.3 million, about a 6% increase from 2016. The strong growth in our IoT business was masked by a decline in the broadband business, particularly during the second half of the year. As Georges mentioned, total IoT revenue grew 43% to $12 million in 2017 and accounted for approximately 25% of total revenue.

Gross margin in 2017 was 43.8%, the same as in 2016. And our net loss in 2017 was $26.2 million, or $0.34 loss per diluted share, American depository share, compared to $24.8 million of loss, or $0.39 per diluted share, in 2016.

Our weighted average share count increased from 63.8 million shares in 2016 to 77.7 million shares in 2017, primarily as a result of an equity offering in June 2017.

On a non-IFRS basis, our net loss for 2017 was $21.6 million, or $0.28 per share, compared to a full year non-IFRS net loss of $19.9 million, or $0.31 per share, in 2016.

Our non-IFRS net loss excludes noncash items related to stock-based compensation expense, the noncash impact of convertible debt amendments and effective interest rate adjustments related to the convertible debt and other financings.

Revenue in the fourth quarter of 2017 was $11.3 million, the same as the revenue for Q3 and an 18.9% decrease compared to the fourth quarter of 2016, reflecting the weakness in the broadband area, which was partially offset by the growth from IoT. We had 3 10% customers in Q4: 2 are distributors, who each serve a number of Asian OEM and ODM customers; and 1 is an ODM directly. Gross margin was 41.7%, reflecting this quarter's mix between chips and modules. And operating expenses were $10.3 million in Q4, down from $10.6 million in Q3. This is primarily due to an unusually high favorable impact from R&D grants coming in, in the quarter, with an impact of over $1 million. Operating expenses were $10.2 million in the fourth quarter of 2016. And we expect operating expenses in 2018 to average about $11.5 million per quarter, reflecting the impact of the stronger euro versus U.S. dollar as well as some headcount increases primarily in engineering.

Our fourth quarter operating loss was $5.6 million compared to an operating loss of $5.6 million as well in the third quarter and $4.9 million loss in the fourth quarter of 2016. Net loss was $7.6 million in Q4 compared to $6.9 million in Q3 and $5.4 million in the fourth quarter of 2016.

Basic and diluted loss per share was $0.10 in the fourth quarter of 2017 based on 79.8 million average shares outstanding compared to net losses of $0.09 in the third quarter and $0.07 in the fourth quarter of 2016 based on 74.5 million shares.

The increase in weighted average shares outstanding reflects the equity offering in June 2017 as well as stock option exercises and conversion of $150,000 in convertible debt.

We've also reported our results on a non-IFRS basis, which excludes net loss, the noncash items related to stock-based compensation expense, and the noncash impact of convertible debt amendments and interest -- effective interest adjustments related to the convertible debt and other financings. Non-IFRS net loss was $6 million in the fourth quarter of 2017 compared to net losses of $5.9 million in Q3 and $4.2 million in Q4 2016.

Non-IFRS basic and diluted loss per share were $0.07 in the fourth quarter, and non-IFRS net loss was $0.07 in the third quarter of 2017 and $0.06 in the fourth quarter of 2016.

Cash used in operations in Q4 was $9.3 million compared to $5.3 million in the third quarter of 2017 and reflects the slippage of $4.5 million in collections from a few large customers moving from December to early January. Our cash and short-term deposits at December 31, 2017, totaled $3.3 million compared to $13.3 million at the end of Q3. And this ending amount does not reflect, of course, the $20.9 million net proceeds from the January 2018 follow-on equity offering.

Accounts receivable at December 31, 2017, were $20.9 million reflecting DSOs of approximately 120 days. Again, this is due to a concentration of shipments at the end of the quarter and the large collections that slipped from January to early -- I'm sorry, from December to early January. Had the $4.5 million in collections received in the first 2 weeks of January been received as expected in December, DSOs would have been 106 days consistent with our Q3 and Q2 levels.

Inventories decreased to $7.4 million compared to $8.8 million at the end of Q3. And short-term debt from financing or receivables decreased slightly to $7.4 million in the quarter compared to $7.6 million at September 30, 2017.

Looking forward, we expect revenues for the first quarter of 2018 to be in the range of $10.5 million to $12 million, reflecting our typical seasonal weakness. And we expect non-IFRS gross margin in Q1 to be above 40% and non-IFRS net loss per diluted share to range between $0.07 and $0.08, based on approximately 94.4 million weighted average diluted shares.

Our guidance for Q1 non-IFRS net loss per share excludes noncash stock-based compensation expense, effective interest adjustments related to the convertible debt and other financings and any other relevant noncash or nonrecurring expenses.

As Georges indicated, we expect the growth in the IoT business to accelerate this year. The broadband business is expected to gradually improve in 2018, and our assumption is that revenue from the vertical markets, which includes public safety, avionics and various strategic partnerships, will be at least similar in 2018 to 2017.

So our growth in 2018 will be driven by full year shipments for CAT 1 combined with the ramp in CAT M1/NB1 from design wins already in hand as well as others we may close in the near future. It's premature to give a specific target for IoT revenue for the year, but we expect substantial growth in CAT 1 as customers provide devices on more networks. And we fully expect the ramp in CAT M1/NB1 to build momentum as the year progresses.

Before I turn the call back to Georges, I'd like to just remind you that at the conclusion of this call, we will post a written version of our formal remarks in the Investor Relations section of our website on the Webcasts and Presentations page. That's the same location where you will find the audio replay.

Georges?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [4]

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Thank you, Deborah. So before turning the call to the question, the key message of our today's call, in my opinion, can be summarized by just a few simple words, and I would like to conclude with this. Yes, we had some challenges in the broadband business that limited our 2017 revenue growth. But the IoT business, which is the major growth engine of the company, is doing great. We are the technology leader of LTE for IoT. We have a strong base of customers and partners and a solid partnership with carriers worldwide. And IoT market is developing very nicely. So all this will result in 2018 and beyond in revenue growth acceleration and value creation to our shareholders.

Thank you for listening. And I would like to turn now the call for the questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Mike Walkley of Canaccord Genuity.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [2]

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Georges, just a little more color on your IoT revenue growth expectations for the year. Can you talk about just that ramp in the second half? It sounds like CAT M1 kicks in the second half. Can you maybe help us think about what could be the IoT run rate exiting the year versus the start of the year? And could you also give us your view of the mix of CAT 1 and CAT M1 sales for 2018?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [3]

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Mike, well, obviously, when you look to the mix, I will say, the IoT global, as I said, we expect a strong growth. And I gave an indication, which is without really giving a guidance, because taking a little bit the consensus number and a look around this, I believe, making 50% of this number in IoT, this is really our target for the year. This number, in my opinion, will be coming, I don't know if I should say 50-50, maybe little more than 50 in CAT 1. We could see maybe 55 CAT 1 and 45 CAT M, if I have to give a guess today. But on one side, the CAT 1 will be full year business, because this is really -- as I said, we had a half-year business last year, and we have very good visibility since Q3 shipment, Q4 and Q1 backlog. And the forecast I'm getting from customer, whether the customer buying our module in the CAT 1, like the Geotab, (inaudible) and so on -- or Gemalto was buying our chip. So this is really quite solid the way we see it. It is a good forecast. Now obviously, the only variable, which is today a little bit more complicated to guess, is the CAT M, where here, we have many module partners. Some of them have signed deal already and start shipping. As I mentioned, we shipped for $1 million in Q4 in CAT M. This represents more than 200,000 CAT M chips that we sold to couple of customers. I will say, this means we have really some run rate starting already since, I'll say, end of Q4, beginning of Q1. But obviously, this will accelerate, and the majority of the design launches are going to happen more towards the second half. Some of them will be in Q2 and some more in Q3. I mentioned, for example, that we have a carrier SKU -- 3 carrier SKU that will be launching in the second half. So 3 independent devices that will be launching in the market. And you have, obviously, the ramp up of our module maker going there. So I don't know if this is -- my comment is enough to give you a color on this, but this is what I could say about it without really giving a real guidance there. But if you make the split, 55-45, you get the number more or less on the CAT M.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [4]

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That's helpful. And then just touching base on the IoT environment, as you look at your design pipeline and the ramp coming, do you see any change in the competitive environment? There's been some new companies launching some solutions in the markets. Have you seen any changes in competitive environment as you execute on your pipeline this year?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [5]

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Yes. I mean -- obviously, I mean, the environment is somehow positive in a sense that the market is validating, and there is no one day where we don't see carrier moving full speed. And I reinsist on this, we didn't see this in the CAT 1 world. When we removed to the CAT 1, it was much slower, much longer. It took us much longer time to ramp up to product. The CAT M I see completely different speed. First of all, people are really jumping quickly to get product to the market because there is a value proposition coming with the CAT M, whether from the power or the cost or the data plan of the carriers. So all those drivers, I will say, are incentives to the end customers to launch product. So this is absolutely happening. And obviously, in this environment, there is a -- the competitive landscape is developing, with people coming with solutions, sometimes announcing and so on. As we are speaking, I didn't see any product certified other than the, I will say, this duopoly between our big brothers and [Sequans], I mean, that we have the 2-chip solution. We still here -- our closest competitors, they were supposed to come with the product last year. They are not there yet. I'm still hearing more beginning of this year. And we have heard some new other guys are announcing product, which is, I believe, it will be the beginning of the journey for them to go through development of the products, developing the software, certifying, validate this in the field. I mean, you cannot imagine the amount of effort we put behind Monarch. As I said, we have this since 1.5 years. And for 1.5 years, really working, I will say, mostly with Verizon and AT&T because they are the first 2 guys ready to get all this working up, running (inaudible) within the field and check all the corner cases and so on, it's really very complicated task. And we are happy to lead this. And the last bullet about it which I would like to say, anyone announcing a product today, he is announcing something taking into account, I will say, what we have done 2 years ago. But in the meantime, as you can imagine, we are working on next-generation product, we are working on derivative of Monarch. I didn't want to say anything more in detail on this because timing of product announcement will come as we determine internally from marketing point of view. But you will hear soon from us new product that will set the bar even higher versus Monarch. And I believe towards the second half of the year, you will see another bar as well coming from Sequans. So we are staying there, and we believe we'll defend our competitive landscape and, say, our leadership position in this competitive environment to maintain our market share.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [6]

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Last question for me, and I'll pass it on. Deborah, as we think about the mix of CAT M1 coming into the models later in the year, how should we think about just modeling gross margin trends for the year?

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Deborah Choate, Sequans Communications S.A. - CFO [7]

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Overall, we're expecting that the gross margin on the CAT M should be equivalent. So I think for us, it's really overall bringing up the volumes to get more into the higher 40s on the chip business.

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Operator [8]

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We will go next to the line of Quinn Bolton of Needham.

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Nathaniel Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [9]

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First off, a little bit more color on the carrier-branded CAT M1 design wins. Maybe a little bit about what the applications are, those trackers, or those other types of CAT M1 devices?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [10]

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Oh my God, Quinn, I don't know how much I can say on this very frankly without really making a mistake versus my carrier's partners. I'd like to avoid commenting on this. Obviously, you could imagine those, I mean, if I -- many people are interested in many consumer-type application and/or businesses, B2B application. So this is the kind of product that the people are launching. I could not comment more on this. I mean, you heard some carriers announcing here and there some kind of application there so really to serve them from this angle.

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Nathaniel Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [11]

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Understood the sensitivity, Georges. Maybe another shot at that. Do you think these are sort of high-volume wins? I mean, could these be devices that ship in steady state hundreds of thousands of units a quarter? Or is that too aggressive on an assumption?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [12]

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No, absolutely. I mean, obviously, when we are talking here about 3 designs, I didn't want to mention which carrier and so on, there is a risk related to this about how much the carrier will be successful in launching a new product and so on. But you can imagine that they are not products to build 1,000 -- 100,000 units a year. So in principle, the target for those are really in -- hopefully, in minimum 0.5 million unit a year. So this is the minimum target we achieved. And some of them have the potential to be in millions of units. But obviously, there will be a ramp. There will be some results. Very frankly, when you look to it, you have so many application happening in the CAT M, and some of them are really big, some of them will be testing. Over time, all this will build up and the volume will be there. Whether this device or the other, it doesn't matter for us. I mean, we are -- whether people buying modules from our partner or people taking our chip for a design chip onboard. And in the initial phase of launch and so on for this year, if you're looking really for short term, they will definitely launch in few hundred thousands of units for the second half.

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Nathaniel Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [13]

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Great. And then just the broadband business IoT mix in the December quarter, can you give us sort of a sense what the broadband revenue was in Q4?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [14]

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It was below $5 million in Q4.

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Nathaniel Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [15]

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Okay. And given sort of the current trajectory of that business and the sort of anticipated modest recovery beginning Q2, does that business -- do you think that, that business is now likely to be down in calendar '18 versus '17? Or do you think you can get back to a roughly flat year in broadband with a ramp of new products in the second half of '18?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [16]

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In our projection, we're taking this a little bit down because we assume that Q1, if you want, or beginning of Q2 is going to be weak. We started the year in '17 very high. We started close to $10 million or $9 million, I will say, in Q1. So obviously, we had a year which is -- the impact was more in Q4. But we enjoyed first half at high level. So in our cautious approach, we are assuming year-to-year it will be down in broadband, a little bit down. But very frankly, we are seeing a lot of good opportunity that -- and one of the challenge, I would like to come back to this, that we had on the broadband that the broadband business is not too much diversified because the carrier, all of them, didn't launch single-mode LTE. We should not forget this. I mean, Sequans is playing in single-mode LTE broadband, and [unpleasantly], this didn't go to all the carriers so far. And it was limited to the emerging plus Verizon. But as I see this year, things continue to go in the right direction. We're seeing our carriers in Europe. We're seeing carriers in the U.S. outside Verizon, coming with a new RFP, an opportunity where they are willing to go single-mode LTE. So the potential remains big for this application, and the carrier are deploying 4G to exceed 3G. I'm hearing this confirmation from other carriers where someone like AT&T mentioned this to me as well. So all this let me feel like the opportunity are there, and they are going to come. Unfortunately, we had some issues at the end of the last year, and this is going to continue. So maybe the impact of all this would not be highly (inaudible) in 2018. But it will go back, I will say, hopefully, to growth at the end of the year and beginning of next year.

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Nathaniel Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [17]

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Understood. And last question, Deborah, the OpEx guidance of roughly $11.5 million, was that a non-IFRS number? Or is that a IFRS number? And a related question. I know some of that is due to the appreciation of the euro. But it also sounds like you're adding staff. Should we sort of interpret that staff additions as sort of a confidence in the design wins that you have and kind of the revenue -- expected revenue ramp you see in -- throughout 2018?

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Deborah Choate, Sequans Communications S.A. - CFO [18]

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Yes. So first of all, that's the non-IFRS number. And keeping in mind that sort of a $0.10 change in the euro-dollar adds about $500,000 per quarter in terms of our OpEx. So a lot of that increases is related to the dollar movement. And yes, I would say, the headcount increases are because we're seeing more and more business opportunities and more and more operators to support. So it's a good sign for the future.

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Operator [19]

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We'll go next to the line of Scott Searle with Roth Capital.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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Deborah, just quickly to hit on the balance sheet, I wanted to make sure I had my hands around that. So it sounds like there was already a collection on a couple of large receivables in the first quarter. And also, I think you typically have a tax credit that gets paid in the first quarter. So if you could just update us on that as well. And additionally, Georges, on the strategic front, are you still -- the evolution of these relationships, are they -- is there a cash component that's going to be involved with that? Or otherwise, can you give us some idea about where they stand and how that might or might not impact the balance sheet? And then I have a couple of follow-ups.

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Deborah Choate, Sequans Communications S.A. - CFO [21]

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So in terms of the cash collections, yes, I mentioned that we had $4.5 million that came in, in early January that should have been paid in the end of December. In the first quarter, we get a little bit of grant money coming in, but not a significant amount. The tax credit actually comes in, in the third quarter.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [22]

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And then for the -- Scott, for the strategic relationship, I mean, definitely, I'm very optimistic, and I tend to say if I have to confirm my view on this versus last call, I'm -- there is progress, and I'm more optimistic than last call, if you want, on closing some of those deals. We have -- some of them made very, very good progress and, hopefully, they could close. Again, the thinking about those strategic relationship is not only to go on and get some money, which is, obviously, money is important, whether coming as revenue line or to strengthen the balance sheet, all this is an important element. But there is the go-to-market and strategy behind it, which is -- also could bring a lot of value for the company and shareholders because if Sequans, thanks to some of those strategic shift, we can secure and accelerate or secure some market share or secure some region because of those relationship, this will be very important, I will say, for the company. And obviously, all those relationship, I will say, will have some cash component linked that will help the company on the balance sheet somehow. And now the nature of those cash, how they will come whether equity, whether revenue and so on, it could be either way, it could be the 2 together, I will say, some of them. It depends. It's also part of the negotiation that we have with the partners.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [23]

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Okay. And just to follow up on the IoT front, you've got a number of strong relationships on the semi front with STMicro and Skyworks. STMicro, we've seen some recent news related to what they're doing with the CLOE platform. I'm guessing we might see some stuff at Mobile World Congress as well. But Skyworks has been a little bit more quiet and, I guess, in the context of Nordic announcing relationship with Qorvo, wondering if you could update us in terms of how that's progressing? Is that relationship strong? Do we start to see some more tangible benefits of that? And in a broader view of CAT M1 this year, how are you thinking about the overall size of the market? I think in the past you talked about being 10 million to 30 million units and having relatively high share. I mean, how are you seeing that opportunity shape up now in 2018? And what are your thoughts on share? I think you talked about earlier probably being 1/2 of the market in the early going. And we've had some competitive announcements out there, but it seems like they're more skewed towards 2019. So maybe your updated thoughts on that front.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [24]

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I mean, obviously, the technology partnership that we have, we value all this, and it is very important for a company the size of Sequans because it give us strength and positioning. So with STMicro, as I mentioned, the CLOE platform is very, very successful. We have real design win with this. Not only one, I mean, a few design win with many customers. By the way, some of them have been announced. Some they secured even on their side customers. I mean, in other words, it's really business in hand for us and for ST. And the relationship is moving extremely well. And what I could say, we're not only stopping here, we're thinking about as well the future of this CLOE and how this will evolve to stay competitive and be more better priced, better cost, better power and so on. So this is definitely moving well. I'm quite happy about this. Skyworks is -- absolutely, it's a very strong relationship that we have. You need to as well keep in mind that when Skyworks defined their front-end module for this IoT space, we did it with them. I mean, we were the guy helping Skyworks to define it exactly to come with what we call the worldwide SKU, where one hardware can fit all the career bands worldwide. All the other guys copy us afterwards. You see, Qualcomm didn't have it. And all the other small competitor, they were coming with this stuff. Some of them they changed the name. I mean, I -- we talk about single SKU, other guys, they talk about 1 SKU, which is -- just to call it like this. But all this was, thanks to this relationship, ahead of everybody, which is Skyworks and Sequans. And what I could say again, all the product that we have certified, all those customers that we are launching, at 90% of the cases, they are with Skyworks as well. And this is good for them and good for us. And definitely, thanks to this relationship, we're not stopping where we are. And we are working on next generation as well how to improve the solution together. And I cannot comment more now. But market will hear from us as well. Again, people will see that the bar -- as soon as someone is talking about something, we'll be delivering something even higher what he's talking about. That's how you should perceive us in technology front.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [25]

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Georges, just from a market perspective, how big do you see the market this year? What's your…

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [26]

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I mean, I'm a little bit puzzled and confused by China. Whatever I talk about market, it's very hard to talk about the NB-IoT in China. Because in China, if the government decide to equip all the park meter or all the bicycle or whatever on one night, even if the business case is not flying, I mean, the government is able to do this, and you can have millions of unit and so on. So it's very, very hard to guess real number. But if I'm talking about the business today, where I see, for 2018, it will be majority focus on the U.S., majority specifically on Verizon and AT&T, in my opinion, even if some others will come in the second half of the year in Japan, specifically, obviously, China and Europe and other carriers in the U.S. And in this scope, when I look to this, I'm still thinking about those -- the 10 million plus, maybe 15 million unit that could be CAT M technology majority in the U.S. And our market share, yes, definitely, we believe that all the competitor coming to the market, they will not influence the market share of 2018. 2018 is over. It's between 2 guys. Now we'll see if it's 50-50 or 60-40 or whatever because it depends on the number of unit that we'll be shipping or what product was successful more on one guy versus the other guy. But this is how we see.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [27]

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Just one last question, and I'll hop off. It sounds like you're talking about -- in the context of the competitive landscape, people announcing products still have to go through certification process. But you basically -- what I'm hearing today is that the next generation of SX, worst case scenario, we'll be seeing that in the second half of this year or at least more details around the specs and otherwise. Is that correct?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [28]

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Sure. Absolutely. And again, when we talk about the certification, don't take this just on the question of certification go on work 1 month or 2 months with the carriers. Getting a stable stack for LTE guys. When you saw how many companies tried to play in LTE and big players and hundred of million of dollars have been spent on R&D, very little delivered, very little people managed to get it out because it's complex. It's not because people are not smart, because it's very, very complex. And Sequans is not leveraging, I will say, 1 year of LTE or 2 years or 3 years. It's 15 years. All our life this is what you're doing. And when we move to go CAT M, we were doing CAT 1 before, we were doing CAT 4 before and so on. This helped us a lot. And despite this, we go and spend 1.5 years to get a matured solution on new chip CAT M. So when you put this in perspective, it gives you what any new competitor is able to do and impact the short term.

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Operator [29]

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We'll go next to the line of Craig Ellis with B. Riley FBR.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [30]

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Just a couple of follow-ups to some of the prepared and Q&A comments. Georges, first on strategic partners. It sounds like you're working on a number of opportunities. I'm hoping you can give us some color on your view for the potential for those strategic partners or partner engagements to be announced in either the first half or the second half. And your view on the potential for there to be any kind of cash or other investment either in the first half or the second half of this year related to the work that you're doing there.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [31]

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Craig, I mean, very frankly, the way I see it, I mean, it's -- again, I don't want to set -- because things can develop, strategic relationship can evolve and -- with the strategy as well of the company on our side what we want to do. But the way I see it, we could conclude something in the first half definitely. This is very realistic, I will say, where we are today and the progress we have done. And as I mentioned, if we have to stretch maybe we could avoid, I will say, delay, I will say, the fund raise on my call. But this means something was really imminent, and they are still there. And still our target is to close some of them first half. And some of those deals, I believe, they have an angle of strong business development on the company's side that I'm doing everything to close it ASAP because this will give us more, I will say, potential, not factoring in our revenue of 2018 or my projection, if you want, in the short term anything of this. But obviously, those happening will boost further our revenue potential and definitely will help in the cash for the company to get stronger balance sheet for our future.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [32]

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That's helpful. And then a follow-up on the broadband commentary. It sounds like the U.S., Europe, Japan and emerging markets remain the key opportunities. But as you look at the potential inflection of that business in the second half, where do you feel most confident about growth? Would it be in the U.S.? Or is it in one of the other geographies?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [33]

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In the broadband, I mean, 2 elements. On one side what we were hoping -- I mean, as I mentioned, we have, first of all, a new product in the broadband coming to the market. And this product is really nice. I mean, I don't want to say a lot of things on this. But when I look really to the competitive product in the broadband, which is, in the broadband space, really, we compete, obviously, with Qualcomm, we compete with Huawei, using their own silicon. These are the major guy. But when I look where they are heading on the broadband, what they are developing and what we have done there, we're really addressing something that they haven't covered, and in terms of, if you want, performance, price positioning and so on. And this product will come out this year second half. And we have many guys waiting for this product to engage further and develop further the business. And on the other side, which is related to what your question directly, which is, outside of Verizon and emerging, we have many carriers moving. We have, for example, one of them already testing products with our customer, completely new product, new customers. It will start with initial revenue. I mean, that will be huge at the beginning, but this really penetrating a new carrier with a single-mode LTE. We have a couple of RFP in the process with our customer are bidding there. So I believe and what I'd like to see even if Verizon business and emerging business are recovering and we go back to where we've been last year, I would like to see at the end of the year more design win outside of those market that will diversify further the broadband and give the broadband more potential -- higher growth potential, but also less sensitivity to any problem happening with one product (inaudible) on Verizon or one emerging carrier getting a little bit of inventory and so on. So this is really my target, and I believe it's achievable. The only question is really we need to be a little bit patient before we see the revenue that will come from this.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [34]

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That's helpful. And then the last question for me. I understand the comments about the uncertainty of the China market given the influence that the Chinese government can have on the way product adoption takes place. But there's recently been a report, I think, stating that the Ministry of Information Technology thinks there could be as many as 100 million NB-IoT units that would ship this year. The question isn't on that as much as if China is that committed to NB-IoT and given the global network relationships that you have, what do you think that means for the pace of activity in other countries globally as we hit the on-ramp to CAT M and NB-IoT?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [35]

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Well, I believe, very frankly, the carriers are going back to the what I hope that from the beginning they would start to -- some carriers at the beginning, they enter into a kind of stupid competition with the technology between CAT M and NB-IoT. And very frankly, the 2 can coexist because they don't address the same use cases. So you can argue at the end, do you have more parking slot to connect versus wearable or versus alarm panels and so on? So you can argue, how big -- if you take from the equation if the network NB-IoT is ready or CAT M is ready, you assume that it's ready everywhere. You have both of them existing. You can argue that this case is better to go on NB-IoT and this case is better to go on CAT M. And I have always the feeling like if you put it in dollar perspective, you will have at least 50% of this CAT M. And at the beginning, you had some fight because you had some of the Chinese pushing more NB-IoT and even some European lining behind them. The way I see it today, all of those guys are now engaging on CAT M, and all of them get rid of this fight, and they are -- they want the 2 technology, and they're deploying the 2. Even carriers, they were very, very strong on their NB-IoT position, now they talk about CAT M as well. So for us, it's good because this means we have the 2. We have the leadership on CAT M and NB-IoT, and we're moving there. Now the potential, I still believe that China NB-IoT, they will favor it, they will push it for any political reason and so on to have at least the NB-IoT successful. And that's fine. But it will not impact the rest of the world. I mean, I don't see this why this will be impacted because the use case, whether in the U.S. or in Europe, if you need CAT M, you need CAT M. It's -- that's how it is. And we are now in kind of second-generation CAT M. So even the price difference between CAT M and NB-IoT will be closer. So I don't see any showstopper against CAT M. This will continue developing, and you will have as well NB-IoT developing. And we'll play the 2 on our side.

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Operator [36]

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We'll go next to the line of Jim Boyle with Charles Schwab.

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James Boyle, [37]

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Just curiosity, what is your current -- what can you tell me about the current sales force? Are you looking to expand it in the future?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [38]

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Well, our -- depends what you call sales force, because we have between the pure sales that I would call really pure salespeople we have -- but you need to add all the business developing -- business development and marketing guys. And then you have, obviously, the support team, which is very strong. On the support, we are -- we have very, very large team, because it's key. This is where we make the difference to support our customer, be with them and all the carriers. And we have almost offices and people in every -- any big Tier 1 carriers and sometimes with vendor lab as well. So this is large. In terms of sales, pure sales what I'll call it, we have close to 10 people, something like this.

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Operator [39]

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And I'll turn it back to management at this time for closing remarks.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [40]

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Okay. So thanks for your time today, guys. Happy to have you with us. Many thanks for all the questions and listening. And looking forward to have you at our next call, Q1 call in April, right?

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Deborah Choate, Sequans Communications S.A. - CFO [41]

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Early May.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO and President [42]

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Early May. Thank you very much, guys. Bye-bye.

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Operator [43]

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Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.