Ladies and gentlemen, welcome to the Sequans First Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before I turn the conference over to our host, Mr. Georges Karam, I would like to remind you of the following important information in behalf of Sequans. This call may contain projections or other forward-looking statements regarding future events or our future financial performance. All statements other than present and historical facts and conditions discussed in this call, including any statements regarding our future results of operations and financial positions, business strategy, plans and our objections 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 risks and uncertainties, and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not 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. Please go ahead, sir.

Good morning, ladies and gentlemen. This is Georges Karam speaking. I'm with Deborah Choate, our Chief Financial Officer, and we are pleased to welcome you to our first quarter 2012 results conference call. Our Q1 results were in line with our guidance and our loss for the quarter was lower than we expected due to a favorable revenue mix leading to higher gross margin, which Deborah will discuss in a minute. As we anticipated, we had no sales to HTC in Q1, as they continue to work down inventory. Product revenue came from our WiMAX customers, ordering chips for CPE and dongle devices, plus a very small amount of LTE-related revenue from trials and initial deployments in markets such as China, Brazil and Australia. We have kept operating expenses under very tight control, while still maintaining our timeline for LTE. We are very pleased with the progress we are making and we are on track to see LTE revenues begin to ramp during the second half. This should be incremental to a base of WiMAX revenue for the rest of this year, driven by the demand in emerging markets, KDDI in Japan, KT in South Korea and Sprint in the U.S. While Sprint will not introduce any new WiMAX devices, they plan to offer WiMAX smartphone to Boost Mobile and Virgin Mobile prepaid subscribers. We believe that WiMAX operators will migrate to LTE, but this will be over the next 2 years or so. As we have been mentioning before, this existing base of operators represents a natural market for our dual 4G WiMAX/LTE chip. We are the only source for such a solution, and we continue to see a lot of interest, particularly from the Asia Pacific region. We have a major design win with initial orders in hand…

Hello, everyone. I'd like to add some details about our first quarter financial results and the outlook. Revenues in the first quarter were in the range of our guidance at $4.1 million for the quarters. This was a decrease of 64% quarter-on-quarter and an 84% decrease compared to the first quarter of 2011. We shipped about 200,000 units compared to just under 1 million units in Q4. As George mentioned, during the quarter, we had no sales to HTC, who is our large customer, in 2010 and 2011. However, we had 4 customers above 10%, all of which are data device manufacturers for emerging markets. We realized an overall gross margin of 57.4%, better than our guidance of around 50%, and better than the 52% in Q4 and 51.2% a year ago. The increase in gross margin percentage is due to a particularly favorable revenue mix. Product gross margin was 48.5% in the first quarter compared to 50.4% in the fourth quarter and 50.5% in the first quarter of 2011. The decrease in gross margin reflected the impact of absorption of fixed production costs by lower revenue base, partially offset by an increase in average selling price. Operating expenses were $11.4 million in Q1 compared to $11 million in Q4 and $10.7 million a year ago. The slight increase in Q1 2012 compared to Q4 resulted primarily from R&D costs related to new product introduction. Also, you may remember that we had a one-off benefit in Q4, which increased our research tax credit by $1 million in that quarter. The research tax credit is recorded as a reduction of R&D expense. While maintaining our strategic investment in LTE, we will continue to be disciplined in spending with an objective of keeping OpEx flat in the coming quarters. Operating loss in…

[Operator Instructions] Our first question is from Quinn Bolton with Needham.

Georges, I just was wondering if you walk through the multimode, multiband opportunity in China, and sort of later on the call mentioned that China Mobile would be millions of units in 2013, are those millions of units expected to be still more data devices in 2013? Or do you start to think you start to see these multimode, multiband handsets in that time frame? And then I've got a couple of follow-up questions.

Yes. I mean -- hi, Quinn. Obviously, on this multimode, multiband, I see that it's getting quite complex, I would say, because on one side, China Mobile is using their own one -- the spectrum they own already for TDS, which is the 1.9 gigahertz, and they're preparing for the 2.3, 2.5, which is the licenses they expect to get from the government in the future, because now they have it just only for trial purpose. And obviously, they added the FDD band in Hong Kong. And so for this, I mean, today, when you see in the trial mode, the majority of the devices are qualified fixed nomadic devices. So you have CPE, you have MiFi devices, portable routers, you have dongles, and in reality, Nationz is, specifically, is introducing the 3 types of devices to China Mobile. And there is preparation for the phone. It's very hard to give -- I believe, we'll see phone in 2013, definitely in China. Still, we are talking about a kind of a phase where the trial will be expanded for 200,000 base stations, so it's becoming more than a trial, call it initial deployment or extended trial, and I expect to see some phone there. However, still I believe, volume, maybe, will not be, maybe huge before the official commercial launch. That depends when it will happen, whether second half 2013 or later, beginning of 2014, depending obviously of the position of the government with MIIT and China Mobile.

It sounds like the granting of the government launch still is kind of the key factor to when you really start to see the knee in the curve on volume production for China?

Yes.

Okay. A question for Deborah. It looks like the product gross margin was down despite the higher ASPs. I was just wondering, are you just absorbing fixed costs over a much smaller unit base and hence, the decline in the product gross margin?

Yes, that's exactly it. We had ASPs going up somewhat to -- particularly, as we had no HTC in the revenue mix. Really no change the fixed cost, but the lower base method, the unit, that's absorbed over a smaller number of units.

Okay. And then lastly, just any update you can provide on how HTC, how they're doing working through the inventory of WiMAX chips? I mean, do you expect them to come back in the second quarter? Do you expect them to come back in the second half? Or is it still difficult to call what that customer may be doing?

Well, I believe they are all really -- it's -- I mean, in terms of inventory, what I can say, that they are -- we're seeing some signs of reaching its end. So obviously, the demand depending on the business of, obviously as you know, HTC, we didn't announce this but this is kind of public. They launched a new phone for KDDI. They call it the Villa, Villa phone that went this quarter. We finished its certification and it has been launched in Japan. And you heard yesterday, it's not yet official, we heard a lot of rumors about it, but yesterday, Sprint CEO has mentioned the prepaid services, which is launched with Boost and Virgin Mobile. And obviously, this will create some demand to HTC. However, we -- still it's too early to give -- to evaluate the amount of our, let's say, the level of this demand for the third quarter.

I think last quarter, we said we did expect them to resume orders this year. We still had that expectation, but it's still a bit early in the process.

I guess, can -- just last clarification then, is there any revenue to HTC assumed in that $6 million to $7 million guidance for the second quarter?

There's a small amount, yes.

Our next question is from Uchechi Orji with UBS.

This is Bara Furruje [ph]. Georges, a couple of questions, plus, regarding the Baharte [ph] launch, LTE launch in India. Could you talk about what I see, and I mean on the devices, that are being launched in India? And also, how do you experiment, what kind of devices you expect to get commencing going forward?

Just -- I want to be sure that I catch the questions. So you're referring to the type of devices they are using in India, right?

Yes. I mean, basically, what are the current wins you have so far and what are the devices you are going to get, I mean, in India, going forward with the Baharte [ph] launch and the potential launch of Reliance?

Yes, I mean, obviously, there is -- Baharte, they have a small launch there, which is more kind -- going with the Huawei and ZTE, the circles, they give them, which is -- and Reliance is moving aggressively there. So we are -- as again, we continue to have lots of engagement happening in India. And the type of devices there will be more depending on the operator, but it's a mix between CPEs, portable routers and USB dongles, depending on the application. The operator is driving Reliance, is driving some kind of video application to home and so on, and the CPE could be even outdoor CPE. And we expect this -- for this, we have ODMs. As I mentioned, one of them is Genentech, but we have as well, local Indian that we mentioned, such as Telenet. And obviously, we're working with other ODM to address this market because it will be diversified. You will see many customers going there and hopefully, we'll be in very good position by being present on many devices in India there.

Okay. And also, can you comment about the competition that is getting into the LTE market. Basically, what we see is mainly all the major semiconductor -- or vendors are getting into LTE, and how does that impact your market position?

I mean, definitely, the set of the competition is large. But again, the -- first of all, not too many of this large set, even if they have plans or they have announcement and so on, have real product that you can qualify to the level of the maturity to go to, even to trials, I tend to say. And the -- main differentiation [ph] remains the same. I mean, the game of Sequans is really to provide superior LTE technology. And I believe, we have the most superior technology today, in terms of 4G. Really, we are talking about Category 4, announcing 150 megabit. We're doing testing and IUT with -- in all those trials. And people are very excited about showing 100 -- close to 150 megabit per second on the device. Obviously, the differentiation in other advanced features, that some of them, by the way, will be announcing soon, because this is how we are differentiating, by getting advanced features, delivering better performance and at the same time, obviously, keep the power very low and the footprint and costs under control. And really, we feel comfortable in terms of technology today on the 4G. We feel the leading position, even better than the well-established company, in terms of technology point of view. Even we are missing, I tend to say, the multimode offer to have a comprehensive offer from one vendor on the 4G itself, we are in very, very good position.

Okay. My last question is about announcements you made with the Verizon Innovation Center. Does it mean that you will be getting on the Verizon Network, and when can we see revenue from those devices?

It doesn't mean this. Obviously, I don't want to give a feeling like this announcement is related to a win in the -- in Verizon Network. I mean, it's not linked in any case. So obviously, being -- this means, essentially, that we are getting better credibility in the FDD market by attacking the U.S., Verizon and Sprint, namely. And here, we are in their lab to work on the advanced features, and there is a process in Verizon to get the chipset filed and so on. In parallel, we have design wins that they will be addressing the U.S. market, obviously. And very hard to comment on the revenue, when it will be happening, but it's in a good shape to see revenue at least in 2013 on this.

Our next question is from Jay Srivatsa with Chardan Capital Markets.

George, as looking beyond the initial design wins and looking ahead to 2013, what is your strategy in terms of addressing an integrated solution versus being a standalone chip provider?

Yes, I mean -- hi, Jay. I mean, first of all, which is I tried, by the way, to go on my - in my script, to cover -- be sure that we have a clear understanding, what is the market, to about confusion about this multimode. And as I mentioned, essentially, 3 of those, it's not a big challenge. And 3 of the segment, which is the CDMA carrier becomes a reality. The only guy who has an integrated solution, CDMA and 4G, is the Qualcomm, who owns the CDMA, and any competitor including the big names there. They will be equal to me attacking this market. So the CDMA carriers, we believe, essentially, by playing the dual standby mode, the multimode solution, that we don't see the push of integrated solution because we can leverage something else to be in a second play to Qualcomm on those markets. And on top of this, Verizon evolving for single mode and so on. And I -- obviously, the BWA is clear at single-mode majority of it. And I talked about China, which is similar to the CDMA case, where through partnership, we can get access to this market and the technology. I believe, really, the real challenge for the integrated offer is really WCDMA camp, which is on one side, as you see, the market, obviously, despite the fact that AT&T is moving fast and some other guys in Japan, they are moving faster, but still, Europe and so on, is still not moving aggressively there. And obviously, it doesn't mean that we are giving up on this fourth segment, but at least, we are focusing on the first 3 where the market is today, and the money is there and it's a decent segment for the company to play. And in parallel, obviously, preparing how to spend and how to scale further by attacking the fourth segment and getting access to this 2G, 3G technology. And as of today, I cannot say more than we have various options on the table. And I don't exclude there the partnership play, if you want, which can help us in getting access quickly or quicker to the market. But I cannot say more, between developing ourself for partnership today. The more we move, I believe, on our -- not only decision implementation, we will be able, maybe, to communicate more to the market.

Okay. Just on the same note, I mean, wouldn't you expect that by end of 2013, that integrated solutions would likely be the way to go? And as such, for you, it might take you a good 8 to 12 months to come up with an integrated solution, which means you potentially have to execute on a strategy sometime this year, is it not?

No, I mean, I didn't -- that's why I don't want to say, Jay, that it's not a good thing to have an integrated solution by end of 2013. What I want to say, I don't want to put too much focus in terms of perception that is saying, this is the only way for the company to go. I want to be clear that there are at least 3 big segments of the market that we are addressing, and if you look at the size or so of those segments, they are big enough for a company like us where we can excel by our differentiated pure-play 4G, with a partnership model and so on, to attack those markets. And at the same time, obviously, an ideal solution will be to expand the position or secure the position of the company by getting the multimode in hand, whether through partnership or through internal integration. And I'm not contradicting. I will say what you are saying, Jay. But all to say about it, I cannot comment more. You can imagine that a strategy like this is very sensitive, I will say, and we should find the right timing to open to the market.

All right. On China Mobile, I think the mix supports on China Mobile's entry into LTE. On the one hand, it appears that they have been doing some trials [indiscernible]. They've done some -- they have gone to do something in Hong Kong, but in the mainland, it appears there has been some commentary that it could be delayed well into 2013, maybe even 2014. What's your read there and what are you hearing from the ground in China Mobile?

I believe, obviously, there are -- we see a lot of conflicting information, whether from one side, obviously, or the government, and the -- and how to position the new licensing, the granting the new spectrum. And you have the China Mobile, which is definitely since the 0, I tend to say, since the first time I met those guys, they didn't change, I would say, in terms of -- I will say, the level of pressure they are putting to their team and on their ecosystem, to be ready and to move fast, because it's a must-have for them to resist and reduce the churn of customers to compete with the other players in China. So we still see China Mobile eager to move and pushing hard. Now, just to be on the clarity, there is -- on one side, China Mobile, you need to understand that they have the 1.9 gigahertz spectrum. They don't need the government to use the 1.9 gigahertz spectrum. And what they did is, essentially, enabling devices, not using only the 2.3, 2.5, which are the new spectrum expected to be -- they are waiting to have a spectrum grant from the government for those new frequency bands, but to use as well the 1.9 gigahertz, which is originally dedicated only for TDS, but because they have enough spectrum, they can use this band with for offering TDS and LTE. And that's why they are pushing devices with those multiband approach, in addition obviously, to cover Hong Kong with the FDD. Now, what we see in the practice, China Mobile, they are in the phase 2 large-scale trials. And the meaning of this, this year, is -- to give you an order of magnitude, that's 20,000 base stations upgrade, which is moving very, very…

Our next question is from Lee Simpson with Jefferies.

I just wanted a couple of quick clarification questions, if I could. First of all, on accounts receivables, I just wanted to know if that new DSO number was, the level going forward. Really, just beyond that, on working capital in general, how should we think about inventories as well? It looks like that $11 million is all for WiMAX. I mean, is the inventory build exclusively LTE or LTE/WiMAX combos going forward? And maybe just a quick color on that flat OpEx that you talked about there, Deborah? I had this working assumption that in the second half, we'd see a tapering of development costs, really just this new product. You get over the hump on big spend on new products. I just wondered, is that now a changing aspect to your thinking and maybe that $7 million-plus in R&D is a new baseline?

On the accounts receivable, in general, our -- I would say our payment terms are, in general, between 30 and 60 days. So really, the DSO for this quarter really reflects the timing of payment. We don't typically have problems with too much late recovery. So a typical DSO is definitely under 60 days in normal circumstances. On the inventory, yes, the current inventory is almost all WiMAX. And inventory build, going forward, will be LTE or the LTE/WiMAX combo. And so any ongoing straight WiMAX sales that we may do to HTC or others would be a positive cash flow for us, because obviously, we've already paid for the inventory. But we will be looking to build LTE on the dual-mode chips to prepare for revenues ramping in the second half of this year. And in terms of operating expenses, I mean, this is something we've talked about before where we're -- the development effort is really never over. I mean, as long as the company is doing well and planning to continue to be advanced in its roadmap and moving forward, so I think this is something where, obviously, we're keeping an eye on the starting point and the slope of the ramp of LTE revenues and what that means in terms of our cash flows. But I don't think, assuming that things go well and as we expect, that we have the next generation to start working on. So while we may not have some of the expenses related directly to launching a new product, if we see things going well into the future, I don't think we'll stand still on OpEx. But again, as we said for the foreseeable future, we expect OpEx to remain fairly flat.

Yes, maybe just to squeeze in one competition question. It sort of stood out at MWC that Renesas has put out a pretty decent LTE chipset, multimode, kind of before. We've also got [indiscernible] in renewing their single mode and focus for back half and into 2013. I just wondered if you could give us any sense, Georges, as to where you can see wins and RFQs, going forward. I mean, are you making wins against this non-Qualcomm camp, sort of standing as a clear #2 just now, and do you see that as being a fixture of your design win momentum into the next couple of years?

Well, obviously, you're seeing the competition continue to move there and there is some focus on this competition, I tend to say, for the -- some kind of competition where you're talking about the smartphone and quite often, when it's integrated and so on. On the LTE phones, very honestly, I didn't see too much change. Obviously, even if they have some change in their strategy between ST and a bit -- and ST-Ericsson, but this doesn't change anything from terms of development. Their timing is whatever it is, which is kind of still late. They're still talking about this next generation that they need, to come end of this year. Renesas, you're right. They announced some good products, still today, focused much more on Japan, what's happened with DoCoMo and so on. I expect them to see them outside as well. But I tend to say, today, I don't see much pressure in the market where we are fighting, which is essentially whether the greenfield opportunity, the CDMA carrier and China.

Our next question is from Daniel Marquardt with Baird’s.

This is Daniel Marquardt on behalf of Tristan Gerra. Just looking at your uptick in guidance this -- for the June quarter. I'm curious if -- what kind of seasonality you now have for your non-HTC WiMAX business? Just as we're looking at that, and looking at your dates [ph] of inventory on hand, kind of wondering what the potential is for inventory write-downs and the potential that you may not be ordering more WiMAX chips?

Well, I think, first of all, in terms of seasonality, we're in an unusual position where we are coming to the end of one market and we've got another market beginning. So it's really difficult to talk about seasonality. We're seeing quite a bit of -- and I would expect that through the next -- through this year or next year, our WiMAX -- the WiMAX business, we're expecting it to continue even into next year, but obviously, at small levels and we expect it to be quite lumpy, because there won't be a lot of new product introductions and people are managing their transition to LTE. So I don't think we can -- we're really in a position to talk about seasonality at this point, but we do see, particularly for the emerging markets, that we'll take a slower transition to LTE. We do see continuing interest in the WiMAX product, and at this point, we don't -- we're not expecting to see a write-off in the -- in our inventory. Obviously, this is something that we'll be monitoring closely and obviously, of concern to us, but at this point, aren't expecting that.

So outside of the, I guess, the small portion of HTC that you have built into your guidance, is, I guess, the significant sequential growth due to lumpiness for this quarter?

Well, I mean, again in the second quarter and basically all the first half, our business remains primarily WiMAX. We are expecting some small revenues from the initial LTE shipments. But as we mentioned before, one of the impacts of the first quarter was Q1, and if there is any seasonality in the business, Q1 is seasonally low combined with no HTC. So I think in Q2, we're seeing, generally, that there's more business in Q2 than Q1, and potentially some business with HTC.

And then a question for Georges. What do you expect the market size is, I mean, when you talk about the CDMA-based carriers, you talked about non-Qualcomm. But as we look at what's non-Qualcomm and what's non-Samsung, I'm curious what -- how you guys size that market outside of Qualcomm and Samsung?

The problem, when you look to the CDMA, let's talk about just the 2 big guys the U.S., Sprint and Verizon, obviously, these are the 2 big opportunities. And there, you need to look to the data market and the phone market. So you have the data market there, which is certainly not sizable for developed opportunity, even in the CDMA, when you could have a few million units between Sprint and Verizon. Maybe up 4 million, 5 million units next year, just only to cover data devices. I mean, dongle, portable routers and so on. And then you have the phone opportunity which is there, which is multimode. The data, by the way, is as well multimode. So it's -- the fact that -- one issue there is that if you look to all the big guys, what I said the non-Qualcomm guys, no one has CDMA. In other words, the competition there, if it has to exist to Qualcomm, no other competitor can be stronger than us, in other words, because it's all about 4G differentiation and your relationship with those carrier and your experience. And as you know, those kind of carrier and the CDMA mix play between -- handoff between WiMAX and the CDMA give us a lot of experience to know how to implement this as well between 4G and CDMA. And we feel we're in a good position with the 2 carriers with our offering. So this is how we see it, and we see it very, very sizable. And if you project this, thinking about that Verizon, going in 2013, very likely they will have, [indiscernible] as I said, the coverage on LTE. Then you can argue about single-mode LTE devices. I'm not saying that will stop the CDMA, but I'm saying more and more opportunity for single-mode LTE will be opening as well in Verizon. And as you know, the number of subscribers they have, they are one of the most aggressive and biggest operator today in the LTE. So definitely, it's big for us.

And then as you list those 4 major segments there, are you listing those in any particular order?

I listed them in the order of, let's say, I put the 3 first, which are our focus and the fourth one, which is we have more challenges, I tend to say. But obviously, I put them in the order of easiness for us, let's say, take it from this segment. And then how it's happening as well in terms of revenue, even if -- because my point of view, you can say the greenfield and CDMA, it's happening now, no doubt about it. In China, it's happening, but we have the question about the timing of the full launch. And obviously, the WCDMA, if you exclude Japan and AT&T, it's not really happening at large scale yet.

[Operator Instructions] Our next question is a follow-up question from Jay Srivatsa with Chardan Capital Markets.

Deborah, it's a question for you. What do you expect the cash flood [ph] to be this quarter, similar to last quarter? And then as a follow-up to that, what -- I mean, what level of cash balance do you expect you need to be at for your customers to feel comfortable about engaging with you going forward?

Based on the loss guidance, which is quite similar to last quarter and taking into account that we're not expecting the $2 million VAT recovery in Q2 as we had in Q1, otherwise we would expect our cash needs to be roughly similar between Q1 and Q2. And frankly, we haven't had that discussion with any of our customers. So...

Or I mean, Jay, I mean, just let me jump on this. I mean, the company, we're not starting yesterday. We exist since 8 years and we went up to -- in HTC and sell phones for them. At that time, if you look to my cash balance, I don't know if we had $10 million in the bank, maybe $3 million or $5 million. So obviously, as a private, we get, I'll say, we know how to manage a limited amount of cash and be able to run the business and optimize it. But obviously, on the other side, as -- if you ask me as a management, for Deborah and myself, we want the public to ensure that on the other side, we have enough means and enough cash to continue expanding in scale and so on. And definitely, the surprise of WiMAX, the change in the strategy in the U.S. and the hit we have it on the WiMAX, that we didn't predict last year, we were thinking that in any case this year, we could have all this amount of cash in our hand for our disposal to do any spending -- any extra spending that, from a strategic point of view, to scale the company as one. And definitely, the fact that we are burning money, it's hurting this position for the company somehow by -- we need to be more cautious and we need to count 3x more if we can execute on something or not. So it's not really without impact, I tend to say, for our decision. But on the other side, from the customer point of view, I don't believe we are there today. I mean, the customer, they look to us as a key player. We are -- we show to them that we know how to exist and stay in the market since 9 years, how to deliver, how to support the technology that we have, and they have enough on their table that they consider that the risk playing with Sequans is very minimal.

And we have no further questions in queue. Please continue.

Okay. Thank you very much, guys. I appreciate all the questions and your time, and hope to take you on-call or meet you face-to-face as soon as possible. Bye-bye.

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