Greetings, and welcome to Sequans Communications S.A. Second Quarter 2022 Financial Results Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Kim Rogers with Hayden IR. Please proceed.

Thank you, Maria 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 the ability to enter into and close a new 5G strategic agreement on presently negotiated terms and the expectation that the potential agreement will fully fund the development of our first 5G platform, expectations for Massive IoT sales, the impact of the COVID-19 on our supply chain and 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 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 second quarter 2022 financial results conference call. Once again in the second quarter our growth was boosted by our Monarch Cat-M product family, which grew 13% sequentially and 122% year-over-year. Notable, because Cat-M’s first quarter annual growth was also privileged. Revenue for the quarter increased 11% year-over-year, with Massive IoT growing 12% and the Broadband category growing 9%, due to services revenue. Broadband’s sequentially decrease was due to the timing of services and licensing revenue generated by our existing 5G agreements, and was fully compensated by the growth in our Massive IoT and Cat-M, and Cat 1 businesses which have driven our sequential product revenue growth. This increase in second quarter service and licensing revenue delivered year-over-year improvement in gross margin of 430 business points to 60.9%. The increased gross margin contribution and a reduction in our operating expenses narrowed our operating loss versus last year. This along with a benefit from foreign exchange helped reduce our non-IFRS net loss to $1.1 million compared to a non-IFRS net loss of $5.6 million in the second quarter of 2021. Let me start by giving an update on the new 5G strategic partnership. I’m pleased to announce that we finalized all the terms of the licensing agreement with a new strategic 5G partner as we had planned. Execution of the deal is expected within a few weeks. A few final logistical steps experienced delays beyond our control, but they are now moving forward to the completion stage. We will provide more details once the deal is announced, but I can share with you today that the agreement is expected to generate more than $50 million of licensing revenue in the first three years, followed by royalty revenue in the future. This…

Another similar project is also impacted by these lockdowns and its ramp phase is now delayed to 2023. As a result, the outlook for CBRS revenue is expected to remain variable during the second half of 2022. The good news is that we have a number of irons in the CBRS fire for exciting enterprise and IoT applications. Several metering customers are exploring Cat 4 CBRS as a compliment to Cat M and B and category 1 categories, Cat 1 categories. We expect these opportunities to develop farther in 2023. We also expanded our licensing agreement with Renesas to cover our Cat 4, Cat 6 broadband modules and this should strengthen our go to market in this category.

The most significant long-term growth driver of our IoT business remains our Taurus 5G platform. 5G will transform and broaden the use of cellular connectivity and IoT and Taurus is uniquely positioned as a leading 5G solution, fully optimized for fixed wireless, enhanced broadband, and critical IoT applications. The Taurus 5G platform will meet the throughput performance and low latency required for these market segments, allowing Sequans to address a meaningful market opportunity that could potentially exceed $2 billion by 2025 tripling our addressable market. The pending 5G strategic deal with strengthen our execution ability to achieve this goal. The 5G Taurus platform development, which is the largest segment of our R&D spending is progressing as expected. We received the engineering sample of our RF chip in May, and we were pleased with the results. The team remains on track to sample the full solution in 2023. Let me now give you a quick update on the progress with our MCU partners. Our MCU partnerships continue to deliver new opportunities and exposure for the Sequans product portfolio. In June Microchip launched a new platform incorporating our Monarch 2 GM02S cellular module. The launch received tremendous media exposure through its large social media audience and customer base. We expect this platform to generate a new flow of design opportunities and to contribute our future growth. On another front, Renesas is promoting a cellular IoT roadmap with a comprehensive portfolio of modules featuring our LTM and B and Cat 1 solutions. This quarter, they have added our Cat 4/Cat 5 technology, and they are fully engaged with our 5G Taurus. This makes Renesas an important go to market partner as they are promoting all our 4G, 5G portfolio to address a broad range of cellular IoT opportunities. We have a number of…

The most significant long-term growth driver of our IoT business remains our Taurus 5G platform. 5G will transform and broaden the use of cellular connectivity and IoT and Taurus is uniquely positioned as a leading 5G solution, fully optimized for fixed wireless, enhanced broadband, and critical IoT applications. The Taurus 5G platform will meet the throughput performance and low latency required for these market segments, allowing Sequans to address a meaningful market opportunity that could potentially exceed $2 billion by 2025 tripling our addressable market. The pending 5G strategic deal with strengthen our execution ability to achieve this goal. The 5G Taurus platform development, which is the largest segment of our R&D spending is progressing as expected. We received the engineering sample of our RF chip in May, and we were pleased with the results. The team remains on track to sample the full solution in 2023. Let me now give you a quick update on the progress with our MCU partners. Our MCU partnerships continue to deliver new opportunities and exposure for the Sequans product portfolio. In June Microchip launched a new platform incorporating our Monarch 2 GM02S cellular module. The launch received tremendous media exposure through its large social media audience and customer base. We expect this platform to generate a new flow of design opportunities and to contribute our future growth. On another front, Renesas is promoting a cellular IoT roadmap with a comprehensive portfolio of modules featuring our LTM and B and Cat 1 solutions. This quarter, they have added our Cat 4/Cat 5 technology, and they are fully engaged with our 5G Taurus. This makes Renesas an important go to market partner as they are promoting all our 4G, 5G portfolio to address a broad range of cellular IoT opportunities. We have a number of…

The most significant long-term growth driver of our IoT business remains our Taurus 5G platform. 5G will transform and broaden the use of cellular connectivity and IoT and Taurus is uniquely positioned as a leading 5G solution, fully optimized for fixed wireless, enhanced broadband, and critical IoT applications. The Taurus 5G platform will meet the throughput performance and low latency required for these market segments, allowing Sequans to address a meaningful market opportunity that could potentially exceed $2 billion by 2025 tripling our addressable market. The pending 5G strategic deal with strengthen our execution ability to achieve this goal. The 5G Taurus platform development, which is the largest segment of our R&D spending is progressing as expected. We received the engineering sample of our RF chip in May, and we were pleased with the results. The team remains on track to sample the full solution in 2023. Let me now give you a quick update on the progress with our MCU partners. Our MCU partnerships continue to deliver new opportunities and exposure for the Sequans product portfolio. In June Microchip launched a new platform incorporating our Monarch 2 GM02S cellular module. The launch received tremendous media exposure through its large social media audience and customer base. We expect this platform to generate a new flow of design opportunities and to contribute our future growth. On another front, Renesas is promoting a cellular IoT roadmap with a comprehensive portfolio of modules featuring our LTM and B and Cat 1 solutions. This quarter, they have added our Cat 4/Cat 5 technology, and they are fully engaged with our 5G Taurus. This makes Renesas an important go to market partner as they are promoting all our 4G, 5G portfolio to address a broad range of cellular IoT opportunities. We have a number of…

The most significant long-term growth driver of our IoT business remains our Taurus 5G platform. 5G will transform and broaden the use of cellular connectivity and IoT and Taurus is uniquely positioned as a leading 5G solution, fully optimized for fixed wireless, enhanced broadband, and critical IoT applications. The Taurus 5G platform will meet the throughput performance and low latency required for these market segments, allowing Sequans to address a meaningful market opportunity that could potentially exceed $2 billion by 2025 tripling our addressable market. The pending 5G strategic deal with strengthen our execution ability to achieve this goal. The 5G Taurus platform development, which is the largest segment of our R&D spending is progressing as expected. We received the engineering sample of our RF chip in May, and we were pleased with the results. The team remains on track to sample the full solution in 2023. Let me now give you a quick update on the progress with our MCU partners. Our MCU partnerships continue to deliver new opportunities and exposure for the Sequans product portfolio. In June Microchip launched a new platform incorporating our Monarch 2 GM02S cellular module. The launch received tremendous media exposure through its large social media audience and customer base. We expect this platform to generate a new flow of design opportunities and to contribute our future growth. On another front, Renesas is promoting a cellular IoT roadmap with a comprehensive portfolio of modules featuring our LTM and B and Cat 1 solutions. This quarter, they have added our Cat 4/Cat 5 technology, and they are fully engaged with our 5G Taurus. This makes Renesas an important go to market partner as they are promoting all our 4G, 5G portfolio to address a broad range of cellular IoT opportunities. We have a number of…

The most significant long-term growth driver of our IoT business remains our Taurus 5G platform. 5G will transform and broaden the use of cellular connectivity and IoT and Taurus is uniquely positioned as a leading 5G solution, fully optimized for fixed wireless, enhanced broadband, and critical IoT applications. The Taurus 5G platform will meet the throughput performance and low latency required for these market segments, allowing Sequans to address a meaningful market opportunity that could potentially exceed $2 billion by 2025 tripling our addressable market. The pending 5G strategic deal with strengthen our execution ability to achieve this goal. The 5G Taurus platform development, which is the largest segment of our R&D spending is progressing as expected. We received the engineering sample of our RF chip in May, and we were pleased with the results. The team remains on track to sample the full solution in 2023. Let me now give you a quick update on the progress with our MCU partners. Our MCU partnerships continue to deliver new opportunities and exposure for the Sequans product portfolio. In June Microchip launched a new platform incorporating our Monarch 2 GM02S cellular module. The launch received tremendous media exposure through its large social media audience and customer base. We expect this platform to generate a new flow of design opportunities and to contribute our future growth. On another front, Renesas is promoting a cellular IoT roadmap with a comprehensive portfolio of modules featuring our LTM and B and Cat 1 solutions. This quarter, they have added our Cat 4/Cat 5 technology, and they are fully engaged with our 5G Taurus. This makes Renesas an important go to market partner as they are promoting all our 4G, 5G portfolio to address a broad range of cellular IoT opportunities. We have a number of…

Thanks, Georges and good morning, everyone. Our revenue for the second quarter was $14.2 million an increase of 10.6% versus Q2 2021 and a 2.4% compared to $13.9 million in Q1 2022. Product revenue, which accounted for 54% of total revenue increased 29.5% sequentially versus Q1, reflecting primarily higher product sales in our Massive IoT category. License and service revenue decreased 17.8% versus Q1 as expected, mainly due to one-time license fees recognized in Q1 that were not repeated in Q2. Revenue from Massive IoT in Q2 2022 increased 36% quarter-on-quarter and accounted for approximately 59% of our total revenue. Revenue from Broadband IoT decreased 25% from Q1, primarily due to the expected decline in one time license revenue. For the quarter, we had three customers that each represented 10% or more of our revenue. As massive IoT designs move into production we expect to diversify the number of end customers served. Gross margin in Q2 2022 were 16.7% up from 56.6% in Q2 2021 and down from 68.1% in the first quarter of 2022. The improvement year-over-year was primarily due to the increase of services and licensing in the broadband category and the increase in the mix of chipset revenue versus module revenue overall, compared to prior periods. IFRS operating expenses were $10.7 million, down 6.1% from the $11.4 million in Q1, 2022 due a decrease in R&D spend of $539,000, a decrease in G&A expense of $141,000 and a modest decrease in sales and marketing of $22,000. Year-over-year IFRS operating expenses were essentially flat at $10.7 million in Q2 2022 and Q2 2021. Non-IFRS operating expenses, which exclude stock based compensation expense were $9.5 million in Q2 2022, compared with $10.1 million in Q1 2022. Our second quarter 2022 operating loss was $2.1 million an improvement compared to…

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

[Operator Instructions] Our first question is from Scott Searle with ROTH Capital. Please proceed with your question.

Hey, good morning. Good afternoon. Thanks for taking my questions. Georges, Deborah, congratulations on getting the 5G deal to the finish line. Hey, just to follow up quickly on the 5G opportunity, Georges, I want to make sure I understand in terms of how the revenue recognition is likely to work understanding that you'll update guidance when it becomes available, but it's going to be licensing. So we'll be recognizing somewhere in the ballpark of $50 million rateably over a three-year period, is that correct? And I'm wondering if you could update us as well on other strategic opportunities in the pipeline?

That's good. Yes, I mean, your understanding is right. I mean, this is how it is. Obviously you could -- we’ll give you more color, you know, on this front when we announce. You could have some lumpiness as well in the early phase, I tend to say later on it will be more smooth because of the nature of the deal, but that's absolutely this is revenue licensing at least $50 million to recognize over three years and followed by loyalty obviously that you should not neglect in the future. So it's really a long-term business that we have here. Regarding other deals, obviously I don't want to give more specific color on this, but we are in the same spot. Scarcity of the 5G technology makes Sequans really unique player with the flexibility that we have on one side and the IP that we own in hand and it's attracting a lot of partners for different application that they are interested to deal with Sequans. So, and we have many discussion that continue to be active, nothing conflict with the one we have and somehow I will, part of our plan as well to develop this business that we are coming now a little bit more seriously with this deal, create like some kind of flow of IP and revenue licensing to continue over time. And I believe we, -- you could see similar deal in the future coming from Sequans as well.

Got you. But it sounds like there's nothing mutually exclusive here in terms of what's in the pipeline versus what's at the finish line.

Absolutely. No, no.

Hey and Georges, if I could, on the supply chain front, it sounds like near term the wafer availability issues have moderated a little bit, I guess in combination with some of your customers, just some mild push outs, but looking to 2023, I was wondering if you could give us some color in terms of what that supply situation looks like? It sounds like you're starting to work on that now that you're feeling good, but is there anything that you could do to quantify in terms of how the increased availability is, what you guys could support as you're getting into 2023?

Yes, I believe Scott, I mean, the real worry that I had if you want is that, we're coming with a new platform or a new fab. And as you know, Monarch 2 is accelerating. I mean, you see the level of growth that we have, so we're not projecting like 50% growth or 30% growth on the Monarch. So it is really, you know, doubling tripling hopefully depending on the ramp. But and that's why we have demand on this platform and on top of this, the challenge that we have on Calliope 2, the new platform coming where we have zero, if you want wafers this year, and we need more wafer next year to start serving the early customer. And, but honestly I feel very, I feel good on this. The allocation that we had, we managed to convince the TSMC from the position that we have, that this is like special, you cannot compare year-over-year and give us some linear growth and so far so good. And then we have the established business on other fab. Here they are kind of giving us more kind of flat and we have some discussion with them a little bit to improve it. But globally, when I look to the picture is much better than our, you know, relatively speaking when they announced last 2022, I was completely unhappy. For 2023 I feel much better.

Yes, I mean, obviously I don't want to comment on the deal as such, you know, but in general, this consolidation is normal to happen. You have a lot of players playing the module and the model is somehow squeezed and having less player, I believe it will be for the benefit for the market and as well the players staying there. We have relationship obviously very advanced relationship with Thales because it's a big customer for us. So we are happy to see them. I would say, you know supporting and maintaining the business with Telit and we have good relationship with Telit. You know, we were working with them on the CBRS originally. So obviously all this at minimum it will be positive. That's how we look to it for Sequans. And they announced to us the partnership officially, and we don't see anything -- any disruption at least in the short, medium term. And we see more upside to come in the future with a partner like Telit and Centurion now to play with.

Great, thanks so much and congrats on the 5G strategic.

Thank you, Scott.

Our next question is with Craig Ellis with B. Riley Securities. Please proceed with your question.

Thanks for taking the question. I'll echo the congratulations on the new strategic deal. Georges, I wanted to start just by trying to quantify the impact of the different supply chain dynamics that are at play. Obviously that's something that's impacting most tech companies, but for Sequans in 2Q, can you quantify the impact that you think those supply chain impacts had? And as you look to 3Q, given that it sounds like there's something that's impacting both Massive IoT and CBRS, if you could quantify the impact that would be really helpful?

Hi Craig, I mean, really for Q2 the main impact, if I have to qualify it is really on the Broadband. I mentioned that if you look to our broadband business this quarter was really mainly services, very little product, really Massive IoT supported the growth of the quarter. And this is good by the way, this really gives you an indication about the nature, because we have new projects moving to production and we start shipping. So all this is positive. Unfortunately, the CBRS where we had a very successful project and there is no problem at all there, we were expecting the second phase to accelerate if you want. And because of the supply challenges, the guys, they didn't move to the second phase of production and this delayed a little bit some revenue for Q2. I will quantify it in the order of half a million dollar, not more. The impact for Q2 was contained somehow. The issue we are seeing a little bit for Q3 and Q4, and depending on this was really more with the, obviously the CBRS is one element, the broadband unfortunately, if I look to the broadband projection at the beginning of the year and where we see it now, mainly the CBRS it's much less than what we thought, even if relatively speaking is the CBRS was small business, it's not big. So, but still, we were hoping CBRS like doubling this year. And unfortunately I don’t know if we'll end by being flat or a little bit down to flat because of the delay we saw there. But if I look to the Massive IoT, which is the most important piece there, we have, as I mentioned, delay, even not only with the project shipping, but even with the project in the design phase, the customer waiting for their prototype to come back delay of one week here, two weeks here to come out of Shanghai and so on. So, it is creating some trouble and delaying a little bit the ramp. But if you dig in there is nothing. I mean, we are not losing any business. We are not missing any opportunity there. It continued to be building out and just only some of the ramp of the projects. We have, for example, one customer to start moving to production, we were expecting this guy will be more in June to be in mass production. Now it's September and we shipped to them end of Q2 the first batch. So we have like couple of months like this, all related to this trouble we are seeing on the supply chain and pushes. And obviously in the order of magnitude of this for us is really reducing the ramp, but we expect continued ramping in the second half versus the first half in the products revenue with Massive IoT.

That's very helpful. And then as a follow up to one of Scott's question on supply, can you just clarify what you'd expect from Renesas, both in the back half of this year and next year on the supply side?

Yes. I mean, Renesas, I mean, by the way, we're shipping to them this year, you know, not yet a million, but we can talk about some significant number and obviously this, we use our own capacity. They are building the fab. If you want the qualification of they are not completely a new fab, because they are obviously using TSMC, but the backend services to run it in their process with all the Q&A and so and so this is happening and they should be ready towards the end of the year. So this will be something that they can use next year definitely. For this year we are making, if you want just preparation of the fab. And obviously they have the ability if we are missing, if we are short by 500 wafers that they can give the priority on their product line versus other product to get it for them and we will -- this can help us to reserve the capacity we have on our side for the customer, direct customer and have Renesas serving their customer with their own fab. So this is really nice upside. For the time being still early I tend to say, but definitely they have the abilities, just a question of priority for them. They just only assuming they have let's say whatever number in 14 nanometer, let's assume they have access to 20,000 wafers in a year, they -- it is easy for them to dedicate 1000 to the cellular business obviously prioritizing this on other business they have, but because it's emerging a new business for them, so they could be putting priority on this versus other established policy customers.

Got it. That's helpful color. And then my final question before hopping back in the queue is to Deborah. Deborah, we had expected that we'd see rising module mix in the second half of the year and then we had real strong gross margins in the second quarter. What should we expect for module versus chip mix as we go through 3Q and 4Q this year?

So in the second half of the year we are expecting there to be, I'd say more weight on modules than chipsets, so that will have an impact on gross margin compared to the first half.

Got it. Yes, and then I know gross margin will change once we get the third quarter guidance update on the closed strategic, but any color on the magnitude of gross marketing change. So we'd look to what would happen pre that deal in the third quarter?

I think it would be a, it would, you know, be a significant positive impact, but I'm not prepared to quantify it at this point.

Yep, got it. Okay, thanks team.

[Operator Instructions] Our next question comes from Mike Walkley with Canaccord Genuity. Please proceed with your question.

Great, thanks for taking my question and my also congrats on the 5G strategic deal. I just wanted to clarify a little bit more on the product revenue in the second half of the year versus the first half of the year, just given some of the supply issues and a little bit of delays, are you kind of signaling product revenue flattish with Q2 results in Q3, Q4 or would second half of the year be a little stronger than kind of the run rate in Q2?

You know, if I compare first half to second, I'll say Q2 let's say second half to the first half, I'm still expecting product to be up, because the Massive IoT will be coming. If anything, on the product, maybe it will be in the broadband shifting on the CBRS because this is also the products avenue, but Massive IoT will continue growing and this is mainly product fab and so this is how it is. Now we could have like quarter-to-quarter that does, that could look a little bit not really accelerating like Q3 a little bit low, and then accelerating in Q4 because of the delay I mentioned, because we had a couple of projects delayed by a couple of months. And we have some inventory with one customer that we shipped to them in Q1, Q2. We're not shipping in Q3, so we could have some lumpiness in Q3. But totally if I look at the second half, we should see growth when I consider Massive IoT and Massive IoT is a product. And any impact on the rest of the product will be coming from the broadband maybe if the CBRS doesn't come back as expected in Q4.

Okay, that’s helpful. And Georges, just on the Cat and family product ramps, any more color, is this broad based or is it just a couple large projects right now? Maybe you can just talk about some of the use cases that are driving that ramp, especially as you look into next year?

I mean, you know we essentially honestly we have two major one making most of the business today is really -- if you remember, at the beginning of the year, I spoke about three major projects. What I qualify them more than 1 million unit a year. Two of them are in production today. When I mentioned that one is a little bit, they have a little bit of inventory, but there is no issue. It’s just only Shanghai that delayed, one moved to production and when I mentioned that this delayed almost for next year, even if this third one is continue building with the customer with more and more projects, and it's very successful, now certainly is taking longer time. And we have another series of medium sized projects moving very well the production, it's really we had at the beginning if you want to hold those ramps, so sometimes we don't see the continuity quarter-to-quarter. You ship one quarter and second quarter a little bit, maybe slow, and then you accelerate in the following one, like, and plus two, because obviously when they are ramping their production, they could be little bit consuming the production not in a smooth way. But again, smart metering remains a key segment for Sequans, and we have many, many design wins there and we are bullish about this segment. Tracking, mainly fleet management and related to cars, we are in very good position we have big projects, and we have even in the medical few projects there or eHealth, and one of them is a major one as well. So this is kind of color, so this continues building up. And the other news, by the way, which is on the Cat 1 I mentioned, Calliope 2 platform. We are very excited about this. We feel extremely good about this platform since the launch. Obviously we are not yet shipping I tend to say the full solution to our customer, if you want. Our software is not yet in certification level. This is the work of Q3, Q4 that you are doing. But even with this stage, I can say we have a short list of four, five major designs very advanced stage to consider them as a -- turning them to design wins soon. And one of them has converted this quarter already. So we're quite positive about, about this success with the Cat 1 as well, adding to the cart.

Okay, thank you very much.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back over to Dr. Karam for closing remarks.

Thank you. So thank you again for joining the call today. We look forward to catching up with you with the update on the new 5G strategic deal and then during our third quarter 2022 earnings calls in November. Please note that you are participating in Canaccord Annual Growth Conference on August 10th. Please contact your Canaccord representative if you would like to book a one on one meeting. We look forward to speaking with you soon. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.