Welcome to the Sequans Fourth Quarter 2020 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 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, or 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 expected seasonal revenue decline for the first quarter of 2021, long-term revenue goal, future results of operations and financial position, business strategy and plans, expectations for Massive IoT and Broadband and Critical IoT sales, the ability to continue to operate remotely as required at high levels of productivity, increasing backlog of orders, and the impact of the coronavirus on our manufacturing operations, supply chain and other customer demand, the impact of [indiscernible], shortages and our manufacturing capacity 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 and subject to change at any time. We undertake no obligation to update the information made in this release any event, facts, or sub consensus subjectively change after the date of this call. 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 rely on or 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 the 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 fourth quarter and full year 2020 results conference call. We hope everyone is remaining healthy. Our global organization continues to take the necessary steps according to local conditions to ensure the safety of all our people and we continue to function very well. As you have seen by our press release, we exceeded our revenue targets in Q4, even as demand related to portable routers had begun to return to pre-COVID levels, leading to full year revenue growth of 65% compared to 2019. This is a very good start toward our goal of an average of 50% annual growth for the 2020-2024 period. As we indicated during our investor event a month ago, we're expecting our served market to grow a little above 40% a year on average through 2025. We set our five-year target for an average annual growth above the expected market growth rate because we believe that we will be in a strong position to gain market share with our second generation Massive IoT products and later with our high-end 5G new radio Taurus platform. The remainder of our results for the fourth quarter and full year were in line with or better than our expectations, and we've strengthened our balance sheet as well. Deborah will give you all the specific financial details. I will focus here on the business aspects and share with you what we think is significant from this perspective, then highlight some key accomplishments and exciting new developments. In 2020 I am pleased to saw we grew in each major category. Massive IoT grew 8% with the impact of COVID on the automotive related business and the timing of…

Thank you, Georges and hello everyone. I would like to add some details about our Q4 and full year 2020 results and early developments. Our revenue for the full year was $50.9 million, an increase of 65% versus 2019, substantially exceeding our goal is over 50% year-over-year growth. Revenue increased in all categories in 2020, compared to 2019. Broadband IoT accounted for the 50% of total revenue in 2020, primarily due to the surge in demand related to portable routers. Both Cat 1 and Cat M revenue increased in 2020 and Massive IoT accounted for about 30% of total revenue. The vertical category, which includes service revenue generated by our major 5G strategic deal increased in 2020 compared to 2019 as well. Gross margin in 2020, increased to 46.1% from 40.1% in 2019. Product gross margin was 32.4%, compared to 23.9% in 2019, even with a high proportion of modules in the revenue mix. The increase in operating expenses occurred mainly in R&D, and resulted primarily from an increase in headcount and related recruiting fees. Financial expenses were higher than 2019 due to higher interest expense mainly the result of nearly a full year of interest on the convertible debt issued in 2019, the change in the fair value of the embedded derivative and convertible debt, which alone represented a non-cash loss of $13.1 million plus a less favorable foreign exchange rate, causing foreign exchange losses. As a result, our IFRS net loss, increased to $54.5 million or $1.94 per diluted ADS compared to $36.7 million or $1.54 per ADS in 2019. On a non-IFRS basis, our net loss for 2020 increased from $33 million, or $1.17 per ADS compared to $31. 6 million or $1.31 per ADS in 2019. Our non-IFRS net loss excludes non-cash items related to stock…

Thank you, Deborah. So to wrap up, I would like really to stress a key point, I mean a few key points here. The first one, which is really to keep in mind that we are really entering 2021 with very, very positive momentum and very confident about our future, and our ability to grow this company at 50% CAGR I will say for the coming five years period, at least. This is really based on two remarks there were, the two drivers of this growth is coming from one, which is Massive IoT is now ramping and as I said, we see very strong demand. The company of the company is very, very strong with the technology, from technology point of view, second generation of product on LTM and Cat 1 and strong acceptance by the market. Our design wins accelerating. And I don't know if you realized, but when we spoke in January, I spoke, I announced almost all what we had in hand already as a design win for Q4 and since then just in four weeks time had more five, six new deals that we landed in January period and I mentioned this in my, on the call previously. So all this to say the pipe of Massive IoT is building with marquee customers and in the diversified markets. You know, I mentioned at least five strong markets where we are strong there. All this really make the Massive IoT a major engine of growth for many years with a sticky business. And the other angle on which our assumption of growth is coming is really the driver of the 5G and our 5G position, our position in the 5G market is very unique. We are attracting many partners. And you see many of them are…

Thank you Sir. [Operator Instructions] We will now take our first question from Scott Searle from ROTH Capital. Please go ahead.

Hey, good morning, good afternoon. Thanks for taking my questions. Georges, Deborah, really nice job in a very difficult operating environment. And I hope you, your family, and your teams are doing well in the current COVID environment. Hey, Georges, just for a quick clarification to make sure I heard everything correctly, you're still looking for the 50% compound annual growth of the next five-year period, you've got comfort with the current existing Street expectations and the pipeline has grown from when you hosted the analyst event in early January. Is that correct?

Absolutely. Yes, hi Scott. All right.

Good. And quickly, just a clarification on the interest commentary, Deborah, did you say $1.3 million in interest average over the course of this year? I just want to make sure I heard that correctly. And on the vertical market deal, Georges, it sounds like you're very close, your confidence levels continue to increase, that is very close. Are there any numbers you'd put around it at this point in time? And then I had a couple of quick follow-ups.

On the interest, that's the expected interest in Q1 yes $1.3 million on a non-IFRS basis and that would obviously go down later in the year if rest of the convertible debt is converted.

Perfect.

And on the vertical question, yes indeed, the satellite deal we are -- we remain very bullish and I could say things are accelerating every day and we feel like 99.9% deal done. Obviously, nothing is done before official award, so we're waiting for official award. And amount of this project remains, as I said, it's a project where it has a service component that will go over almost two years, with more than $12 million, with some upfront, obviously strong upfront and every quarter we'll have some cash and if you look to the cash, but revenue wise, we'll be recognizing this over around two years. And in addition, after those two years, we enter into the production phase, we'll have product revenue for almost 10 years, after this that could go up to $1 million per year. So it's a big deal.

Great, perfect. 99.9% percentage is a nice one. Hey, Georges, looking back to the Massive IoT pipeline then in later in this year, it sounds like you're seeing demand kind of across the board from a product standpoint, right? It sounds like Monarch 1 is ramping up, you're seeing a recovery in Cat 1, but also Monarch 2 has had a lot of design traction. I was wondering if you could kind of provide a little bit more color on that front, particularly around Monarch 2? It sounds like that's a game changing next generation leap forward for you guys ahead of the competition. So what are you seeing in terms of the design opportunity there? When that starts to contribute? And lastly, just to throw in as well, CBRS it sounds like the tone and the outlook from an industry standpoint continues to improve pretty dramatically. You've talked about a million per quarter over the course of this year. I was wondering if you're starting to see that creep up now in terms of the orders that are starting to filter in? Thanks.

Yes, I mean, on the Massive IoT, absolutely. What we are seeing is really strong demand on existing platforms. So I mean, somehow the ramp is happening. We waited very, very long to see, to start feeling this and it's happening. I don't know if it was the COVID was delaying this a little bit last year and finally, post-COVID even if we cannot talk about post-COVID but let's say the new normal, but we're seeing demand. But the good news there as well is, what you mentioned, our Monarch 2 platform is getting very, very strong reception in the market. If you remember, we spoke like in Q4, about more than dozen of projects engaged with this and if you look to those projects, 90% of them are design wins today and we have a new project engagement. So I have two feelings if you want, on one side, I'm feeling like the customer making decision quicker and moving to their project faster, which is if I compare it to last year, I don't know if them moving faster or just only because we have a greater product and they jump on it quicker, but the two are contributing to make things to move faster. And in terms of timeline of the revenue for this, obviously, some of them will remain longer run, which is more revenue next year, all those big projects, they tend to take more than 12 months to get the product ready, because big customers, big company and they want to go through all the qualification process. However, we have some of them generating revenue already. We mentioned that we have order already for shipments in Q2 on Monarch 2. So Monarch 2 will be shipping to one customer at least in Q2, and others will follow in Q3, Q4. So we'll see revenue from Monarch 2 this year definitely, in addition, obviously to the Monarch 1. And on CBRS, really the traction and demand remained the same. I could not give more. I cannot say more than, we mentioned a $1 million per quarter. I have the feeling that this, we could have some upside there. Give me one more quarter, I will say more about it if really it’s in hand or not. But for the time being, I would like to stay a little bit conservative, saying it's developing and developing great and we're seeing a lot of opportunity every day. By the way it's developing with the new demand, but I need a little bit more time to see if this will convert to the size. The order of magnitude of customer will be the same.

Great, thanks so much. Nice quarter.

Thanks, Scott.

Thanks, Scott.

We will now take our next question from Mike Walkley from Canaccord Genuity. Please go ahead.

Great, thanks for taking my question. And great quarter and hope everybody's healthy also. Just want to touch a little bit, you shared so much good detail on all the design wins, just on the short term, I guess Georges and Deborah, given the well known supply constraints in the industry, did it impact at all your shipments in Q4? And how much do you think it could impact maybe your first half of the year? Sounds like it would just be a slippage, but any thoughts on the supply constraints impact in the intermediate term?

Hi, Mike. I mean, in Q4 we had some impact already integrated somehow. So I could not say that we had real surprises in Q4 from supply, I mean point of view, they were integrated if you want. If you remember we had a lot of demand on the COVID and we factored this in and we were fine. However, for -- we start seeing this really for all the order of Q1 really starting end of December, and it was more for Q1 timeframe. And we are seeing two angles, on one side TSMC obviously everyone knows that they are really receiving more than 25% of the capacity. We have our allocation. So I'm not nervous in a sense, like saying, okay, that's - TSMC played the partnership very well, they are very long partner with Sequans. And I have my allocation if you want there. Obviously, it's an allocation that I don't like. I would like to have more and more flexibility and so on, but I'm working this daily and every month with them to get my capacity. But what we had on top of this and then that's the old set, all the substrate, the PCB, you have a lot of factory as you heard they get under fire and created another stress in the market other than the extra demand or the reduction of CapEx that we saw last year now impacting the industry. So all this to say is very complicated situation, because not only one angle, one component, many, many components really impacting the module level, not the chip. We had some impact on the chip, but we have as well an impact on the module and we have a lot of demand. Very honestly, even we went to our customer by saying you need to place order for the full year to get -- so Sequans can secure. So we entered into a [indiscernible] with our customer and one-by-one securing as well a location for them in the year, which gives us on the other side more visibility if you want and it's nice to have. But on the other, we're still struggling with the capacity. So if you tell me now, how much this will impact first half or I believe that hopefully in Q3 this will be will have less problem and it's going to be a problem indeed in the first half of the year. I didn't look yet for Q2, but if I focus on Q1, I'm having constraints where I'm working around $2 million maybe $2.5 million if you want to what I consider on challenge. Does it mean that we will not be able to serve it, but like in revenue, I have booking if you want, I have $2.5 million that I'm working on to see how to minimize the impact on this.

Okay, that's last one, just my follow up question, I'll pass the line, just on the 5G development, you talk about…

And also, just to say we're working as well, we're working sometimes with customer to give them other flavor of products. So it's not only capacity, but I give you the example of Cat 1, for example, Cat 1 we have many operators, so we could be better on one line versus the other one for whatever reason, and we are working as well as with some customers to change order, so they can still get what they need despite the shortage. So that's why it's a little bit complex answer, if you want to address.

Okay, good, thanks. And just a follow up question I'll pass the line just on your 5G development, given how important that is, for the 50% CAGR over this next several years, can you just share with us the milestones you've hit to date that you've highlighted in your script the key milestones and anything you should look out for in 2021 in terms of key milestones, just to track the progress?

So, I mean, to share a little bit, obviously when we entered into this strategic deal, we entered into with a blank sheet of paper at the beginning. So you could imagine, the first year has a lot of milestones, which is confirming that Sequans is able to scale and get this product up and running. So obviously, today we're approaching the design is very advanced, and we are approaching the milestone of tap out, so tap out will be this year. So when you look to the detail to reach tap out is obviously all the specification or the readiness and so on. So these were the milestones where our partner was looking to check if we are really progressing on time if you want. But, in general is all the development reach tap out towards the end of this year as we planned and we are on track for it. And for 2021, we don't expect if you want risky milestone. If the question, in 2020 we had more risky milestone than in 2021. In a sense, milestone you need to hit at the beginning of the project, otherwise the relationship could be challenged. But now we're entering this, obviously we need to continue executing and if we execute, we can recognize the revenue within few percent versus our target. We know what -- how much we are going to do on this need this year.

Great, thanks for taking my questions and best wishes for success with the big pipeline this year.

Thank you.

Thank you.

Operator?

We will now take our next question from Craig Ellis from B. Riley Securities. Please go ahead.

Hey, congratulations on the momentum and funnel and the momentum with various partners as you start the year. Georges, I wanted to start just by getting some insight on Monarch 2 and Calliope 2, because it sounds like the customer interest in both of those products is very strong. The question is this, how do you envision the ramp of those products kind of picking up as we exit 2021 and move into 2022? And Deborah, is there a meaningful gross margin differential between Monarch 1 and 2 and Calliope 1 and 2 that we would want to be aware of?

Well, I mean, hi Craig. In terms of ramp of revenue, obviously Monarch 2 as I mentioned, will start this year and has started. I could say that even in Q1 we shipped some like two I mean, obviously small quantity, in 1000s. But at the beginning for initial projects they are launching will accelerate little bit to the Q2 because they know that we have one project will be moving and we have a lot of pressure to supply the demand there. And in Q3/Q4 we will have more than one projects coming. And as you saw as well, even Gemalto will be adopting Monarch 2, so we could have more demand. So, we should, I believe we should exit on Monarch 2 this year, where almost all the new design becomes Monarch 2 and Monarch 1 will be just only on the older product if you want. It will be like phasing out, not from revenue because you could have still customers going with Monarch 1 for a while, but all new designs will be all going with Monarch 2. That's how we are seeing today, because it's a great product and optimized and so on. Calliope 2, we'll get the product to market in Q2 and sampling in Q2 and we have existing customers waiting for it. So even we have one customer want to have a launch in Q4, I don't know very honestly if we'll be ready with the customer to launch in Q4, otherwise it will be Q1. But any high level, I don't believe Calliope 2 will generate revenue this year, but will start ramping next year in terms of revenue. So for this year, if you want in other words will be, Calliope 2 will, in 2022 will be like Monarch 1 this year if you want and we'll start ramping from there. And all this obviously continue to add up on the existing platform of Calliope 1 as one, that's how it is.

And in terms of margin, we're expecting similar margins on both chipsets.

We will now take our next question from Tristan Gerra from Baird. Please go ahead.

Hi, good afternoon. Just looking back at the commentary about supply shortages, is there the potential for wafer price increases later this year that could have some impact on your gross margin?

Hi Tristan, you should not say this loud. I mean, so far I'm not expecting this, at least with my contracts with TSMC, I'm not expecting this, to be to be honest, from the at least the wafers pricing, I don't know if TSMC. In the past, I had similar phases, similar situation with TSMC and I didn't see an increase. So this is what I'm hoping. But your question still valid for other stuff, like when you go on the module, when you go on other components like the substrate and so on, when you start having very long lead time, if you want to accelerate lead time for a period of time, for a short period just to get to serve. We could have, some money to pay a little bit more to get some hot run to some acceleration and secure our customers and could impact a little bit the gross margin, but we're not expecting major impact. It will be in the noise. That's at least from today feeling.

We will now take our last question from Rajvi Gill from Needham & Company.

Yes, thanks and congrats on good momentum. Georges just talking about the CBRS opportunity for you, I was wondering if you could talk a little bit about what are some of the end markets that you expect to kind of move to this technology? And secondly, how do you think about your modules? I know you're -- you've been talking about that, your modules are based on Cat 4 LTR [ph] technology, you've been developing that for a decade. Wondering how you are positioning your technology to kind of benefit from the strength?

Hi Rajvi. While you're on the obviously from on the CBRS, you have in general three ways where you can see CBRS people talk about CBRS and it gets a little bit, big picture. The first one which is, I don't believe it's a new business, is like Verizon getting the CBRS bandwidth and just on the extra batteries for Verizon. The business of Verizon remains, the market of Verizon is the same, but those guys obviously they use CBRS to offload their capacity they have on the regular network when CBRS is available. So having the CBRS with Verizon is like a nice feature that can help you win a design win, but it's not like a new market, not at all a new market for us or for anyone. The other markets where really there is a new market, you go to the second category, which is the cable operator like big guys, where they have access technology. They provide MVNO typically wireless as MVNO, now having CBRS allows them to expand more their access last mile over wireless in a cheap way by using their own network, when they develop it. Now those networks are developing. They are not there yet, when you talk to Charter and Comcast and so on. I don't have the good feeling about the timing to get those available, even if they spend a lot of money to acquire the CBRS, but this is definitely a new market. The third one which is we are seeing really development now, is what we call the private network, which is essentially really beyond -- private network independent of the carriers to provide last mile access. We saw a lot of activity in the schools, where the schools, they put a small access point in…

That concludes today's question-and-answer session. I'd now like to turn the conference back to the management team for any closing or additional remarks.

Thank you all for all the questions and for listening for the time and looking to see you in the near future, hopefully face-to-face maybe. It will happen in three, six months with all those vaccines. Thank you very much guys, and thanks operator for handling the call.

This concludes today's call. Thank you for your participation. You may now disconnect.