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Edited Transcript of SQNS earnings conference call or presentation 30-Oct-18 12:00pm GMT

Q3 2018 Sequans Communications SA Earnings Call

Paris Nov 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Sequans Communications SA earnings conference call or presentation Tuesday, October 30, 2018 at 12:00:00pm 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 & 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

* 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 Third Quarter 2018 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 sales, sufficiency of funding, our objectives for future operations and potential strategic partnerships 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 in 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.

Please go ahead, sir.

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

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Thank you, Kelly. Good morning, ladies and gentlemen. This is Georges speaking. I'm with Deborah Choate, our Chief Financial Officer. Welcome to our third quarter 2018 results conference call.

As you know from our press release, our revenue in Q3 was lower than expected due to project delays in our IoT business. In fact, we are seeing around a 6-month delay in the ramp of the LTE-M market. We'll give you in a moment more details about reasons, but I want to emphasize that these are only delays. The market potential is solid and the pipeline of opportunities is getting better every day. Also, our traction in IoT and competitive position remain excellent. The projects we have in hand are still moving forward, and we are adding new ones, so our mid- and long-term business potential is not impacted, although we have to deal with the short-term financial implication of the delayed revenue ramp-up.

In this regard, we have already taken a few actions, including modifying the terms of the agreement on our largest tranche of convertible debt to extend the maturity date by 2 years. In securing $18 million of additional debt financing, $4.5 million are extra convertible debt and around $14 million are coming from a loan facility.

We have lowered our break-even point by reducing non-IFRS operating expenses to a run rate we expect to average $9.5 million per quarter for 2019. As a result, we believe we have created enough additional runway to be able to avoid the need for any additional financing all the way through 2019, even with a worst-case revenue model well below our current expectations. We have also made further progress toward a strategic deal which includes a financing element, but this is something we want to do for strategic reasons, not something we need to do in order to fund the company, as the actions I mentioned before are sufficient.

Aside from the short-term consequences of the timing of CAT M revenue, the big picture hasn't changed. We still see market reaching more than $250 million, LTE-based IoT units per year by 2021, and CAT M and CAT NB are the dominant portion of this. As of today, we have been chosen or are close to it for over 60 CAT M/NB projects that are in various stages of maturity. Half a dozen Sequans power devices are currently shipping for applications such as trackers, quick online ordering button and sensors, with about 20 additional devices scheduled to launch by mid-2019.

On top of the design wins and design ins, we have a line of sight to more than 70 additional specifically identified projects, and this number is growing all the time. This means that between design wins, design ins and new opportunities, we are working on over 130 different projects, representing a far more diverse pipeline than we've ever had before. Through these projects, we are engaged directly or indirectly with a wide array of end customers of various sizes and stripes.

One indicator of the vast IoT opportunity is the impressive list of companies that are now getting involved. We have projects in our pipeline involving close to 2 dozen different companies on the Global Fortune 500 list. That means some of the largest company in the world are depending on or are thinking about depending on Sequans for 4G and 5G connectivity.

So in this context, let's discuss specifically what happened in the third quarter. The delay in the ramp of CAT M was caused by a number of customer-specific issues that fall into 2 main categories. The most significant cause of the delay was some customer perception of the readiness of the CAT M networks and the extension of CDMA product activations through year-end after an earlier announcement that they would end in June 2018.

So after our initial CAT M shipments to our channel partners, the acceleration we expected to begin toward the end of Q3 and continue during Q4 has been delayed because of slower transition from 2G to LTE, plus in some cases, there may have been some 2G inventory to use up. As you know, among the first CAT M applications are existing IoT/M2M applications running previously on 2G/3G technology and are transitioning to CAT M or NB so the extension of this transition has a direct impact on the timing of the CAT M RAM.

The same issue, by the way, has also impacted our CAT 1 revenue, as some of our CAT 1 model customers took this opportunity to extend the life of their CDMA products instead of moving full speed on CAT 1. Let me stress here that this issue will go away over the next couple of quarters as the extension of CDMA activations has ended and CAT M networks are reaching full maturity. For other CAT M customers with entirely new IoT application not transitioning from 2G solutions, their delays were simply because the target launch dates proved to be overly optimistic for one reason or another. The fact that target here is to build the brand-new designs implying new end-to-end systems, hence it’s taking longer than expected to be ready due to the complexity of such system.

The net effect of these factors is that the acceleration of the CAT M ramp now looks like it will realistically happen toward the end of Q1. Note that the delay we are seeing here is impacting all the CAT M market, and it is not specific to us, as all the ecosystem is facing the same challenges.

Meanwhile, we remain very excited and bullish about our IoT business, because if we start first with our CAT 1 business, it's progressing very well and we are working on new projects related to new applications such as connected speakers and home security. Also, we are engaged with several customers with a plan to introduce devices on the Sprint CAT 1 network next year, thus extending our business to all carriers in the U.S.

On CAT M, we have several hundred thousands of devices deployed in the U.S. from half a dozen design wins for a range of applications, and we are very pleased with the performance of our Monarch platform. Outside the U.S., CAT M certifications are complete or close to complete with many operators around the world, specifically, in Japan, Korea, Australia, Canada, Europe and even in China. So our plan to expand beyond the U.S. market is on track.

It's also interesting to note that beyond the regular telco market, we have a number of opportunities with nontelco service providers like satellite and cable companies interested in our IoT technology, which further broadens our potential served market. We have more than a dozen key CAT M design wins ramping between now and mid-2019, plus a number of smaller ones as well. In addition, we have possible new deals that are very advanced in the proof of concept stage, each with the potential to be multi-million units that could launch in the second half of next year.

Now that we are seeing bigger customers coming into the pipeline with bigger deals, it presents further confirmation that the IoT market is really happening since larger companies often wait to confirm the market and tend not to be the early adopters. We have some opportunities in the pipeline with the potential to be 5 million to 10 million unit per year each. Most of these deals have a life of at least 3 years.

Looking at our IoT pipeline. We can say we have design wins or advanced designs that are close to being secured, representing future revenue of at least $140 million over the collective life of these CAT M/NB deals. Plus, we are engaged with projects, representing another $180 million worth of CAT M/NB business over the life of those deals that would probably be spread over the later part of 2019 through 2023. So that's the line of sight to $300-plus million of revenue from specifically identified CAT M/NB projects, and this pipeline will continue to grow larger from here. Converting this pipeline's revenue and further expanding the pipeline is what we are keeping in our sights.

Let me now say few words on our broadband and vertical activities. The broadband business in Q3 was in line with our expectation, and we continue to expect gradual improvement over the next several quarters. During the third quarter, we secured a new customer in Latin America. Longer term, we stand to benefit from greater single mode penetration, as 4G networks around the world achieve coverage. We expect more focus on growth from developed markets, as the opportunity in industrial routers continue to grow and may be somewhat shielded from Chinese competition based on security concerns.

In the U.S., the CBRS opportunity looks promising and is moving through various regulatory milestones. We are well-positioned, but it's difficult to get a good handle on the timing or the magnitude at this point, and thus the analysts believe it could reach a few million units a year by 2021.

The vertical markets also continue to develop according to our expectations. We have good visibility in this part of our business, but there can be quarter-to-quarter lumpiness depending on the timing of reaching percent of completion milestones or finalizing the documentation for [NRE] or large license deals. We are very pleased to see the success of these relationships. We are extending some relationships with additional milestones, and we are expanding others into new area of collaboration such as satellite applications.

On the strategic front, we are making good progress with one of the strategic opportunities we have been pursuing and expect to report more before the end of the year. We are very positive on the potential it represents because it's motivated by the business opportunity. As I mentioned earlier, the funding element is attractive but not essential. The level of interest generally from potential strategic partners remains very high, which was one of the reasons we pursued the new capital with the lowest amount of dilution possible to our current shareholders.

So if you look at the big picture and ask what has changed, the answer is we have encountered a few short-term bumps in the road that are frustrating for management and investors alike because we have been depending on the timing of the ramp to reach cash flow break-even. We have put funding in place to position the company, to manage through the ramp and take the best advantage of the strong interest we are seeing in the company and its product.

We strongly believe the remaining risks are manageable, and we are making our plans based on cautious assumptions while also ensuring we remain in a position to take advantage of any upside that comes along. Now I will turn the call over to Deborah to discuss the financial perspective. Deborah?

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

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Thank you, Georges. Good morning, everyone. I'd like to add some details about our Q3 results and the debt funding we've secured that does not appear on the Q3 balance sheet, as the funds were received in October.

Our revenue was $10.3 million for the third quarter of 2018, a decrease of 18.7% sequentially from the second quarter, primarily due to the delayed ramp in CAT M that Georges described, and a decrease of 9% compared to the same quarter a year ago. The change versus the third quarter of 2017 reflected significantly higher IoT product and other revenue that was more than offset by lower broadband product revenue compared to last year.

In Q3 we had 4 10% customers. 2 are distributors which serve a number of OEM and ODM customers. 1 of the 10% customers is an OEM, and the last 1 is an ODM. Gross margin in Q3 was 35% compared to 39.4% in the second quarter of 2018 and compared to 44.3% in the third quarter of 2017. The lower gross margin was primarily due to a shift in product mix toward a higher proportion of modules.

Operating expenses were $11.5 million in Q3, down from $11.9 million in Q2, reflecting the impact of vacations in the quarter, favorable foreign exchange rate, and lower sales and marketing expenses. The increase from the third quarter of 2017 is primarily a result of the increase in headcount and some higher legal fees.

Subsequent to the end of the quarter, we determined that we could lower our break-even point without jeopardizing our technology leadership. We are taking several cost reduction measures by optimizing various support functions and realigning our R&D resources, leveraging our technology leader position and the progress we have made on our product roadmap. Most of these moves have been implemented, but it will not show the full effect until next year, resulting in non-IFRS operating expenses that we expect to average about $9.5 million per quarter in 2019.

Our third quarter operating loss was $7.9 million compared to an operating loss of $7 million in the second quarter, and $5.6 million loss in the third quarter of 2017. Our net loss in Q3 was $9.9 million or $0.10 per diluted share or ADS, compared to a net loss of $8.1 million or $0.09 per diluted share ADS in the second quarter. The net loss in the third quarter of last year was $6.9 million or $0.09 per diluted share.

Our weighted average share count was 94.5 million shares in Q3 compared to 79.8 million a year ago, and 94.5 million in Q2. On a non-IFRS basis, our net loss for Q3 was $8 million or $0.08 per diluted share, compared to a non-IFRS net loss of $6.8 million or $0.07 in the second quarter, and a net loss of $5.9 million or $0.07 in the third quarter of 2017.

Our non-IFRS net loss excludes noncash items related to stock-based compensation expense, and the noncash impact of convertible debt amendments and effective interest rate adjustments related to the convertible debt and other financings. Cash used in operations in Q3 was $1.3 million compared to $8 million in the second quarter, reflecting the recovery of the French research tax credit as well as research grant funding, together totaling $4.7 million in Q3.

Our cash at September 30, 2018 totaled $5.2 million, compared to $7 million at the end of Q2. The September 30 cash balance does not include the $18 million in new debt which was funded in October, and I will explain the details of that in a moment.

Accounts receivable at September 30, 2018 were $20.8 million, a slight decrease from the end of Q2. Excluding the impact of unbilled service revenue, DSOs were 114 days, up from 112 days calculated on the same basis at the end of Q2, and continue to reflect the impact of billings being concentrated in the last part of the quarter. Inventories were down slightly at $7.3 million and short-term debt from financing receivables increased by $1.4 million to end at $9.5 million at the end of Q3.

Subsequent to the end of Q3, we restructured the $12 million principal convertible notes issued in 2015, extending the maturity by 2 years to April 2021 in exchange for a lower conversion price and a grant of warrants. In addition, we issued $4.5 million in new convertible notes on the same amended terms.

The funds from the $4.5 million issue were received in early October, so this debt was not recognized on the balance sheet at the end of September. We also secured from Harbert European Specialty Lending Company EUR 12 million of traditional venture debt, which will be repaid over time with a 42-month term and interest-only payments for the first 12 months. With the $4.5 million in new convertible debt, this represents a total of about $18 million in additional funding. All the details of these financings are disclosed in the form 6-K filed today, which is available on our website.

In connection with the foregoing transactions, we repaid $1 million principal convertible notes issued in 2016, leaving $6 million of principal in these notes maturing in 2020 if not converted. As Georges noted, we believe the new funding combined with lower operating expenses will give us sufficient cash for all of 2019 using cautious revenue instructions, and we have no plans to access the capital markets.

Turning to the near-term outlook, we expect our non-IFRS results for the fourth quarter to be similar to Q3. We prefer not to give detailed quarterly guidance until we have better visibility on the CAT M ramp. Before I turn the call back to Georges, I'd just like to 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 Webcast and Presentations page, the same location where you will find the audio replay.

As an additional reminder, we will be participating in 2 upcoming conferences, the UBS Global Technology Conference in San Francisco on November 12 and the Roth Technology Corporate Access Day in New York City on November 14. We look forward to meeting with you at one of these events if you are planning to attend. Those conferences are one-on-one meetings only, so there will not be a group presentation webcast available for either of them.

And now I'll turn the call back to Georges.

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

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Thanks, Deborah. So, before turning the call to questions, let me little bit make couple of points as a conclusion for this conference call. Obviously, we are disappointed with the timing shift of our IoT revenue ramp acceleration caused by various reasons I explained before, all not related to our execution. But it's important as well to keep in mind that we've dealt with the financial impact of our CAT M revenue ramp on best possible terms, and we are firmly on track to reach cash flow equivalent without returning to the capital markets.

Again, we remain confident that the market potential is there, and the ramp has indeed begun even if the acceleration is taking a little longer to materialize. Equally important, our competitive position remains strong, and because we have maintained an aggressive pace of investment in our roadmap, we can afford to ease off a little temporary. This will not interfere with introducing our next-generation technology next year or reaching other important milestone.

Despite the timing issues, we continue to have a very valuable business. Our people, our technology, our know-how, our relationships all remain extremely difficult to replicate. The scope of the market opportunity and our specific strength are being recognized by more and more potential customers and strategic partners and will continue to contribute to additional value in the future.

Thanks for listening and now I will be pleased to take your questions. Kelly?

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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 Scott Searle with Roth Cap.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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Georges, Deborah, first to clarify some of the sequential revenue growth in the second quarter or lack thereof, broadband was up sequentially, gross margins were down pretty much dramatically. I'm trying to figure out what the magnitude of the decline in the IoT sales looked like on a sequential basis. Looks like it might have been somewhere in the ballpark of around 30% or so. And was most of that then CAT 1 and module-driven, given the gross margin profile? And how should we think about the gross margin profile going into the fourth quarter?

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

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Well, obviously, the gross margin was a little bit tricky to give accurate guidance because as you know there is fixation between module and chip and fixation as well with services that in general which is a very high margin. So depending on the component, we could be well above 40% sometimes, at the edge to reach 40%.

So for this quarter, indeed, I mean, it's -- we had more modules than chip, and overall this didn't help to -- even the low level of (inaudible) didn't help as well to absorb the fixed cost. So we expect -- matter of fact, we don't expect an issue on the gross margin, and we continue to repeat this, that as soon as the revenue will ramp, because as you know, all the LTE-M business, all the CAT M business is more towards chip business, which is close to a 50% gross margin, and the CAT 1 is split in general between module and chip and add the services. So we don't see an issue there. For the Q4 specifically, again, it depends on the mix. We're expecting this -- you know, I mean if we have to give -- all depends on the mix there, but we could be around the 40% we are talking about we are targeting for this quarter.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Georges, just to clarify, though, the gross margins that you're seeing in terms of existing deals with pricing on CAT M are in the ballpark of 50% or 40% to 50%?

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

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Absolutely. I mean, obviously, you know, it's very sensitive information to share details there, but our cost structure and the way we're addressing the market is, you know, we have a fully optimized chip even with our first generation. So we don't see really an issue of gross margin in the CAT M business, and this is definitely that will help the plan of improving the gross margin next year and beyond.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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And just to clarify on the broadband front, so broadband was up a little bit sequentially in third quarter and you would expect that slight recovery to continue into the fourth quarter?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [7]

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We didn't say it's up, we said that it's in line of what we planned. You know, I mean, broadband is, as we said, it bottoms, it improved a little bit, and it's there. I mean, it's not -- I mean, we don't want to give really quarter-to-quarter by segment exact variation, but it's in line of our expectation and it will be in line as well -- we don't see an issue there. You know, vertical and broadband weren't really in line of our expectation. The issue we faced is, as I mentioned specifically, is the ramp of the LTE-M, that we were expecting to start seeing some acceleration and this been pushed. And we saw a little bit of impact on the CAT 1, which is, you know, specific for all the CDMA activation where 1 customer was supposed to boost more CAT 1 and to some extent they used more CDMAs than what we are hoping. So the transition to CAT 1 didn't move full-speed. And again, this impact of CDMA activation should go away end of this year.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Georges, just to clarify, though, so, you know, looking for the M1 ramp in the first quarter, what gives you confidence that at that point in time we're going to start to see the inflection? And maybe if you could give us some recent context or historical context for the pipeline. You've got a pipeline of $300 million now, 180 million-plus million in terms of design wins or 140-plus million of current design wins. What did that look like at the end of June?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [9]

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In terms of improvement quarter to quarter?

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

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Yeah.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [11]

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I mean, it's -- I don't know if I can give you it in terms of real value of the dollar amount, you know, quarter to quarter. But definitely, in the quarter, we added more design wins. You know, I mean, we had worked on, and the pipe is increasing. I mean, you could say each quarter we're seeing 10-plus new opportunity happening in this CAT M. So the business is really accelerating. I mean, there is no doubt about this. And again, the delay is really specific of the launch. I mean, we had product that has already launched. We're hoping that this will accelerate further, and to some extent people are not accelerating full-speed, as I said, because of this transitioning from 2G to CAT M, giving them more, I'll say, window of opportunity to keep using all the product before they transition full-speed on this.

Beyond this, as I said, we have key design, even without talking about the dollar amount. I mean, we mentioned that we have over more than a dozen, close to 20 additional devices in hand, you know, design win, that they should be launching between -- you know, scheduled to launch between now and 2000 first half -- or mid-2019. So the confidence level, if you want, in terms of pipe, as I said, it's big. But on top of this, independent of the pipe, the deals that we have in hand, I mean obviously we talk about half a dozen of device that they're already launching, but we have 20=plus in the pipe to launch between now and mid-2019. So we remain very bullish on this, and sooner or later this transition from 2G to CAT M is going to happen and all this will add up and will support the acceleration of our revenue ramp in the CAT M business.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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Okay, last one and I'll hop back in the queue, but the strategic discussions, sounds like they're ongoing. You don't need the capital now at this point in time, but is the expectation that you get something done by the end of this year? And I think you had talked about before China and verticals. Are those still the areas that are percolating?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [13]

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Yeah, I mean, there is still discussion with the China angle. Very frankly and without -- it's not a surprise you're all hearing about the sensitivity of some multi-close deal with China, so we are a little bit thinking about it twice, if you want, on this angle, but we still have interest and discussion there. And we are moving on the other strategic, which is really quite advanced. I mean, I don't want to give timing and disappoint there. Very frankly, what matters there is the business. There is no more rush, and I believe the financing will give us even better position even to negotiate any strategic deal, because we will not be doing this on the business of looking for financing the company, and it's progressing very well and hopefully I can say more end of the year.

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Operator [14]

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Next, we'll go to the line of Mike Walkley of Canaccord Genuity.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [15]

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Georges and Deborah, just with the cost reduction programs, can you maybe give us a high-level thought process of how you came up with $9.5 million per quarter and how you think maybe about worst-case revenue scenarios for 2019, given the ongoing pushouts in that planning process?

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

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Well, you know, on – in terms of transaction, as you know, we invested a lot so far. As you know, when you have an emerging market like CAT M happening, Sequans became -- we're the first platform to the market, the most optimized platform in power and cost. And thanks to this, we took a very strong position in this market and we have all these type of design wins. And obviously, we didn't want to take the risk of being late on the second generation, because no matter what, when someone is doing a product 2 years after you, if you do nothing, he could at least improve a little bit the solution and he could show up and saying I have better product than Sequans.

So to take off completely this risk off the table, I didn't want at all to optimize the investment in the R&D last year and this year, and we maintained the push to develop next-generation platform, whether that for LTE-M or NB-IoT, as well as some on the broadband, as you know. And this is not impacted. It's moving forward and it will be launched and announced to the market, as I said, next year you will hear about it. So we feel very comfortable to maintain our leadership position from technology point of view.

Obviously, taking this into account and the speed of the market, this allows us as well to start a little bit, you know, optimizing, fine tune the investments we are doing globally in the company. And by doing so, we took measures that already in place, you know, so it's not any -- it's not something we are planning to do. We took measure already implemented, as I'm speaking, that give us a line of sight for $9.5 million in average next year, per quarter, obviously, (inaudible).

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Deborah Choate, Sequans Communications S.A. - CFO [17]

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Yeah, and I guess we can say it's a combination of some headcount reduction. For example, we work with a number of external contractors on the R&D side that once the projects that they're working on are completed, those contracts can be terminated. And also, as we've finished the development of these different projects, a lot of the sort of out-of-pocket expenses are reduced or eliminated as well. So that's really -- it's both headcount and external spending that contribute to the reduction in the operating expenses.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [18]

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Great. And Georges, just a competitive question. With the delays, can you talk maybe about the competitive environment and also maybe even alternative technologies with the CAT M1 NB-IoT delays. How do you see LoRa as a competitor? I think they want to hit 60 million endpoints per year. Do you see that eating into some of your market opportunities and do you think they could hit that 60 million endpoint number?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [19]

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Well, very frankly, I'm not seeing customers moving to LoRa back. I mean, people are 100% convinced that CAT M and NB is the right technology, and all of them are moving on in. You know, we saw customers and very frankly start seeing this a little bit in September, where they had a plan to go away now and start a move to the CAT M, and then after making some trials on some, they felt like okay, there is a little bit of maturity, they take a little bit more time before they switch over. So this is what we found. We didn't see any people say, okay, I'm disappointed, this is not the right technology, I want to move to LoRa. And I still maintain my position and I believe it's well-known today that LoRa really addressed a segment of the market which is really, call it, you know, local private network, and not at all what LTE-M and NB-IoT offer. It's completely different value proposition, and the competition is really minimum there.

I don't see really people putting their 2 lines and saying, I'll go with LoRa or LTE-M. I mean, they know when they have to go to LoRa and it's really a local network, private networks, and they are happy about dealing with the network themselves, and all the other angles they will go to LTE-M and NB, and you have people as you know adopting the 2 or sometimes selecting 1 between NB and LTE-M. So this is definitely not a risk at all.

From competitive landscape, frankly, I didn't see much different from what I saw in the past last quarter, I tend to say. So we still today in the -- if you want to have technology which is proven and certified and used by the customer, you are playing a duopoly between Sequans and our [sort of] big competitor. And then you will see couple of guys that they are working to come, maybe 1 still planning to come at the end of this year, we should see them. And all the others are really well behind. And then you see the group of Asian -- I'm talking about the Western company. And then you see the group of Asian company. There's still nothing in there around LTE-M. Most of it is NB-IoT-only, and focusing on China.

So very frankly, the dynamic in terms of competitive landscape is equally the same. I mean, it didn't change since the last quarter. And we remain in very good position and the market, you know, and customer [and the parts] still looking to us for what we have on Monarch platform, as well as the roadmap we are preparing for next year to keep improving this technology.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [20]

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Last question from me and I'll pass it on. Just as you talk about your $140 million line of sight pipeline, can you give us a sense over the time horizon and how you see that ramping, and maybe even build on that how you see maybe the $300 million ramping over time, to just kind of give us a feel for how you're seeing a 1- to 3-year revenue opportunity?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [21]

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Yeah. I mean, the $140 million, this is the pipe we've [related]. You know, most of those years, they have 3 years lifecycle, I mean (inaudible). Some of them could be 5 when it's metering projects. So it's a combination, you know, so we have some model there to come with this number. And obviously, we're talking about deals where most of it is in hand, design win, and some very close to be design win when I talk about the $140 million.

And this mean some of it will start beginning of 2019 and will grow, you know. So the beginning of it is really from where -- from end of this year towards 3 years down. Obviously, the deals, they are not yet closed. You should expect them more second half of 2019, and this will shift more towards 2023.

And obviously, the other piece of the number I gave, which is other deals where work on the pipe, which is I don't find them almost to $180 million, those are deal we are working on, and I tend to say they will be more, you know, 2020 to start, and this will scale obviously to 2023 or 2024.

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Operator [22]

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We'll go next to the line of Quinn Bolton with Needham & Company.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [23]

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I'm sure the delay in the CAT M project is frustrating, so I guess I first wanted just to ask your thoughts, maybe a little bit more color on your choice of financing here. Obviously, an equity deal dilutes shareholders, but the debt deal kind of transfers enterprise value from the equity holders to the bondholders. So just wondering if you could give your thoughts around the pros and cons of equity versus debt versus the strategic. And then your selection of debt, does that have -- does your outlook and your confidence in the ramp of CAT M in sort of the middle part of 2019, does that kind of -- did that influence your selection of the debt financing? And then I've got a couple of follow-ups.

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

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I mean, you know, obviously, when you talk about the debt financing we added, I don't want to confuse the people, so it's $18 million indeed, but of those 18, 14 are coming from what we call regular debt financing with -- you know, obviously it's expensive for a company the size of Sequans in terms of interest. But the good thing about this is that you are paying this on a monthly basis over the coming 3 years and a half term of this. So this is not kind of debt sitting on our neck where you need to just see, depending on your convert price, depending on the price and so on and you need to pay it in one lump sum.

So looking, obviously, at our business potential and the ramp, it was obvious for us that we can't sustain this kind of debt return rate, you know, monthly from the revenue projection we have, even with the scenario which is even the greatest scenario, if you want to call it, or slow scenario in terms of ramp. And from this perspective, it's really very optimum to shareholders. I mean, because the enterprise value will come back to normal as we are returning all this debt completely as we move forward. So this is really what drove the most of it.

We obviously added a lot of $4 million convertible debt, $4.5 million, but as you understood from Deborah, we return 1 as well, we reimbursed 1. So globally, we added $3 million, $3.5 million on the convert, but this was as 1 part of the equation of delaying this convert by 2 years to really push the overhang completely, at least give it a line of sight for the company to secure the ramp and go to nice revenue, and we're left now with a situation where the first debt we have to reimburse is happening in 2020. So it's April 2020, and the principal is $6 million, so it's very small debt.

With this, I believe we are kind of financially much healthier than we've been before on this. So this is really what drove this. And obviously, the strategic could come tomorrow and this can help us put it on the balance sheet as well, and if we do over, you know, in a year from now, in 2020 or so, equity financing, this can come to compensate the debt we have on the balance sheet. So I believe we did the best when you look to it, and also taking into account that all those discussion we have with the strategic angles let us feel like this is the best deal we can do today is really to take it with this loan facility to drive the financing.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [25]

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Understood. And then I guess sort of a related question. You know, you've got the financing now in place and so you're sort of secure for 2019. But is there a point in time, if delays of CAT M and NB-IoT continue to push to the right, that you might look to at least explore strategic alternatives and try and find a partner that can help you kind of fund the business until those ramps, or are you guys fairly confident that this is a short-term delay and you're kind of best off as an independent company to realize that CAT M opportunity?

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

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Well, first of all, I'm confident this is really a short-term delay, because to see something really major, you will see it from the market, you'll see your pipe down, you'll see carriers stopping deploying, stopping putting CapEx on this and so on. None of this is happening. It's really an execution problem. Simple execution problem. You have a new technology, new networks deployed. People, they plan originally to make things happening, always optimistically, somehow. Add to this as well some product, as I said, transitioning from the product working on 2G for CDMA. Verizon said, okay, we'll stop activation by June. And then people come end of June and ask for a little bit of extension or they can buy for 2 quarters or 3 quarters CDMA and SIM in advance. So this is what's happening. I don't want to say anything else that impact our confidence. My confidence remains strong on this.

Now, on the other side, related to the strategic angle, we -- on one side, we are confident in our number, confident with our market and our position in the market. But this is also, as we said, we have a lot of strategic discussion going around the company, people interested to partner with us in one way or another way. So we are evaluating all this for the best interest of Sequans, obviously, and we will not -- if we do something strategic, it's not because we are afraid about the ramp of the CAT M, it's just only because we believe this can create more value for our shareholders, and that's what drive the decision.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [27]

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Okay and then lastly, for Deborah, I just wanted to make sure I understand. The financing that you put in place, you say carries you, your financing needs through 2019 or you have enough cash through 2019, but you also made the comment you also sort of felt that it would carry you through cash flow break-even. I don't know that you guys have said you think you hit cash flow break-even in 2019, so I guess I just wanted to see if you would make any comments on when you think you might hit cash flow break-even. Just trying to reconcile the 2 comments.

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Deborah Choate, Sequans Communications S.A. - CFO [28]

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Yeah. Yeah, I'd say our current expectation is that that's an achievable target in the second half of next year. However, we've also -- the other point was even on a sort of lower-case scenario where we wouldn't necessarily achieve that, we still believe we have enough cash from the financing to see us through.

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Operator [29]

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We'll go next to the line of Craig Ellis of 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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Georges, I missed the early comments on the call, so I wanted to go back and just try and better understand the probability that you see around the projects that you're seeing that either -- but that are not in production or scheduled to go into production near-term. So about 105 projects of the 130 that you cited, I think would fit that category. So as you look at that group of projects, 1, how would you frame the probability of those converting to something that would be revenue-generating, and then, 2, can you provide some more color on that subset? When could it potentially start to benefit the income statement and drive revenue for the company?

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

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Yep. Well, you know, what I mentioned, we talked about 130 different projects that we are working on, and we said technically, 60 of those are (inaudible) one in other words we are just on executing on, and we have timing -- we could have timing issue in terms of when it starts, if this project will go for full production in Q1 or Q2 or Q3. But we are very confident on those 60 because big chunk of them are ready, 1, and some part of it is (inaudible) very close to win. So if we lose part of it, it will be minor. In other words, if we say we have 60 projects between 1 or advanced in terms of proof of concept, this means at least we are very comfortable that 50 of them will be really 100% in production and will generate revenue to us there.

And I mentioned that even 20 of them will be launching before 2019, mid-2019. So, in other words, they are planned to launch between Q4, Q1, and Q2. So whatever we had in hand that I was planning on to launch in Q4, it's just only shifting and it's coming to be there, and the number is increasing because we're not talking anymore about couple of projects, we're talking about 20 of them. So all this will give us confidence, you know, that -- to generate the revenue and ramp in the short-term, at least for 2019 and beginning of 2020.

And on top of this, there's 70 other projects that we are working on. Obviously, they are design wins and not all of them -- they are new business opportunity. Not all of them would be secured, but looking at our track record there, we have probability of at least 50% on a new opportunity to win it, so you could make the math there that those projects will transform -- will become real design win and will generate revenue towards end of 2019 and more 2020.

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

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All right, that's helpful. And then, Deborah, just clarifying the operating expense dynamic for next year. So given that moves sometime take some time to implement, is the view that you would start the year at a level of operating expense that would be higher than the $9.5 million and over the course of the year get down to that level or below, or would the moves that have been executed result in operating expense that could start the year at that $9.5 million?

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Deborah Choate, Sequans Communications S.A. - CFO [33]

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We expect we should be close to the target level even in Q1.

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

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Okay. And then if there is a situation where for similar reasons to what we're seeing now there is a further pushout in the ramp of various projects, is there flexibility to take operating expense below the $9.5 million or is $9.5 million really a floor level for the company in terms of how you see the future operating environment?

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Deborah Choate, Sequans Communications S.A. - CFO [35]

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Well, I think that there is room to further reduce. It really depends on the market outlook and what we're seeing in the causes of the delay. But yes, there would be room to further reduce if we were required to do so.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [36]

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Okay. And then lastly, just following up on an earlier question regarding strategic partners, so it sounds, Georges, like you're saying those remain of interest to the company and you're discussing opportunities with different entities but there's nothing to announce at this time. Can you just help us understand how much of a priority doing something is for you, whether it's either in the second half of this year as you look to 2019, how pressing is it to ink a deal or a couple of deals that would be new strategic for Sequans?

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [37]

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Well, I mean obviously, those deals, when you're put under strategic you can imagine various discussion, obviously. And some of them, you should not be too much excited when you're discussing with them and let them be excited on their side. But if I talk about the strategic deal that I was referring to that this is -- you know, [quas] in hand and we are working on, it's important for us from business point of view. So I like it. I would like to have it there. It would be good news for the company. Even if I'm not anymore running just on the -- for the financing angle there, even if the financial component will come, in my opinion, if the deal will happen, it's more the business angle that is attractive for us. And I'm excited about closing this, you know, as this year, hopefully, I mean, if I can.

But again, it's not like all the company life depends on this. I mean, this is not -- I don't want you to feel like when I wake up in the morning, this is the only thing I have in mind. What I have in mind is very important, all the excitement about the LTE-M and get the ramp of the LTE-M, and accelerate our revenue on LTE-M.

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Operator [38]

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Next we'll go to the line of [Robert Numeist], a private investor. (Operator Instructions) And we'll go to the line of [Bill Tippett], a private investor.

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Unidentified Participant, [39]

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Yes. I missed the earlier comments. I just wondered if Georges had any thoughts on the CBRS activity recently.

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

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Yeah, I mean, I said a few words on the CBRS. There is a lot of discussion there. There is a little bit, you know, not yet the timing of this business is not 100% clear. But since, you know, in this quarter, mainly in September we saw a lot of activity and a lot of demand for the CBRS, with more and more partners and customers. And as we already said in the past, we have a few customers that they have product already. I mean, not only the (inaudible) they integrated, they have devices and they are trialing in the U.S. with the CBRS. The only challenge for us there, and we believe we are in very good position -- the challenge we are seeing in this market, if you want, is really the timing when this is going to turn to revenue for us. So we remain cautious of predicting this happening, you know, right now. But we are seeing all the momentum is positive, and we believe this is a nice opportunity for the company that can support the broadband business.

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Operator [41]

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And presenters, there are no further questions from the phones at this time.

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

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Okay. So, many thanks for all of you for the questions and taking the time to listen to our call, and looking forward to speak with you in a quarter from now on our next call. Thank you very much. Thanks, Kelly.

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Operator [43]

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Thank you. All right, ladies and gentlemen. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.