Greetings. Welcome to Sequans Communications Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kim Rogers of Hayden IR. Ms. Rogers, you may begin.

Thank you, Chemali [ph], and thank you to everyone participating in today's call. Joining me on the call from Sequans Communications are Georges Karam, Chairman and Chief Executive Officer; and Deborah Choate, Chief Financial Officer. Before turning the call over to Georges, I'd like to remind our participants of the following important information on behalf of Sequans. Sequans issued the earnings press release this morning, which and was posted to the company's website at www.sequans.com/investors under the News section. Before we start, I'd 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, and 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 rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now, I'd like to hand the call over to Georges Karam. Please go ahead, Georges.

Thank you, Kim. Good morning, ladies and gentlemen. Welcome to our third quarter 2021 financial results conference call. We are building momentum across all our lines of business, validating our strategy to focus on 4G and 5G for Internet of Things. Year-to-date, our revenue is up 6%. However, like the second quarter, we face external challenges in the third quarter that are masking our progress with our massive IoT and CBRS businesses. We stated on the prior quarter earnings that we anticipated an increased impact from these factors in the third quarter. And this uncertainty has also affected shareholder value. We believe it's important to peel back the effect of the external factors to evaluate Sequans performance and provide evidence that customer demand is building and our massive IoT and CBRS revenues are growing significantly. Stripping out the impact of Verizon Jetpack, we have grown total revenue 86% and product revenue 123% year-to-date, amid supply chain challenges that limited our ability to meet all our customers demand. The main growth drivers continue to be massive IoT, which increased 113% year-to-date and broadband CBRS that replaces almost half of the Jetpack business that was originally expected this year. We have significant competitive advantages across all our lines of business, where we bring material value to our customers and strategic partners. The growth of our pipeline, and the increasing percentage secured by design wins are a testament to our technology, team and vision. Looking to the supply situation impact, we feel confident that the impact of supply chain constraints in the fourth quarter of 2021 and the first quarter of 2022 are to some extent under control. And we are actively working to secure our supply for the remainder of next year. Our operations team has done a great job working with…

Thank you, Georges, and good morning, everyone. Our revenue for the third quarter 2021 was $11.9 million, a decrease of 15.8% versus Q3, 2020 and 7.5% sequentially. Demand for our products continues to be robust despite our third quarter growth being impeded by supply chain constraints for materials. As George mentioned, we were not immune to the supply chain challenges that are impacting many businesses. Importantly, though, we have a backlog of orders in hand that are awaiting fulfillment. Revenue from massive IoT in Q3 2021 continue to account for over half our total revenue. Both Cat 1 and Cat M product revenue increased modestly quarter-on-quarter and increased exponentially compared to the prior year quarter. Revenue from broadband IoT increased from Q2 2021 as growth from CBRS private networks is starting to pick up, and there's no revenue from the Jetpack business in the sequential comparison. Compared to Q3 2020, as expected, revenue in this portion of our business declined due to the absence of Jetpack sales. Our vertical category of business which includes service revenue generated by our major 5G strategic deal decreased as expected in Q3 2021, compared to Q2 as a result of the pattern of revenue recognition from long-term contracts. For the quarter, we had three customers and one channel partner that each represented 10% or more of our revenue. And as massive IoT design wins move into production, we expect the number of M customers served to diversify. Gross margin in Q3 2021 was 49.2%, up from 42% in Q3 2020 and down from 56.6% in the second quarter 2021. The year-over-year improvement was due to a shift in revenue mix that included higher service revenue and a higher level of chip sales versus modules. Sequentially, our gross margin declined as a result of higher…

Thank you, Deborah. Operator, we are now ready to open the call for Q&A, please.

Thank you, Georges. [Operator Instructions] And our first question is from Scott Searle with ROTH Capital. Please proceed with your question.

Hey, good morning. Thanks for taking my questions. Nice job, guys in terms of the outlook, starting to build that visibility in supply chain, in addition to just seeing that backlog and pipeline of opportunities growing. Maybe for starters, just clarification in terms of the supply constraints in the current quarter. How much was left on the table? And just want to clarify, as we're looking into 2022, it sounds like that 50% growth number. So you're targeting mid 70s, kind of coming out of the gate here. I'm just kind of wondering what the visibility is in terms of what you've got with design wins in the backlog, in the pipeline right now that gives you that sort of comfort? I know we're supply constrained.

Yes. Hi, Scott. Thanks for being on the call. On the first question on the Q4, obviously, the question is never easy if you want it to be because we are planning -- we anticipate there is already some limitation in our stuff and we moved some of the order we received more towards Q4, nothing Q3. But typically in the last -- in every quarter where we are relieving [ph] easily kind of $1 million. And even sometimes in the last minute, we're relieving $0.5 million or so that we were thinking we'll be able to do it and we're not doing it. So this is what happened in Q3. We were -- Q3 was very tough. From the beginning, we know that many of the order we are not able to serve them, and we move them to Q4 and Q1. And -- but despite this, we left on the table a little bit, obviously small $1 million in this quarter. Regarding next year, definitely. I mean, you have two pieces of this question, our comfort level for next year. Big piece of it is really the backlog. The Backlog a record level, as I said, not only for the quarter, but we didn't enter yet in 2022. We've never seen this before. End of Q3, we have this strong visibility for an order to serve customers, Q3 next year. So we have backlog covering not only the first quarter and second quarter, but even going towards the second half of next year from existing customers. So obviously, this is moving very well. The piece of existing customer growing. This is one piece of it. And the other one, which is all the design win that we have them in hand and they are ramping and I mentioned like we're talking about a few of them, even some of them with orders. In other words, we have order from customer to whom we shipped. But also we have order from customer to whom we didn't ship yet big volume, just because they want to secure like 0.5 million units in advance for next year that we have it in hand. So the two angle of it, if you want the design win, we have it in hand and the progress of those design win moving to initial order pre-production and some of them production order, that’s up and give us the confidence to talk about this growth here.

Hey, Georges, just to follow-up on your comment related to TSMC in the fourth quarter of next year. So you're starting to get good allocation for the end of next year. So given what you're seeing from a demand standpoint, at a minimum, that's where we should see a meaningful inflection as we go from fourth quarter '22 into 23. Is that the correct interpretation?

Yes, I mean, TSMC to be honest, we have an allocation, I mean, I want to have the people understand how they work. They work with everybody like this. You have a minimum allocation reserves to. In other words, even if you don't have order, because I hear some people say they secured with order and so on. It's not because you are small or you are big that you can get this, right. I mean, you have your allocation. So I have reserve allocation for Q1, Q2, Q3, Q4 next year. The picture how it looks if you want is very manageable for Q1. It's good in Q4. It's weak in Q2, Q3. And the whole game with them if you want is to pull in some of our capacity allocated for Q4 to Q2 and Q3 and we're honestly we're making a lot of progress with them. And I feel at least like we're heading into the right direction. It takes time because you need to work on this weekly base on other customers not taking their order, some allocation free in here and there, this is how we can get our allocation. And keep in mind that Sequans allocation is really very small versus the big players in this industry. So any small variation here and there can give us the ability to secure our capacity. So that's why I remain comfortable, I will say managing this, I'm not panicking at all. But obviously, I could not say like, I don't have at all problem in Q3 -- Q2, Q3 as I'm speaking today.

Got you. And if I could, in terms of following up on the financing opportunities, so to break that down a little bit, if we were to take out 5G investment now is the massive IoT opportunity approaching breakeven results as we get into the fourth quarter in the first quarter? And then as it relates to some of the strategic opportunities, it sounds like there's some other things that are percolating there. I'm wondering if you could kind of wrap that into how you're thinking about that with the financing, and any other elements that you could provide in terms of timing magnitude or otherwise.

Yes, if you want -- if you take the [indiscernible], if you consider the company with obviously the legacy, which is mainly driven by massive IoT. Unfortunately, the broadband get weakened a little bit this year. This is really one of the challenges that we spoke about, mainly relate to the Jetpack business. But if we take all the legacy outside of the 5G investment, the company is in good shape to be cash flow positive, despite, obviously, we could get it faster if we didn't have the supply chain challenges. But I'm expecting that for next year, we should be able to overcome all this and be any cash flow positive situation for this business. Taking into the account, obviously, all the cost burden of the company, right, I mean, being public and all the elements of spending as far as we are able to finance the 5G. So the only piece which is really a cash burden to the company is either 5G, which is big piece of it is finance, but still some more to figure out that. So if the rest of the business is able to generate cash will be in very good shape. If it's just only cash flow positive, which is the scenario I'm working on, I need to help the 5G financing. And honestly, the unique position that we have there is attracting a lot of partners around and we believe we should be able to find options. So the Board took the decision [indiscernible] seriously and we are working on it and on a couple of options.

Great. And lastly, if I could. Coming out at Mobile World Congress last week, and some other trade press articles are really starting to talk about the opportunity for Cat 1. You alluded to that earlier in terms of the opportunity this year of 50 million units, largely China, but growing to 100 million units in a couple of years. And you are well-positioned now with Calliope 2 solutions starting to come out. So I'm wondering if you could dig in a little bit more on that front? It sounds like NB IoT has been really marginalized and Cat 1 is gaining a tremendous amount of traction. And you guys were the only solutions vendor with a new part that's coming available that really hits kind of the price points in the performance. I wonder if you could dig in a little bit more on that opportunity? How quickly that rams for you? When we can be expecting in '22 and '23? Thanks.

Well, I mean -- yes, I mean, it's got -- indeed, in Kaplan, first of all, we are an established player and we have very nice market share, two digit at least, no matter how we take the numbers in the market we are working on outside of China. And the way when we look to the IoT, you have -- you still have a lot of application or the people have preference for Cat 1. Even just people could be surprised by this, but it seems that some of the metering application, the high-end metering application, I call high-end more the main meter, the electrical meter, people likes -- like to see Cat 1 as a solution for this. And obviously Sequans is the only vendor capable of bringing later generation on both Cat M and Cat 1 and obviously and be part of the Cat M offer that we have it there. So that's why it's really a good angle for us to increase our market share with this new platform, which will hit two objectives. One, reduce the cost, bring down the platform, I will say to high single-digit or low two digit if you want pricing at the module level, and be able to offer a comprehensive offer to our customer because we have many of our customers taking the metering space, where they need Cat M, but they need Cat 1 and obviously having Sequans playing with the two products that they have the same interfaces, they had the same software environment and so on, makes it very appealing to our customers and help them driving their business. And the other angle of it is really some application where you need a voice. And here you have even some application they need low power, because you can use it on wearable application. So all those segments and all those applications are really requiring Cat 1. We are very happy with the decision that we took like a year -- more than a year-ago to develop this and invest in this Cat 1 platform. We have the chip working. As I said, last quarter, we have it in hand, and it's in the lab under testing. And now we have the module ready under testing and we should just start something just to our customer in Q1. So this should be a an engine of growth for us next year, obviously, that should start generating revenue new more towards the end of the next year, because we need to factor and take into account customers taking the product developing their product and take it to market. So we should maybe ship this new platform in Q4 next year and obviously a lot more in 2023.

Great, thanks so much.

Thanks, Scott.

And our next question is from Craig Ellis with B. Riley. Please proceed with your question.

Yes, thanks for taking the question. And Georges, congratulations on the growth you're getting in the pipeline, and the visibility that's providing. I wanted to follow-up on Scott's question on supply, and maybe pose it this way. As you look at the way the supply dynamics will unfold with your partner at TSMC, when would you expect to get more visibility on 2Q and 3Q? Would that be after Lunar New Year or before then or sometime thereafter?

No, I believe on the Q2. But honestly, I should have more visibility end of this quarter hopefully. Obviously, there is no straight. Every day there is work on this. I can tell you we had long weekend in Paris yesterday. And I was -- I took one day off a little bit to relax. And during this day, I get a call from TSMC asking me and working with me the guy to improve the Q2 [indiscernible]. No, they are working very seriously with us. And honestly, it's not like we're missing. We are missing more to support the growth, if you want. The challenge that we have that the company is growing, as you know. We're targeting 50% growth. So by definition, we need at least 50% more wafer. And when TSMC is making their location, they are making this fairly flat, or let's say they can give you 5%, 10% growth. And this is my challenge. And the way I'm getting this is not securing. It's securing Q4, but not Q2 and Q3. So I feel calm. I don't know for Q3 it will be too early for towards the end of the year. But I'm hoping as the year I'll start seeing much better Q2, at least.

Got it. And then as a longer term consideration, do you have the ability to think about other front end fab options? Or just given the IP and other process related technology that TSMC offers, is that not an option for Sequans?

I didn't get the …

You have other front end …

Oh, yes.

… options that you could pursue or do you feel like you need to stick with TSMC longer term exclusively.

I mean, obviously, we're not exclusive. So we have the choice to make. If this supply situation continue like this, I mean to be honest, TSMC is very, very helpful and very supportive. And indeed, we can go and make another foundry, make the dual sourcing on the wafers. But on the logistics stand, it's not the question of IP. It's not the mission impossible, but you will not be ready. It doesn't deliver the results before one year work if you want. So on this basis, I felt like at least assuming that those challenges will go away in 2023, that better to work more closely with TSMC on fixing next year and keep relying on them as a key partner. Not exclusive, but key partner. That’s how we see it.

Yes. Yes, and I understand all the complexities in making a fab change, and certainly the feedback we're getting from others is that TSMC has been very engaged in trying to grow output. Moving on to another point in your prepared remarks, when you were talking about Cat M. Gen 2, I think you mentioned that there were multiple 100 unit customer opportunities. I was hoping you could provide more color on those, maybe types of applications and when those might be able to convert to design wins and pre-production, production work potentially.

Yes, I mean, what I said is that we have a few number of them that there will be more in the million units per year order. Obviously, it's industrial space. And I'm sure that the people are now familiar that massive IoT is not about tens of millions per customer. You don't see those kind of profile, at least per project, to say. Maybe you could have a customer, who have many projects and they add up. But if you take one application, one project, the big project is million units per year. And we have, a few of them like this, and they are very advanced to be ready next year and generate those kind of revenue. And obviously, we have a lot more in the few hundred thousands of unit per year and those are what we call them smaller volume customers. In terms of application, without really talking who's who here, because I would like a little bit to keep things under confidentiality, a little bit for our customer and for us as well. But obviously, we are very successful in the smart -- in the metering space. This is a space where Sequans is really making great success. Thanks to the low power nature of those requirement that we have on Monarch 2, because when you go to gas meter, water meter, and obviously electrical meter, they don't have the same challenge. But once you are in a shop, you can get all the -- all kinds of projects, because it becomes competition on the other type of performance. So metering is really a key segment for us. The medical as well, we're quite excited about few opportunity there. And then we spoke about the older tracking device, mainly in car, in automotive related projects. Here we have -- a few -- couple of them big size. And last but not least, obviously the Smart Home, Smart City application. So we remain really on those four segments penetrating each. We see many projects in each of them and we have a lot of wins there. And this is really helping us to win more and increase our [indiscernible].

That's helpful. And then one last one for me before I hop back in the queue. So appreciate the fact that 5G is very R&D intensive. So the points made about looking for funding options is understandable. But can you talk about; one, from a timing standpoint, when do you think something might occur? And based on your preferences, Georges, what would a ideal solution look like in your view? Thanks.

Craig, I mean, there is no ideal solution. The ideal solution is really to shake hand with a partner who's an ideal partner for you, and it's a win-win situation. Obviously, the challenge there is really to have someone helping in this financing. And obviously, you need to give him something which is -- to let him, because he offer to take the risk. So it can scale from customer to a technology partner and it can take different form. So we are very, very open minded on this. Keep in mind, very important, that the 5G price is key to invest into the 5G because when you talk about the 5G -- as we know about the 5G technology in the company, because this can develop even to massive IoT, maybe you're hearing the terminology like RedCap, which is really taking the 5G down into speed and so on. So the investment of the company there is no doubt that we need to invest into the 5G and push this. Now obviously for this high-end platform that we're developing on Taurus, and it's a lot of demand of cash there and we are working on it. And we have a lot of support as we said, because we have a really strategic partner there. We have the French government, but we believe like adding one or two more, this will be great. Which one is the ideal, honestly, anything where Sequans can keep control if you want to [indiscernible] ideal one. And in terms of timing, there is no exact timing for this. I would like to enter next year with this solved, if you want. Let's -- let me say it like this as a goal for me.

That's great. Thanks, Georges.

And our next question is from Tristan Gerra with Baird. Please proceed with your question.

Hi, guys. Going back to the TSMC wafer allocation, so you’ve mentioned that Q4 and Q1 align with your current target shipments. My understanding is that you were probably shipping 70% of demand in the prior quarters. So does that mean that for Q4 embedded in the guidance should basically shipping 200% of demand? Or are you still constrained even though -- and does that mean that there is any -- some type of catch up shipments in Q1 before you potentially get tight with capacity again?

I mean, we are not -- let me say it like this, it's we are good versus our guidance, if you want. But obviously, if I look to the demand, the demand is higher than what we are getting. But we are not any more tight at 70% that I have to qualify it, I mean, maybe we are in the region of 10%, if I need to -- if I'm not limited in supply, if you want. So this is how I look to it. And again, it's really we feel good to serve the guidance more than we have extra volume of a lot of things because if I have much more than I need, then I can use it to serve my Q2 if you want them because they can build inventory much more on this. That's how it is.

Okay. That's useful. And then, how do you look at the opportunity for Taurus? I mean, is that Jetpack only type of applications? Or is it really going to be something that has potential in applications whether it's industrial 4.0 or automotive, anything that's now in the smartphone, if you could characterize that opportunity, what it took to what you saw with your 4G modem?

Yes, Tristan, this is a very, very good question. Obviously, we're developing this 5G Taurus platform, which is really supporting what we call the new radio 5G high-end capable of going to more than 7 gigabits per second and obviously, you can scale down this technology to serve even the 1 gigabits per second. So once you develop the technology, you are able to very quickly, I'll say, to have more than one product, by the way to the market, depending on the segment. And here in terms of target, that's exactly all what you mentioned is this is our -- our target is really our position is clear. We are on every device, what we call it IoT device, which means not the smartphone, and obviously, we're attacking this based on the go-to-market and the readiness of the market, the timing and so on. The first market that we believe really is happening and will be happening is more the 5G for fixed wireless application. Here we are talking about gateway router, whether at home or enterprise. So this is really a straightforward target. You can go obviously to portable router like Jetpack, this is again an easy target. And then industrial is a very important one for that all what you mentioned. This is really key for us. Automotive will work, but automotive will require a little bit other partners, I will say, to help us on this, at least for the time being. So in a nutshell, this platform is capable of addressing all the markets you mentioned there. It's just a question of the go-to-market that we have and the ability of the company to take this technology to a given segment. And obviously some of them are easy. They are in hand of the company today and accessible. Some will need more work or more partnership to work on drive back.

Great. Thank you very much.

[Operator Instructions] And the next question is from Rajvindra Gill with Needham & Company. Please proceed with your question.

Hi, guys. Good morning. This is Denis on for Raji. So just wanted to ask a couple of questions. The first one is going to be you guys talked about this 50 million to 100 million unit opportunity for Calliope 2. Could you explain whether that's your expected sales for Calliope 2 for China? Or is that kind of like a total [indiscernible]. Could you just provide some more color please on those numbers.

Yes, I mean, there is -- this is -- I mentioned like it's the total marketing. Today the Cat 1 market if we look this year it was around 50 million units. I mean you can look to many reports depends, it varies a little bit 10%, 15% between the various guys and based on our analysis as well. Bottom up, we believe it's around 50 million units, where half of it is -- more than half, by the way it was like 60% this year was in China and this will be growing to 100 million total addressable market. Obviously, Sequans will be taking some percentage of market share there. Today, I believe we are in the Cat 1 business. We are somewhere between 12% and 15% market share outside of China. This is what we have, and we believe Calliope 2 will increase our market share, because it gives us the differentiation and the uniqueness with this platform because practically there is almost very limited competition. The only new platform Cat 1 coming to the market is a Chinese platform. And outside of China, no one has developed this next-generation platform as Sequans did.

Got it. Thank you. And my second question is about relates to wafers in TSMC. So what TSMC has recently increased prices by roughly 20% for wafers. Are you planning to pass on these price increases to customers? And if so, I know, when will you be doing so?

No, we did, obviously, we could not keep absorbing those price increase. I mean, in the past, we absorbed some of the price increase when it was about substrate and so on. I mean, we manage to stay with our commitment to customers. But obviously, since this price increase on TSMC, which was worldwide at large and some 20%, we reflect this price increase as well to our customers worldwide as well. Obviously, customer by customer, there is some work on this, but in general, we will recover our margin if we want. We are not losing on our margin.

Got it. That’s it all for me. Thanks.

And our next question is from Craig Ellis from B. Riley. Please proceed with your question.

Yes, thanks for taking the follow-up. Georges, I just wanted to look a little bit beyond fourth quarter to the first quarter. And I'm not looking for specific guidance here. But I think typically, we would think about the business having a seasonally down first quarter, but given what's going on with the supply chain, given the strength in the pipeline and the pipelines conversion capability, I was just wondering if you could provide some color on what we might expect for the first quarter just in high-level terms rather than specific guidance. Thank you.

Yes, Craig, obviously, we have some of our business which is seasonable like everyone. But as you said, as you mentioned, I mean, there is some -- yes, there is some -- today we don't see this down. And let me say it like this, we don't see a down versus Q4 because in any case, our Q4 was low and we see it at least flat.

That's helpful. Thank you very much.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Dr. Georges Karam for closing remarks.

Yes, thank you again for joining the call. We look forward to catching up with you next year on our fourth quarter earnings call. We are -- by the way, we are presenting company in the upcoming Growth Capital Virtual Technology Conference and are hosting one-on-one meetings on November 17 and 18. And also in January 2022 we are participating in the Needham Growth Conference. So we look forward to connecting with you at one of these upcoming events. Thank you very much. Thanks, operator.

Thank you. This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.