Ladies and gentlemen, good morning, and welcome to the Sequans Communication Q1 FY '23 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Kim Rogers, Investor Relations for Sequans.

Thank you, Ryan, 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 our future results of operations and financial positions, business strategy, plans, including the ability to enter into new 5G strategic agreements, the exploration of strategic options, expectations for Massive IoT sales, 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 would like to hand the call over to Georges Karam.

Thank you, Kim. Good morning, ladies and gentlemen, and thank you for joining our first quarter 2023 financial results conference call, and welcome. Our first quarter revenue was $11.9 million, in line with our guidance with a record gross margin of 78.5%, reflecting the contribution from high margin licensing revenue. Product revenue this quarter reflects the factors we discussed on our Q4 earnings call. One, the impact of a large customer's inventory rationalization; and two, delayed LTE-M projects launches. Before I dive into discussing the business details, I would like to update you on a few important strategic developments. Following the quarter's end, we strengthened our balance sheet with a $20 million private placement with several existing shareholders. Note that despite the challenging market environment, we were able to close this deal very rapidly and reinforce the company's position in our ongoing strategic discussions. The strategic committee appointed by the Board is actively evaluating the various options, and we expect to share more on this subject on our second quarter earnings call. In addition, we are making strides toward sampling our 5G Taurus chipset later this year and are actively engaging with customers eager to get a 5G NR platform optimized by design for broadband IoT applications. Our progress on Taurus is highly beneficial in our ongoing discussions regarding 5G IP licensing. And we are optimistic that we will be able to reach a new licensing agreement before the end of the year. Our newest 5G strategic partnership, which began last year, continues to evolve and deepen, which is very encouraging. I am delighted by how closely our teams are collaborating. We are confident in our ability to deliver outstanding results. And I am excited about the future potential of this partnership, including the possible expansion of our relationship. Before…

Thank you, Georges, and good morning, everyone. As we expected and roughly in line with our guidance, revenue for the first quarter of 2023 was $11.9 million. This compares to $13.9 million in Q1 2022, a decrease of 14.3% year-over-year and $15.9 million in Q4 2022. As Georges has stated, our first quarter revenue reflects the impact of inventory rationalization with a key customer, delayed product launches and seasonally lower activity in the first quarter. Revenue from Massive IoT in Q1 2023 accounted for approximately 28% of our total revenue with Cat 1 driving the sequential decline caused by the inventory issues previously explained. Revenue from Broadband IoT accounted for 72% of our total revenue as license and services revenue generated by our 5G licensing deals increased year-over-year, but declined sequentially, as expected, due to the structure of the most recent 5G strategic agreement. For the quarter, we had 2 customers that each represented 10% or more of our revenue. One of these is our 5G strategic partner. Gross margin in Q1 2023 was an historic high of 78.5%, up from 68.1% in Q1 2022 and up from 75.3% in the prior quarter. The improvement was primarily driven by the higher proportion of licensing revenue in the revenue mix. IFRS operating expenses were $13.3 million, up a modest 2.9% from $13 million in Q4 2022 due to an increase in R&D expense of $127,000 and an increase of $472,000 in sales and marketing expense, which was partially offset by a $222,000 decrease in general and administrative expense. Year-over-year IFRS operating expenses increased by $1.9 million compared to $11.4 million in Q1 2022. Non-IFRS operating expenses, which exclude stock-based compensation expense, were $11.6 million in Q1 2023, up slightly compared with $11.2 million in Q4 2022. Our first quarter 2023 operating…

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

[Operator Instructions] Our first question comes from Scott Searle from ROTH MKM.

A quick clarification and a couple of questions. On the cash front, Deborah, just wanted to know whether or not I think there was a $7 million scheduled payment that was supposed to come in from the China relationship. Did that happen in the first quarter? And I believe there was another one scheduled in the second quarter. Is that remaining on track? And then I wanted to clarify the comments around European and/or French loan. Did you say $15 million 1-5 or 5-0? And then George, on the 5G front, it seems like the timeline in terms of product development sampling is on track for later this year, but it sounds like the discussions in terms of the near-term strategic may have slipped a little bit. I was wondering if you could clarify that and any sort of issues around it? I think you'd also talked about 3 customers or potential strategic partners that were lower in the funnel. Is that still the number we're talking about or has the number of relationships there expanded?

So just with respect to your questions, the payments that were scheduled to come in in the first quarter did in fact come in, and we are on track for the scheduled payments at the end of Q2 as well. In terms of the financing -- European and French financing options that we're pursuing, if everything came in at the high end, it would be in excess of $50 million 5-0 funding which will probably come in over a couple of years.

Couple of years. Okay.

Scott, just on the other question, the 5G execution is on track. As I mentioned, we started to engage customers around MWC. We didn't announce yet the product publicly, but it's -- you will hear about it in the course of the year. We -- but obviously, under NDA, we engage with many customers. Traction is really great. And we obviously, from the beginning of the year until now, at the beginning of the year, in our pipeline, we had only some strategic customers, as you know, that they are engaged with us, and obviously, their number in the pipeline was integrated. But since end of Q1, we had more than half a dozen of very, very serious customer with whom we have very advanced discussion and opportunity. And those now they start to be part of the pipeline and we'll start adding more new deals in the pipeline. Obviously, they are not in the design win portion yet, those are new deals that we are talking about, as all those customers are waiting for the product to sample and we conclude the deal. But the traction is tremendous. People, they love this product, the way we're positioning in terms of performance and cost. And obviously, when you factor in the competitive landscape, this position us in a very good shape to win hopefully a couple of new deals towards the end of the year and continue next year. And regarding the strategic, obviously, this development is -- the progress we're making on the chip is very positive for our strategic discussions that we continue to have. I tend to say -- I don't want to say it slipped, because you mentioned this is, we're still confident about closing this year. But we have a lot of strategic discussion ongoing in the company globally. And as you could imagine that some of them are connected and related. So that's why we won't -- I mean, I didn't want to give closer timeline, but we're still positive about closing something this year. It's taking a little bit some more time, but I don't call it slipping. It's more developing and taking more complex relationship.

And lastly, if I could, George, the product ramp, I think in the release, you talked about a clear step-up in revenue in the second half and you referenced that again growth in the second half of this year. I was wondering if you could clarify that a little bit more. It sounds like you've got some large module opportunities out there that don't actually contribute to the revenue. These are existing design wins. But I'm wondering if you could provide a little bit more clarity, when you talk about that step-up in the second half of this year, it sounds like you're talking about growth on a year-over-year basis in the second half of this year. Is that in each quarter or is that collectively for the second half of this year, that would be very helpful?

Obviously, Scott, I’m talking about the product because when we compare year-to-year, we need to factor in – exclude the licensing because we have some variation last year in the second half. We did a big number with the strategic deals. So you need to normalize this to have the fair comparison, if you want, on the product. And definitely, on this basis, we expect growth in the second half versus year-over-year, I don’t want to say it quarter, every quarter, but in general, the 2 quarters should be coming up. And this is coming from 2 things, and this is what I wanted to insist on the call. Obviously, the pipeline is developing, and it’s developing by having a new opportunity that’s coming in, and they call them not yet one, but as more and more opportunity engaged, specifically, as I mentioned, Calliope 2 and Taurus. We have more opportunities secured than designed. And one, in another words, we can take it to market and generate product. But the other really focus that really will drive revenue this year and beginning of next year is the design wins that we have in hand since last year and we are waiting to see those products turning to mass production with the customer. I mentioned that in Q1, just only in Q1, 3 products that were forecasted to become secured product, they are now in the green and they are not really contributing to revenue immediately because most of them, not the 3, have some initial shipment that we did last year and we were stuck. But this is now consumed because the product is qualified and moved to shipment. And we expect those products to generate revenue in the second half. But also, all what we have planned for the second half to turn to launch, it’s on track. I could not guarantee 100% is going to happen on time, but from the execution we have done at the beginning of this year, all of them are on track. And specifically, we have 4 metering projects, nice projects, they are developing well. And as we are speaking, still plan to enter into production in the second half. So obviously, factoring all this in – and we have as well the initial shipment of Calliope 2. We have a major design win that we should ship in Q4, the first shipment. If you bring all this together, definitely, the product revenue should come back to growth and this should help the second half of the year. And definitely, we’ll be in a very great position for a full year in 2024.

Our next question comes from the line of Craig Ellis from B. Riley Securities.

Deborah, I wanted to follow-up on Scott's question regarding the potential European and French government grants. Can you just talk a little bit more about when you would expect to know if those are successful? And what the qualification or other conditions are for grant receipt in each case?

So in both cases, they are basically funding what are considered to be strategic projects. And in particular, the European financing is related to the European equivalent of the CHIPS Act that's provided an additional pool of resources. The European process is a longer one. I don't think we'll know for sure before probably the end of Q3 or even early Q4. But it could be a very large amount and it's basically unsecured debt and it's based on the future projects that we're planning to do. And the French project has already been submitted. It's in the process of being evaluated. This is more of a typical kind of project that we've done many times. And whereas a portion is grant, a portion is zero interest loan. And the only difference is it's a bigger amount than we've gone after in the past. But I'd say, both items are in process and progressing, but they're big amounts and we're dealing with government. So it will take a few months to finalize.

And then Georges, on Taurus, so great to hear the broad customer interest. As we look out at the landscape and one of the big themes coming off of Mobile World Congress was all the enthusiasm around fixed wireless access and we're seeing that show up in a lot of carrier subscription ramp trajectory. So the question is this. Given that we're into sampling exiting 3Q and 4Q, is it possible to see revenues materialize in calendar '24 or is the real material ramp really starting in calendar '25? Any color on the timing of revenues, conversion and the breadth of customers that might initially start to hit would be helpful?

I mean, we -- real revenue is really for late 2024 because in terms of product revenue. Obviously, we could have some, what we call it licensing, not really to license of use. When people get access to the project like this, they pay some lump sum to get access to the technology and get the support that could be factored in in Q4. So we could have some money like this in Q4 this year. But really, the product revenue is more towards second half '24, late '24 and much more 2025.

And then, Deborah, I'll come back with one to you and then hop back in the queue. So we've had just stunning gross margins over the last couple of quarters and they're still really high in the first quarter. I know mix is going to take margins back towards the 60s. But can you provide some color on the expected mix between chips and modules in the second half? And while not providing guidance, just give us some help maybe qualitatively on where you'd expect gross margins to be as we exit '23 and head into '24?

With the product ramp, I think we’re still expecting that to be more weighted towards modules. So as we have – we’re expecting license revenues to be lower in the mix. I think we should expect to end the year going back to more normalized gross margin that’s somewhere in the 45% to 50% range.

Our next question comes from the line of Raji Gill from Needham & Company.

Just on the $350 million design pipeline that you've been speaking about, in the past, you talked about it, it's based on kind of orders. And I think you had described that the orders in terms of the timing, normally it's for shipments 3 to 4 months out. And then you've kind of adjusted the backlog number based on kind of your judgment of that. So I wanted to get a sense of that design pipeline now as we sit into -- going into the middle of the part of the year. How do you kind of assess this pipeline? Some of these designs come with supply agreements, whether or not guaranteed shipments. So just curious sort of how you're kind of characterizing that design pipeline now?

Yeah, absolutely. I mean, the -- some of those -- I mean, first of all, any design win, what we qualify design win, let's see it in the first phase, obviously, at some time, the guy is buying from us and he has product in the field. But before reaching this mass production, the design win is qualified by us when we are obviously awarded officially by the customer that he kicked off a project. We're invited for the kick-off. We launched the kick-off for the customer. And we see first hardware from him where our product is on it. In other words, it is -- otherwise, we keep it as advanced design in in the company. And really, we are reaching 100% assurance that the customer has allocated resources and people on his side and he has product under development that we can see and touch. And obviously, we need to support him on this product to get there. Now obviously, this means always we get the guarantee the customer is working with us to bring product to the market. And we -- to generate revenue after this, the customer needs to execute on this phase. And obviously, once he has his product certified and shipping, he starts buying from us. Now some of those deals, they come just on the basis of they buy prototype and there is no supply agreement. Some they enter at the same time with the big supply agreement where they guarantee really the relationship over many years. And it comes with more complicated term if you want more sophisticated terms for the relationship. But both of them, it's not like binding order. The only binding order you get when you enter -- when you receive real order to ship product and this becomes binding in a sense that they cannot -- we have in the backlog order and we need to ship to it. So when I'm talking about my pipeline, probably to some of those customers we could have backlog for them when they are in mass production. But I'm not counting committed order in a sense like it's really binding. But it's 99% sure that the project is real and it's happening. There is maybe a risk in the quantity because we have an estimate based on the discussion with the customer how much he will buy in the first year, the second year and third year of production. And there is obviously a risk in the timing because we could say, okay, he's ready end of the year. And then finally, he is short by 1 quarter or he is ahead of time 1 quarter and we have more or less some risk relative to the revenue ramp or advanced revenue ramp depending what's happening there.

And just for my follow-up and just along the lines of the pipeline discussion we were talking about, and I know you don't guide beyond 1 quarter. But when we're kind of looking at calendar '24 and kind of reconciling that with the pipeline, you've talked about in the past that kind of about $700 million total pipe and 80% of that is related to Massive IoT or about $600 million. And then you talked about half of that or $300 million is based on design wins. And if you've entered into -- I guess, my question is, what percentage of those design wins are now entered into production? And how many of those designs will go into production in 2024 so we can get some sense of what the actual revenue ramp would be and trying to reconcile that with the kind of the design momentum that you're talking about? Any color there would be helpful.

So this is a very good question, Raji. I mean, I appreciate it. But let me – exactly what you said is right. I mean, so we have a pipeline, half of it is design win and a big percentage of this is related to Massive IoT. Now once – and this is where you go down to somewhere in the $300 million, I would say, of Massive IoT, a little bit less of Massive IoT design win. But this is over 3 years. Now the question is, if you look year 1, year 2, year 3 for every project and you look to the maximum ramp of those projects, you realize, and that’s what we said, we exceed $100 million only considering this portion – annual revenue. In other words, if I look to those projects and I look to the peak of those projects in 1 year between those 3 years, we are well above $100 million. I’m staying cautious by saying we are around beginning of 2025. We will be there achieving this, close to this. But really we exceed $100 million. Now – okay. So this is – we know where we can go with this ramp on a yearly basis. The question which is you’re raising, where we are today? And if I look to this amount of dollar, like 20% of this amount is already with the project that they have passed the certification and the qualification and they are really now in shipment mode. It doesn’t mean they are buying maybe today because they could be maybe – they have inventory in Q2 and/or by in Q3, but they are not projects where there is any risk on execution. It’s just on the project where the customer will be buying from us and…

Our next question comes from the line of Tristan Gerra from Baird.

My first question is really macro-related. I think there's been clearly admissions in the industry that the adoption rate of IoT node generally was -- has been well behind what the expectations were 5 years ago and some of that has been the ecosystem versus the type of forecast that Ericsson had 4, 5 years ago. So now we're seeing, obviously, a slowdown at the macro, there's been some push out, there might be a recession. How should we look beyond just your design win and the company-specific traction at your business medium-term? Particularly if there is a recession, what's the risk that there could be more project delays? And also, is there any particular inflection point that you would expect? You've talked about some design wins, including in smart metering, those are the traditional applications for IoT. But is there something that you think could really create kind of an inflection point in your demand? And when could that be?

I mean, you're absolutely right on the -- I would say, let's say, the projection the industry has for IoT node, by the way, combining everything, what they call IoT and counting every device to be connected. So I believe the idea is still correct, still correct. I mean, if you're managing all your assets, connect all your assets, this is what's about IoT makes sense. If you count all those objects, you come to billions of units and big numbers that they didn't materialize in the meantime. First, I still believe that we are -- this is going to happen sooner or later because I don't believe that demand is wrong there. It's really related to services and a movement in this industry, which is not stopping. It just only -- it's more complex to reach this level of penetration as predicted by Ericsson, I would say, 5 years back. However, on all what I'm talking about, and this is what you mentioned, we're not really -- and this is what happened to the company, if you want, in the early launch of our Massive IoT product. We're engaging many, many customers, which I could say coming out of the blue, not necessarily small customers, sometimes they are big customers, but they didn't have experience in cellular or they didn't have experienced at all in connectivity, IoT. And just only they thought that they can launch projects obviously and extend their business, leveraging this IoT. And many of those projects failed or they get delayed and so on. And this, by the way, impacted all the industry, including us. However, in the last couple of years, the focus of Sequans, by the way, was really on what we call them traditional businesses. Where we are today is really smart…

And then as my second question and as you prep-up the ramp of 5G, if you could talk about, first, the type of ASP uptick relative to units that we could expect in the medium-term, the mix between licensing and actual product revenue and also the potential that you get some of the key customers that you had with 4G in the past with 5G?

I mean, obviously, 5G, I mean, what’s exciting in the 5G, first of all, the application of fixed wireless, mobile computing, all this is happening and there is real demand and networks are developing. So there is – the first phase went well. But if you look to the number and so on and you start talking with the customers or the carrier, all of them, they see the cost of the 5G is too high to really make this really a mainstream, if you want. And there is no doubt that over time between now and 10 years, you are going to see less 4G, even sometimes switching 4G network and everything becomes 5G. And that’s why we are starting with this Taurus platform, which is really coming at optimized cusp, dividing by a factor of 2 the existing – the current cost structure that you can see it in the 5G. That's why we have a lot of excitement from many customers. Now for us, the impact on our business model is really major because when you are talking about chipset level, let’s talk – not to talk about the module chipset level between Cat 1 and Cat-M, you are talking single-digit, $3, $4, $5. This is the ASP that you will be talking about. And when you are moving to Taurus 5G, without giving a price – open price now because the product is not launched, but obviously, a few tens of dollars, if you want. So by definition, you have a factor of almost 10 between what you can do on Cat-M and on Taurus. So selling 1 million units on Cat-M, you could do chipset $3 million, $4 million. On Taurus, you could do $30 million to $50 million. So obviously, the difference is big for us. And that’s why as soon as we are going to start getting real customer there, our pipeline is going to explode with those numbers.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back to Dr. Georges Karam for any closing remarks.

Thank you, operator. Thank you again for joining the call today all of you. We look forward to catching up with you during our second quarter 2023 earnings call in August. Please note that we are participating in the B. Riley Institutional Investor Conference on Wednesday, May 24th, in LA, as well as the Roth MKM London Conference on Thursday, June 22, obviously in London. We hope to connect with you at one of these events. Thank you very much for all your time. And thank you, operator, you can close the call now.

Thank you. The conference of Sequans Communication has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.