Welcome to the Sequans Second Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. 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 contains projections and 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 and plans, sources of funding, 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 belief and expectations with respect to our 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 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.

Thank you, Greg. Good morning, ladies and gentlemen. This is Georges speaking. I am with Deborah Choate, our CFO, and we welcome you to our second quarter 2017 results conference call. Business during the second quarter was in line with our expectations. We are particularly pleased with our progress in IoT with CAT-1 ramping and strong pipeline of business for LTE-M and NB-IoT, set to accelerate our growth next year. We also had a very positive development in the broadband area with the launch of the Verizon branded SmartHub which will be another source of revenue, similar to the new version of Jetpack. On the negative side, we had an exceptional product return from an early 2016 sales related to our old tablet business which affected the [OpEx] [ph] of our results by reducing revenue by $740,000. Otherwise we would have reported about $14 million, well within the range of our guidance and a 41% increase versus second quarter of 2016. Deborah will give a full explanation of the financial details. I will focus here on the business strategy and highlight some details of our progress. Since we have some new shareholders, I will start by spending a minute on our business strategy. Long before the IoT hype began, we decided to focus on 4G only solutions because we believe they would enjoy rapid growth once operators' 4G coverage reached parity with 2G-3G. LTE only connectivity offers the benefit of smaller footprint, better life and lower cost than multi-mode solution that fall back to 2G-3G. And obviously, LTE networks are more efficient to operate. We have seen multiple proof points that support our strategy. 4G networks deployments which initially begun in the developed regions like the U.S., Japan and Korea, have spread rapidly throughout the world making LTE the fastest…

Thanks, Georges, and good morning, everyone. I would like to have some details about our Q2 results and discuss the outlook including our guidance for Q3 of 2017. Our revenue was $13.2 million after giving effect to the accounting treatment related to a product return. Specifically in 2016, we were supplying tablets destined for Wal-Mart pursuant to firm purchase orders. When sales were disappointing, our customer could not pay and we spent a long time trying to find a solution. We were able to find another customer to use the product for a different application and they are currently completing their certification with Verizon. However, they were not able to commit for all of the units of the product, so ultimately we decided to take some of the product back into inventory until the new customer is ready for it. Excluding the effect of this return, our total revenue would have been $740,000 higher or nearly $14 million and well within the range of our guidance. In the quarter we had three 10% customers ranging from 10% to 11% each, but one of them is a distributor serving a total of Asian OEM and ODM customers. Our gross margin was 42.1%, reflecting a higher proportion of modules in the product mix this quarter. Our operating expenses were $9.6 million in Q2, down from $10.1 million in Q1. This quarter we capitalized some development costs related to our Cat M product. And our sales and marketing expenses were lower because Q1 expenses reflect two major tradeshows. We expect operating expenses to return to slightly above $10 million per quarter going forward. Our second quarter operating loss was $4.1 million compared to an operating loss of $4.2 million in the first quarter and an operating loss of $5.7 million in the second…

Thank you, Deborah. So to wrap up, I am happy to say that we are pleased with the progress of all our businesses despite the cautions we have expressed on emerging markets as this has limited impact on us in my opinion. The exciting development remains on the IoT where all signs are positive on all fronts. Market development on one side where we see all carriers worldwide moving full speed to upgrade their LTE networks with Cat M1, NB1. All marketing scale studies confirming the size of the opportunity for IoT and Cat M1, NB1. The pipe of opportunities we are seeing keeps expanding with a variety of applications and many tier 1 players. And the other point is our leadership position where each day we have a confirmation of our strong position in this market whether from the product angle, performance and cost, time to market, readiness with carriers, ecosystem of partners. So are very confident that we will capture a big market share and translate this for growth and acceleration for our company. So my team and I are working hard to keep good execution and enhance the value to our shareholders. I will turn it now to take your questions to the operator. Greg?

[Operator Instructions] Your first question comes from the line of Scott Searle from Benchmark. Please go ahead.

Deborah, just quickly, to follow up on the capitalized software cost related to Cat M1. Could you just give us a figure on that front? It sounded like you don’t expect that to continue going forward? And then I had a couple of market questions.

We capitalized about $800,000. We are likely to have some more capitalization in Q3, probably slightly less and finishing up in Q4. We would then expect to begin amortizing in R&D expense from most likely Q1.

Got you. And Georges, congrats on the Verizon SmartHub win. When do you expect that to start to contribute and what's the magnitude of design win of that type. It sounds like you said it could double your current Verizon run rate but how quickly will it ramp up to those levels.

Hi, Scott. So this has started already in the same quarter, so some of the revenue are coming from SmartHub and we have backlog for Q3 and maybe some for Q4. So we don’t have much -- the same level of experiences as we have on the Jetpack, where we have three years of shipment. So this is a new product shipping. The launch looks fine, looks in line of our expectation. And if all continues to be like this we expect to -- this is something that can contribute to us around $1.5 million per quarter in average.

Okay. And just in terms of, two more things and I will hop back in the queue. But certification now for M1, how many carriers have actually certified at the current time. You have won, it sounds like now up to eight design wins on the module front. But what is the timeline for additional carriers for certification. We get a lot of them done by the end of this year. And then M1 contribution, will we see that in the fourth quarter and when do you expect to see NB IoT contribution. Thanks.

So in terms of certification, obviously as you know some of the carriers, the big carriers, they have a process, strict process for certification. Others, they will turn it to lab and they do some kind of IoT. So today the carriers that are organized and started the certification process are Verizon and AT&T only. The other guys are only doing trials or testing IoT with their infrastructure. And obviously we are engaged with a few IoT with many guys but specifically in terms of formal certification, it's Verizon and AT&T today where we have engagement. Verizon has done and even re-certified I tend to say because we have done it in January and then we follow up. We certify even customers of us, that they already, already they have product certified. And we have many others in the last step, I tend to say. And AT&T, I mean we are very close. We have engaged in Q2 strongly and this is something that should happen soon. And also we have other customers, some of them publically they mentioned the focus on AT&T, for example Huawei. So they will be ready on AT&T first in terms of certification. And regarding the business ramp, obviously in terms of big opportunity we still see it really next year but we expect a little bit in Q4. It's very hard to see today because this will be their initial quantity coming to us with some orders. We have some people even requesting the chips and initial preparation in Q3 but not major in terms of dollar. But we hope a little of bit ramp during Q4. As I mentioned in the past, maybe $0.5 million up to $1 million could be coming from Cat M business. And on NB1, still the market is kind of six months behind M1 activity, coming from the fact the ecosystem is a little bit, you know came all in second step whether the vendors, the carrier readiness and so on. But we are fully engaged already with IoT with infrastructure vendors with our NB1 and in Q3 we will be engaged as well with some carrier testing on NB1 as well.

Georges, just one last one if I could. Could you talk a little bit about the magnitude of some of the design activity in terms of units? We are moving from smaller design wins to potentially, it sounds like millions of units per design win, when you start to think about things like wearables. Is there any color or commentary you could provide on that front would be helpful. Thanks.

I mean generally, when you look to the old IoT business which was really M2M market building on 2G, 3G. And even if you see 100 million units on a year, when you go down the path and look for those 100 million units sold on a yearly basis, except you could have few exceptions where people talk about millions but in general the 100,000, 200,000, 300,000 units a year for a design looks big in M2M environment. If you talk to our friends of the module play, this is what they will tell you and this is their business. And even if they average on the number of customer, you come with an average which is almost below 50,000 units per customer or in the 10,000 and so on sometime. Thanks to the power advantage and the cost advantage and all this with the engagement of all the carriers across the world, so you have many many new applications coming and people, they are not questioning anymore the use, I will say of cellular technology for IoT application. While in the scope of the M2M, they were using cellular technology only because they have no other option, here they take it like the first, the choice number one. And as such, we are seeing a lot of projects. Some of it related to logistics and people talk about million of projects. Obviously, you have the fleet management, all the asset tracking and not to talk about wearable, so all those projects becomes really -- all the big projects are there and you have tier one guys without naming the guys but you will see really with the top notch company engaged with the project and they would like to use the IoT to serve, I will say some kind of application. And here people start with the 1 million unit and I tend to say the smallest product, talk about 500,000 as starting point. So we see really on order of magnitude difference in terms of projects and this is very encouraging. And this supports by the way the $1.2 billion-$1.3 billion units we are talking about for the coming five years to cover all those even if it has some broadband, majority of this is really IoT application.

Your next question comes from the line of Mike Walkley from Canaccord. Please go ahead.

Georges, just going back to the broadband business. Can you elaborate a little bit on the softness in emerging markets and then for the broadband business maybe to exceed that $10 million per quarter, do you need the new Cat 6 product next year or do you see it kind of steadily growing throughout 2018 from exiting the year right around $10 million. Thanks.

Hi, Mike. I mean essentially the emerging market, the complexity of the emerging market -- we are not talking about one carrier. When you look to the business like Verizon and so on, since they establish you are talking about maybe almost one device, one SKU, like the Jetpack can go across to 800,000 unit a year. And you have track record and it's a device, branded and so on. When you go the emerging market which is under this umbrella, we are counting their maybe 20 carriers behind the scene and those carriers, they buy essentially [CPE] [ph] and its' always driven by cost. And they do it on the PO by PO basis. It's not like all these units to be selected, so all are OEM, ODM that we work with. They all are strong players in this space but they don’t win if you won't deal for one year, two year, they win a PO. They win a PO for deployment six months then another PO for another six months and so on. So this fragmentation, if you won't give us less -- if you want -- it doesn’t help us in the prediction, if you want, as we are able to do it with big carriers like Verizon, AT&T and others. And what we saw in this quarter, if you want some of the order business come as expected, to our customer not to us because to some extent this is more in the projections. So we are seeing a little bit in some situations carriers, they didn’t issued a PO, some situation our customer didn’t win the PO themselves and maybe went to Huawei, which is Huawei is a strong competition there. And we saw a little bit of price war happening at the CPA…

Okay. Thanks, Georges. And just a bit on that question, when you look at your pipeline for accelerating growth into 2018, can you just kind of walk us through your pipeline as you look at the broadband business, vertical markets and then the IoT. Just how you see kind of that mix in your business changing over the next 12 months.

Well, very frankly, the broadband, I mean we already said even if we have -- even if we go with the pessimistic scenario by saying that broadband is going to have, let's say 10% growth year to year, not more. We still believe that the major growth obviously for the company will be coming from the Cat 1 where this can double year to year today, based on the hockey stick nature of our business because this is going well. It's just only a matter that the shipment this year is happening towards the end of the year and it continues to accelerate, mainly Gemalto as a customer, they will be accelerating more and more with other market in Japan, all deploying starting in Q4 with their customers. So we see the Cat 1 doubling. And all this, the Cat M is fully new business, so all this is upside. So if I look in the total picture next year on a -- I believe we should have more than 50% IoT business versus broadband. Obviously, some portion there still for the vertical projects which is going well. If I compare it this year and we expect to see it continue next year.

Okay. Thanks. And then last question from me. Deborah, just on that mix, how should we think maybe about gross margins over time? Where do you think that could go given the mix shift expected next year? Thank you.

Next year with the Cat 1 business we will still have modules in the mix. But the Cat M business is chipsets, not modules, so that should help improving the margin. And once the business is really much more chip reliant, which is, I am not sure if that’s going to be second half of next year or a little bit further out, then we should be targeting more of a solid ship gross margin in the upper 40s.

In fact, Mike, if you look to all the Cat M, they way we predicted today, it's all chip. We may sell some modules but looking to the strong penetration we have with the module players and the sensitivity to pricing, very likely is going to be 99% business chip. Cat 1 is half-half, the way to model it. And obviously broadband is the chip and public safety is as well, it's services and chip. So all this makes it look like module business will be below 20%, maybe 15% of our total business. So the impact in terms of gross margin should be to the favor of the chip in this sense.

[Operator Instructions] You have a question from the line of Quinn Bolton from Needham & Company. Please go ahead.

Just curious, in the current quarter, could you give us some sense of the split between the broadband business and the IoT business. And then within broadband, obviously you talked about some of the pricing pressure and caution you are seeing on the emerging markets. How much of the broadband business comes from emerging markets versus the Verizon business.

Hi, Quinn. Just to start with the end, obviously it depends on the emerging because the emerging is varying. But what I said, typically, our broadband business on Verizon, I mentioned that this is now with the SmartHub should be $3 million-$4 million per quarter. So on the picture, you assume a broadband around 10 and the projection where we are targeting, so this will be around 40% of this coming from this. And 60% from the emerging if we are considering 10. In Q2, the picture on IoT was ramping up because we have strong sales of Cat 1 modules. As I mentioned, we have two strong customers in the module space. The move to full speed in initial order and accelerating and we start seeing further picture. So if I think in terms of broadband IoT, 40% was kind of IoT and 60% broadband.

That’s great. And the two module partners for Cat 1, does that include the Gemalto business or are you separating Gemalto from those?

No, no, Gemalto is a chip. So I am not -- because, again, just to avoid the confusion. In Cat 1 we have really, as I said, half a dozen end customer buying module from us. Some of them were public like Geotab doing fleet management and so on. So those guys buy module directly from Sequans. And obviously we have Gemalto, they have their own modules for U.S. and Japan and they serve dozen of customers behind them with our Cat 1 chip. So we see it kind of today split or next year split maybe half-half between chip and modules. And this is essentially Gemalto and the other customers Cat 1 business.

Sorry, just to clarify. You had said that you are seeing strong activity in the Cat 1 business right now driven by two modules, I thought you said partners, but maybe you said customers. Are those kind of buying...

Two customers buying modules with us. Obviously, Gemalto, I mentioned as well that they are ramping up. I don’t want to qualify them yet reaching my expectation but it's better and better each quarter and we have forecasted, it's ramping up. So I remain strongly positive for next year even if it's a little bit slower than what I hoped originally. But it's moving well. But my indication about the strong customer we had on the Cat 1 this quarter, they were module partners, module customers, if you want. Customers buying modules from us, not Gemalto.

Buying the Sequans branded modules. Got it. Okay. Great. And then the second question, just wondering if you give us an update on any of the operators looking at qualifying voice on their Cat M networks. I know you have mentioned AT&T and Verizon are sort of in the process of qualifying their Cat M networks. But just wondering if you are seeing any voice trials for Cat M starting to take place.

Yes. This is one of the key differentiation between Cat M and NB1. As you know that they are built to support voice. And when you talk about supporting voice, you have two ways of doing this. You can support voice over the top, which is on IP. You cannot do it on NB1 because the speed is so low, so you need to do it on Cat M1. Or you can do it VoLTE. In other words run it embedded in the protocol stack of the LTE that the carrier prefer to have because they control the quality and control as well the redundancy and many things there. So obviously today Verizon and AT&T and all those carriers will be implementing voice over LTE for Cat M. We have done some trials already ourselves with Verizon and we are working on the full integration and certification of Cat M with VoLTE. So we have this program going on and we should be, I tend to say the carrier should be ready at the end of the year in terms of having the proof that everything is fine and everything is 100% guaranteed, it will work. And now when they are going to announce this officially, the may announce it in the beginning of next year or they can delay it six months if they want to launch the service. So very frankly, I don’t control this date. But I know that technically today we have the proof that this is working and we are finishing the certification and the extensive testing, if you want, so they can define the service to the end customer what they can get on Cat M voice. And this is important for wearable and this is important as well for all the alarm, many applications in the IoT world you require voice as well.

And then just a quick question for Deborah. The converts or at least a portion of the converts maybe from long-term to short-term liabilities. So looks like you have go about a year left on these converts. I assume that we are still well above the conversion price on those converts and you would expect those converts to convert into equity rather than having to repay them assuming the spot price stays where it is. But could you just remind us of what the conversion price is on those converts?

Yes. The first issue comes to term in April 2018 for a nominal value of $12 million. And the conversion price is 1.85.

[Operator Instructions] And you have a question from the line of Caroline Gangi from Cougar Capital. Please go ahead.

I apologize, I jumped on the call late, but in the press release you had a comment about being approached by a number potential partners to discuss various forms of cooperation. I was hoping if you could elaborate on that please. Thank you.

Yes. Definitely. You know this is nothing new. I tend to say it because from the leadership that we have in the LTE space and the acceptance or let's say becoming the market, the LTE for IoT is becoming a must have for any players who want to play in IoT. Because you can get connectivity through Bluetooth, you can get connectivity through the Zigbee. But all those technology, you need to go through a gateway and when you look to the use cases, many of them, many of the use cases require direct connection to the network and today the only connection that makes sense to use is really Cat M1 and NB1. Maybe in some private networks you can go LoRa but in general this is a must have. And when you look to the scarcity about Sequans because as I mentioned, today if you want to get a product you have two guys that they have a product, our closest competitors and a well-known company and Sequans. And this technology, if you want to get anything to offer as a platform, you need to get Sequans ready there. And this is obviously attracting all the partners who would like to play in the IoT space, and this is very important for our strategy because it complements our position by offering a full platform where if you need MCU, if you need GPS, if you need Bluetooth. So you have all those partners that can provide this and Sequans providing the LTE technology. So this reinforces our position and with those partners.

And you have a follow-up from the line of Scott Searle. Please go ahead.

Just real quickly to follow-up on the VoLTE front. How many design wins, is that an active portion of the discussion or requirement for those design wins. And also on some of the vertical markets. Could you, I am not sure if I missed it, but could you quantify a little bit in terms of the air to ground opportunity and what you are seeing more in the traditional PMR or Motorola type markets. Thanks.

Yes. So in terms of VoLTE, today you have two places where you need the VoLTE. One are the wearable or the alarm systems. Call it in general, security, home security and so on. The home security is really a tradition market and we have many design wins already using the Cat 1 technology. And we offer VoLTE on the Cat 1 technology and this is really one of the major differentiation of our Cat 1 module. If you compare to other competitors, they don’t offer VoLTE. And Sequans is really strong on this because we have the VoLTE on Verizon and T-Mobile and people appreciate this and they use it. So obviously all those guys would move to Cat M in the future and for some applications they don’t camera and VoLTE is part of it. But on the other side they are not in a rush because they are already launching their Cat 1 with VoLTE there. On the wearable is a little bit more challenging because some of the wearable they can go with voice over the top so they will not wait for Verizon and AT&T to launch their service and they will be happy to get a VoIP service over LTE. But some others, they are really looking for guaranteed service and so on. And those kind of design wins are call it [launching] [ph] projects, they will need some assurance from the carrier that they are going to launch the service and the quality is going to be there. On the vertical market, in general as I mentioned, the major differentiation what we have there in vertical market is people coming to us and they say, okay, I want to use dish LTE which is a commercial LTE technology but I want you Sequans…

And at this time there are no further questions.

Okay. Thank you, Greg. Thanks all of you for listening and for all the questions. I am looking forward to having you with us on the next call. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.