Welcome to the Sequans Second Quarter 2020 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 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 expected revenue for the third quarter and the fourth quarter of 2020, future results of operations and financial positions, business strategy and plans, expectations for Massive IoT and Broadband and Critical IoT sales, the ability to continue to operate remotely as recorded at high levels of productivity, increasing backlog of orders, the impact of the coronavirus on our manufacturing operations, 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 risk and uncertainties are 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. Thank you. Please, go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen. This is Georges speaking. I am with Deborah Choate, our Chief Financial Officer. Welcome to our second quarter results conference call. We have added a number of new shareholders since our last call, and we expect that some are listening to this call. So we'd like to welcome you and say that we appreciate your interest and investment in Sequans. In the press release, I characterized Q2 as a pivotal quarter for us. It was indeed and I'd like to recap some of our most important achievements. Q2 revenue increased nicely both sequentially and year-over-year in all three of our businesses. We significantly reduced our operating loss, and we raised $32.6 million in equity capital to strengthen our balance sheet. Other major accomplishments that are not apparent from looking at the financial statements include the following: We met important technical and business milestones related to our large strategic partnership for 5G. In fact, we are running slightly ahead of schedule and are seeing growing interest from an expanding list of potential customers. We secured important new design wins and projects in each of our businesses. One of them is a major long cycle industrial platform win in our Massive IoT business. It can scale up to many projects that will ship over many years with this same marquee customer, and it has the potential to generate up to $100 million in total revenue. We continued engaging with almost no impact from COVID-19 restrictions, with many new prospective deals, most of them with Tier 1 customers, again covering all three business segments. We strengthened and expanded our partnerships with multiple distributors and microcontroller vendors, reinforcing the go-to-market strategy to scale our Massive IoT business I have described on our previous calls. And we…

Thank you, Georges, and hello everyone. I’d like to add some details about our Q2 results and other developments. Our Q2 revenue was $12.2 million, a sequential increase of 39.4% from the first quarter, primarily driven by 59% increase in products revenue reflecting the surge in demand for modules for portable routers, but also increases in product sales from Massive IoT. Revenue in Q2 increased 54.6% compared to the same quarter a year ago. We continue to expect further sequential growth in the final two quarters of the year and we are on track to meet our goal of at least 50% topline growth for 2020. We had three greater than 10% customers in the second quarter, one is an OEM and two are ODMs. And our grow margin in Q2 was 48.3% compared to 51.3% in the first quarter and compared to 37.7% in the second quarter of 2019. The Q2 2020 gross margin reflects a greater proportion of modules in the product mix than in Q1 and a lower proportion of service revenue. Operating expenses were $11.5 million in Q2 down from the $12.3 million in Q1 primarily due to fewer trade shows and less travel as well as the one-time charges in Q1 related to bringing onboard a new 5G development team in Israel. Non-IFRS operating expenses were $10.8 million, down from $11.6 million in Q1. Our second quarter operating loss was $5.6 million compared to an operating loss of $7.8 million in the first quarter and a $6.9 million loss in the second quarter of 2019. Our net loss in Q2 was $19 million or $0.70 per diluted ADS and included a non-cash $9.1 million loss of revaluation of the embedded derivative arising from the March 2020 amendment to our convertible debt agreements. This compares to…

Thank you, Deborah. So again, to conclude a few words. As I said, it was Q2 was a great quarter on all fronts, including the balance sheet aspect and we believe that 2020 is going to be a strong year. Our three businesses are doing very well. Extra demand for broadband, but also ramp of new customers and new market segments. Acceleration of Massive IoT is happening and vertical deals continue to build. Also, strategic partnership continues to develop, thanks to our leadership position as unique provider of comprehensive 5G, 4G connectivity solutions focused on the IoT market. So all signs are positive, and we feel very good about our future. Thanks for listening. We'll turn the call now to questions. Operator?

Thank you. [Operator Instructions] We will now take our first question from Craig Ellis of B. Riley FBR. Please go ahead.

Yes, thanks for taking the question, and congratulations on all the accomplishments in the quarter. Georges, I wanted to start just with a clarification on the supply side dimension that there were some supply issues impacting the Verizon Jetpack business and Massive IoT business. How do you see that supply issue progressing as we go through the third quarter? Is that something that's resolved now and you feel like you're getting sufficient supply for both of those businesses or is the supply sufficiency something that occurs later in the quarter, and if so, when would you expect that?

Hi, Craig. Indeed, you know, it's getting better. I don't want to say there is no issue because the lead time remains long, and obviously those demands, related to the COVID are very hard to predict, so you're getting always, because no one knows when this crisis will end and people are a little bit cautious. So they are - they plan something and suddenly they need much more, and obviously we plan on our side all this. So, in a nutshell, July was still tough, but I see August doing well. We're catching up, and I believe hopefully with all the anticipation we did for the rest of the year, we should be fine, but we remain a little bit on the edge there make - staying cautious as anything can happen in the last minute on the supply.

Yes, that makes sense, and then turning to the Critical IoT business, so nice to see some of those emerging markets design wins starting to come in and ramp in the back half of the year. If you looked at calendar ’21, how do you see Critical IoT geographic mix dynamics playing out? Is a lot of the growth coming out of the emerging markets versus the U.S. market? And Deborah, given the geographic mix dynamic, is there anything to note on the gross margin side?

Just correct for, maybe when you refer to Critical IOT, what you are referring is this what you meant, Critical or you're talking about the Broadband IoT as the reference?

Yes, Broadband Georges. Thank you.

Yes, Broadband so, okay I mean, just for the terminology, because Broadband and Critical IoT the 5G had this Critical because this is the latency, the low latency with opening new applications, but on the - indeed, I mean the emerging market, I mean is moving well as I said, because we added some customers last year, and those guys are moving through production, and I'm quite happy to see this ramp accelerating even in Q3. So, hopefully this would continue. And obviously when you refer to CBRS and the gen tech and all this is outside of the emerging. So, the mix there is always impact a little bit on the gross margin when you sell in the emerging market, but overall…

Yes, I'd say that it's more where we sell and is not so much of an impact or a factor on the selling price. It's more really related to volume and the end application. So, I'm not expecting any significant impact on gross margin based on where we're selling to.

Got it. And then lastly, before I hop back in the queue, turning to the Massive IoT business, while you made some points on your distribution and MCU partnerships, Georges, can you just help us understand the visibility you're getting into the demand creation, design win funnels with those two sets of partners, distribution, MCU, and what should we expect from a messaging and just a quantification standpoint with respect to those opportunities as we look at the back half of the year and more significantly calendar ‘21? Thank you.

Yes, I mean, Craig, it's - I can't talk this about Q2 because we had a first full clear quarter of all those engagements that are developing. I will start with the solution and the reality, the pipe was never as big as we saw it in the past. You know, in other words, this was really very, very helpful for lead generation and bringing Tier 1 account to us. So, I don’t know if the market was – there is obviously the development in the market at the same time, but the go-to-market, I'm 100% sure has a very positive impact. It's still early to talk about revenue impact for next year. And I'll say specifically on this, even if we see the trend, we see the pipe bigger, we see bigger deals that are negotiating, and obviously this would fuel our revenue in Massive IoT next year. On the MCU partner, this is really another angle, which has obviously helped the go-to-market, mainly the dark pipe, already we're seeing some traction there and more will come I would say in the second half of this year. I mean, we're seeing more customer buying if you want the EVK, the tools to block projects and so on. And again, this should help us significantly next year. I'm very positive about it, but still too early if you want to quantify, I will say to tell you, look, I mean, this was the portion of direct business, and this is the percentage of indirect business or through partners. But all is very, very positive, and I'm very excited about and this should fuel the growth next year.

Got it. Thank you.

And we will now take our next question from Mike Walkley of Canaccord. Please go ahead.

Great, thank you. Just a follow up question on the growth sequentially the 10% plus growth, is it equally weighted across all businesses or more broadband, can you just give us maybe some color of the sequential growth? And going back to the supply chain question, how much do you think was not able to ship in Q2 in terms of revenue because of the supply issue that looks like it might get rectified throughout the third quarter? Thank you.

Well, on the 10% I will not say equally in a sense because, you know, we have all this, the vertical and strategic project, as you know, it's revenue recognition. So sometimes you can vary from quarter-to-quarter because this is percentage of completion and depending on what we are doing in a quarter, we could be taking $0.5 million more or less, even if we have new deals adding up. But very honestly, if I have to look to Q3, if I have in mind, we are not expecting growth quarter-to-quarter on the vertical and strategic. So all this growth will be coming from the two line product line, Broadband and Massive IoT, and the two will be growing quarter-to-quarter and our plan at least in the short term we're seeing. And regarding the supply chain, I could say that we could do - I mean, it's very hard because the older one would receive order from the beginning. We didn't think we’ll do everything in Q2. We're thinking that we'll do something, the piece in Q2, and the piece in Q3 from the beginning. So it is not all what you have in the backlog was planned for Q2 just because we know that it will be impossible for us to solve it. However, we are planning maybe to do in terms of supply, we could, in fact, I'll give you really the number in mind. I have it on the plan. It was somewhere 700 K, 800 K that we could do more if the supply was in line of what we were hoping.

Okay, now that's helpful and congrats on the stronger balance sheet. Deborah, how does this cash now that you guys up in terms of your growing forecast towards breakeven? And then for the France and Israel funding, you know, what could those amounts look like if they come through later this year?

Sure. So with all of the fundraising we did in Q2, we feel that we are set to take the company to cash flow breakeven, and the additional funding that's still in process from the French Government, we're expecting maybe about $6 million, which would be a portion this year and a portion next year. And the Israeli is probably the financing is probably more around 400,000 per quarter.

Okay, thank you guys. That it from me, congrats.

Thanks.

And we'll now take our next question from Tristan Gerra of Baird. Please go ahead.

Hi, good afternoon. Just a quick follow-up from the prior question and trying to look at the timing of the EPS breakeven and how should we look at your cost structure next year? I know you're not guiding for next year, but just trying to kind of model where we could get to the timing of that EPS breakeven looking at the OpEx?

Yes, I think our expectation is that this year that we have 5G team fully ramped, and then the - and also engineers moving from sort of lazy to 5G. So we're not expecting to have to continue to increase headcount and costs that significantly next year. So, as we bring on more projects, there might be a bit more support to be done, but so I'm not expecting a significant increase in OpEx for 2021.

Okay, great. And then could you expand a little bit on the CBRS that you've mentioned as a significant growth opportunity next year, and that you've talked about some telecom operators and cable companies and utilities, could you help us just on what is the current shaded about you know, that's a specific frequency what it says to - your product offering right now and basically what are some of the key applications maybe a little bit in more detail?

Yes, Tristan, as you know the best way to look about, we have two kind of big applications for CBRS, whether it's used by the main Telco as an offload, in other words, you have the regular business of the big operators, if they get the frequency. So because they have some frequency band available in some regions, if they are saturated with their on spectrum, they can offload their users on this. And for this, it will not be in my opinion a new business for us in the sense like it is the regular business that you have with the operator and okay you have one more frequency band to support and the device versus not having the CBRS onsite. However, we have completely new application, which is you can qualify them like private 4G or whatever in the future 5G networks, which is essentially the new operator, called them operator even if at the end of the day, maybe they are not telecom operators, but new service provider or developing a network to serve campus application, to serve cities, to serve utility, to serve factory, and this is like, is super Wi-Fi if you want to, those are quality of service, because the WiFi has its challenge when it's at larger scale and volume, because you start getting - losing the quality of service, while 4G, 5G can get digital quality of service. And now we have a frequency band that looks like, which is a semi license, but it looks like unlicensed frequency band because you can build your network without really paying a lot of money for the spectrum and use it to run an operation locally. So this is really the new market for us. It's very hard very honestly to - I don't have real numbers of the market size because it's very, very complicated. All the study I have seen - it's very hard for them to estimate the number of units you can get there. But if we sense the traction we have from the customers, because we have dozen of customers, I mentioned that even during the quarter, we added a couple of guys. All this let us feel like there is demand. We already shipped some, but lower level, but obviously now when the auction will be finished and the people can start moving, we should see acceleration of this market. And our estimation that we could do it a few million that are maybe more incremental revenue next year coming only from this market in the U.S.

Great, that's useful. And then the next question, now that we're getting very close to actually calm and not being able to get supply from TSMC, does that change at all your outlook about China? I know you have been - you have not considered China as a market where you can have meaningful participation in the past, does that change or maybe it doesn't, but there are potential opportunities arising from the current dynamics?

All those dynamics really that are coming are positive to the company. It's very, very hard to say, you know, how big it is and sound today because it's very hard to - we didn't measure it yet, but definitely from traction all this is positive, Sequans being obviously that the - it's breaking the monopoly [ph] in the western world having the 4G, 5G technologies that are attracting a lot of partners. We're seeing as well, some traction with some people that they want to avoid using as well, American components, not to say it like this, and having France, having Sequans, the French company and we have some people coming to our ship because we are not American. So and that ours is very hard to say, to quantify it and say, how much would we benefit from this inside China are more interested in the impact of our business in the U.S. and Europe than the reverse, but maybe the reverse could be as well as positive. If we're getting something more in China it could be positive because if people, if the tension continues and they want to avoid, they want to have Europeans technology, we can be well place to sell this technology as well.

Okay, thank you very much.

Okay, thank you, Tristan.

And we will now take our next question from Scott Searle of ROTH Capital. Please go ahead.

Good morning. Good afternoon. Thanks for taking my questions. Guys a really nice job in a very difficult operating environment. First a quick clarification, I just want to make sure I heard this correctly. Broadband revenues doubled sequentially from the first quarter and the second quarter and Georges, as it relates to incremental MCU partners, it sounds like you're optimistic that you're going to sign an additional Tier 1 by year-end. Did I hear that correctly?

Yup. I mean, Scott, I mean that the two I can - your understanding in Broadband, yes indeed doubled and the MCU partner. I mean, very honestly I still believe in my vision. All the apps your partner there, they have interest in Sequans and I see Sequans becoming their center of technology for the MCU partner. Obviously all of them will not eat on displays and display it – but the way I see the traction, the message when I discuss with those partners, rings a bell to them and it is very positive. You know the name that we made them public, and others we have discussion with them and when it becomes more serious, we'll make them public as well. And we hope that something will close as well in the coming six months. Yes, indeed.

Very good. And then looking at the fourth quarter, you're looking for sequential increase from the third quarter, which is up 10%. It seems like there are a lot of factors that are starting to contribute to some of that upside as well. If I heard correctly, you start to see some contribution from emerging market, broadband kicking in, in the fourth quarter, CBRS should be ramping, Monarch Go. And we start to see MCU partner contribution that early as well? Are all four of those new elements going to be contributors by the time we get to the fourth quarter?

Well, indeed everything is going to the right direction and we believe all the business will contribute in Q4. Now on the MCU, you know, I don't qualify it as dollar amount in Q4. It will be too early in dollar amount because even you know shipping thousands of EVK left and right and getting design wins can generate some revenue, but it will be really not measured. However, the flow of design win will be important, thanks to the MCU partner for Q4.

Okay, and real quickly NB IoT we haven't talked a lot about lately, but Monarch can partner what's available, what's the level of interest, does that really start to ramp up in 2021?

Very honestly there is interest, but we're seeing a little bit the world, as you know, in the U.S. they have IoT, but the people, they didn't make clear differentiation between Cat M and NB. And as a conclusion of this, people prefer to go – I am talking differentiation in terms of pricing of the data plan if you want. So as such, we see really in the U.S. still Cat M oriented. Europe we some couple of operator motivated by NB IoT because some of them they deploy only NB IoT, namely, for example, Vodafone. So we see some interest there and obviously we're not playing in China. In Japan they backed off a little bit on NB IoT. For example, DoCoMo, they stopped their NB IoT plan saying we will maintain only Cat M. There is some noise on some bankers on that they will do the same. So all this if you want to give you the global, if you, which excluded China, we are feeling Cat M becoming the dominant. Maybe with some still use case for NB IoT. So obviously we are not giving up on NB IoT. We have a solution on NB IoT which we are promoting, but we are more seeing design win and the promotion and so on, on Cat M. And for us there is no negative impact of all this, because as you know, we have the Cat M, we have the NB IoT, we can offer the dual more the platform or single mode platform for NB IoT. So this has no impact. It is just for us to adjust therefore and the resources versus the priority of the demands of the market.

Got you. And lastly, if I could on the 5G front, it seems like there continues to be a tremendous amount of interest, tremendous amount of dialogue in terms of what you're doing from the Taurus standpoint and you're tracking expectations from the development standpoint. Could you just clarify the number of strategic discussions that you have ongoing and it sounds like you're very close on one? And then also, but in a world of limited 5G availability and resources, you've got Qualcomm, you've got MediaTek, and then basically you've got, so beyond scarcity, why are so many potential partners coming to work with you? What are you guys doing that's differentiated that continues to put them on the radar screen and the ability to close these deals? Thanks and nice quarter.

Yes, Scott, I mean on the 5G, we're really, we are seeing amazing interaction. You know, I mean, it's very hard to quantify who is strategic, who is not, but we're getting, I would say from deep pocket guys where they have really strategic interests and so on to regular customers really looking to get our solution in hand as soon as possible. So obviously, people aren't looking for us for a little bit of the technology. The price point we are targeting on this technology and cost optimization if you wanted the solution. The optimization of the solution for [indiscernible]. All this is really creating the traction. I could say today, you know, we have couple of them. I could qualify them strategic and it says they are deep pockets and we would have decent amount of money and one of them is in advanced stage of negotiation. But you have others, you know, maybe just only they - I don't see them really coming with big check now, but they will be coming to engage with Sequans as well for customer and for partner, and we put some money as well on the table to be sure they can get to be into the - between the first access to this technology.

Thank you. And that concludes the Q&A session. I'd like to turn the call back to you for any additional or closing remarks.

Okay, so thank you very much for listening and all the questions, looking forward to talk with you on other occasions. Thank you very much and thanks operator.

Thank you. That will conclude the call. Thank you all for your participation. You may now disconnect.