Sequans Communications S.A. (SQNS) on Q1 2022 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Sequans Communications First Quarter 2022 Results Call. . I would now like to turn the call over to your host, Kim Rogers with Hayden IR. Thank you, you may begin.
Kim Rogers : Thank you, Melissa, and thank you, to everyone participating in today’s call. Joining me on the call today from Sequans Communications are Georges Karam, Chairman and Chief Executive Officer; and Deborah Choate, Chief Financial Officer. Before turning the call over to Georges, I would like to remind our participants of the following important information on behalf of Sequans. Sequans issued the earnings press release this morning, which was posted to the Company’s website at www.sequans.com under the Newsroom section. Before we start, I would like to remind everyone that this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and potential financing sources. All statements other than present and historical facts and conditions contained in this call, including any statements regarding future results of operations and financial positions, business strategy and plans, including financing alternatives for our 5G business, expectations for Massive IoT and portable router sales, the impact of the COVID-19 on our supply chain and on customer demand, the impact of component shortages and manufacturing capacity, our ability to convert our pipeline to revenue, and our objectives for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions 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 rely or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now, I would like to hand the call over to Georges Karam. Please go ahead, Georges.
Georges Karam : Thank you, Kim. Good morning, ladies and gentlemen. Welcome to our first quarter 2022 financial results conference call. Sequans is off to a strong start in 2022. First quarter revenue grew by more than 12% year-over-year and, when adjusted to exclude the $1.1 million of the Verizon Jetpack contribution, from the first quarter 2021, revenue grew by 23.7% year-over-year. The main revenue growth driver was our LTE-M/NB-IoT business with our Monarch products family, which grew more than 24% sequentially and 125% year-over-year, driven by design wins moving into mass production. Also, the Broadband category grew 35% year-over-year, attributable to increased services and licensing revenue from our existing 5G agreements with our strategic partner and Renesas. This increase in service and licensing revenue significantly boosted our gross margin in the first quarter to 68.1%, from 50.1% in the same quarter last year and 57.1% in the prior quarter. The increased margin contribution narrowed our operating loss and reduced our non-IFRS net loss to $1.8 million from a non-IFRS net loss of $5.1 million in the first quarter of 2021. Massive IoT, and specifically the Monarch LTE-M products family, remains the primary near term growth lever for Sequans. Our product revenue pipeline now exceeds $320 million of design wins with over 80% for Massive IoT applications. Keep in mind that our pipeline represents expected revenue contribution over three years of design life, with several large projects having longer lifetime spans, in some cases up to ten years, which is not reflected in our pipeline number. In March, we completed a $20.9 million equity raise, which improved our balance sheet and enhanced our position for negotiating a new 5G strategic agreement. Let me start by providing an update on the 5G strategic initiatives we launched late last year and referenced on our last call. We successfully executed an MOU with a new strategic partner that, once finalized, is expected to fully fund the balance of our 5G investment in the Taurus platform. Due diligence has been completed, and the definitive agreement is currently being finalized with the goal of closing by June 30th. In parallel with this new strategic partnership, our strong position in 5G has led to other additional non-exclusive, high-potential strategic discussions. These are opportunities that would further expand our addressable market by increasing penetration in existing markets or providing access to new ones that we do not currently serve. We expect to have further clarity on these initiatives over the course of the year. Switching now to our Massive IoT and Broadband categories. Typically, we see seasonality in our first quarter product revenue, and that was the case with all our product categories this quarter except for our LTE-M/NB-IoT category that helped to compensate for such effect and allow us to deliver over 12% sequential growth in terms of total number of units in all categories shipped in the quarter. Massive IoT revenue represented around 45% of our total revenue in the first quarter. The varied performance of AS and ASP of the Cat 1 and Cat M/NB categories of the Massive IoT resulted in flat revenue sequentially. As I stated in my opening comments, the LTE-M/NB-IoT category once again delivered strong revenue growth both sequentially and year-over-year, reflecting the layering in of a number of new design wins that moved into the mass production and shipment phase in the quarter. The growth in Cat M/NB offsets the contraction in the Cat 1 category, related to lower module sales to an eHealth customer, which saw shipments spike last year in the first quarter related to COVID and the build-up of inventory levels by another customer in 2021, that affected the sequential growth in Q1 2022. That said, Calliope Cat 1 demand remains solid. We expect this platform to return to growth over the balance of the year, with growth acceleration in 2023 driven by the ramp of our second-generation platform, Calliope 2. On our last earnings call, I outlined our prospects in several Massive IoT markets, three large segments: Smart City and specifically Metering, Asset & Car Tracking, Smart Home and Security, and two smaller segments: Medical & Fitness, and People. In each of these growing markets, Sequans is well-positioned to expand, and in some cases, double our market share with both our Massive IoT platforms in Cat M and Cat 1 products. During Q1, we made measurable progress towards this goal by adding design wins in metering, the largest segment, with more projects moving to mass production. We are one of the few pure plays in Cellular IoT in terms of the breadth and depth of our portfolio with all the advantages of our solution in terms of power, cost, security, and category coverage, and are now partnered with leading MCU vendors. Thus, we anticipate increasing our share to 30% of our addressable market on average in each of these segments as they expand. Put another way, we believe that our growth rate in the Cellular IoT can exceed the 40% five-year CAGR forecasted for the industry. Our Broadband category showed modest sequential growth this quarter and increased by 35% year-over-year. When adjusted for the Jetpack revenue in the first quarter of 2021, annual growth for Broadband rose by 66%. The significant growth in services and licensing revenue offset the seasonal decline in product revenue we typically experience in this category in the first quarter. In CBRS, we are experiencing a delay on one big project and the demand on other CBRS projects remains lumpy, with the private networks market still developing. As a result, CBRS revenue will be muted in the first half of 2022, but we expect this business to pick up in the second half of the year. Although flat, the Cat 4/Cat 6 emerging market business remains productive. While our differentiated CBRS offering helped us re-establish our Broadband IoT business, our focus for this category remains on private networks applications where we are progressing on a key strategic initiative creating new design opportunities that we could secure this year. We will talk more about this initiative in the near future as it could boost our revenue growth in the legacy Cat 4/Cat 6 business. The new 5G Taurus platform is the major long-term growth driver of our Broadband IoT business. We are addressing a significant opportunity potentially exceeding $2 billion by 2025 that could triple our addressable market. The 5G Taurus platform development, which is the largest segment of our R&D spending, is progressing at full speed. We expect to have our RF chip back for testing by the end of May and we are on track with the development of the other Taurus platform components. Our goal is to begin full product sampling in 2023. Given the progress we are achieving with strategic partners, we are highly optimistic about the next major growth lever for Sequans, our cellular IoT 5G product line. Looking at our backlog and pipeline, we entered 2022 with a record backlog of non-cancelable orders that continued to grow in Q1. Also, our business pipeline keeps building with new design wins and new opportunities. It’s now well above $650 million of three-year product revenue, with around 50% in the design win stage. Over 80% of our design wins are for Massive IoT applications, predominantly for the Monarch 2 Cat M platform. The broad success of our second-generation Monarch 2 platform has been a significant driver of pipeline growth, along with Renesas’ LTE-M/NB-IoT module product line. We continue to expand our pipeline in Metering and expect to see a continuous inflow of new engagements in this large growth sector. We added three new metering design wins in the first quarter, two of which are with new customers. Our existing Cat 1 business is very solid with a strong backlog, and our next-generation Cat 1 Calliope 2 platform continues to receive substantial interest, as evidenced by the successful launch of Calliope 2. The positive market reception and ongoing interest are creating a strong revenue pipeline for Calliope 2. We expect to close several new deals in the near future as we turn to mass production on this product. Given the reception, we are confident that Cat 1 Calliope 2 will be a new growth lever in 2023. If we analyze our pipeline, we still have a majority of the design win projects in the development phase with modest revenue contribution. Many of these are anticipated to move into mass production later in 2022. We have three significant projects potentially having an annual run rate of over one million units each. This quarter, we began shipping one of them and have secured a backlog for the second one that will move to production in Q3. However, some of the design win projects are moving into mass production slower than had been initially planned due to supply chain issues our customers are experiencing and other execution challenges they are facing. This may affect our 2022 growth target for Massive IoT as some shipments could push into late 2022 or early next year. These possible delays are not expected to impact our 2023 revenue growth forecast. Overall, our backlog continues to grow, and our potential sources for future revenue streams continue to expand. This is expected to accelerate further once Calliope 2 starts to add to our pipeline. As more projects progress toward mass production, we will see an expansion in our revenue even if some external variables could affect the timing ramp of certain projects in 2022. Let me switch now to our MCU partnerships. Our MCU partners considerably strengthen our go-to-market strategy, and they value Sequans’ contribution to their offerings. Sequans brings cellular technology to each of them who need this expertise to have a competitive, comprehensive IoT solution. Each partner has its unique strategy for working with us, which removes the need for exclusivity in our agreements. This broadens our addressable scope, giving us access to opportunities we would not have otherwise. The expanded partnership with Renesas has been successful on both the business development side, as evidenced by the growth in revenue pipeline, as well as on the second sourcing of manufacturing options to solidify our supply capability. Our other MCU partnerships continue to be valuable to Sequans as well, and we have numerous exciting projects under discussion with them, with design wins in the pipeline. Yesterday Microchip launched a tiny Cellular IoT platform, Arduino-Compatible, integrating our Monarch 2-based GM02S module with the Microchip AVR MCU. The platform will be distributed via Microchip’s extensive distribution network and, as a result, could further expand our design pipeline. Let me provide a quick update on our supply chain. We are closely monitoring potential business hurdles for the remainder of 2022, including the recent lockdowns in China, the upsurge in the Russia-Ukraine war, and our wafer supply from TSMC. Regarding the lockdown in China, we have managed to limit the impact on our shipment in Q1. That said, we continue to monitor this closely, as this could impact the delivery of modules in Q2 and affect our customers manufacturing devices in China. In terms of our small R&D team located in Ukraine, they continue to work and successfully meet their deliverables. The impact of the Ukrainian crisis on our execution was minimal. Lastly, with the help of TSMC, we have sufficient wafers supply to meet our customers’ demand for 2022. Sequans has a close working relationship with the team at TSMC, who supports our goals and our cellular IoT strategy. In summary, Q1 was strong with growth in Monarch LTE-M/NB-IoT and high interest in Calliope 2, both of which remain important sources --
Kim Rogers : Operator?
Operator: Ladies and gentleman, it seems we’re having some technical difficulties, one moment, please. Ladies and gentleman, please continue to standby. Thank you Kim, please go ahead.
Kim Rogers : Hi, everyone. Sorry for the interruption there. I am just going to finish, Georges section. In summary, Q1 was strong with growth in Monarch LTE-M/NB-IoT and high interest in Calliope 2, both of which remain important sources of future product growth for Sequans. We have some fluidity in the timing of a few projects moving to mass production later this year, but we remain on track to deliver nice growth in 2022. Our 5G services and licensing delivered strong growth in the quarter and helped narrow our operating loss. With the new 5G Strategic engagement expected to progress to closing in Q2, we should have the vast majority of the funding for the remaining development of our Taurus 5G platform, a key long-term growth lever for Sequans. This agreement would also bring high-margin revenue for the next few years, which will improve our financial performance and strengthen our balance sheet. Today, with a growing pipeline and the new 5G strategic deal under discussion, we have increased confidence that we can deliver sustained long-term growth. Sequans is in an excellent position to expand market share, grow revenue, and improve profitability. I’d like to thank all our shareholders for their ongoing commitment to Sequans. And I’d like to thank my global team for their hard work and dedication. I’ll now turn the call over to Deborah. While they are working on getting Deborah and Georges, back on the line, I will continue with Deborah’s section and read the CFO comments until she has joined back in. Our revenue for the first quarter was $13.9 million, an increase of 12.7% versus Q1 2021 and slightly up compared to $13.8 million in Q4 2021. The quarter includes an increase in service and licensing revenue primarily driven by revenue recognition under our 5G deals with Renesas and our existing strategic partner. Product revenue accounted for 43% of total revenue, a 14.4% decrease versus Q4, reflecting lower product sales of CBRS and Cat 1 modules that have higher ASPs. Revenue from Massive IoT in Q1 2022 accounted for approximately 45% of our total revenue with Cat M/NB growth compensating for the lower shipment of Cat 1 modules. Revenue from Broadband IoT increased from Q4 2021 as service and licensing revenue generated by our 5G strategic deals increased sequentially and year-over-year. As expected, compared to Q1 2021, product revenue from this portion of our business declined due to the absence of Jetpack sales. For the quarter, we had three customers that each represented 10% or more of our revenue. One of these is a channel partner with multiple end customers. Gross margin in Q1 2022 was 68.1%, up from 50.1% in Q1 2021 and up from 57.1% in the prior quarter. I am just going to pause here for one second. Operator, do we have Georges and Deborah back online?
Operator: Yeah, they are connected back, yeah.
Kim Rogers : Deborah, can you take over?
Deborah Choate: Okay, I will continue. We continue where Kim stopped. The improvement was primarily due to the increase of services and licensing in the 5G Broadband category and, the increase in the product mix of chipset revenue versus module revenue, compared to prior periods. IFRS operating expenses were $11.4 million, down 4.1% from $11.9 million in Q4 2021 due to a decrease in R&D expense of $264,000 and a decrease in general and administrative expense of $405,000, which was partially offset by an increase in sales and marketing of $179,000. Year-over-year IFRS operating expenses decreased $581,000 compared to $12.0 million in Q1 2021. Non-IFRS operating expenses, which exclude stock-based compensation expense, were $10.1 million in Q1 2022, in line with $10.1 million in the prior quarter. Our first quarter 2022 operating loss was $2.0 million, an improvement compared to an operating loss of $4.0 million in the fourth quarter of 2021, and a $5.8 million loss in the first quarter of 2021. We posted net income in Q1 of $2.0 million, or $0.04 per diluted ADS, which included a non-cash benefit of $6.4 million from the revaluation of the embedded derivatives related to our convertible debt offset partially by $1.2 million of non-cash interest expense. This compares to a net loss of $7.7 million, or $0.21 per diluted ADS in Q4, which included non-cash charges of $2.4 million from non-cash interest expense and the revaluation of the embedded derivatives. The net loss in the first quarter of last year was $11.4 million or $0.33 per diluted ADS, which also included non-cash charges totaling $5.2 million on revaluation of the embedded derivatives and non-cash interest expense. On a non-IFRS basis, our net loss for Q1 was $1.8 million, or $0.04 per diluted ADS, again an improvement compared to a non-IFRS net loss of $3.5 million, or $0.09 per diluted ADS, in the fourth quarter, and a non-IFRS net loss of $5.1 million, or $0.15 per diluted ADS, in the first quarter of last year. In Q1, we had a gain on foreign exchange of $370,000, primarily related to the revaluation of euro-denominated net liabilities on the balance sheet. This compares to foreign exchange gains of $135,000 in Q4 and $1.4 million in Q1 of last year. Investors should be aware that the company’s results are subject to certain market risks, and as a result, our net profit and loss may fluctuate quarter-to-quarter. Specifically, the financial income or expense category on the income statement, which is below our operating results, includes foreign exchange gains or losses and the marking to market of the embedded derivatives related to the convertible debt, which can cause significant differences in net income or loss from quarter-to-quarter. These fluctuations may be more extreme during periods of increased market volatility in foreign exchange rates or in the company’s share price. While swings in the value of the embedded derivatives are excluded from our non-IFRS presentation, foreign exchange gains and losses, whether realized or unrealized, are not. And please remember that our IFRS net loss includes significant non-cash interest expense related to our convertible debt, much of which is excluded in the non-IFRS presentation. Turning to the balance sheet, cash and short-term deposits totaled $26.3 million at the end of Q1 compared to $4.8 million at the end of 2021. The Q1 2022 closing amount reflects the proceeds from our equity raises during the quarter. Cash used by operations for the first quarter of 2022 was $2.8 million, an improvement over the $4.7 million used by operations in the fourth quarter of 2021. Short-term debt from financing receivables increased modestly to $9.7 million versus $9.5 million at the end of Q4. As Georges mentioned, we successfully executed an MOU with a new 5G strategic partner effective March 31st that, once executed, is expected to fully fund the balance of our 5G investment in the first Taurus platform and minimize its cash burden while reinforcing our balance sheet. Thanks to equity deals completed in Q1, we believe we have sufficient resources to fund our operations even without the new 5G deal, but we would likely invest in our 5G development at a slower rate. Regarding the outlook for Q2, we are currently targeting sequential growth in the quarter, although we continue to monitor the potential impacts on revenue of China’s pandemic lockdowns and of supply chain disruptions on the timing of product shipments and project advancement. We expect service and licensing revenue to continue to be a large part of the revenue mix in Q2 and therefore, we expect gross margin to be above 55% in the quarter. We expect that non-IFRS operating expenses, which exclude stock compensation expense and assume a stable euro/dollar exchange rate, will average close to $10.5 million per quarter over the next few quarters. And we expect IFRS interest expense in Q2 to be approximately $2.6 million and non-IFRS interest expense to be around $1.4 million, meaning that we expect our non-IFRS net results to have lower interest expense by $1.2 million. We are not providing guidance on any impact of revaluing the embedded derivative nor possible foreign exchange gains or losses given this is largely determined by market conditions. And for modeling purposes, the number of ADSs outstanding today is $47.7 million ADS. We plan to update our outlook once we finalize the strategic 5G agreement as this is expected to have a significant positive impact on our future revenue and gross margin profile. As Georges mentioned, we are targeting to close and fund by the end of the quarter. At the conclusion of this call, we will post a written version of our formal remarks in the Investor Relations section of our website on the Webcasts and Presentations page, the same location where you will find the audio replay. And now I’ll turn the call back over to Georges.
Georges Karam: Thank you, Deborah. Operator, we are now ready to open the call for Q&A, please.
Operator: Thank you. Our first question comes from the line of Scott Searle with ROTH Capital. Please proceed with your question.
Scott Searle: Hey, good morning. Thanks for taking my questions. George, Deborah, congrats on getting the 5G MOU to this point and it's nice to see the wafer progress at TSMC.
Georges Karam : Thanks Scott.
Scott Searle: Maybe, George, firstly, to dive in on the 5G strategic MOU, it seems like your level of confidence is high. So I wondered if you could expand on that a little bit, what the gating factors and also just broadly speaking, are there any exclusivities here and to clarify whether or not there's any equity component in terms of how you guys are approaching the deal now.
Georges Karam : Yeah, Scott, definitely the opposite. The deal is really a business, there is no equity component at all, it's a licensing deal opening the new application for Sequans, that's what I could say for the time being in terms of expanding the market. So it's really a plus from the angle of the market as well. You know, start limiting or taking anything off the table from Sequans to the counter is expanding Sequans business. And as I said, it's pure licensing deal and I rather don't comment much yet on the amount and so on but obviously from the tone when I'm talking about covering all the complementary spending of 5G, you could imagine that this is a sizable deal. And that will be, in terms of amount that will cover completely the financing missing on the 5G and at the same time obviously give us some improvement on the gross margin as well on the balance sheet as we explained. And obviously the deal is very advanced. I have to qualify it from MOU due diligence and we are really finalizing this deal like any other deal and hopefully we can close it in the quarter.
Scott Searle: And Georges, just quickly on TSMC and from a wafer standpoint, it sounded like previously third quarter was the area where you were a little concerned. But I guess 90 days ago, you were -- you thought you were about 90% covered, you're pretty confident and you've been able to fill in that that third quarter gap from TSMC wafer standpoint?
Georges Karam : Yeah, I mean, we feel good, you know? Obviously, we don't have extra capacity, in other words, absorbing some unpredictable upside or some acceleration in the business will have a limit. So it's not like we have access to any wafer , but versus where we were at the beginning of the year, we -- on our demand, we feel very good for now. And no other -- no impact so far, even the Ukrainian crisis, I mean, all that check, we have done. Everything seem to be moving positively. We remain cautious because no one knows but we feel very good versus last call.
Scott Searle: Very good. And lastly, if I could, it sounds like the Cat M momentum is continuing to build up particularly in the near term. But Cat 1, it seems like there's a lot of design traction and momentum. I'm wondering if you could dive in there a little bit more in terms of the magnitude of the impact as we get out into 2023. What kind of win rates you're seeing and kind of Cat 1 coming back into the forefront a little bit more, given what Calliope 2.0 delivers in terms of performance, price power? What's that tune to the landscape and market share on that front? And they'll get back in the queue. But congrats, again, on the MOU, looking forward to the definitive conclusion of that agreement. Thanks.
Georges Karam : Thanks. I mean, on the Cat 1, we have already very good business, quite solid and good visibility for next year. Our current Cat 1 business, we continue to ship in Japan, we have visibility on some Metering project, as you know, there. We have big projects, at least one big project in Metering using our existing Cat 1 and we have visibility, at least towards the end of ’24, if not 2025. So just we’ll say that we are in a good position in Cat 1. We have many strong customer as well in the tracking, feed management and so on. Though, and our market share currently is in the low teens, with the existing Cat 1. However, the new platform where we had all the improvements in terms of power, opening new market, but also improve the customer solution globally, is opening for us now the game to win a new skew with this solution. Because it has really no equivalent, I tend to say, outside of China in terms of competitive landscape. And we have a lot of traction around it for security application for new metering application and many projects. You know that we talk about projects in the -- the smallest one, we talked about 300,000 units a year and, and we have many projects that you will be above 1 million unit a year. So this is really -- we're quite happy about what we have done there. The pipe is very strong. I don't qualify, we have -- we are in very advanced stage with many of these. I don't qualify the net design win, because I'd rather wait for the full shipment of the mass production product of Sequans that we are planning to do in Q3. And by then, we could talk more about design win and I'm expecting the pipe to increase in design win just only before the end of the year, driven by this platform.
Scott Searle: Great, thank you.
Operator: Thank you. Our next question comes from a line of Mike Walkley with Canaccord Genuity. Please proceed with your question.
Mike Walkley : Great, thank you and best wishes on finalizing that 5G MOU. I guess, Georges, just given, we all know about the tough supply environment out there and it sounds like some of them are impacting your customer timing for ramps in 2022. How should we think about maybe second half 2022 product revenue versus first half of 2022? And then the follow up would be, you said it’s not going to impact your 2023 growth rates, could you remind us what -- how you're thinking about product revenue growth in 2023?
Georges Karam : Yeah, I mean, hi, Mike. Obviously where we’ll -- our visibility, the way we're looking to this, that will be growing every quarter in terms of product revenue and not towards the end of the year. This is my target, we have growth in on product every quarter and this has really related to the fact that we have a lot of those products turning to mass production and accelerating. It's very important as well, when you look to the product that they don't behave all the same way. You imagine that the growth is really driven by the Cat M category, which is where we have the majority of the design win turning -- with the products turning to mass production. And obviously this category is adding the growth. The Cat 1, the existing Cat 1, is more or less stable. I don't qualify it like meter growth, it's very solid. We have backlog and so on. But the growth is not expected to be big. Minor growth every quarter, because we have existing customer and we continue shipping to them and we can have fluctuation around those quarter. The growth on Cat 1 needs to come from the Calliope 2 platform and this is more towards the end of the year, maybe we see some Calliope 2 shipment in Q4. But in any case next year, definitely. And obviously, the other element, which is a little bit -- can give different perspective, which is the CBRS business where this is going well. And we have even some opportunity, I hinted a little bit on my -- on the call by talking about the new initiatives there with the new deal. We are very unique and a strong position in the CBRS space. The market is moving, but it's like we get bigger there then it's slowed down a little bit until all this is consumed. So it's very hard to predict if you want quarter-to-quarter growth too on the CBRS. But in any case, we see second half much better than the first half. So again, even if the product revenue could look weak, if you want in the -- in Q1, we're expecting this to go back to growth in Q2 and beyond Q2, definitely with acceleration in Q3, Q4.
Mike Walkley : Many thanks, thought.
Georges Karam : And maybe, Mike, the last one about 2023. Very honestly, today we continue -- we will continue strong on 2023. Obviously, I'm not talking about any supply or any situation out of control. But if I look to the demand and the number of projects we have in hand, we have a little bit of fluidity this year, because a project, assumed to be originally launched in Q2 shift to Q3 will impact our revenue in the short term. But once it's shipping in Q3, its shipping history will continue in Q4 and next year. So we have much better, I’ll say, confidence if you want about ’23, just only looking to the design win in hand turning to production because even if they could have some slippage here and there, the slippage remains under control, I mean for the majority of those projects today. And some of the slippage I mentioned, where for example, some customer; they are not able to get that MCU part. So we can ship to them, but they miss other components. So we have those kinds of challenges delaying some of the -- the ramp of some of the product for customers. But we -- nothing really there could scare us for the future, because this is really recovering. It’s just only a quarter and it will recover and we will continue ramping from there.
Mike Walkley : Well, thanks. And just for a follow up question, the services and licensing revenue, really strong, should stay at these levels in Q2 and if you sign this MOU, does it go to even higher levels in the back half of the year? Or any color you can give us in modeling that higher margin business? Thank you.
Deborah Choate: Yeah, in Q2, I think it may be not quite as high as it was in Q1, but still a significant portion. So that's why we're saying the gross margin will still be quite high in Q2. Absent the new deal, we would expect it to be lower in the second half of the year. With the new deal that would be -- we would expect that that would add quite a bit to the top line. But again, we'll provide a more precise update on that one, so once it's executed.
Mike Walkley : Great. That’s my questions. And I hope your employees in Ukraine stay safe.
Deborah Choate: Thank you.
Operator: Thank you. Our next question comes from line of Craig Ellis with B. Riley Securities. Please proceed with your question.
Craig Ellis: Yeah, thanks for taking the question and echoing the congratulations on the MOU progress, just great news there. Georges, I wanted to move over to the product side. You've talked in your prepared remarks a little bit in Q&A on the success you're seeing in metering, but that seems like it's something that really is kind of a tipping point position for your technology and your solution. So I was hoping you could provide a little bit more color on the breadth of wins that you have across different metering customers and add a little bit more color on some of the new wins that you saw in the quarter so we can calibrate what's possible as we look out to 2023 and 2024 there.
Georges Karam : Yeah, I mean, hi Craig. I mean, definitely this is a segment where we are quite excited about and we believe. We are very comfortable to say that we can project 30% market share to happen in this market, if not more. We have all the big names, Tier I engage with us and many of them have project with us. Even in this quarter, as we said, we added two new customers and one existing customer in one project. So, we are talking about maybe more than 10 projects in metering today for Sequans, all using the Cat M platform. And some, by the way, in the future will be as well requesting Cat 1 and solution that Sequans is able to provide from Cat M to NB to Cat 1. Even in some station they request Cat 4 and CBRS for private, utility for private network application. All this puts us in a unique position and we are developing this. Obviously, also, the relationship with some partner like Renesas helps as well helps and in some of the accounts. So and this let us feel like, if one have to bet, why not even being above 40% market share in this segment. And this is what we hope if we conclude all those -- the execution of those design win, because the designer in hand, just a question of execution, and turning them to shipment. In the quarter, I mentioned, as I said three new design wins but -- three new projects, but also one of them we did the first shipment to this customer. It was design win and it turned to production this quarter, so quite excited about the opportunity there.
Craig Ellis: That's very helpful. The second question is related to manufacturing supply in the Renesas agreement. Can you comment on whether or not you will have supply from that partner later this year? And if not, then how would you handicap the prospects for supply from them in 2023?
Georges Karam : Yeah, I mean, definitely, we are, and this is one of the important relationship we have with Renesas is really to provide second source for our customer, by the way. And second supply capacity, I tend to say, for Sequans and Renesas combined, leveraging their buying power and their position to work. Today we're implementing all the manufacturing paths through Renesas. So in other words, we'll be able to get to have them buying from TSMC wafers, building the chips, building all the parts and even going down to the module all built by Renesas in parallel to Sequans. And this is today in, call it, into the NPI stage. In other words, they are just only cleaning the process, checking that everything is fine and making the Q&A of this, I would say, path of manufacturing. And this should be ready in the second half of the year. I don't know how much we will use it this year. We'll have maybe a little bit of production going through them this year. But definitely next year with the -- there seems to be the tension on, in terms of supply is going to continue. So this could be very helpful. Knowing that next year, we'll have as well the ramp of Calliope 2, and the ramp of the pipe of Renesas themselves, right? I mean, they have a solid pipe of design win not yet turning to production this year and this will add as well, more demand next year. So definitely it's a good strategic move that we are happy about. And I'm sure it will help us next year.
Craig Ellis: Very helpful. And then finally, before I hop back in the queue, very encouraged to hear that with the new partner that you're engaged with under the MOU, could offer a new application for the company. My question is just around that partner. I know you can't identify who it is but can you provide any color on whether this was an entity that was known and kind of in your ecosystem before or net new and any geographic color and any color on the application, etc., so that we can get a fuller picture of what you're seeing there?
Georges Karam : Yeah, I mean, I don't know. I mean, obviously, it's a known entity. And we -- it's part of the ecosystem that we used to know, I will say. It's not like a discovery or coming out of the blue. But again, what's very important to keep in mind, I spoke about this MOU but I stress as well the fact that since we launched these initiatives, we have more than one deal under discussion. Again, if I have to shortlist, I will say, I would shortlist four including one this MOU. So we have three other initiatives going on. And also interesting that we are able with our unique position in 5G and the scarcity of this technology in the world, to be really like the center of many guys looking for this technology in one way or another and Sequans play really an important role there. To expand again, that’s the go to market and what's also interesting that those deals, at least on the surface, they don't look requiring exclusivity. In other words, nothing prevents Sequans from making 4Gs like this. If I have to present, but obviously, there is a limit of what you can do in a given timeframe as a company. But on the principle, nothing prevent us from doing more than one deal, closing this MOU deal to full definitive agreement and close another one, maybe towards the end of the year. So which is, again, the interest there, maybe even in the short term was really too hard to find someone helping us funding the R&D. But if you exclude this on the side, and you look to the real picture, it's really expanding the market of Sequans. And this matters more, I tend to say, because this will be a future growth for the company with more business that you can get thanks to this investment into the 5G.
Operator: Thank you. Our next question comes from the line of Tristan Gerra with Baird. Please proceed with your question.
Tristan Gerra: Hi, guys, I know that you're still not really guiding for the full year, given all the uncertainties. And you've talked about the design pipeline, which is very encouraging. My question on this was really more about in terms of the real demand. So if we exclude the potential disruption from the lockdowns, and some disruptions in terms of the supply of certain components, how do you see the real end demand shaping up in this type of environment? Is the higher uncertainty actually having an impact on the timing of deployments of IoT project? Or is that the opposite that a shortage of labor is actually accelerating those projects? So if you could touch on how you're seeing the actual timing of those IoT initiatives relative to your expectation, let's say, at the beginning of this year or exceeding last year? And also touch maybe on the maturity of the ecosystem, what's left, that needs to be done to eventually get to a higher TAM for IoT in general and for your products?
Georges Karam : Hi, Tristan, thanks. Thanks for the question. I mean, well, it’s a very interesting question that you're raising here, Tristan. We're not -- we need to keep in mind that IoT is not really consumer business. So we see, obviously, we're nervous about the macro condition in general, because at some time, if there is a big war in Europe, something will happen, right? I mean, you could not say we’ll be -- we’ll not feel anything about all this. But if we look to the demand, and the variable, we are in industrial environment, industrial initiatives, where the guys are not questioning everyday if this project is needed or not for the company, right? And to say, the more you have disruption, the more they see, , I will say in the war, the more they are convinced that IoT is a must have and you need to deploy your network to control it over distance and improve the efficiency of your service and so on. So very honestly, even if you think in Q1 where you have like the crisis in Ukraine and so on, and we have a new deal, new project, new customer signing on for new project. So the demand is there, and no one is questioning this. Now, practically in terms of execution, we could face some impact, because related to the -- also the consequence of executing on a project. They are working, they get the product, if they are missing one component, obviously, it creates some problem. If they're good, they are locked in Shanghai and they cannot get the prototype and they lose two weeks on this, we see those impacts. So we’re seeing those, if you want, micro impact. And definitely this impact our growth because the project instead of being ready to move to full production in nine months, it may take one year or take maybe even up to one year and a half, if I want to exaggerate the impact and this will impact us. But in none of this, you will see like our pipe reducing and a project canceling or deferring. And you see that our pipe keeps building and this is really the indication that demand is there and specifically for IoT there is no question on it. Now, if I go to the maturity of the ecosystem, and then very honestly, the picture is getting more and more clear on this and people are getting -- now, Cat M is well established in the US, well established in Japan and some places. We have in Europe also some holes between Cat M/NB because you need to switch between the two technology. And Cat 1 is available everywhere. So from network point of view or radius of this, there is no question on this. Still, a cellular IoT remains complex technology to take it to market because you have the operator involved to provide some connectivity and so on. And you have a lot of initiatives, it’s making a lot of progress with MVNO, with the iSIM. We're doing a lot of stuff on our side as well to accelerate, I would say the adoption. This is really moving positively. But I consider that the ecosystem is ready, there is no one questioning the technology now. Sometimes the implementation of this technology is taking a little bit longer than having a Wi-Fi project, or Bluetooth project or Zigbee project because it's cellular, but at the end the value the cellular can provide, which is global coverage, none of the other technology can provide. And when the people they need global coverage, they have no choice they move on.
Operator: Thank you. Our next question comes from line of Nicholas Doyle with Needham & Company. Please proceed with your question.
Unidentified Analyst: Hey, this is Nick Doyle on for Raj Gill, can you hear me, okay?
Georges Karam : Yeah
Deborah Choate : Yeah.
Unidentified Analyst: All right. There's been a lot of questions about supply, questions and you chat about on the call. I was just wondering what process node is the highest volume product. And then also, if you could remind us that node for the upcoming 5G Taurus platform, and if you have capacity in place to support the program?
Georges Karam : Yeah, I mean, you know, on the -- our -- I mean, we shipped our product, all -- majority is 40 nanometer. This is really the node where we need the most. We have a little bit in 65 nanometer but the biggest node in terms of product to ship today is 40 nanometer. And when you look to the capacity build that TSMC is building and so on, they are building more in the 28 nanometer and below. They build a little bit on the 40 nanometer. The demand is really -- we have big problem on 90 nanometer and downgraded to 65 nanometer. On 40 nanometer, we still have a problem, but not at the same level in terms of supply, the ratio between demand and capacity. And the good news on the 40 nanometer as well that you have a lot of design at 40 nanometer We'll be moving to 28 nanometer and 22 nanometer because people this is what they do typically at some of those big company and can free some capacity on the 40 nanometer. So it remains a little bit of concern, the 40 nanometer but not as a big problem as you can see it for higher node like 90 nanometer and others. And for the 5G, we are at 12 nanometer there. And 22 nanometer and 12 nanometer, we have to technology there so it's really -- there is no supply problem at all on to 5G today. It’s -- to the contrary, we have more capacity.
Unidentified Analyst: Okay, thank you. And lastly, just how do we think about the mix of services and products as we progress through the year. You talked about 2Q but maybe a little more color on the second half?
Georges Karam : But as we said, excluding the new deal -- the deal, the new deal. If we stay with the original guidance, let's say like this, obviously, we're expecting services to go down we have a peak in the services related to some revenue recognition in the year and because we closed Renesas license at the end of the year, this was impacting Q1 mainly and a little bit of Q2 and this will go back to more normal in Q3, Q4, which is what we used to see last year if you want to see. If I have to compare services on the -- we should go down in Q3, Q4. Now obviously, if we add this new deal, this will have a major component of licensing and it will impact not only the service for the second half, but also next year and the following year. But historic comment on this, it will be providing outlook on this once the deal is there and explain all the details about it.
Unidentified Analyst: Thanks Georges.
Operator: Thank you, ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Dr. Karam for any final comments.
Georges Karam: Thank you, operator. Thank you, again, all of you for joining the call today. We look forward to catching up with you during our second quarter ’22 earnings call in August. Please note that we are participating in the B. Riley Institutional Investor Conference on May 26 in LA. We look forward to speaking with you soon. Thank you very much.
Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
