Welcome to the Sequans Third Quarter 2018 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, our future financial performance and potential financing sources. 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, expectations for IoT and broadband sales, sufficiency of funding and our objectives for future operations and potential strategic partnerships are forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 as amended in 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 the 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.

Thank you, Kelly. Good morning, ladies and gentlemen. This is Georges speaking. I am with Deborah Choate, our Chief Financial Officer. Welcome to our third quarter 2018 results conference call. As you know from our press release, our revenue in Q3 was lower than expected due to project delays in our IoT business. In fact, we are seeing around a 6-month delay in the ramp of the LTE-M market. We will give you in moment more details about the reasons, but I want to emphasize that these are only delays. The market potential is solid and the pipeline of opportunities is getting better every day. Also, our traction in IoT and competitive position remain excellent. The projects we have in hand are still moving forward and we are adding new ones. So, our mid- and long-term business potential is not impacted, although we have to deal with the short-term financial implication of the delayed revenue ramp. In this regard, we have already taken a few actions including modifying the terms of the agreement on our largest tranche of convertible debt to extend the maturity date by two years, and securing $18 million of additional debt financing, $4.5 million are extra convertible debt and around $14 million are coming from a loan facility. We have lowered our breakeven point by reducing non-IFRS operating expenses to a run rate we expect to average $9.5 million per quarter for 2019. As a result, we believe we have created enough additional runway to be able to avoid the need for any additional financing all the way through 2019, even with a worst-case revenue model, well below our current expectations. We have also made further progress toward a strategic deal, which includes a financing element, but this is something we want to do for strategic…

Thank you, Georges. Good morning, everyone. I’d like to add some details about our Q3 results and the debt funding we secured that does not appear on the Q3 balance sheet as the funds were received in October. Our revenue was $10.3 million for the third quarter of 2018, a decrease of 18.7% sequentially from the second quarter, primarily due to the delayed ramp in CAT M Georges described, and a decrease of 9% compared to the same quarter a year-ago. The change versus the third quarter of 2017 reflected significantly higher IoT product and other revenue that was more than offset by lower broadband product revenue. In Q3, we had four 10% customers, two are distributors which serve a number of OEM and ODM customers, one of the 10% customers is an OEM and the last one is an ODM. Gross margin in Q3 was 35%, compared to 39.4% in the second quarter of 2018, and compared to 44.3% in the third quarter of 2017. The lower gross margin was primarily due to a shift in product mix toward a higher proportion of modules. Operating expenses were $11.5 million in Q3, down from $11.9 million in Q2, reflecting the impact of vacations in the quarter, favorable foreign exchange rate, and lower sales and marketing expense. The increase from the third quarter of 2017 is primarily a result of the increase in headcount and some higher legal fees. Subsequent to the end of the quarter, we determined that we could lower our breakeven point without jeopardizing our technology leadership. We are taking several cost reduction measures by optimizing various support functions and realigning our R&D resources, leveraging our technology leader position and the progress we have made on our product roadmap. Most of these moves have been implemented but will…

Thanks, Deborah. So before turning the call to questions, let me little bit make a couple of points as a conclusion for this conference call. Obviously, we are disappointed with the timing shift of our IoT revenue ramp acceleration caused by various reasons I explain before all not related to our execution. That’s important as well keep in mind that we’ve dealt with the financial impact of our CAT M revenue ramp on best possible terms and we are firmly on track to reach cash flow breakeven without returning to the capital markets. Again, we remain confident that the market potential is there and the ramp has indeed begun even if the acceleration is taking a little longer to materialize. Equally important our competitive position remains strong and because we have maintained an aggressive pace of investment in our roadmap, we can afford to ease off a little temporarily. This will not interfere with introducing our next generation technology next year or reaching other important milestones. Despite the timing issues, we continue to have a very valuable business. Our people, our technology, our knowhow, our relationships all remain extremely difficult to replicate. The scope of the market opportunity and our specific strengths are being recognized by more and more potential customers and strategic partners and will continue to contribute to additional value in the future. Thanks for listening. Now we will be pleased to take your questions. Kelly?

Thank you. [Operator Instructions] Our first question will come from the line of Scott Searle with ROTH Capital. Please go ahead.

Hey, good morning. Thanks for taking my question. Hey, George or Deborah, first to clarify some of the sequential revenue growth in the second quarter [indiscernible], broadband was up sequentially, gross margins were down pretty much dramatically. I'm trying to figure out what the magnitude of the decline in the IoT sales, look like on the sequential basis, looks like it might have been somewhere in the ballpark around 30% or so, and was most of that in CAT 1 and module driven given the gross margin profile, and how should we think about the gross margin profile going into the fourth quarter?

Hi, Scott. Obviously, the gross margin was a little bit tricky to give accurate guidance because as you know there is fluctuation between module and chip, and fluctuation as well with services that in general, which is very high margin. So depending on the component, we could be well above 40%, sometimes at the edge to reach 40%. So for this quarter indeed, I mean we had more modules than chip, and overall this didn't help to – even the low level of revenue didn't help as well to absorb the fixed cost. So we expect to be – but in fact, we don't expect an issuance in the gross margin and we continued to repeat this with as soon as the revenue will ramp because as you know all the LTE-M business, all the CAT M business is more towards chip business, which is close to 50% of the gross, and CAT 1 is split in general between module and chip and had the services. So we obviously don't see an issue there for the Q4 specifically, again it depends on the mix. We are expecting this, I mean if we have to give – all depends on the mix there, but we could be around the 40% we are talking about – we are targeting for this quarter.

Hey, George just to clarify that the gross margins that you're seeing in terms of existing deals with pricing on CAT M are in the ballpark of 50% or 48% to 50%?

Yes, absolutely. I mean, obviously it's very sensitive information to share details there, but our cost structure and the way we’re addressing the market as you know, we have a fully optimized chip even with our first generation. So we don't see really an issue of a gross margin in the CAT M business. And this is definitely that will help the trend of improving the gross margin next year and beyond.

And just to clarify on the broadband front, so broadband was up a little bit sequentially in third quarter and you would expect that slight recovery to continue into the fourth quarter?

We didn’t say it’s up. We said it’s inline of what we've planned. I mean broadband is as we said the bottoms that improved a little bit and it’s there. I mean it's not – I mean we don't want to give really quarter-to-quarter by segment, exact variation. But it's inline of our expectation and it will be inline as well, we don't see an issue there. Vertical and broadband went really inline of our expectation. The issue we face is as I mentioned specifically is the ramp of the LTE-M that we were expecting to start seeing some acceleration and this has been pushed out. And we saw a little bit of an impact on the CAT 1, which is specific for all the CDMA activation, but one customer was supposed to boost more CAT 1 and to some extent they use more CDMAs instead of what we are hoping, so the transition to CAT 1 didn't move full speed. And again this impact of CDMA activation should go away end of this year.

George, just to clarify those, so looking for the M1 ramp in the first quarter, what gives you confidence that at that point in time we're going to start to see the inflection? And maybe if you could give us some recent context or historical context for the pipeline, you've got a pipeline of $300 million now, $180 million plus in terms of design wins or $140 million plus of current design wins. What is that look like at the end of June?

In terms of improvement quarter-to-quarter?

Yes.

I mean, I don't know if I can give you in terms of real value of the dollar amount quarter-to-quarter. But definitely in the quarter, we added more design wins. I mean, we’re [worth on] and the pipe is increasing. I mean you could say each quarter we're seeing 10 plus new opportunity happening in this CAT M. So the business is really accelerating. I mean there is no doubt about this. And again, delay is really specific of the launch. I mean we had product that has already launched. We're hoping that this will accelerate further. And to some extent people are not accelerating full speed as they said because of this transitioning from 2G to CAT M giving them more I’d say window of opportunity to keep using their older product before they transitioned full speed on this. Beyond this, as I said, we have key design even without talking about the dollar amounts. I mean, we mentioned that we have over more than a dozen, close to 20 additional devices in hand design win that this should be launching between – scheduled to launch between now and first half or mid-2019. So the confidence level if you want in terms of pipe, as I said it's big, but on top of this independent of the pipe, the deals that we have in hand, I mean obviously we talk about half a dozen of device that they are already launching, but we have 20-plus in the pipe to launch between now and mid-2019. So we remain very bullish on this. And sooner or later this transition from 2G to CAT M is going to happen. And we will – all this will add up and will support the acceleration of our revenue ramp in the CAT M business.

And last one, I'll hop back in the queue. About the strategic discussions, it sounds like they are ongoing. You don't need the capital now at this point in time. But is the expectation that you get something done by the end of this year, and I think you’d talked about before China and verticals, are those still the areas that are percolating? Thanks.

Yes. I mean there's still discussion with the China angle very frankly and without – it's not the surprise you're all hearing about the sensitivity of some, I’d say, closed deal with China. So we are a little bit thinking about it twice, if you want on this angle, but we still have interest and discussion there. And we are moving on the other strategic, which is really quite advanced. I mean, I don't – I could not – I don't want to give timing and disappoint there. Very frankly, what matters there is the business. There is no more rush and I believe the financing will give us even better position even to negotiate any strategic deal because we will not be doing this on the business looking for financing the company. And this is progressing very well, and hopefully I can see more end of the year.

Thank you.

Thank you. Next, we will go to the line of Mike Walkley of Canaccord Genuity. Please go ahead.

Great. Thanks. Georges and Deborah, just with the cost reduction programs, can you maybe give us a high level thought process of how you came up with $9.5 million per quarter, and how you think maybe about worst case revenue scenarios for 2019 given the ongoing push outs in that planning process?

Well, in terms of cost reduction, as you know, we invested a lot so far. As you know, when you have an emerging market like CAT M happening, Sequans, we came with the first platform to the market, the most optimized platform in power and cost. And thanks to this, we took a very strong position in this market and we have all this type of design wins. And obviously, we didn't want to take the risk of being late on the second generation because no matter what, when someone is doing a product two years after you, if you do nothing, he could at least improve a little bit to the solution and he could show up and saying have a better product than Sequans. So to take off completely this risk off the table, I didn't want that all to optimize the investment in the R&D last year and this year. And we maintained a push to develop next generation platform, whether for LTE-M or NB-IoT as well as some on the broadband, as you know. And this is not impacted, it's moving forward then it will be launched and announced to the market. As I said next year, you’ll hear about it. So we feel very comfortable to maintain our leadership position from technology point of view. Obviously, taking this into our account and the speed of the market, this allow us as well to start a little bit, optimizing, fine tune the investments we are doing on global end company. And by doing so, we took measures that already in place, so it's not any – it's not something we are planning to do. We took measure already implemented as I'm speaking, that give us a line of sight for $9.5 million in average next year, per quarter obviously.

I guess we can say it's a combination of some headcount reduction. For example, we work with a number of external contractors on the R&D side. Once the projects that they're working on are completed can be – those contracts can be terminated. And also as we finished the development of these different projects, a lot of the sort of out of pocket expenses are reduced or eliminated as well. So that's really – it's both headcount and external spending that contribute to the reduction in the operating expenses.

Great, thanks. And George just a competitive question with the delays, can you talk maybe about the competitive environment and also maybe even alternative technologies with the CAT M1 and NB-IoT delays. How do you see LoRa as a competitor? I think they want to hit $60 million endpoints per year. Do you see that eating into some of your market opportunities, and do you think they could hit that $60 million endpoint number?

Well, very frankly, I mean, I'm not seeing customers moving to LoRa back. I mean, the people are 100% convinced that CAT M and NB is the right technology and all of them are moving on it. We saw customers and very frankly start seeing this a little bit in September, where they had a plan to go away now and start – move to the CAT M. And then after making some trials are found they felt like, okay, there is a little bit of maturity, they take a little bit more time before the switchover. So this is what we found. We didn't see any people saying, okay, I'm disappointed. This is not the right technology, I want to move to LoRa and I still maintain my position and I believe it's well known today that LoRa really address the segment of the market, which is really call it as a local private network and not that all what, LTE-M and NB-IoT, offer is completely different value proposition. And the competition is really minimum there. I don't see really people putting the two lives I’ll saying I’ll go with LoRa or LTE-M. I mean they know when they have to go to LoRa and it's really a local network, private networks and they are happy about dealing with the network themselves. And all the other angles they will go to LTE-M and NB, and you have people as you know, adopting the two or sometimes selecting one between NB and LTE-M. So this is definitely not the risk at all. Some competitive landscape, where frankly I didn't see much different from what I saw in the past, last quarter I tend to say. So we still today any – if you want to have a technology, which is proven and certified and used by the customer, you are playing a duopoly between Sequans and our big competitor. And then you will see a couple of guys that they are working to come, maybe one still planning to come at the end of this year. We should see them and all the others are really well behind. And then you see the group of Asian, I'll talk about the western company. And then you see the group of Asian company still they’re still nothing in the air around LTE-M, muscle fits NB-IoT only and focusing on China. So very frankly the dynamic in terms of competitive landscape is equally the same. I mean it didn't change since the last quarter and we remain in very good position and the market, and customer and parts are looking to us for what we have on Monarch platform as well as the roadmap we are preparing to next year to keep improving this technology.

Great, thanks. Last question for me, I'll pass it on. Just as you talk about your $140 million line of sight pipeline, can you give us a sense over the time horizon and how you see that ramping? And maybe even build on that, how you see this maybe the $300 million ramping over time too just to kind of give us a feel for how you're seeing one to three-year revenue opportunity?

Yes, I mean the $140 million, this is the pipe we believe you know much of those –they have three years life cycle, I mean use that. Some of them could be five when it's metering products. So it's a combination, so we have some model there to come with this number. And obviously we’re talking about deals where muscle fit is enhanced design win and some very close to be design win, when I talk about $140 million. And this means some of it will start beginning of 2019 and will grow. So the beginning of it is really from end of this year towards three year down. Obviously, the deals that are not yet closed, you should expect them more second half of 2019. And this will shift more towards 2023. And obviously the other piece of the number I gave, which is other – these were welcome to pipe, which is I don't find them almost to $180 million. Those are deal we are working on and I tend to say there will be more 2010 – 2020 to start and this was scale obviously to 2023 or 2024.

Thank you.

Thank you. We'll go next to the line of Quinn Bolton with Needham & Company.

Hi, George and Deborah. I'm sure that the delay in the CAT M projects is frustrating. So I guess I first wanted just to ask your thoughts, maybe a little bit more color on your choice of financing here. Obviously, an equity deal dilute shareholders, but the debt deal kind of transfers, enterprise value from the equityholders to the bondholders. So just wondering if you could give your thoughts around the pros and cons of equity versus debt versus the strategic? And then your selection of debt, does that have to your outlook and your confidence in the ramp of CAT M and sort of the middle part of 2019, does that kind of – did that influence your selection of the debt financing? And then I got a couple of follow-ups. Thanks.

Hi, Quinn. I mean, obviously when you talk about debt financing, we added – I don't want to confuse the people. So it's $18 million indeed, but of those $18 million, $14 million are coming from what we call it regular debt financing with – obviously, it's expensive for the company in the size of Sequans in terms of interest. But the beauty about this is that you are paying this on a monthly basis over the coming three years and a half term of this. So this is not kind of debt sitting on our neck where you need to just see depending on your convert price, depending on the price and so on, and you need to pay it in one lump sum. So looking, obviously it's our business potential on the ramp. But it was obvious for us that we can sustain this kind of debt returning it, monthly from the revenue projection we have, even with this scenario which is even the greatest scenario, if you want to call it or slow scenario in terms of ramp. And from this perspective that’s really very optimum to shareholders, I mean because the price value will come back to normal as we are returning all this debt completely as we move forward. So this is really what drove the most of it. We obviously added another $4 million convertible debt, $4.5 million. But as you understood from Deborah, we returned one, as well we reimbursed one. So globally we added $3 million, $3.5 million on the convert, but this was as well part of the equation of delaying this convert by two years to really push the overhang completely at least with the line of sight for the company to secure the ramp and go to nice revenue. And we will ask now where the situation or the first debt we have reimbursed is happening in 2020, so it's April 2020, and the principal is $6 million. So it's very small debt. With this, I believe we are kind of financially much healthier than we've been before on this. So this is really what drove this. And obviously, the strategic could come tomorrow and this can help us to put it on the balance sheet as well. And if we do over in a year from now in 2020 or so equity financing, this can come to compensate the debt we have it on balance sheet. So I believe we did the best when we look to it and also taking into account that all those discussions we have with the strategic angles, let us feel like this is the best thing we can do today is really to take it with this loan facility to drive the financing.

Understood. And then I guess sort of a related question, you've got the financing now in place and so you're sort of secure for 2019, but is there a point in time if delays of CAT M and the IoT continue to push to the right that you might look to at least to explore strategic alternatives and try and find a partner that can help, kind of fund the business until those ramps? Or are you guys fairly confident that this is a short-term delay and you’re kind of best off as an independent company that to realize that CAT M opportunity?

Well, I mean first of all I’m confident, this is really a short-term delay because to see something really measured, you’ll see it from the market, you see your pipe down, you see carriers stopping deploying, stopping – putting CapEx on this and so on. None of this is happening. It's really an execution problem, simple execution problem. You have a new technology and new networks deployed. People they plan originally to make things happening always optimistically somehow. Add to this as well some product, as I said transitioning from the product working on 2G for CDMA. But as I said, okay, we'll stop activation by June and then people come at end of June and ask for a little bit of extension or they can buy for two quarters or three quarters CDMA, SIM in advance. So this is what's happening. I don't want to say anything else that impacts our confidence. My confidence remains strong on this. Now on the other side, related to the strategic angle. On one side, we are confident on our number, confident with our market and our position in the market, but this is also as we said, we have a lot of strategic discussion going around the company. People interested to partner with us in one way or another way. So we are evaluating all this for the best interest of Sequans obviously. And we will – if we do something strategic, it's not because we are afraid about the ramp of the CAT M, it just only because we believe this can create more value for our shareholders, and that's what drive the decision.

Okay. And then lastly for Deborah, just wanted to make sure I understand the financing that you put in place, you say carries your financing needs through 2019, or you have enough cash through 2019, but you also made the comment. You also sort of felt that it would carry you through cash flow breakeven. I don't know that that you guys have said you think you hit cash flow breakeven in 2019. So I guess I just wanted to see if you would make any comments on when you think you might hit cash flow breakeven. Yes, just trying to reconcile the two comments.

Yes. I'd say our current expectation is that that's an achievable target in the second half of next year. However, we've also the other point was even on a sort of the lower case scenario where we wouldn't necessarily achieve that. We still believe we have enough cash from the financing to see us through.

Got it. Okay. Thanks for that clarification.

Thank you. We'll go next to the line of Craig Ellis of B. Riley FBR.

Thanks for taking the questions. George, I missed the early comments on the call. So I wanted to go back and just try and better understand of the probability that you see around the projects that you're seeing that either, but there are not in production are scheduled to go into production your term, so about 105 projects of the 130 that you decided, I think would fit that category. So as you look at that group of projects; one, how would you frame the probability of those converting to something that would be revenue generating. And then two, can you provide some more color on that subset, when could it potentially start to benefit the income statement and drive revenue for the Company?

Well, I mean what I mentioned; we're talking about 130 different projects that we are working on. And we said, technically 60 of those are whether one, in other words, we’re just only executing on and we have timing. We could have timing issue in terms of when it starts, this project will go for full production in Q1or Q2 or Q3. But we are very confident on those 60 vehicles, big chunk of them are already won and some part of it is in a proof-of-concept, very close to win. And so if we lose part of it, it will be minor, in other words, we have – if we say we have 60 projects between one or advanced in terms of proof-of-concept. This means at least they are very comfortable that $50 of them will really 100% in production and will generate revenue to us. And I mentioned that even 20 of them will be launching before 2019, the mid of 2019. So in another words, they are plan to launch between Q4, Q1 and Q2. So whatever we had in hand that I was planning on launching Q2, Q4. It just only shifting and it's coming to be there and the number is increasing because we are not talking anymore about a couple of projects with about 20 of them. So all this will give us confidence that to generate the revenue ramp in the short-term at least for 2019 and beginning of 2020. And on top of this, the 70 other products that you are working on, obviously they are designed wins if not all of them, they are a new business opportunity and not all of them will be secured, but looking to our track record there we have probably of at least 50% on a new opportunity to win it. So you could make demand there that those projects will cross forum, will become real design win and new generate revenue towards end of 2019 and more 2020.

All right. That’s helpful. And then Deborah, just clarifying the operating expense dynamic for next year. So given that moved some time take – some time to implement, is the view that you would start the year at a level of operating expense that would be higher than the $9.5 million and over the course of the year get down to that level or below or a would the moves that have been executed result in operating expense that could start the year at that $9.5 million?

We expect we should be close to the target level even in Q1.

Okay. Thank you. And then – if there is a situation where for similar reasons to what we're seeing now, there is a further push out in the ramp of various projects. Is there flexibility to take operating expense below the $9.5 million or is $9.5 million really up or level for the Company in terms of how you see the future operating environment?

Well, I think there is room to further reduce. It really depends on the market outlook and what we're seeing in the causes of the delay. But yes, there would be room to further reduce if we were required to do so.

Okay. And then lastly, just following up on an earlier question regarding, strategic partners. So it sounds Georges like you're saying those remain of interest to the company, and you're discussing opportunities with different entities, but there's nothing to announce at this time. Can you just help us understand how much of a priority doing something is for you, whether it's either in the second half of this year as you look to 2019? How pressing is it to ink a deal or a couple of deals that would be new strategic [indiscernible]?

Well, I mean, obviously those deals, I mean when you put under strategic, you can imagine various discussion obviously, and some of them you should not be too much excited when you’re discussing with them and let them be excited on their side. But if I talk about the strategic deal that I was referring to that this is of course in hand and we are working on. It's important for us from business point of view. So I like it. I would like to have it there. It will be good news for the company. Even if I'm not anymore, I would say running just only for the financing angle there, even if the financial component will come, in my opinion if this deal happen. It's more of the business angles, that’s attractive for us. And I'm excited about closing this year hopefully, I mean if I can. But again, it's not like all the company life depends on this. I mean this is not – I don't want you to feel like – when I wake up in the morning, this is the only thing I have in mind. What I have in mind is very important. All the excitement about the LTE-M and get the ramp of the LTE-M and accelerate our revenue on LTE-M.

Thank you.

[Operator Instructions] And we will go to the line of [Bill Tripet] of Private Investor. Please go ahead.

Yes. I missed the earlier comments. I just wondered if George had any thoughts on the CBRS activity recently.

Yes. Hi, Bill. Yes, I mean, I said few words on the CBRS. There's a lot of discussion there. There is a little bit – not yet – the timing of this business is not 100% clear. But since on this quarter, mainly in September, we saw a lot of activity and a lot of demand for the CBRS with more and more partners and customers. And as we already said in the past, we have a few customers that they have product already. I mean not only the – in other words, they integrated, they have devices and they are trialing in the U.S. the CBRS. The only challenge for us there and we believe we are in very good position. The challenge we are seeing in this market that you want is really the timing. One, this is going to turn to revenue for us, so we remain cautious of predicting this happening right now. But we're seeing all the momentum is positive and we believe this is a nice opportunity for the company that can support the broadband business.

Great. End of Q&A

Thank you. And presenters there are no further questions in the phones at this time.

Okay. So many thanks for all of you for the questions and taking the time to listen to our call and looking forward to speak with you in a quarter from now on our next call. Thank you very much. Thanks Kelly.

Thank you. And 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.