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Edited Transcript of SQNS earnings conference call or presentation 11-Feb-20 1:00pm GMT

Q4 2019 Sequans Communications SA Earnings Call

Paris Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Sequans Communications SA earnings conference call or presentation Tuesday, February 11, 2020 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 & President

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Conference Call Participants

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* Ariel Jonathan Shusterman

Needham & Company, LLC, Research Division - Associate

* Scott Wallace Searle

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

* Thomas Michael Walkley

Canaccord Genuity Corp., 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 Preliminary Fourth Quarter and Full Year 2019 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'd 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 massive IoT and broadband and critical IoT sales, the expected value of a recent strategic agreement, the potential for new strategic transactions, the potential impact of the coronavirus on our manufacturing operations in China and on customer demand and our objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933,as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risks and uncertainties and subject to change at any time. We operate in a very competitive and 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. We have not filed our Form 20-F for the year ended December 31, 2019. As a result, all financial results described in this call should be considered preliminary. And are subject to change to reflect the completion of our audit and any necessary adjustments or changes in accounting estimates and are -- that are identified prior to the time we file the Form 20-F. Please go ahead, sir.

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

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Thank you, operator. 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 2019 results conference call.

I'll start by saying, as we enter a new year, we have a strong foundation on which to build as leaders in 5G, 4G chips and modules for all IoT application. We already offer the most mature and comprehensive portfolio of solutions for the massive IoT market, where power, cost and size are the main drivers as well as for the cost-optimized broadband IoT market and we continue to innovate at a rapid pace.

We are currently developing a new chip to address the 5G high-end enhanced Mobile Broadband and ultra-reliable low latency communications to expand our offer to future broadband IoT applications.

Despite our strong position, the delay in the ramp of the IoT market made 2019 a complicated one. But now that several obstacles to the market ramp have been eliminated, we look forward to capitalizing on the growth that we believe is finally happening. 2019 was also impacted during the second half by an inventory issue with our Cat 1 module partner, even though overall Cat 1 end market demand was steady. This was frustrating to everyone. But we had a good finish to the year, particularly on the strategic front, closing 2 strategic deals in Q4, which represent license and services revenue, totaling over $40 million to recognize over 3 years or so.

In the fourth quarter, we had good sequential growth over 25%, driven by an increase in services revenue. This specifically reflects revenue recognized from the larger strategic deal we concluded in the fourth quarter and can now qualify that partner has a Fortune Global 500 company working with us on 5G, 4G solutions.

In November, Ericsson issued their mobility report, which included a strong forecast for the IoT market that was broken out in a way that's the same as the way we look at our own business, except using slightly different terminology. We see this terminology being used in other places and attracts the 3GPP technical terminology. So we decided to start using it as well. So we now refer our 2 main categories of business as massive IoT and as broadband and critical IoT, plus, of course, the vertical market business where we often adapt cellular technology for special use cases such as satellite, avionic, or public safety and military applications.

Massive IoT represents the low-speed and low-power devices that will connect everything to the Internet in a 5G world. For us, it includes our Cat 1 solution Calliope 1 and Calliope 2, and our Monarch Cat M/NB chip family.

It's important to appreciate the evolutionary aspect of our massive IoT chips and modules. Monarch 2 and Monarch N, which are sampling now, and Calliope 2, which is in development, are all 5G-ready solutions.

The second category, broadband and critical IoT, is the 5G, 4G high -- end category that includes applications requiring high bandwidths as well as critical applications requiring higher reliability and low latency. For us, the broadband and critical IoT category includes our Cassiopeia Cat 4 and Cat 6 solutions, including those optimized for the new CBRS bands in the U.S. as well as our Taurus, our new 5G high-end chipset, currently under development. To be consistent, these are the labels we will use to discuss our business going forward.

Although industry forecasts are still quite bullish over the next several years given the delay in the ramp of Cat M, the massive IoT market was anything but massive in 2019.

As you know, the factors contributing to the long delay included the readiness and maturity of the Cat M networks, operator extending their acceptance of more devices using legacy technology beyond the original deadlines, and the complexity of bringing a device to market, including working out the data plan, completing device certification and the complexity of the ecosystem. As a result, projects have been taking longer to move to mass production than our customers' planned. We believe the network issues are behind us, and our Monarch platform is certified with virtually every relevant operator worldwide.

Recently, we have had more Monarch-powered devices moving to mass production, including various types of advanced tracking devices, an initial version of a pallet-tracking application,as well as a device for a major cable company for security application.

The Consumer Electronic Show last month was a great event for us, with demos of devices that will be launching shortly. Examples include anti-theft devices from Invoxia and an asset tracking device from Foxconn, which features software-only positioning using the cellular network; in other words, no need for GPS. Pebblebee demonstrated their smart tracking device that will complement their current short-range Bluetooth family of devices. This is a very innovative company, building a strong partnership for cloud connection with Soracom, which is a subsidiary of KDDI. Itron, which is a huge global industrial IoT company, had a very interesting smart city demo with us. If you are attending Mobile World Congress, you will have a chance to see it there as well.

Our technology partners, Skyworks was also promoting our joint system-in-package solution, the Monarch SiP, calling it the flagship of their massive IoT portfolio. They mentioned several customers also had demos at CES, including Pebblebee, Daatrics and Geotraq.

The Monarch SiP is shipping and represents the smallest, thinnest Cat M/NB solution on the market, which is ideal for applications where size is essential, for example, e-health and consumer devices. Also, we are seeing strong traction with Tier 1 metering companies looking for a suitable solution able to sustain in harsh environmental conditions associated with water and gas installation. The Monarch SiP is shielded in Ag-free sulfate-tolerant package and has no equivalent in the market. Both the companies are promoting the joint solution, which will be sold through RFPD, a subsidiary of Arrow Group, as the most effective go-to-market approach. Skyworks brand and marketing reach should certainly be a strong benefit. And this type of partnership is part of our go-to-market strategy for our massive IoT portfolio.

On the obstacles to the IoT market trend I referred to a moment ago, is the complex process involved in bringing a device to market, which requires managing data plans, SIM cards, antenna matching and device certification, particularly if the customer has little or no experience with cellular connectivity.

We have addressed this need for a simple -- for a very simple solution with our Monarch Go product, we just announced today with Verizon after they spoke about it at CES. This is the first solution of its kind to provide an integrated antenna along with the Verizon data plan, in addition to cost and power advantages. Monarch Go accelerates our customers' time to market because they can get an IoT connection in a matter of hours as the design effort is very limited and no end-device certification is required. We have several initial customers, which we use to test the concept.

Monarch Go is launched through a large distributor, Avnet, since this is really intended to capture a very large number of potential customers, including the smaller ones by eliminating the design and certification challenges. The target is to reach the IoT mass market with an ultra-simple solution where all you need to do is add power on Monarch Go to connect the end device to the cloud.

Also, as we have noted before, we have been actively discussing relationships with various microcontroller partners as another avenue to address the mass market, since we believe that the significant portion of these mass market applications will require Cat M/NB cellular connectivity. Each of the top MCU vendors reach over 100,000 customers. And we have recently concluded business agreements with several of these MCU vendors. We'll offer hardware and software development kits for an integrated solution, providing IoT cellular connectivity for the entire MCU family of each partner from the simplest to the most sophisticated one.

Another major step forward in our massive IoT go-to-market strategy is the establishment of a strong distribution channel, which will enable us to effectively capitalize on a very fragmented but rapidly growing market. During the fourth quarter, we signed 2 worldwide contracts with 2 very large global distributors, Avnet and RFPD, both have teams of experts including RF designer and application engineers around the world and thus we'll be distributing our whole family of products.

In addition, as I mentioned a moment ago, Avnet will exclusively distribute Monarch Go, and RFPD will exclusively distribute the Monarch SiP. We have noted in the past that as the IoT market begins to mature, we are seeing more and more very large opportunities in our pipeline. The various aspects of our evolving go-to-market strategy will allow us to use our resources more effectively and properly focus on these large potentially strategic customers in each category, including broadband IoT and verticals.

Regarding design wins, among those we recently added was an important new Monarch design win in the U.S. with a large energy management company, and we have identified a dozen potential strategic accounts for our Monarch platform. Since the Monarch customers and projects continue to get closer now that we are developing the mass market through distribution. I'm pleased to say we are seeing the expected future revenue potential metric continue to climb, mostly in the pipeline of opportunities category so far since it tends to take longer to finalize the larger deals.

On the product front, our next-generation Monarch solutions, Monarch 2 and Monarch N are sampling now. To remind you, these are more highly integrated than the first generation, and therefore, lower cost with lower power consumption and many added features, and they are 5G-ready.

Cat 1 is also part of the massive IoT category and serves those applications that require low power, but higher speed than Cat M can provide. Our Cat 1 business declined in 2019 for some very specific reasons. But in general, we see Cat 1 as a growing market. Some of the earliest IoT applications that began by developing Cat 1, because the Cat M networks were not ready at that time, started migrating to Cat M in 2019. So there was a bit of cannibalization of Cat 1 during 2019. However, the main factor was an inventory issue with our primary Cat 1 module partner, which affected both Q3 and Q4. This will be resolved during the current quarter, and we expect to see Cat 1 revenue back in growth mode in the second quarter of this year.

Our main Cat 1 business is driven by the U.S. and Japan, but we see it expanding to Europe with a new design win planned to launch by the end of the year. The ongoing demand for Cat 1 solutions is driven by traditional M2M applications requiring higher than Cat M speed and voice services, such as security, plus new consumer applications requiring voice and audio streaming, such as connected speakers. We are seeing very good traction with major new potential customers with many Cat 1 type projects. This interest confirmed to us the need to take the next step and respond with the next-generation Cat 1 solution. So we now have Calliope 2 in development. We expect it to represent a unique solution in the market and extremely cost-optimized Cat 1 solution for both traditional M2M application as well as the emerging consumer market for hearable, wearable and voice control devices, which could make up more than half the Cat 1 market a few years from now. Calliope 2 will be 3GPP Release 15 compliant, like Monarch 2 and Monarch N. In other words, it will be 5G-ready as well.

Moving to the broadband and critical IoT category. Over the course of 2019, the broadband business improved and stabilized, setting the stage for renewed growth in 2020. We are happy that the Verizon business is doing well and that the emerging markets portion is recovering with the addition last year of 2 new customers, whose business is planned to ramp in 2020.

We are also very excited about the potential of the CBRS market in the U.S. For those of you who aren't familiar with this opportunity, the 3.5 gigahertz band is currently under use in the U.S. So the Federal Commission -- Communication Commission is opening 150 megahertz in this band for access to licensed users with a priority access license and to registered users with a general authorized access. The spectrum will also be shared with -- by incumbent who retain the right to use the band.

CBRS will enable 4G and 5G deployments in this band. Our broadband product have been supporting 3.5 gigahertz band worldwide for a decade. So last year, we launched 2 low-cost Cat 4 and Cat 6 modules that are cost-optimized for CBRS broadband IoT. As we have reported in the past, we have enjoyed strong interest in our CBRS solution for various types of devices and applications, including CPEs and gateway for broadband access and various industrial IoT applications.

We have accumulated close to a dozen customers going through testing and trials, plus a growing pipeline of opportunities. One of them, by the way, was demonstrating their product at CES last month.

The gating factor for the ramp in this market is the auction of the priority access licenses in June. Assuming everything is on schedule, we should see a few customers start shipping during the second half of this year, and we are in a very good position to achieve a high share in this market. While it's a comparatively small market, the ASP of these modules is above $20, so it represents nice revenue potential for the company.

Going forward, we expect growth from both emerging and developed markets through greater simple -- greater single-mode 4G penetration into residential broadband as 4G coverage improves in emerging markets and as the opportunities in areas such as industrial application continue to grow in developed markets.

Longer term, we see new 5G use cases in enhanced Mobile Broadband and residential, industrial and vertical market application. We have been working on 5G technology for several years, generating important patterns and contributing to the evolution of the 5G standards by actively contributing to the 3GPP standardization body.

Now having achieved a leadership position in massive IoT technology, we are rebalancing our R&D resources towards broadband and critical IoT via strong push on our new 5G chipset called Taurus, which is now under development.

We are aiming to introduce the most optimized solution in the market for 5G with fallback capability to high-end 4G category. We are moving ahead aggressively, but prudently on 5G, and we have been able to expand our team quickly by bringing on recently the cohesive team of about 20 people from another tech company.

Turning to the vertical market category. We had a lot of traction in 2019. However, we have had 1 project put on hold for external reasons, unrelated to our business relationship, and several others took longer than expected to finalize the detail and close in 2019. Still, we made a lot of progress on the large deal that we are hopeful to close in the first half of the year, and we have managed to close several extensions to existing projects with some vertical market customers.

We also have a few new opportunities that are large ones. These new projects continue to be in the area of satellite, avionic, public safety and military applications. On the strategic front, we are moving ahead full speed on the 2 strategic deals we closed in Q4. For the larger one, that's $35 million plus spread over 3 plus years, we expect around $8 million to be recognized as revenue during 2020 and around $10 million per year in the following 2 years. We continue to have active interest from potential strategic partners and remain engaged in ongoing discussions, but we wouldn't characterize any of them as imminent at this point.

On the financial front, we are working on additional research funding from the French government and exploring other research funding options. I will close by saying that we believe that we can look back on 2019 as a year of base building, during which we achieved important strategic relationships and strengthened our go-to-market capabilities.

We entered 2020 very well positioned to take advantage of growth in both massive IoT and broadband and critical IOT, which we expect to occur over the next several years, now that some initial obstacles and customer growing pains have been overcome.

Now I'll turn the call over to Deborah to discuss the financial perspective in more details.

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

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Thank you. Good morning, everyone. I'd like to add some details about our fourth quarter and full year 2019 results and the outlook for 2020. Our revenue for the full year was $30.9 million, massive IoT revenue decreased compared to 2018, primarily due to the delay in the ramp of Cat M and an inventory issue with our Cat 1 module partner during the second half of the year.

Massive IoT accounted for approximately 42% of total revenue in 2019 versus about 50% in 2018. Both Cat 1 and Cat M are expected to grow in 2020.

The broadband and critical IoT category and revenue from vertical markets both experienced slight declines in 2019 compared to 2018, but are expected to rebound this year due to revenue from new broadband customers in emerging markets and higher services revenue from vertical markets plus the revenue recognition related to our large strategic deal.

Gross margin in 2019 increased to 40.1% from 39.5% in 2018.

Operating expenses decreased year-over-year by about 15% to $40.3 million, reflecting lower average headcount and other expenses as well as increased capitalization of R&D and a favorable exchange rate.

Financial expenses were higher than 2018, reflecting a full year of venture debt and the increase in convertible debt.

Our IFRS net loss declined slightly to $36.1 million or $1.52 per diluted ADS. On a non-IFRS basis, our net loss for 2019 declined to $30.9 million or $1.52 per diluted ADS compared to a full year non-IFRS net loss of $32.3 million or $1.55 in 2018.

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 -- interest adjustments related to the convertible debt and other financings and deferred tax benefit or expense related to the convertible debt and other financings.

If we turn to the fourth quarter of 2019, our revenue was $9.2 million in that quarter, an increase of 25.2% sequentially from the third quarter, which has been adjusted to $7.3 million to reflect the adjustment to the timing of recognizing some revenue among the quarters of 2019.

Revenue in Q4 increased 50.9% compared to the same quarter a year ago. In Q4, we had 4 10% customers, 1 ODM and 3 OEMs.

Gross margin in Q4 was 47% compared to 37.8% in the third quarter of 2019 and compared to 43.3% in the fourth quarter of 2018. The higher gross margin was primarily due to a higher proportion of license and service revenue in the mix.

Operating expenses were $9.9 million in Q4, lower than the $10.3 million in Q3, reflecting lower legal fees as well as higher capitalization of R&D. The decline from the fourth quarter of 2018 is for the same reason, plus lower bad debt expense and a more favorable exchange rate.

Our fourth quarter operating loss was $5.6 million compared to an operating loss of $7.5 million in the third quarter of 2019 and a $9.3 million loss in the fourth quarter of 2018.

Our net loss in Q4 was $8.5 million or $0.36 per ADS compared to a net loss of $8.8 million or $0.37 per ADS in the third quarter. The primary reason for net loss only improving slightly, despite a much better operating results in the quarter, is the foreign exchange loss recognized in Q4 versus a foreign exchange gain in Q3.

The net loss in the fourth quarter of last year was $9.9 million or $0.42 per ADS.

Our weighted average share count was 95.2 million shares in Q4, which equals 23.8 million ADSs after the adjustment of the ratio of shares to ADS on November 29, 2019.

On a non-IFRS basis, our net loss for Q4 was $7.2 million or $0.30 per diluted ADS compared to non-IFRS net loss of $7.5 million or $0.32 in the third quarter and a net loss of $9.1 million or $0.39 per diluted ADS in the fourth quarter of 2018.

And again, 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 adjustments related to the convertible debt and other financings as well as deferred tax benefit or expense related to the convertible debt and other financings.

Cash flow from operations in Q4 was $16.9 million (sic) [$16.3 million] compared to cash used in operations of $1 million in the third quarter.

Our cash at December 31, 2019, totaled $14.1 million compared to $6.3 million at the end of Q3, reflecting the upfront payment of $18 million as part of the strategic deal closed in Q4.

Accounts receivable at December 31, 2019, decreased to $8.2 million (sic) [$8.4 million] from $13.2 million at the end of Q3. And DSOs improved considerably to 71 days compared to 114 days at the end of Q3.

Inventories decreased to $6.7 million compared to $8.2 million at the end of Q3. And trade payables decreased to $8.8 million from $9.4 million.

Short-term debt from financing receivables also decreased to $4.1 million from $10.3 million at the end of Q3.

Looking at the near-term outlook, we expect our revenues for the first quarter of 2020 to be seasonally flat to up slightly from the fourth quarter, followed by sequential improvement in the remaining quarters of the year. This outlook does not include any potential impact from the coronavirus on the company's direct supply chain, its manufacturing partners in the region or demand from our customers with manufacturing partners located in China.

Sequans is taking steps to help ensure the well-being of its employees, and we are actively monitoring the situation and communicating with customers and our supply chain in order to assess and mitigate the effects. But today, it's too early to make an accurate assessment of the potential impact.

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. That's the same location where you will find the audio replay.

And as an additional reminder, Georges and I will be participating in the Roth Conference in Laguna Niguel on March 17, and we look forward to meeting with you at this event if you're planning to attend.

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 just to conclude, I mean, a couple of words. I mean obviously, looking backward, again, I feel like the situation now is behind us completely, all the issues that we encountered in 2019 and specifically, the delay of the mark -- delay of the market. And obviously, we are very excited about the start of this year, all the first, I'll say, weeks and months, we were -- we saw a lot of things and a lot of opportunity and some ramp of the product that let us feel like things are going into the right direction finally.

Obviously, we can -- you saw that we are very uniquely well positioned in this IoT space. We can -- you can say we are the unique company that has today a portfolio fully optimized for IoT application, I mean non-handset application going from the low power, low speed to the high speed and extended feature broadband application.

Today, whether Cat 4, Cat 6, Cat 1, Cat M, Cat M/NB product today is fully mature, certified, shipping, that is really -- they are all in maintenance mode. The company is investing a couple of -- 2-axis (inaudible) innovate in the future. Obviously, take to the mass production, the second-generation of Monarch to drive further the power and the cost, and prepare for the low power IoT market ramp. A Cat 1, which is more to position for a new market where we can expand the company for consumer application requiring for low power, but higher speed than Cat M. And this is really all what we are seeing.

Let me feel, it's the right approach what we are doing there. And obviously, investing prudently, but aggressively in the 5G high end to bring something to the market in 2 years down the road. All this with a very good position with a strategic relationship that you have seen get concluded, at least with a couple of deals in the last quarter. We continue to enjoy this strong position, and I believe we are very well positioned to milk finally, the ramp of the IoT market and turn it to revenue and growth and create value to our shareholders.

Thank you very much, and we can take now the questions. So operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question today from Mike Walkey from Canaccord Genuity.

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

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Great. And congrats on the strong close to the year. Georges, can you just give us maybe some color on a little bit of a change in kind of your go-to-market strategy? Can you update us on the microcontroller partnerships and the opportunities you see with those partners? And same question also on the distribution channel with Avnet and DigiKey and some others, how are you targeting that market? And what can that do to drive new channels for you?

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

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Mike, in fact, as we said, the market, we are seeing more and more big opportunity where we are focusing on. And here, we are talking about really Tier 1 customers that they are coming kind of in the second phase. They are not really the early adopter in a technology like this. But now finally, they realize that the network is there and everything is there, and they are moving all this. And we are putting direct focus on taking this as a direct customer.

However, on the other side, we see that a lot of new application of IoT, which is very, very hard to predict in advance, how big it will be, each application. Here, we reinforce our go-to-market to make it simpler to the company. As I mentioned, get the distributor with 2 major global distributor that we signed with them to distribute our product and create some of the end-to-end solution. Specifically, when you look to Avnet, for example, they were demoing at CES, many, many end-to-end solution. So that's really ideal for us because they integrate the Sequans technology with other technology around it and address some of those vertical market application that could be hard for Sequans to find them. But also, the MCU, which is, since last year, I spoke about it many times, I'm really dreaming about the 10 billion -- 10 billion microcontroller that they are sold per year. Each year, we have 10 billion microcontroller. And if you ask me, in general, what's an IoT device? I can tell you, it's a box that has an MCU inside. It has a microcontroller, whether 8-bit, 16 bits, 32 bits; it doesn't matter. There is a small engine like this, managing the sensors and the device. And a big percentage of this will be connected. Obviously, many of those connections will go Bluetooth and Wi-Fi. But more and more, and for many good reasons, many of those connections can go through cellular to provide 1 connectivity, and you don't have to pair the device, just on the device is connected because you have a SIM card and data plan built in.

So all this ecosystem taking longer obviously to come altogether. But for us, the way to play it at Sequans, we are a unique partner for those MCU company because you have half a dozen of big ones there that they don't have the solution. It's very complicated for them to build it. And they cannot find better partner than Sequans. So from this angle, we'll start engaging with them. We spoke about ST, what we did in the past with STMicro. But as I mentioned previously, we have a couple of them with whom we concluded some, and you will be hearing about them in the future.

And for us, it's more about bundling the offer with them an integrated simple solution to accelerate the go-to-market and go through even larger distribution channel to reach the end market, those, what I said, 10 billion microcontroller or at least maybe a few percent of those 10 billion, which will be big for us. But in the same time, maybe take it longer, if this is successful, to have further integration and maybe some other model where you can go to some licensing and royalty. But at least, in the first step, is really a joint solution taking to the market with integrated software and integrated hardware and same distribution channel and co-marketing. And we hope to get nice results of this during the second half of the year. Obviously, all this is implemented. So I believe from a revenue point of view, we should see the results of this in the second half of the year.

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

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Great. And my....

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

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And maybe towards...

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

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Sure, go ahead.

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

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Yes, Mike, one last comment, which is related. The Monarch Go, the device that we -- Verizon announced this today, if you look to the -- it happened -- accidentally happening today. We didn't plan for this to have it on the earnings call. But the press release is getting out, which is a device with Verizon. Again, simplify the connectivity, just only take a small black box, connect it, drop it on a product -- existing product or new one, add the power on it and running. In 1 hour, you have a connection to the network. We believe we have a big belief in this way to scale, what I would call it, IoT to the mass market. And these are the kind of channels that we invested a lot of energy in them during 2019. And hopefully, we can start seeing the revenue result of this in 2020.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [8]

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And just my follow-up question, just building on that, with all the new products and customers in the channel, how should we think about product revenue into Q1? I know it's usually seasonally weak, but as some of the Cat 1 is starting to ship again, does that grow sequentially and then build throughout the year? Just trying to get a little color on the mix into Q1 between product and other revenue.

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

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Yes. Indeed, this is good remark. I mean we have, as I said, Cat 1, inventory issue. We shipped almost 0 in Q4 and very, very little in Q3. And obviously, this will recover. Start -- coming back in Q1, we should have half of the -- we were planning that we should ship half of a regular quarter, if you want, in Q1, which will improve the product. We are expecting as well some broadband to come back.

Obviously, all this and keep it under the element of the virus issue, if we have something happening in the production it will be on the product oppositely if we face issues there. For the time being, I feel positive on it. I'm not panicking. But obviously, we're observing because until China come back to work, you cannot claim anything for this. But indeed, we should see revenue growth quarter-to-quarter -- product revenue growth quarter-to-quarter.

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Operator [10]

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We will now go to our next question today from Scott Searle from Roth Capital.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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Georges and Deborah, nice to see momentum building on multiple fronts across the board for Cat M and Cat 1. Maybe to follow-up quickly on Mike's question. Just Georges, to get a little bit more color on the timing as it relates to some of the Cat M opportunities, how quickly can Avnet ramp up and start to contribute to sales? Have you gone through training within their channel? Is the product really getting out there?

And then as well on the MCU front to just follow-up a little bit. STMicro, I believe last week, were starting to talk about some of their cellular modules with IoT connectivity. It seems like some of this is starting to come to market. So they're already there. How quickly can some of these other guys ramp up? And I think in the past, you talked about a pipeline of opportunity, understanding that the time lines are very difficult to project. But I was wondering if you could give us directionally some idea about how that has grown over the past quarter or so? And then I had a couple of follow-ups.

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

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Scott, on the timing with the distributor, yes, I mean, we started some training. So things are online recently with Avnet. We did it before with RFPD and the team we organized as well as the company because we are not supporting. We never done this. This is really new for us. We had distribution, but it was just only fulfillment distribution in Asia. So now it's about lead generation and driving this.

So we are in the beginning, I tend to say. But with the training and joint training meeting that we did and the product are open, so we are expecting -- by the way, we have order to -- but as you know, through a distributor, you cannot take revenue before you see things coming out. So we are fulfilling the channel and moving forward with them. Hopefully, we can start seeing traction from this and from revenue. Maybe, for some products like Monarch Go , this can start in Q2. Obviously, the Monarch SiP, we have design win already. So this is built in even in Q1, maybe there is some in Q2 as well. So on those products, which are design win already in the past or easy to ramp, they will be fast. Obviously, for a new customer that we'll be capturing from scratch through Avnet or RFPD, we need to give them the time, I will say, to ramp, and this can take, depending on what solution they are using, but if they go with the module version, this can be 6, 9 months to ramp to revenue. But we have already design win that will go with them, as I said, on the Monarch SiP and the Avnet, Monarch Go, which could be fast time to revenue on cellular product.

On the other angle, the MCU, we have -- the question is a little bit complicated because we have currently design win with ST. We have customers using ST product. And by the way, we have others using NXP product. And obviously, those are moving. So we could qualify them like the relationship that we built with the MCU help those design win last year. But I tend to say, we are moving now. You're going to see from us more, I would say, higher speed, if you want to generate lead. Because to generate lead, you need to be -- to get an approach, which is the hardware is fully integrated in small tiny stuff with all the software, and you can go through distributor, even what I'll call them, catalog distributors, like DigiKey and Mouser, that could create more lead for us. This piece of the ramp, we should see it in the second half of the year.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Great. And maybe to just follow-up quickly on Cat 1 as well. It sounds like that business now has stabilized. You've got visibility to the inventory burn off in that core business coming back to a base level. But a lot of activity, whether it's CBRS, it sounds like some new design wins potentially in consumer and wearables markets as well. Could you kind of give us your thought process in terms of how CBRS filters into the numbers? It sounds like it's going to be modules first as opposed to silicon. How maybe some of those larger opportunities shape up? And then as well, the competitive landscape has really shifted with Intel selling their business to Apple. Competitively, are they disappearing from the dialogue out there with some of your customers?

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

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I mean obviously -- let's start with the CBRS. The CBRS, we have customer already related, they have designed specifically arrays and we did a small shipment for [Verizon]. For those guys, they are using chip. In other words, Sequans not selling the module. But honestly, when we start looking to this market and the demand, we realized that there is a real demand for low-cost module. For a module that the people can take it, plug it in and so on. That's why we decided to invest a little bit of energy to go from chip to module, knowing that as well, the ASP and the gross margin are all positive, if you want, because the competing solution of CBRS that you can find in the market module is very high end. You're talking about module at $80. Yes, some people may be looking for $80 module. But believe me, with all the applications we're seeing on the CBRS, there is more demand for something much more cost-optimized, let's say, below $30 module, $25 or so.

So for this reason, we build those module. We push them to the market. They are certified today, and we get very, very quickly a dozen of customers attracted by those modules and some of them finished the product, and they announced it and show it even at some show.

So for us, it's really -- we have really -- when I look to the CBRS players, I feel like we have more than 50% of them working with us. So it's really a nice market share. It's just a question when the market is going to ramp. And obviously, this is related to what I said, depending on the licensing of this -- authorize the CBRS band to go forward. So hopefully, it will happen in June and then we start ramping. So I'm planning to make some module revenue this year, and this should be one of the component of the growth of the broadband year-to-year, one will be looking for the total revenue in the broadband in 2020.

Back to the Cat 1 story, and to some extent, to all this competitive landscape. When we look to the Cat 1, it's kind of interesting market. At the beginning, my feeling on this was, there is not much to do, let's sell what we have and watch it because it's going to be a niche market, small market. There is nothing to do there. And suddenly, we realize that the voice promised -- the voice service promise on Cat M is not happening. And more and more customer, they need voice. When I say voice, voice or audio or music and everything related to this. They cannot go with Cat M, and they need Cat 1. So when you look to this market, it's sizable. You could see 50 million units in a year. And then when you look to the competitive landscape for all what's happening, whether Intel going to Apple, but also the big players focusing on the 5G high end, by the way, they never did really Cat 1-optimized product, it leaves the market for us, like greenfield opportunity for Sequans, where we are playing already. We have a nice market share that we can increase it -- we can improve it by -- for the traditional market, and we can even win a new consumer application, they could be huge for us. So from this point of view, we decided really to make a re-spin of the Cat 1 baseline chip to improve some elements there, mainly the power consumption, and to address some of the consumer application, but also take benefit by cutting the cost down and be more attractive for all the guys using old legacy Cat 1 to move to us because we have, in this space, maybe 15%, 20% market share. There is no reason why we'll not be above 50% or 60% market share in the Cat 1 today.

And for all those reasons, we decided to do this new Cat 1 chip. And we have a lot of opportunities that we are working on today to secure even in the quarter, and it could be a very big opportunity to drive the growth for 2021 in terms of revenue.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

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And lastly, just a clarification, Georges, on the 5G front. I think historically, it was the expectation that it was going -- you're going to be more fixed wireless access focused, but I thought I heard in your opening remarks, a little bit more talk about mobility. Just was hoping you could clarify that. And if we're looking forward to a big show in terms of Mobile World Congress announcement, partnerships, et cetera.

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

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Yes. So I mean, on the 5G, obviously, what I said, I said -- I talked about enhanced Mobile Broadband, because this is the definition of the high-end 5G. If I have to use the terminology of 3GPP, we call -- we talk about eMBB, which is really 5G chip exceeding, let's say, the few gigabit per second. Obviously, the first application of this is mobile phone. And for the time being, we are not going to play there. But obviously, the focus remain on fixed residential and industrial. That's what we are doing. And we believe the market -- this is the market we can address today. Now obviously, we could imagine a new business model or other partnership relationship to go beyond this market. But for now, this is our main target.

And for Mobile World -- for Barcelona in a couple of weeks, hopefully, the show, I mean, with all these coronavirus, we're seeing a little bit of tension there with people canceling and so on. But then, I guess, for the time being, we are going to be there. And we will have obviously some show that we'll be doing with customers as well as some partnership, but I will keep it -- keep you surprised in a couple of weeks.

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Operator [17]

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We'll now go to our next question today from Ari Shusterman from Needham Capital.

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Ariel Jonathan Shusterman, Needham & Company, LLC, Research Division - Associate [18]

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This is Ari, taking question for Raji Gill. So first, I wanted to talk about gross margin. Yes, so can you kind of talk about the puts and takes for that? And yes, are you still aiming for the -- I know 45% is your long-term target but you did 47% this quarter. Is 45% still your target or do you expect a higher gross margin moving forward?

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Deborah Choate, Sequans Communications S.A. - CFO [19]

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Yes. So this quarter, we had higher gross margin from -- mainly due to the higher percentage of service and licensing revenues coming in, in the quarter. But yes, we continue to maintain an objective of being about 45% in gross margin over the course of 2020 and ultimately improving that as the business moves to a more chip-based model and with less modules in the mix.

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Ariel Jonathan Shusterman, Needham & Company, LLC, Research Division - Associate [20]

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Got you. And when it comes to your strategic deals, can you provide some color on how you're progressing through them? Yes, that would be very helpful.

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

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So the deals are a combination of licensing and services. So -- actually, the Q4 results reflected some of the upfront license part of the deals and the rest will be recognized for the most part on percentage of completion as we go over the course of the project. So as Georges mentioned, for the largest deal we had talked about, it's ramping up over time. So we're expecting probably around $8 million to come in this year. And that increasing to about a $10 million run rate for the 2021, '22.

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Operator [22]

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It appears that we have no further questions at this time, Mr. Karam. I'd like to turn the conference back to you for any additional or closing remarks.

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Georges Karam, Sequans Communications S.A. - Chairman, CEO & President [23]

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Great. So thanks, everybody, for listening and the question. Looking forward to meet you in -- maybe in the Roth Conference or other opportunities. Thank you very much. Operator?

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Operator [24]

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Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.