Greetings, and welcome to the Sequans Communications S.A. Fourth Quarter 2022 Financial Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kim Rogers, Managing Director of Hayden IR. Thank you, Kim. You may begin.

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 I turn the call over to Georges, I'd like to remind our participants of the following important information on behalf of Sequans. Sequans issued their 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'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, expectations for future product sale, potential for future strategic licensing deals or other strategic transactions, 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 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 fourth quarter and full-year 2022 financial results conference call. I'm pleased to report that we ended 2022 with solid financial performance results showing $60.6 million of yearly revenue and 71% gross margin. Year-over-year, this represents 19% growth in revenue and 17.4 basis point increase in gross margin. Consequently, we achieved non-IFRS operating profit of $1.6 million for the full-year 2022 compared with a non-IFRS operating loss of $13.2 million in 2021. These results are a particularly outstanding achievement given our industries, supply chain and inflationary challenges in 2022. In fact, the supply chain disruption was the principle cause of the delay we faced on our design win project launches in 2022. A significant factor in achieving a year of growth and improved operating results was our ability to leverage our 5G asset and it's scarcity value to create a new IP licensing business that was able to compensate for product shipment delays and boost our gross profit. Looking back at the key highlights 2022. There were three notable accomplishments that benefited our results, and more importantly, will position Sequans for sustainable long-term growth in the cellular 4G, 5G, IoT market. As said before, the first milestone was securing 5G licensing revenue. We closed the multi-year strategic 5G licensing partnership for our Taurus 5G platform valued at more than $50 million. The deal adds licensing revenue over three years and will position to royalty payments for up to 10 years once the Taurus platform starts shipping to customers. The licensing revenue from this deal supported our revenue growth, increased gross margin, and narrowed our net loss in the second half of 2022. The second key highlight was the growth of our product sales pipeline to over $700 million of three-year-life…

Thank you, Georges, and good morning, everyone. Revenues for the full-year 2022 increased 19% from $50.9 million in 2021 to $60.6 million in 2022. Gross margin improved to 70.8% versus 53.4% in 2021, due to the significant increase of licensing in the revenue mix. Product gross margin improved as well moving from 27.7% in 2021 to 32.7% in 2022. Our top-line and margin improvements combined with only a 2.7% increase in operating expenses meant that we were able to reduce our IFRS operating loss to $3.8 million, down from $18.3 million in 2021, as well as reduce our IFRS net loss to $9 million from $20.3 million in 2021. On a non-IFRS basis, we achieved operating income of $1.6 million in 2022, compared to an operating loss of $13.2 million in 2021, and we achieved a net loss of $5.4 million in 2022, down from $19.5 million in 2021. Moving to Q4, our revenue for the fourth quarter was in line with our guidance at $15.9 million. This is an increase of 15% versus Q4 2021 and down slightly compared to $16.5 million in the third quarter of 2022. Product revenue increased sequentially but declined compared to the same quarter last year. Revenue from Massive IoT product sales in Q4 2022 continued to account for nearly all of our product revenue. Licensing revenue all in the Broadband IoT segment declined slightly from the elevated Q3 2022 level as expected. Year-over-year, licensing revenue increased significantly due to the revenue recognized from the strategic 5G licensing deal. For the quarter, we had one customer and one channel partner that each represented 10% or more of our revenue. IFRS operating expenses were $13 million in the quarter, up 11.7% from $11.6 million in Q3 2022. The increase was primarily due to a nearly…

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

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Scott Searle with ROTH. Please proceed with your question.

Hey, good morning, good afternoon. Thanks for taking the questions. Hey, just a quick clarification first, Georges, on the $700 million pipeline in that $350 million design win opportunity, it sounds like, right, there's no 5G in that currently, and a majority of that is Cat M driven at the current time, the Cat 1 production is starting to really ramp up in that design activity, is that correct?

It's 80% of this is Massive IoT, Scott, I mean the remaining is a Broadband 20%. So in other words, if you take Massive IoT only we are a little bit below $300 million like $280 million, $290 million. And the Broadband has some 5G, but it's really longer run because we have some design win as you remember from the -- from day one on this deal. And we have some product revenue expected in the pipe to come once the product will launch. But indeed, 80% if you take like of the $700 million when I said $300 million, I'm counting deficit, the design win. If you take the $700 million by completely with design win and design-in 80% of this is pure Massive IoT, which means Monarch 2 mainly and Calliope 2.

Perfect. And maybe just look into the product ramp up in the second half of this year. It sounds like part of that is related to the expectation of new projects going into production. I think you said 20% are in production now and you expect 45% in the second half. I'm wondering two things. The -- it seems like there's a lot of comfort for that ramp up in the second half. What sort of visibility do you have to the one large customer in terms of their inventory build that gives you comfort on that front? And then do you have actual timelines of when you expect these projects to kick in to revenue in the second half of this year or some of that's still fluid?

I mean few elements in your questions, Scott. I mean one which is related really to the inventory with one specific customer. Reality all the customers that they bought last year have some inventory. And this is really the reality of the industry. Most of them, they have maybe one quarter to like five months if you want excellent inventory. In our case, the measure -- I will say we have a couple of them here and there. Maybe if they add all up, maybe it'll be around $1 million, $1.5 million. But we have one measure, one who typically does an average $2.5 million per quarter. He -- the extra, I will say he purchased more than needed last year as everybody was really building inventory and their customer is building inventory and he's reaching year-end with too much inventory. That's why we put on hold the sales to this guy in Q1 and Q2, to some extent, some of Q2, even if we have by the way, backlog -- we have some backlog from them that we're not shipping as planned originally for Q1, Q2. Just to let them absorb, I will say the inventory they have. So this is what I will call it really one case not related to our ramp, not related to the project, the design win momentum we have creating a challenge for us at the beginning of the year, extra challenge. The others, as I mentioned, and I wanted really to extend hopefully enough time so everyone can appreciate how we move from a design win pipeline, which is big. But as I said, this is really three years of revenue for each project. So obviously if you average this, you need to average this on maybe 4.5 years, depending on the launch of every project. And the level of product revenue we have it today and this is really the reason is that the design win, even when we consider this design win, and even if we can go to $100 million there, they're not all in production. And we have, as I said, 20%, however, all the projects that they were in the pipe last year and they continue and they are accelerating and we have visibility and very honestly, the delay we got on those in the majority of them, they were related to the focus of those customer on fixing their supply issue with the whole generation product. And we have -- I'll say good visibility and feeling like at least 45% of those projects will we -- will be in full production when we exit 2023. That will give us good ramp for next year from there and where we can add more projects. So we have good visibility. We are very comfortable on this. Obviously, customer are working on their project. Things are moving. Most of them, they are in the last phase if you want on execution. So we feel good about timing.

Very good, very helpful. And lastly, if I could, and then I'll hop back in the queue, but on combination of the 5G IP licensing special committee and kind of the balance sheet. First, just to clarify, it sounds like you have expanded discussions going on with your existing 5G China-based customer that is not one of the advanced discussions, is that correct? Sounds like there could be an expansion there in addition to the advanced discussions, it sounds like with one or two other guys that you would expect by the middle of this year. Want to clarify that -- want to understand kind of the magnitude of what those potential payments upfront could be for that new customer. And then just if you could from a cash coming onto the balance sheet standpoint, there were some payments I believe in the fourth quarter related to the existing 5G relationship. What does the timeline of new payments look like in 2023? And then, if you could on the strategic committee, what is the composition of the committee? What is the mandate on that front? Thanks so much.

I mean Scott, on one thing, obviously, I want really to stress that the partnership we have, and I know that because we didn't announce the name and maybe for whatever reason people are not really valuing at this value I will say this partnership. This partnership is really working very well, has potential, as I said, licensing and royalty because the customer is very solid and has business in hand. So as soon as the product will move to production, we'll start getting royalty. And we have engagement and other opportunity and discussion with them even some related to product revenue, extra business that will help. And what I -- when I was referring to new IP licensing deal, they are beyond this partner and other deals that that will be adding to this one and order of magnitude of this as, we left this open because the licensing model, we can have a licensing that can start at $15 million and can be $60 million. The question about the licensing is really how much where is the royalty level, right? So if you could have -- if you have low licensing, you'll have very high royalty. If you have very high licensing, you'll have lower royalty. And obviously, this is part of the discussion with the partner, and we are flexible on our side to conclude something, but it'll be meaningful no matter what.

Scott, on the cash, I mentioned that we're under the 5G licensee agreement, we're scheduled to receive close to $7 million in each of Q1 and Q2, and then later in the second half of the year.

Our next question comes from Craig Ellis with B. Riley. Please proceed with your question.

Yes. Thanks for taking the question and congratulations on a number of the year's milestones as you look back. Georges, I wanted to start just by clarifying an issue on the supply chain. So you've been clear in terms of the impact of the current environment and supply chain issues on your customers, and frankly, we're seeing that impact across a range of companies that are involved in the IoT. The question though is more about your own supply and how you're looking at supply potential from your foundry partners and agreement partners in 2023? And then, just as much in 2024, how confident are you that those foundry partners can be what looks like a really steep ramp coming as we exit 2023 into 2024 on the Massive IoT side?

Yes. Hi, Craig, I mean, we are feeling really that the supply is easing from this point of view. In other words, obviously, even if the tension remains there with the story of Taiwan and so on, so there is a big question mark, but at least practically today, there is access to foundry and there is a way for get now there is always limitation. You know when you ramp, and we are anticipating this, we build inventory in the company already, and this is by the way consume some of our cash. So we're sitting on more than what we will be sitting on in terms of inventory as well. And that let me feel like 2023 will not have any problem. And from there, for 2024, obviously it's too early to speak about it, but again with a partnership we will do the Renesas and so on. I don't expect really an issue there. And hopefully, we'll be there to support the ramp of our revenue.

Got it. That makes sense. And then for the second question, I wanted to follow-up on a question that Scott asked. I don't think I heard a response just related to the strategic options, what's the Board involvement? Is there a timeframe to the mandate that you've given them, et cetera? Can you just flush that out a little bit for us?

Yes. I mean, Craig, I mean unfortunately, I mean as you could imagine for those contacts, I cannot give more details. So very honestly obviously three Board member, I mean, we could give the name, but I don't believe it's important. But obviously, three key guys that they're involved when they help me and this is what I could say more than this, I believe when will be the right point we'll talk about it.

Got it. And then lastly, when we look at the part of the funnel that's that incremental $350 million, that, that hasn't been as much of a focus prior to this call, but is becoming much more so. As we think about the end market exposure of those opportunities, Georges, how does it compare to what we've been looking at previously where there's a real high smart metering home, et cetera, quotient? Would it be similar mix or significantly different mix from an end market standpoint?

So I mean, it's really going in the same direction. When I look to it like backward, beginning of last year, we're talking about where we are seeing potential win. In 2022, to be honest, we had more and more metering projects. We wanted a lot. I mentioned nine customers, not nine projects. I can tell you close to 20 projects, above 20 projects that the company has and we have more in the pipe. It's really a place where we ended by the fact that we have the two product, Cat 1 and Cat M and very low power. And it's a small plus adding many plus. At the beginning, it was very complicated to win this segment because you need to prove yourself as a brand. You can stay there for 10 years, but it's really playing very positive for us. So this remains a very solid segment. Telematic and asset tracking will be the second one. And then you will have more security, the third one. But we're seeing this as very diversified as well. And as I said, it's diversified in product as well because we have Cat 1 and Cat M addressing this market.

That's helpful. And then, just lastly, before I hop in the queue, given that you've got nine customers and 20 projects with metering, are you basically penetrated in all the major metering companies globally, or where do you stand? Yes, go ahead.

Absolutely. I mean, Craig, I don't want to be -- I'll say, I'm a little bit prudent of saying I have all the top guys, but I could claim this, yes, from the top 10.

Congratulations on that. Yes, thanks, Georges. Thank you.

Thank you.

Our next question comes from Raji Gill with Needham & Company. Please proceed with your question.

Hi, this is Nick Doyle on for Raji Gill. My question is, you talked about how Calliope 2 now has a competitive advantage. Can you expect market share gains? Could you just talk a little bit more about that?

Hi, Nick. I mean, Calliope 2 what happened in the market that many people thought at some time when LTM were -- was coming that LTM will jeopardize the Cat 1 market. And honestly, even me, I was thinking like this at the beginning. So for a while no one was investing in Cat 1 next-generation, milking what -- whatever they have in hand and relying all on LTM NB-IoT. But as soon as we start playing, working with the customers and so on, and realizing the limitation of the LTM in some use cases, I felt like this is something we invest in. And there is really a space that remains extremely big and Sequans can make the difference. So we moved early in this, we invested when no one was investing there to come with this platform and practically the only guys who invested in this is Chinese. We have some people that even licensed Chinese technology to bring it to Europe. And with this, give us really a competitive advantage because as you know, there is a sensitivity of playing Chinese, non-Chinese in many markets. So Sequans is unique in this and obviously, it's a great product, very new, and that it reduced the cost structure by at least 30% versus the first-generation. So if you take a module first-generation, a module second-generation, you can cut the cusp by 30%, which is major for all new projects where they need Cat 1. We are in very, very good position. And obviously, you have some projects where they use even Cat 1 for coverage reason, not only for speed. So this is really why we feel very good about it. We have done three big wins last year in Q4. We are developing the project with them, really major one. We have one of them exceeding $10 million, $50 million yearly revenue. And we have in the pipe a dozen of them, very, very advanced. Some maybe should close this quarter. If my sales team is, we are able to deliver on this, this quarter; we should close two, three more deals on this Cat 1. So we are very optimistic on this.

Thanks for that. And then another maybe technical question, why do the metering applications take longer to qualify? Is that you mentioned that a year longer? Is that about two years to qualify these metering applications?

Yes, I mean, when I say maybe two years, sometimes three years, because depending what is better for us.

Okay.

But to be honest, you could have some of them a little bit faster. What -- and all what they are doing is changing what they call the communication unit. In other words, the meter is there and you had the communication. But you need to keep in mind that any deployment with utility, any projects that the metering company win, they have to deploy and commit for 10 years, 10 years with the quality, with penalty on the quality and so on. So that's why the process is very -- is really a process where you have qualification phases and so on. That makes things more complicated to get there. But once you are in, in general, doesn't move and it's roll for 10 years. So this is really a counterpart, which is very positive versus the ramp on it. And we have, I mean, thanks God, because this is a very important market metering and it's growing very fast in domestic IoT and we have big chunk of our part there. And this may be one of the reason why things are not going fast as well in terms of ramp product for Sequans.

It appears that there are no further questions at this time. So I would now like to turn the floor back over to Dr. Karam for closing comments.

Okay. Thank you again for joining the call. We look forward to catching up with you next year on our first quarter 2023 earnings call. We are participating in the upcoming ROTH Capital Conference on March 14 and 15 in Dana Point and the B. Riley Institutional Investor Conference on May 25 and 26 in LA. We look forward to seeing you at one of these upcoming events. Thank you for all of you and thanks, operator.

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