Welcome to the Sequans Preliminary Fourth Quarter and Full Year 2019 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'd like to remind you of the following important information on 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 massive IoT and broadband and critical IoT sales, the expected value of a recent strategic agreement, the potential for new strategic transactions, the potential impact of the coronavirus on our manufacturing operations in China and on customer demand 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 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. We have not filed our Form 20-F for the year ended December 31, 2019. As a result, all financial results described in this call should be considered preliminary. And are subject to change to reflect the completion of our audit and any necessary adjustments, or changes in accounting estimates and are -- that are identified prior to the time we file the Form 20-F. Please, go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen. This is Georges speaking. I'm with Deborah Choate our Chief Financial Officer. Welcome to our fourth quarter and full year 2019 results conference call. I'll start by saying, as we enter a new year we have a strong foundation on which to build as leaders in 5G, 4G chips and modules for all IoT application. We already offer the most mature and comprehensive portfolio of solutions for the massive IoT market where power, cost and size are the main drivers, as well as for the cost-optimized broadband IoT market and we continue to innovate at a rapid pace. We are currently developing a new chip to address the 5G high-end enhanced Mobile Broadband and Ultra Reliable Low Latency Communications to expand our offer to future broadband IoT applications. Despite our strong position, the delay in the ramp of the IoT market made 2019 a complicated one. But now that several obstacles to the market ramp have been eliminated, we look forward to capitalizing on the growth that we believe is finally happening. 2019 was also impacted during the second half by an inventory issue with our Cat 1 module partner; even though overall Cat 1 end market demand was steady. This was frustrating to everyone. But we had a good finish to the year, particularly on the strategic front, closing two strategic deals in Q4, which represent license and services revenue, totaling over $40 million to recognize over three years or so. In the fourth quarter, we had good sequential growth over 25% driven by an increase in services revenue. This specifically reflects revenue recognized from the larger strategic deal we concluded in the fourth quarter and can now qualify that partner has a Fortune Global 500 company working with us on…

Thank you. Good morning everyone. I'd like to add some details about our fourth quarter and full year 2019 results and the outlook for 2020. Our revenue for the full year was $30.9 million, massive IoT revenue decreased compared to 2018, primarily due to the delay in the ramp of Cat M and an inventory issue with our Cat one module partner during the second half of the year. Massive IoT accounted for approximately 42% of total revenue in 2019 versus about 50% in 2018. Both Cat one and Cat M are expected to grow in 2020. The broadband and critical IoT category and revenue from vertical markets, both experienced slight declines in 2019 compared to 2018, but are expected to rebound this year due to revenue from new broadband customers in emerging markets and higher services revenue from vertical markets, plus the revenue recognition related to our large strategic deal. Gross margin in 2019 increased to 40.1% from 39.5% in 2018. Operating expenses decreased year-over-year by about 15% to $40.3 million, reflecting lower average headcount and other expenses as well as increased capitalization of R&D and a favorable exchange rate. Financial expenses were higher than 2018, reflecting a full year of venture debt and the increase in convertible debt. Our IFRS net loss declined slightly to $36.1 million or $1.52 per diluted ADS. On a non-IFRS basis, our net loss for 2019 declined to $30.9 million or $1.52 per diluted ADS, compared to a full year non-IFRS net loss of $32.3 million or $1.55 in 2018. Our non-IFRS net loss excludes noncash items related to stock-based compensation expense, the noncash impact of convertible debt amendments and effective interest rate -- interest adjustments related to the convertible debt and other financings and deferred tax benefit or expense related to the…

Thanks, Deborah. So just to conclude, I mean a couple of thoughts. I mean obviously looking backward again, I feel like the situation now is behind us completely all the issues that we encountered in 2019, and specifically the delay of the mark -- delay of the market. And obviously, we are very excited about the start of this year, all the first, I'll say weeks and months we were -- we saw a lot of things and a lot of opportunity and some ramp of the product that let us feel like things are going into the right direction finally. Obviously, we can -- you saw that we are very uniquely well positioned in this IoT space. We can -- you can say, we are the unique company that has today a portfolio fully optimized for IoT application. I mean non-handset application going from the low power low speed to the high speed and extended feature broadband application. Today, whether Cat 4, Cat 6, Cat 1, Cat M, Cat M/NB, product today is fully mature, certified, shipping that is really -- they are all in maintenance mode. The company is investing a couple of -- on two-axis to innovate in the future. Obviously take to the mass production, the second-generation of Monarch to drive further the power and the cost and prepare for the low power IoT market ramp. A Cat 1, which is more to position for a new market where we can expand the company for consumer application requiring for low power but higher speed than Cat M. And this is really all what we are seeing. Let me feel, it's the right approach what we are doing there, and obviously investing prudently, but aggressively in the 5G high-end to bring something to the market in two years down the road. All this with a very good position with a strategic relationship that you have seen get concluded at least with a couple of deals in the last quarter. We continue to enjoy this strong position and I believe we are very well-positioned to milk finally the ramp of the IoT market and turn it to revenue and growth and create value to our shareholders. Thank you very much and we can take now the questions. So, operator?

Thank you. [Operator Instructions] We'll take our first question today from Mike Walkey from Canaccord Genuity. Please go ahead.

Great. Thank you and congrats on the strong close to the year. Georges can you just give us maybe some color on a little bit of a change in kind of your go-to-market strategy? Can you update us on the microcontroller partnerships and the opportunities you see with those partners? And same question also on the distribution channel with Avnet and DigiKey and some others how are you targeting that market? And what can that do to drive new channels for you? Thank you.

Hi Mike in fact, as we said, the market we are seeing more and more big opportunity where we are focusing on. And here we are talking about really Tier 1 customers that they are coming kind of in the second phase. They are not really the early adopter in a technology like this. But now finally they realize that the network is there and everything is there and they are moving all this. And we are putting direct focus on taking this as a direct customer. However, on the other side, we see that a lot of new application of IoT which is very, very hard to predict in advance how big it will be each application. Here we reinforce our go-to-market to make it simpler to the company. As I mentioned, get the distributor with two major global distributor that we signed with them to distribute our product and create some of the end-to-end solution. Specifically, when you look to Avnet, for example, they were demoing at CES many, many end-to-end solution. So, that's really ideal for us because they integrate the Sequans technology with other technology around it and address some of those vertical market application that could be hard for Sequans to find them. But also the MCU which is since last year I spoke about it many times, I'm really dreaming about the 10 billion -- 10 billion microcontroller that they are sold per year. Each year we have 10 billion microcontroller. And if you ask me in general what's an IoT device? I can tell you it's a box that has an MCU inside. It has a microcontroller whether 8-bit, 16 bits, 32 bits; it doesn't matter. There is a small engine like this managing the sensors and the device. And a big percentage…

Great. Thanks. And my…

And maybe…

Sure, go ahead.

Yes Mike one last comment which is related. The Monarch Go the device that we -- Verizon announced this today, if you look to the -- it happened -- accidentally happening today. We didn't plan for this to have it on the earnings call. But the press release is getting out which is a device with Verizon. Again simplify the connectivity just only take a small black box, connect it -- drop it on a product -- existing product or new one, add the power on it and running. In one hour you have a connection to the network. We believe we have a big belief in this way to scale what I would call it IoT to the mass market. And these are the kind of channels that we invested a lot of energy in them during 2019. And hopefully we can start seeing the revenue result of this in 2020.

Make sense. And just my follow-up question just building on that with all the new products and customers in the channel, how should we think about product revenue into Q1? I know it’s usually seasonally weak but as some of the Cat 1 is starting to ship again does that grow sequentially and then build throughout the year? Just trying to get a little color on the mix into Q1 between product and other revenue? Thank you.

Yes. Indeed this is good remark. I mean we have as I said Cat 1 the inventory issue. We shipped almost 0 in Q4 and very, very little in Q3. And obviously this will recover -- start coming back in Q1. We should have half of the -- we were planning that we should ship half of a regular quarter if you want in Q1 which will improve the product. We are expecting as well some broadband to come back. Obviously all this and keep it under the element of the virus issue, we have something happening in the production that will be on the product oppositely if we face issues there. For the time being I feel positive on it. I'm not panicking. But obviously, we're observing because until China come back to work you cannot claim anything for this. But indeed we should see revenue growth quarter-to-quarter -- product revenue growth quarter-to-quarter.

Thank you.

Thank you. And we’ll now go to our next question today from Scott Searle from Roth Capital. Please go ahead.

Hey good morning, good afternoon. Thanks for taking my question. Georges and Deborah nice to see momentum building on multiple fronts across the board for Cat M and Cat 1. Maybe to follow-up quickly on Mike's question, just Georges to get a little bit more color on the timing as it relates to some of the Cat M opportunities, how quickly can Avnet ramp up and start to contribute to sales? Have you gone through training within their channel? Is the product really getting out there? And then as well on the MCU front to just follow-up a little bit. STMicro I believe last week were starting to talk about some of their cellular modules with IoT connectivity. It seems like some of this is starting to come to market. So they're already there. How quickly can some of these other guys ramp up? And I think in the past you talked about a pipeline of opportunity, understanding that the time lines are very difficult to project. But I was wondering if you could give us directionally some idea about how that has grown over the past quarter or so? And then I had a couple of follow-ups.

Hi Scott. On the timing with the distributor yes I mean we started some training. So things are online recently with Avnet. We did it before with RFPD and the team we organized as well as the company because we are not supporting. We never done this. This is really new for us. We had distribution, but it was just only fulfillment distribution in Asia. So now it's about lead generation and driving this. So we are in the beginning, I tend to say. But with the training and joint training meeting that we did and the product are open so we are expecting. By the way we have order to -- but as you know through a distributor you cannot take revenue before you see things coming out. So we are fulfilling the channel and moving forward with them. Hopefully we can start seeing traction from this revenue. Maybe for some products like Monarch Go, this can start in Q2. Obviously the Monarch-SiP we have design win already. So this is built in even in Q1 maybe there is some in Q2 as well. So on those products which are design win already in the past or easy to ramp they will be fast. Obviously for a new customer that will be capturing from scratch through Avnet or RFPD we need to give them the time I will say to ramp and this can take depending on what solution they are using, but if they go with the module version this can be six, nine months to ramp to revenue. But we have already design win that will go with them as I said on the Monarch-SiP and the Avnet Monarch Go, which could be fast time to revenue on cellular product. On the other angle, the MCU, we have -- the question is a little bit complicated because we have currently design win with ST. We have customers using ST product. And by the way we have others using NXP product. And obviously those are moving. So we could qualify them like the relationship that we built with the MCU help those design win last year. But I tend to say we are moving now. You're going to see from us more I would say higher speed if you want to generate lead. Because to generate lead you need to be -- to get an approach, which is the hardware is fully integrated in small tiny stuff with all the software and you can go through distributor even what I'll call them catalog distributors like DigiKey and Mouser that could create more leads for us. This piece of the ramp we should see it in the second half of the year.

Great. And maybe to just follow-up quickly on Cat 1 as well. It sounds like that business now has stabilized. You've got visibility to the inventory burn off in that core business coming back to a base level. But a lot of activity whether it's CBRS, it sounds like some new design wins potentially in consumer and wearables markets as well. Could you kind of give us your thought process in terms of how CBRS filters into the numbers? It sounds like it's going to be modules first as opposed to silicon. How maybe some of those larger opportunities shape up? And then as well the competitive landscape has really shifted with Intel selling their business to Apple. Competitively are they disappearing from the dialogue out there with some of your customers?

I mean, obviously -- let's start with the CBRS. The CBRS we have customer related they have designed specifically arrays and we did a small shipment for prior and so on, where those guys they are using chip. In other words Sequans not selling the module. But honestly when we start looking to this market and the demand, we realized that there is a real demand for low-cost module. For a module that the people can take it, plug it in and so on. That's why we decided to invest a little bit of energy to go from chip to module knowing that as well the ASP and the gross margin are all positive if you want because the competing solution of CBRS that you can find in the market module is very high end. You're talking about module at $80. Yes, some people may be looking for $80 module. But believe me with all the applications we're seeing on the CBRS there is more demand for something much more cost optimized let's say below $30 module $25 or so. So for this reason we build those module. We push them to the market. They are certified today and we get very, very quickly a dozen of customers attracted by those modules and some of them finished the product and they announced it and show it even at some show. So for us it's really -- we have really -- when I look to the CBRS players, I feel like we have more than 50% of them working with us. So it's really a nice market share. It's just a question when the market is going to ramp. And obviously this is related to what I said depending on the licensing of this -- authorize the CBRS band to go…

And lastly just a clarification Georges, on the 5G front, I think, historically, it was the expectation that it was going -- you're going to be more fixed wireless access focused. But I thought I heard in your opening remarks, a little bit more talk about mobility. Just was hoping you could clarify that. And if we're looking forward to a big show, in terms of Mobile World Congress announcement partnerships et cetera. Thanks.

Yeah. So I mean, on the 5G, obviously what I said, I said -- I talked about enhanced mobile broadband, because this is the definition of the high-end 5G. If I have to use the terminology of 3GPP, we call -- we talk about eMBB, which is really 5G chip exceeding, let's say, the few gigabit per second. Obviously, the first application of this is mobile phone. And for the time being we are not going to play there. But obviously the focus remain on fixed residential and industrial. That's what we are doing. And we believe the market -- this is the market we can address today. Now obviously we could imagine a new business model or other partnership relationship, to go beyond this market. But for now this is our main target. And for Mobile World -- for Barcelona in a couple of weeks, hopefully the show I mean with all these coronavirus, we're seeing a little bit of tension there, with people canceling and so on. But then I guess, for the time being, we are going to be there. And we will have obviously some show that we'll be doing with customers as well as some partnership. But I will keep it -- keep us apprised in a couple of weeks.

Great. Thank you.

Thank you. We'll now go to our next question today from Ari Shusterman from Needham & Company. Please go ahead.

Hey guys. This is Ari taking question for Raji Gill. So first I wanted to talk about gross margin. Yeah. So can you kind of talk about the puts and takes for that? And yeah, are you still aiming for the -- I know 45% is your long-term target, but you did 47%, this quarter its 45% your target or do you expect a higher gross margin moving forward?

Yeah. So this quarter we had higher gross margin -- mainly due to the higher percentage of service and licensing revenues coming in the quarter. But yes, we continue to maintain an objective of being about 45%, in gross margin over the course of 2020, and ultimately, improving that as the business moves to a more chip-based model and with less modules in the mix.

Got you and when, it comes to your strategic deals, can you provide some color on how you're progressing through them? Yeah, that would be very helpful.

So the deals are a combination of licensing and services. So -- actually the Q4 results reflected some of the upfront license part of the deals. And the rest will be recognized for the most part on percentage of completion, as we go over the course of the project. So as Georges mentioned, for the largest deal we had talked about it's ramping up over time. So we're expecting probably around $8 million to come in this year, and that increasing to about a $10 million run rate, for the 2021, 2022. Hello?

Thanks. Thank you. It appears that we have no further questions at this time, Mr. Karam. I'd like to turn the conference back to you for any additional or closing remarks.

Great, so thanks everybody for listening and the question, looking forward to meet you in -- maybe in the Roth Conference or other opportunities. Thank you very much. Operator?

Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.