Greetings, and welcome to Sequans Communications S.A. Third 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 of Investor Relations. Please go ahead.

Thank you, Vikram 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'd 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, expectations for future sale, the impact of the COVID-19 on our supply chain and on our 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, 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 located 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 everybody. Welcome to our third quarter 2022 financial results conference call. Before we jump into my comments, there are several highlights I want to emphasize. First, we had a great quarter from the consolidated revenue and profitability perspective. Number two is that the new 5G strategic deal is going very well. Number three, our pipeline for Massive IoT products continue to grow and we are landing design wins with the new and existing customers. Number four is that Cat 1 Calliope 2 is off to a great start, and future looks bright. And last but not least, our MCU partnerships are doing very well, particularly Renesas, who's introducing Sequans to the largest brands in the space. Let's start with a quick look at the third quarter results. Third quarter revenue rose by 39% year-over-year and 16% sequentially, reflecting the significant increase in our licensing and services revenue, which included revenue from our new 5G strategic partner for the AIP delivered in the quarter. A growth from licensing revenue in the quarter lifted our gross margin to 77.6% and turned the company to non-IFRS profitability of $0.01 per ADS on a fully diluted basis. The higher licensing revenue offsets the lower product revenue in the quarter. But as we said last quarter, we expected our product revenue to be impacted by ongoing macroeconomic factors. Specifically, the lockdowns related to the China's zero COVID policy, and other supply chain challenges have hampered our customers' ability to ship or launch products on time. In a moment, I will discuss why the delay in our product shipment will not impact our growth potential. Turning to an update on our new 5G strategic partnership. As expected, we receive the first payment of $13.5 million in October net of withholding tax.…

Thank you, Georges and good morning, everyone. Our revenue for the third quarter was $16.5 million, an increases 39% versus Q3 2021 and up 16.2% sequentially. As Georges mentioned, our product sales were impeded by shipment and fulfillment delays related to lockdowns from China and other supply chain issues, as well as the impact of our customers continuing to work through their inventory from prior shipments. Revenue from Massive IoT product sales in Q3 continue to account for nearly all of total product revenue. Revenue from broadband IoT increased from Q2 and from Q3 of last year, due to the revenue recognized from the new strategic 5G licensing deal. As Georges mentioned, this deal is expected to continue to contribute significantly, if somewhat less in Q4 and again somewhat less in Q1 and then contribute around $3 million to $4 million per quarter for the remainder of the term of the agreement. For the quarter, we had one customer and one channel partner that each represented 10% or more of our revenues. As Massive IoT design wins and end customers move into production, we still expect to see some concentration of our revenues with our channel partners. Gross margin in Q3 2022 was 77.6%, up from 49.2% in Q3 2021 and up from 60.7% in the second quarter of this year. The year-over-year and sequential improvements were due to higher contribution from licensing revenue. We have quarter-to-quarter fluctuations in our gross margin due to shifts in our revenue mix, but we are confident that the overall gross margin for 2022 will be above 65%. IFRS operating expenses were $11.6 million in the quarter, up from $10.7 million in Q2, and increased from $10.9 million in Q3 of 2021. Non-IFRS operating expenses which exclude stock-based compensation expense were $10.5 million in…

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

Thank you very much. Ladies and gentlemen, we will be conducting our question-and-answer session at this time. [Operator Instructions] We have a first question from the line of Scott Searle with ROTH Capital. Please go ahead.

Hey, good morning. Good afternoon. Thanks for taking the questions. Nice job on the results the strategic and the pipeline that's building. Georges maybe to start in terms of supply chain certainly impacted the near-term, but it sounds like it's starting to get better, as well you're building some inventories from a wafer level. I'm wondering if you could kind of walk us through how you see that normalizing over the next couple of quarters? And in particular on the wafer level as we start to look out to 2023, can you kind of update us on your early thoughts in terms of how that wafer availability is working?

Hi Scott. Yes, I mean, on the supply -- on the macro, what you are hearing, I believe, you get all this news and obviously discussing with the SMC, the -- we’re on the other side of the cycle, I tend to say and there is some relief in terms of supply, but it's not like normalized. You still see some tension here and there, some components missing here and there. On the other side, you see some extra inventory in some situations. So, just to, kind of, still I believe in not really normalizing back to normal, but it's in the right direction. Now, if I look to Sequans, for us, it was very important to secure because we have a lot of demand for next year and we didn’t want really to miss and rely just on some projection for next year. So, we're building inventory a little bit more than usual. Also you have some price increase, which is happening beginning of the next year. And obviously, this inventory is cheaper, if you want for us buying things in Q4 to sell it in Q1, you will make some better margin, I will say for the company. So, the two combined forced us a little bit to take our capacity this year and not neglect it. And if I look to 2023, I believe, we are in good shape. I'm not nervous on the supply as we are speaking today for us at least.

Great, very helpful. And maybe looking out into the pipeline in 2023. It sounds like a lot of good things are ongoing. I think last quarter you talked about a full ramp in 2023 that would be 70 million in product opportunity. But that's going to going –going to ramp over the course of 2023. It sounds like you're continuing to add to that, particularly with some Cat 1 design. So I’m wondering, if there's an updated number on that front. And then as well, the pipeline of opportunities as it relates to Cat 1, I believe you said 700 million wanted to confirm that again, and kind of how you're defining that I think historically, when you talked about the $300 million design win pipeline was about three years are using the same metrics on that front. Because I know some of the Cat 1 deals run over a longer time period, but still big numbers? And lastly, the $400 million time that you're talking about for Cat 1 in 2025. I'm wondering, the share figure we should be thinking about for you is 50% kind of given how to design when ramp activity is going?

Yes. I mean. See, what about the pattern, first of all, just to go on the basic number, we're still using the same metric, which is, by the way, when you compare to other company, some other company in the IoT space on industrial, the user metric, which is five years rather than sequence use three years. So and we didn't change this. And just only, we don't want to lose the reference, I'll say, so we're still counting only three years. And you know, those projects are typically for seven years, I will say and often more than 10, because when you talk about metering differences, 10 years, and the pipeline, here is 700 million that are so indeed is that counts their design win secured, which is we said almost half of it. So somehow $350 million in design win, three years revenue design, and the remaining 350 are really advanced projects that we believe we have very high likelihood, I will say to turn them from design end to design win. So this is really what I speak about data. Now, I tried to give you as well a picture, which is an interesting way of looking to the pipe, which is I put this in my script really to give you more color. And I you know, it's like, because I know that many of the investor can say okay, or if you have $350 million potential product line, so over three years, divide this by three. So in average, we have more than $100 million, why you don't have any $100 million product revenue now or next year. And why this is not happening. Now, the reality, I wanted to share with you just only I picked 10 customers, just only 10 customers that they…

Great. Thank you. I really appreciate the color and the detail. Very exciting what's going on? And just lastly, if I could, on the 5G strategic front, you got the China deal done. It sounds like there's other activity going on in the pipeline. Could you could you just give us some more thoughts and details on that front? Are these similar types of deals that we could see? Are we thinking about 2023 years? It's something on the longer term horizon. Thanks so much. Nice job on the quarter.

Yes, I mean, that's – first of all, 5G deal as I said, it's moving very well, I know that maybe some people they have some doubt or whatever. I mean, the deal is really happening. But it was a great relationship. And the parties are respecting the terms and we are moving very well. And there is maybe more things to do together on this partnership. I mean, I don't want to commend more on this, but to feel very positive on it. And obviously, it is really strengthen our position in a model where we can get licensing and royalty to address some segments in the market where sports is not playing today, and maybe other partners, potential partner muscles them, and I should say are missing cellular because, if you need cellular, is very hard to get for you to get 5G technology. So Sequans 3G will be the ideal partner. Yes, we have discussion. With more than three guys, I said and progressing very positive. I'm very optimistic about this. I'm optimistic if you say that I will learn maybe in the next year, but I don't want to command more if you want. Because I believe with the number of engagements we have the – the great position, we have the fact that we are moving to have product in hand, fully working. All this is converging to reinforce our position for those partnerships. And many people are missing this 5G technology and there will be they have no other option if I say other than partnering with signals. So I'm very optimistic on this.

Great. Thanks so much.

Thank you.

Thank you. We have next question from the lineup Craig Ellis with B. Riley Securities. Please go ahead.

Yes. Thanks for taking the question and echoing the congratulations on getting the new strategic deal in the income statement and in your color for the outlook. Deborah, I wanted to follow up on that point, it was really helpful to get your view that the new deal could be 3 million to 4 million in quarterly revenues beginning next year, but the question is, can you help us with the specific number that rep racked in the third quarter? And what is the specific expectation for the fourth quarter?

We're not, we haven't been giving this the specific number I really want just wanted to give the color Once we're through sort of these initial three quarters, it was clearly a larger, larger contribution to the third quarter, we'll meet we're expecting it to be slightly less in the fourth quarter and slightly less again in the in the first quarter. But in all quarters in excess of the then run rate, we're expecting to be 3 million to 4 million.

Okay, got it. Okay. And then, when you look --

Craig, when you look to the licensing component, I mean, you have it obviously, the licensing and it's separated as business versus product. And obviously, it's not the only the issue, you should remember that you have other views there. In this quarter, it's a big portion of the revenue recognized as cost was coming from this, so when I say let's say about 70%, from what you see that is coming from this lead. This will be a little bit lower in Q4 as Deborah said than Q1 and then we'll go down to 3 million, 4 million in our third quarter.

Okay. That's helpful. And then Georges, pulling up on the supply dynamics as we look to 2023. So, clearly, yes, we're on the favorable side of the cycle and I think that's shapes all of our view for what's possible with TSMC and cognizant that there still supply chain issues out there. My question is more on what we might expect with Renesas’ contribution to the company's supply and revenue capability next year, can you just provide some color on how that might trend to the year and what's possible it should look at the funnel that's developing based on your collaboration with that team?

I mean, to be honest, the relationship with Renesas is really great. I don't want to stress this more than this. But I believe it's clear. This partnership was very, very successful for Sequans, because it developed from many projects and it moved in the go-to-market as well into the manufacturing. Today, by the way, I can tell you that Renesas is able to produce one or two completely, and they're already produced, I will say what to call it the kind of pre-production unit just to test, it doesn't have wafers and see that all the processes under control. And so far, all this is positive. And we should end the year, with Renesas capable of producing Monarch 2 that give us obviously, by definition, because this is where the demand will be coming is on this kind of waivers to leverage I would say that some of the capacity of Renesas, if there is a need for this next year. So this is really going well. And I'm happy about that. And honestly, I don't see today, it's not my -- if you asked me last year, same time, my first priority was really the supply. Today, it's not my first priority, even it doesn't mean it's not an issue anymore, but I feel more comfortable on this. It's coming that number one, number two, that worry me. But obviously, I keep an eye on it. And we are watching this, and it's under control. But the other angle as well, with the Renesas that you mentioned is really the success, that contribution to the funnel. To be honest, you don't need to commend that going to Japan and selling to Tier 1 customer in Japan is very complicated if you are not Japanese with good relationship and established network and no doubt that Renesas has all this. easy, I should say. So this is developing very, very well the past there, but it's really beyond Japan, we have big deal with them closed in the US, very big one. And we have in the past couple of them, they are big in the US and Europe. So it's developing very well, the relationship with their sales team, the marketing team is very smooth. So it's not a relationship only at the top level of the company. And when you go down in the fields, you don't see that people talking or it's working very well. And it’s really a great partnership. And we believe that will represent nice revenue for us next year. But even in the pipe over time, this will keep building up and adding more potential to us through this.

Got it. And then on longer-term revenue dynamics. I think in the past, we've talked about that potential for around 50% year-on-your calendar 2023 through 2025 revenue growth and a Massive IoT share expanding from where we are now 12% up towards 30% and a 40% same kicker there. Are those still the right macro numbers to look at for the bigger opportunities that the company has? And then, Deborah, I think in the past with the new deal, we thought that cash self-funding could be possible in the second half of 2023. Can you just update us on the prospects for that especially given the level of revenues that we can expect from the new strategic deal? Thank you.

I mean, in terms of you know, the CAGR, the growth potential, we are in the average still in the same numbers, nothing has changed in terms of CAGR and average whether the market or market share, share keeps building. And just again, if you go back to this example, what I consider 20 customer, the 10 customer sorry, doing 20 million, and their potential and for run is [Technical Difficulty]. So you could argue that was not reach this next year that will reach in the following year. Or let's say the ratio that 80% of the following year, whatever it is, this gives you that we are really in the Cat Monarch growth potential more than 50%. If you take the Cat M along now obviously when you combine it for the existing business and so on, we are targeting an average of 50%, which remains our target. The challenge we have is really the timing of those products -- those projects, moving them from design phase to really full production. And this is really where we have the challenge when you compare year-over-year and we have already we suffered already with this year. So hopefully, all those roadblocks move away and we start going back to normal, but the trend is clear.

Yes. And so, yes, we're still expecting that the new 5G deal fully funds our 5G development. And really it's the revenue trend for next year is as we expect then that we can really target for that operating cash flow breakeven in 2023.

Great. Thanks team.

Thanks, Greg.

Thank you. We have a next question for the line of Nicholas Doyle with Needham and Co. Please go ahead.

Hi. Thanks. It’s Nick on for Raji Gil. Thanks for taking my question. I know you guys talked about be more specific on why Taurus as a sub 60-nanometer product won't be -- won't need a license or won't be impacted. And then just more broadly, why your -- why do you think that your 5G technology just will be allowed to move forward in China.

I mean, Nick, hi. As you know, things are suddenly very complicated and sometimes confusing. If you look to the rules, first of all, when you talk about the geometry, you know how small it is, this is going for manufacturing tools. Sequans has not being in manufacturing, our partner is a fabulous company. So it's completely clean in all the chapter where they talk about FIN FAT, the restriction to China and so on. We're not playing them; by the way our partner will be buying from TSMC from outside China. So somehow Taurus if it's sold by our partner, as it's called, like, everybody wait for from TSMC outside of China, and all this is clean, like any other Chinese buying from TSMC. Now, obviously, I'm not. It's very hard for me to project what will happen in the future. I mean, you could maybe in two years, or in one year, whatever restrict the Chinese to buy anything from TSMC, then we'll -- there will be stuck or my partner will be stuck, but today, there is nothing related to this or conflicting with Sequans. And the 5G as such as a technology is not touched. I mean, we are talking about military application, and if you can use this for military. So what are the manufacturing, for smaller geometric manufacturing, this is out of the scope, completely Sequans, there's nothing there and our partner is nothing there. And if you talk about the technology, 5G, you are not there. I mean, again, as we are speaking today, if tomorrow, we have rules saying you cannot sell 5G to China anymore, and no one can touch anything and so on, then obviously will be impacted, but Qualcomm will be impacted. And I can tell you, the World…

Thank you. That was very helpful. Could you just talk a little bit more about the product declines in the quarter in the guide? I understand that supply chain from inventory burning and the macros impacting, but do you kind of expect and I understand we have some new products ramping next year. But do you expect kind of bottom in product revenue growth to be next quarter, we could see that moving on to 1Q and 2Q? Thanks.

Nick, I mean in, we see the product getting up next quarter. So, we expecting Q4 to have better product in Q3, if I have to give another guidance, I'm saying in our number, even if we're not specific, in general, our banners. But indeed Q3 was a bottom. And they said the issues that we have nearly really for Sequans really, we have many products all our nascent, like, customers, whether they start, they bought the first few hundred thousand units and they moved them to production. And somehow the production didn't move on time, impacted by what's happening in China, or some projects in design phase and the guys were planning to launch them now, or launch them in September and finally are launching them in January. So, again, I can assure you, none of those projects, as has an impact in the sense cancels or disappearing or everything is that we're talking about delays, simple delays, sometimes -- couple of months or three months, and sometimes maybe six months, but all are delays, and that's why they remain in our pipe and that's why we remain optimistic about renewing with the growth of the product. Okay.

Nick, do you have any further questions?

No, that's all. Thank you.

Thanks Nick.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. And I'd like to turn the call back over to Dr. Georges Karam, President and CEO for closing remarks. Over to you Dr. Karam.

Thank you, operator. Thank you again for joining the call all of you. Please note that we are participating in the Needham Growth Conference in New York City on January 10th. We also plan to attend the ROTC Capital Conference in Orange County, California in mid-March. We hope to speak with you soon or meet at one of these upcoming events. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.