Sequans Communications S.A. (SQNS) Q3 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to Sequans Communications S.A. Third Quarter 2022 Financial Results Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kim Rogers of Investor Relations. Please go ahead.

Thank you, Vikram and thank you to everyone participating in today’s call. Joining me on the call today from Sequans Communications are Georges Karam, Chairman and Chief Executive Officer; and Deborah Choate, Chief Financial Officer. Before turning the call over to Georges, I'd like to remind our participants of the following important information on behalf of Sequans. Sequans issued the earnings press release this morning, which was posted to the company’s website at www.sequans.com under the Newsroom section. Before we start, I would like to remind everyone that this conference 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 contained in this call, including any statements regarding future results of operations and financial positions, business strategy and plans, expectations for future sale, the impact of the COVID-19 on our supply chain and on our customer demand, the impact of component shortages and manufacturing capacity, our ability to convert our pipeline to revenue 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, subject to risk and uncertainties, and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time-to-time. Given these risks and uncertainties, you should not 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 factors that could affect our business and financial results are located in our public filings made with the Securities and Exchange Commission. And now I’d like to hand the call over to Georges Karam. Please go ahead, Georges.

Thank you, Kim. Good morning everybody. Welcome to our third quarter 2022 financial results conference call. Before we jump into my comments, there are several highlights I want to emphasize. First, we had a great quarter from the consolidated revenue and profitability perspective. Number two is that the new 5G strategic deal is going very well. Number three, our pipeline for Massive IoT products continue to grow and we are landing design wins with the new and existing customers. Number four is that Cat 1 Calliope 2 is off to a great start, and future looks bright. And last but not least, our MCU partnerships are doing very well, particularly Renesas, who's introducing Sequans to the largest brands in the space. Let's start with a quick look at the third quarter results. Third quarter revenue rose by 39% year-over-year and 16% sequentially, reflecting the significant increase in our licensing and services revenue, which included revenue from our new 5G strategic partner for the AIP delivered in the quarter. A growth from licensing revenue in the quarter lifted our gross margin to 77.6% and turned the company to non-IFRS profitability of $0.01 per ADS on a fully diluted basis. The higher licensing revenue offsets the lower product revenue in the quarter. But as we said last quarter, we expected our product revenue to be impacted by ongoing macroeconomic factors. Specifically, the lockdowns related to the China's zero COVID policy, and other supply chain challenges have hampered our customers' ability to ship or launch products on time. In a moment, I will discuss why the delay in our product shipment will not impact our growth potential. Turning to an update on our new 5G strategic partnership. As expected, we receive the first payment of $13.5 million in October net of withholding tax. In the third quarter revenue, we recognize a significant portion of this first payment milestone as revenue for the IP we delivered in September. This caused our licensing and services revenue this quarter to be higher than normal. In the following two quarters, revenue recognition from this deal will be lower, but remains significant. In the future, the licensing revenue will continue at a rate for the remainder of the agreement. Our team and I are closing engaged with our partner and I'm happy to say that the partnership is very solid with a potential for further engagement. By the way, there has been a lot of press recently regarding the expansion of U.S. restrictions on chip exports to China. As a sense today, based on discussions with our advisors and the scope of our deal, we do not anticipate our future revenue stream from this partnership being impacted by the new export control rules. Now, let's discuss our Massive IoT business. Almost all of our products shipped in the third quarter were related to the Massive IoT business, which was impacted by the macro factors I mentioned earlier. The Cat-M product family was particularly affected as it represents most of our design win projects, ramping to mass production. Obviously, would like things to be happening faster, but most of the elements regarding the timing of product shipments are beyond our control. In the metering segment, for example, where we have over a dozen design win projects, most of the launch dates have shifted to 2023. In other applications, we had several big products that move to production and started shipping in the first half of 2022 only to decelerate because of the manufacturing disruptions. We anticipate that once the roadblock are removed, we'll see the ramp resume in 2023 with expected growth over the next three, five years at least. Looking at the trends year-to-date, we can see that Cat-M remains our strongest product category, driven by the success of second generation Monarch products. And year-to-date, Cat-M grown 62% despite the delays. Largely the Cat 1 business category is performing in line with our expectations as we are shipping to variety of established projects in the U.S., and Japan, one of which is for metering products. The Cat 1 revenue was down this quarter, but this was related to the timing of some shipments and is expected to return to normal in the fourth quarter. We anticipate this product family returning to grow in the second half of 2023 once we start shipping Calliope 2, our next generation of Cat 1, enabling a significant product cost reduction with lower power and many other advanced features. Sequans is uniquely positioned in the Cat 1 category as the only non-Chinese company that has invested in a next-generation product. With the many Massive IoT applications requiring Cat 1 speed and performance, we believe our Cat 1 addressable market, which excludes China, will be well above $400 million by 2025. Based on the size and scope of the design wins I will discuss in the moment, we anticipate strong performance from Cat 1 in 2024 and beyond where we expect to capture a significant market share. Let's now update you on the growth potential of our pipeline and why we are so optimistic about our future. Our pipeline, representing an expected product revenue contribution over the first three years of each design life, continues to grow and this has accelerated with something of Calliope 2. We now have a pipeline of design wins and advanced design ins close to $700 million, almost half of it is secured design wins. I remind you that our pipeline does not include services and licensing revenue. Expansion of design wins reinforces our confidence and our outlook. The vast majority of the design wins are for Massive IoT applications with the Cat M Monarch 2 Platform and we added more this quarter. A strong reception of the new generation Cat 1 Calliope 2 allowed us to secure our first two significant design wins, representing over $30 million of three-year aggregate revenue. Currently, we are working on about seven additional big Calliope 2 opportunities that could add over $100 million aggregate to our Cat 1 revenue pipeline. That means in the upcoming two quarters, we could see an acceleration in Calliope 2 design wins, adding a new growth lever to our Massive IoT business. Of our key Massive IoT vertical markets, metering remains our strongest segment for design wins followed by asset tracking, smart home, ehealth, and a few other industrial applications We are confident we'll increase our market share in these growing markets. We are successfully leveraging our technology leadership in the Cat M and Cat 1 categories in large metering applications, whether electrical, gas, or water meter. Given our engagement with the most prominent brands, with the expected growth in these markets -- and the expected growth in these markets, we expect to significantly expand our market share in metering, the largest vertical from around 10% today to close to 50% market share in the next three years. To conclude on this topic, let me give you some more color on our design win pipeline. The top 10 customers in terms of revenue potential at forum [ph] represent only about $20 million in 2022 as most are still designing their products. However, they could generate over $80 million in annual revenue at forum. This is ForEx. In addition, this business is highly sticky with a product life cycles of up to 10 years for most of the design wins even longer in some cases. This level of growth potential from only 10 secured customers give us -- gives us tremendous optimism about our future. Shifting to the broadband category. Broadband revenue grew significantly in the quarter, thanks to the increase in licensing revenue, primarily driven by the new 5G. Looking ahead, the broadband product category remains promising for the Cat 4, Cat 6 CBRS business expected to grow in 2023, followed by the Taurus 5G launch in 2024. CBRS has yet to meet our expectation this year, partially because our two largest projects did not ship as planned due to the lockdowns in China. In addition to these two big projects, we are pursuing private network CBRS applications with utilities. Last quarter, I discuss a new CBRS module, we are designing that offers private networks connectivity with fallback to public carrier networks. There's a new Cat 4 Cat 6 CBRS solution, combined with our Cat 1 and Cat M and D product categories positions us with a comprehensive differentiated offering that reinforces our leadership in the metering segment. The future of Sequans Broadband segment is our first generation 5G platform Taurus, which is in development, and our new strategic deal has strengthened our execution capability. This development is progressing as expected and we are on track to sample the full solution and 2023. Our renewed 5G licensing deal covers the remaining investment needed to launch Taurus. The Taurus platform with target fixed wireless access, mobile computing, private networks, and high end IoT markets It's and optimized to deliver a cost-effective 5G solution with the performance required for these applications. The tremendous growth we see in connected devices is expected to rise dramatically with 5G IoT and exciting opportunity for Sequans Taurus platform, We believe Taurus will be the only 5G chip optimized for IoT, giving us a significant competitive advantage in a market that could potentially exceed $2 billion by 2025. In addition to the Taurus regular product business, the new 5G strategic deal will expand the 5G SAM to China with licensing and royalty revenue. Beyond this deal, there are other potential strategic partners for our 5G platform in a new market segments that makes sense to address via such partners. Discussions are happening. It's too early to define the longer term outcomes of these talks at this time. What's important is that there is active interest and we are following up with interested parties. Our partnerships continue to play a key role in our growth. We are pleased with our MCU partners and enhanced market access they provide for Sequans. Microchip released its Monarch 2 product platform and this has received very good traction in the market. We see this generating more design win opportunities that will further support the growth next year. Our relationship with Renesas continues to deepen and they now have a roadmap with all our products. They have launched their first LTM module using our first generation of Monarch and now we'll be launching new modules platform with Monarch 2 and later Calliope 2 in the next year. Also Renesas is promoting all our 4G 5G broadband portfolio to address a broad range of cellular IoT opportunities. We're engaged with Renesas in ongoing projects worldwide and are contributing to our pipeline and design wins. They have strong relationships with the biggest brands in the electronics and industrial space in Japan, the U.S., Europe, and India. We are successfully leveraging those relationships to secure new design wins. This is a big funnel we can continuously access to our partnership to build a line of business that otherwise would be much more difficult for us alone. We are confident that Renesas contribution will be another pillar of product growth in our Massive IoT ramp starting in 2023. In summary, Q3 was a strong quarter, despite the headwinds on product revenue. Our licensing and service revenue was very strong, helped by the first revenue recognition from our new 5G strategy partnership. In addition, this deal has helped us reduce our cash burn and a profitability gap this year. I'm pleased with the growth in our pipeline, particularly happy with the reception to Calliope 2. We will enter 2023 with a strong Massive IoT business, primed for growth over many years, and a 5G licensing deal that funds our 5G development that will generate future royalty revenue. As a result of our work on this deal, Sequans could develop a 5G licensing and royalty business for similar deals, another potential growth-- Sequans is leveraging its comprehensive product line, optimized for IoT, our strong brand, and our valuable channel partners to increase market share, grow revenue, and improve profitability. I'd like to thank our global team for their loyalty and hard work, and our shareholders for their ongoing commitment to Sequans. I'll now turn the call over to Deborah.

Thank you, Georges and good morning, everyone. Our revenue for the third quarter was $16.5 million, an increases 39% versus Q3 2021 and up 16.2% sequentially. As Georges mentioned, our product sales were impeded by shipment and fulfillment delays related to lockdowns from China and other supply chain issues, as well as the impact of our customers continuing to work through their inventory from prior shipments. Revenue from Massive IoT product sales in Q3 continue to account for nearly all of total product revenue. Revenue from broadband IoT increased from Q2 and from Q3 of last year, due to the revenue recognized from the new strategic 5G licensing deal. As Georges mentioned, this deal is expected to continue to contribute significantly, if somewhat less in Q4 and again somewhat less in Q1 and then contribute around $3 million to $4 million per quarter for the remainder of the term of the agreement. For the quarter, we had one customer and one channel partner that each represented 10% or more of our revenues. As Massive IoT design wins and end customers move into production, we still expect to see some concentration of our revenues with our channel partners. Gross margin in Q3 2022 was 77.6%, up from 49.2% in Q3 2021 and up from 60.7% in the second quarter of this year. The year-over-year and sequential improvements were due to higher contribution from licensing revenue. We have quarter-to-quarter fluctuations in our gross margin due to shifts in our revenue mix, but we are confident that the overall gross margin for 2022 will be above 65%. IFRS operating expenses were $11.6 million in the quarter, up from $10.7 million in Q2, and increased from $10.9 million in Q3 of 2021. Non-IFRS operating expenses which exclude stock-based compensation expense were $10.5 million in Q3, up sequentially from $9.6 million in Q2. Our third quarter operating income was $1.2 million compared to an operating loss of $2.1 million in the second quarter of 2022 and a $5.1 million operating loss in the third quarter of 2021. Our net loss in Q3 was $2.9 million, or a loss of $0.06 per diluted ADS and included a net non-cash loss of $700,000 from the revaluation of the embedded derivatives related to our convertible debt, partially offset by the non-cash gain on the extension of one convertible note. In the third quarter of 2022, we also recognized income tax expense of $1.6 million, which included $1.5 million related to withholding tax on licensing revenue. In Q2 this year, we had a net loss of $3.2 million or $0.07 per diluted ADS, which included a non-cash gain on the revaluation of the embedded derivative totaling $663,000, and income tax expense of $120,000. The net income in the third quarter of last year was $192,000, or $0.01 per ADS, which included a non-cash gain on a revaluation of the embedded derivatives of $7.7 million. On a non-IFRS basis, our net income for Q3 was $424,000, or $0.01 per diluted ADS compared to a non-IFRS net loss of $1.2 million, or a loss of $0.02 per diluted ADS in the second quarter, and a net loss of $5.3 million or $0. 15 per diluted ADS in the third quarter of 2021. In Q3, we had a gain on foreign exchange of $1 million or $0.02 per ADS, primarily related to the revaluation of Euro-denominated net liabilities on the balance sheet. This compares to foreign exchange gains of $1.2 million in Q2, and $400,000 in Q3 of 2021. Investors should be aware that possible changes in foreign exchange rates related to balance sheet items and the marking to market of the embedded derivatives related to the convertible debt can cause significant differences in net income or loss from quarter to quarter. While the impact of swings in the value of the embedded derivatives is excluded from our non-IFRS presentation, foreign exchange gains and losses whether they're realized or unrealized are not excluded. Cash and short-term deposits totaled $5.8 million at the end of Q3 compared to $16.8 million at the end of Q2. And in October, we received $13.5 million net of withholding taxes from our strategic partner as a first payment under our three-year agreement. Cash flow used by operations for the third quarter of 2022 was $2.9 million, of which $3.1 million came from the buildup of inventories in the quarter, primarily due to purchases of wafers. In addition, short-term financing, and -- sorry short-term debt from financing receivables decreased to $9.9 million from $12.1 million at the end of Q2. Turning to the outlook for Q4, we expect revenue to be flat to slightly down compared to Q3, reflecting an increase in product revenues offset by a decrease in licensing revenues. However, as the revenue mix should still be weighted towards licensing and service revenue, we expect gross margin to be above 65%. We expected non-IFRS operating expenses to be at least $500,000 higher in the fourth quarter assuming a stable Euro/dollar exchange rate, meaning we should be close to or at breakeven at the operating level. We expect IFRS interest expense in Q4 2022 to be approximately $2.8 million, but non-IFRS interest expense to be around $1.3 million, meaning that we expect our non-IFRS net results to reflect lower interest expense by $1.5 million. We are not providing guidance on any impact of the revaluing of the embedded derivative, nor possible foreign exchange gains or losses given this is largely determined by market conditions. Finally, for modeling purposes, the number of ADS outstanding today is 48 million. At the conclusion of this call, we will post a written version of our formal remarks in the investor relations section of our website on the webcasts and presentations page, the same location where you will find the audio replay. And I'll turn the call back to Georges.

Thank you, Deborah. Operator, we are now ready to open the call for Q&A please.

Thank you very much. Ladies and gentlemen, we will be conducting our question-and-answer session at this time. [Operator Instructions] We have a first question from the line of Scott Searle with ROTH Capital. Please go ahead.

Hey, good morning. Good afternoon. Thanks for taking the questions. Nice job on the results the strategic and the pipeline that's building. Georges maybe to start in terms of supply chain certainly impacted the near-term, but it sounds like it's starting to get better, as well you're building some inventories from a wafer level. I'm wondering if you could kind of walk us through how you see that normalizing over the next couple of quarters? And in particular on the wafer level as we start to look out to 2023, can you kind of update us on your early thoughts in terms of how that wafer availability is working?

Hi Scott. Yes, I mean, on the supply -- on the macro, what you are hearing, I believe, you get all this news and obviously discussing with the SMC, the -- we’re on the other side of the cycle, I tend to say and there is some relief in terms of supply, but it's not like normalized. You still see some tension here and there, some components missing here and there. On the other side, you see some extra inventory in some situations. So, just to, kind of, still I believe in not really normalizing back to normal, but it's in the right direction. Now, if I look to Sequans, for us, it was very important to secure because we have a lot of demand for next year and we didn’t want really to miss and rely just on some projection for next year. So, we're building inventory a little bit more than usual. Also you have some price increase, which is happening beginning of the next year. And obviously, this inventory is cheaper, if you want for us buying things in Q4 to sell it in Q1, you will make some better margin, I will say for the company. So, the two combined forced us a little bit to take our capacity this year and not neglect it. And if I look to 2023, I believe, we are in good shape. I'm not nervous on the supply as we are speaking today for us at least.

Great, very helpful. And maybe looking out into the pipeline in 2023. It sounds like a lot of good things are ongoing. I think last quarter you talked about a full ramp in 2023 that would be 70 million in product opportunity. But that's going to going –going to ramp over the course of 2023. It sounds like you're continuing to add to that, particularly with some Cat 1 design. So I’m wondering, if there's an updated number on that front. And then as well, the pipeline of opportunities as it relates to Cat 1, I believe you said 700 million wanted to confirm that again, and kind of how you're defining that I think historically, when you talked about the $300 million design win pipeline was about three years are using the same metrics on that front. Because I know some of the Cat 1 deals run over a longer time period, but still big numbers? And lastly, the $400 million time that you're talking about for Cat 1 in 2025. I'm wondering, the share figure we should be thinking about for you is 50% kind of given how to design when ramp activity is going?

Yes. I mean. See, what about the pattern, first of all, just to go on the basic number, we're still using the same metric, which is, by the way, when you compare to other company, some other company in the IoT space on industrial, the user metric, which is five years rather than sequence use three years. So and we didn't change this. And just only, we don't want to lose the reference, I'll say, so we're still counting only three years. And you know, those projects are typically for seven years, I will say and often more than 10, because when you talk about metering differences, 10 years, and the pipeline, here is 700 million that are so indeed is that counts their design win secured, which is we said almost half of it. So somehow $350 million in design win, three years revenue design, and the remaining 350 are really advanced projects that we believe we have very high likelihood, I will say to turn them from design end to design win. So this is really what I speak about data. Now, I tried to give you as well a picture, which is an interesting way of looking to the pipe, which is I put this in my script really to give you more color. And I you know, it's like, because I know that many of the investor can say okay, or if you have $350 million potential product line, so over three years, divide this by three. So in average, we have more than $100 million, why you don't have any $100 million product revenue now or next year. And why this is not happening. Now, the reality, I wanted to share with you just only I picked 10 customers, just only 10 customers that they have, I consider them the highest potential in terms of three year's revenue. Some of them they are doing zero with us this year, just to be clear on this. And if you look how much all those guys they do this year, they do around 20 million. If I say how much they do at full run, in other words, when I consider the pipe is 80. So you see 20 million multiplied by four at full run. So the question is, when this full run happened, for me, it definitely it's happening. I mean, there is no doubt about it, I have zero doubt about any projects in the pipe in terms of design, doubt in terms of the potential or if it's happening or not, because many of those customers, they give us more projects, and we win more projects with them because they select the Sequans as a key platform for IoT. The point which is I call it what I don't like. But this is unprecedented the reality of the IoT in general, that thinks the project takes longer to go from design win to mass production, and generate revenue. And you add to this, the headwinds we have in China and other supply chain challenges adding more complexity for us in terms of. But when you take those $8 million, sooner or later there will be on full year revenue in other parts of this pipe. So this is very important, to give you give you the color on this. Specifically, I mentioned the Cat 1 success. This is indeed I'm very excited. And this is one of the key message of this quarter, I was positive already previous quarter, things were looking well. But I can say today and clearly that I have secure two big guys, I can say one in the US, one in Europe, all on this new product. So in other words, they appreciate a lot the value of this product positioning pricing and so on. It's really each one of them I mean, the two they will be do more than $30 million the two in terms of design, -- in the pipe in terms of design win and when I look to the pipe of Cat 1. I have like as I said seven other big deals, all of them are big. So we're very positive on Cat 1. And today Cat 1 didn't catch up in the pipe when you convert Cat-M and Cat 1 still lagging in terms of size, if you want versus Cat-M because we need to keep in mind that the Cat 1 is smaller in quantity than Cat-M but higher ASP. So over time, maybe we could end by having 50% of design when Cat 1 in dollar amount and 50 Cat-M. So this is what my target, I'll say what I will see. And there, we see ourselves in very good position, I spoke about $400 million addressable market for us, in 2025, this is almost counting, like, somewhere chips a little bit more than chips, if we sell module, the number will be bigger, you can double it so. So the number could be around $0.5 billion, if you make it, it mix – assuming that we'll be doing half of our business chips, half of our business module. We could be above $0.5 billion, and we're targeting on the new deal, to be honest, to be well above 50% on the new deal. Now, if you project this in 2025, are we going to be at 50% market share, maybe not, if there is some of the products projects, still shipping. But that trend will be to be above 50% in catalogue, and we are in good shape – on this as we said.

Great. Thank you. I really appreciate the color and the detail. Very exciting what's going on? And just lastly, if I could, on the 5G strategic front, you got the China deal done. It sounds like there's other activity going on in the pipeline. Could you could you just give us some more thoughts and details on that front? Are these similar types of deals that we could see? Are we thinking about 2023 years? It's something on the longer term horizon. Thanks so much. Nice job on the quarter.

Yes, I mean, that's – first of all, 5G deal as I said, it's moving very well, I know that maybe some people they have some doubt or whatever. I mean, the deal is really happening. But it was a great relationship. And the parties are respecting the terms and we are moving very well. And there is maybe more things to do together on this partnership. I mean, I don't want to commend more on this, but to feel very positive on it. And obviously, it is really strengthen our position in a model where we can get licensing and royalty to address some segments in the market where sports is not playing today, and maybe other partners, potential partner muscles them, and I should say are missing cellular because, if you need cellular, is very hard to get for you to get 5G technology. So Sequans 3G will be the ideal partner. Yes, we have discussion. With more than three guys, I said and progressing very positive. I'm very optimistic about this. I'm optimistic if you say that I will learn maybe in the next year, but I don't want to command more if you want. Because I believe with the number of engagements we have the – the great position, we have the fact that we are moving to have product in hand, fully working. All this is converging to reinforce our position for those partnerships. And many people are missing this 5G technology and there will be they have no other option if I say other than partnering with signals. So I'm very optimistic on this.

Great. Thanks so much.

Thank you.

Thank you. We have next question from the lineup Craig Ellis with B. Riley Securities. Please go ahead.

Yes. Thanks for taking the question and echoing the congratulations on getting the new strategic deal in the income statement and in your color for the outlook. Deborah, I wanted to follow up on that point, it was really helpful to get your view that the new deal could be 3 million to 4 million in quarterly revenues beginning next year, but the question is, can you help us with the specific number that rep racked in the third quarter? And what is the specific expectation for the fourth quarter?

We're not, we haven't been giving this the specific number I really want just wanted to give the color Once we're through sort of these initial three quarters, it was clearly a larger, larger contribution to the third quarter, we'll meet we're expecting it to be slightly less in the fourth quarter and slightly less again in the in the first quarter. But in all quarters in excess of the then run rate, we're expecting to be 3 million to 4 million.

Okay, got it. Okay. And then, when you look --

Craig, when you look to the licensing component, I mean, you have it obviously, the licensing and it's separated as business versus product. And obviously, it's not the only the issue, you should remember that you have other views there. In this quarter, it's a big portion of the revenue recognized as cost was coming from this, so when I say let's say about 70%, from what you see that is coming from this lead. This will be a little bit lower in Q4 as Deborah said than Q1 and then we'll go down to 3 million, 4 million in our third quarter.

Okay. That's helpful. And then Georges, pulling up on the supply dynamics as we look to 2023. So, clearly, yes, we're on the favorable side of the cycle and I think that's shapes all of our view for what's possible with TSMC and cognizant that there still supply chain issues out there. My question is more on what we might expect with Renesas’ contribution to the company's supply and revenue capability next year, can you just provide some color on how that might trend to the year and what's possible it should look at the funnel that's developing based on your collaboration with that team?

I mean, to be honest, the relationship with Renesas is really great. I don't want to stress this more than this. But I believe it's clear. This partnership was very, very successful for Sequans, because it developed from many projects and it moved in the go-to-market as well into the manufacturing. Today, by the way, I can tell you that Renesas is able to produce one or two completely, and they're already produced, I will say what to call it the kind of pre-production unit just to test, it doesn't have wafers and see that all the processes under control. And so far, all this is positive. And we should end the year, with Renesas capable of producing Monarch 2 that give us obviously, by definition, because this is where the demand will be coming is on this kind of waivers to leverage I would say that some of the capacity of Renesas, if there is a need for this next year. So this is really going well. And I'm happy about that. And honestly, I don't see today, it's not my -- if you asked me last year, same time, my first priority was really the supply. Today, it's not my first priority, even it doesn't mean it's not an issue anymore, but I feel more comfortable on this. It's coming that number one, number two, that worry me. But obviously, I keep an eye on it. And we are watching this, and it's under control. But the other angle as well, with the Renesas that you mentioned is really the success, that contribution to the funnel. To be honest, you don't need to commend that going to Japan and selling to Tier 1 customer in Japan is very complicated if you are not Japanese with good relationship and established network and no doubt that Renesas has all this. easy, I should say. So this is developing very, very well the past there, but it's really beyond Japan, we have big deal with them closed in the US, very big one. And we have in the past couple of them, they are big in the US and Europe. So it's developing very well, the relationship with their sales team, the marketing team is very smooth. So it's not a relationship only at the top level of the company. And when you go down in the fields, you don't see that people talking or it's working very well. And it’s really a great partnership. And we believe that will represent nice revenue for us next year. But even in the pipe over time, this will keep building up and adding more potential to us through this.

Got it. And then on longer-term revenue dynamics. I think in the past, we've talked about that potential for around 50% year-on-your calendar 2023 through 2025 revenue growth and a Massive IoT share expanding from where we are now 12% up towards 30% and a 40% same kicker there. Are those still the right macro numbers to look at for the bigger opportunities that the company has? And then, Deborah, I think in the past with the new deal, we thought that cash self-funding could be possible in the second half of 2023. Can you just update us on the prospects for that especially given the level of revenues that we can expect from the new strategic deal? Thank you.

I mean, in terms of you know, the CAGR, the growth potential, we are in the average still in the same numbers, nothing has changed in terms of CAGR and average whether the market or market share, share keeps building. And just again, if you go back to this example, what I consider 20 customer, the 10 customer sorry, doing 20 million, and their potential and for run is [Technical Difficulty]. So you could argue that was not reach this next year that will reach in the following year. Or let's say the ratio that 80% of the following year, whatever it is, this gives you that we are really in the Cat Monarch growth potential more than 50%. If you take the Cat M along now obviously when you combine it for the existing business and so on, we are targeting an average of 50%, which remains our target. The challenge we have is really the timing of those products -- those projects, moving them from design phase to really full production. And this is really where we have the challenge when you compare year-over-year and we have already we suffered already with this year. So hopefully, all those roadblocks move away and we start going back to normal, but the trend is clear.

Yes. And so, yes, we're still expecting that the new 5G deal fully funds our 5G development. And really it's the revenue trend for next year is as we expect then that we can really target for that operating cash flow breakeven in 2023.

Great. Thanks team.

Thanks, Greg.

Thank you. We have a next question for the line of Nicholas Doyle with Needham and Co. Please go ahead.

Hi. Thanks. It’s Nick on for Raji Gil. Thanks for taking my question. I know you guys talked about be more specific on why Taurus as a sub 60-nanometer product won't be -- won't need a license or won't be impacted. And then just more broadly, why your -- why do you think that your 5G technology just will be allowed to move forward in China.

I mean, Nick, hi. As you know, things are suddenly very complicated and sometimes confusing. If you look to the rules, first of all, when you talk about the geometry, you know how small it is, this is going for manufacturing tools. Sequans has not being in manufacturing, our partner is a fabulous company. So it's completely clean in all the chapter where they talk about FIN FAT, the restriction to China and so on. We're not playing them; by the way our partner will be buying from TSMC from outside China. So somehow Taurus if it's sold by our partner, as it's called, like, everybody wait for from TSMC outside of China, and all this is clean, like any other Chinese buying from TSMC. Now, obviously, I'm not. It's very hard for me to project what will happen in the future. I mean, you could maybe in two years, or in one year, whatever restrict the Chinese to buy anything from TSMC, then we'll -- there will be stuck or my partner will be stuck, but today, there is nothing related to this or conflicting with Sequans. And the 5G as such as a technology is not touched. I mean, we are talking about military application, and if you can use this for military. So what are the manufacturing, for smaller geometric manufacturing, this is out of the scope, completely Sequans, there's nothing there and our partner is nothing there. And if you talk about the technology, 5G, you are not there. I mean, again, as we are speaking today, if tomorrow, we have rules saying you cannot sell 5G to China anymore, and no one can touch anything and so on, then obviously will be impacted, but Qualcomm will be impacted. And I can tell you, the World will be impacted largely and I don't know what will be the situation. But very honestly, today, I feel good on this. We have also other angles, just to give you more feedback, that the fact the Sequans is not developing, the R&D is not in the US. And R&D is really in Europe, and nothing in the US. So we give us another safety, doesn't mean that will not be impacted, because the French or the European, they can follow the rule and so on. But at least from a technology point of view, it's not built in the US. And this gives us another safeguard if you want another level to go there. And there is the third one, which is very important. It's an IPD. This means if you sell something and you deliver the IP, it's not retroactive. In other words, whatever I'm doing today, even if tomorrow there is a deal, my partner has this technology. So if you build a chip, he can build chip with this and he can use it, so because it's not that attractive, obviously the money will remain due for me, because he's using our IP and will not be shipping any more royalty in the future. So, these are some angles, I know that the subject is very complicated is never 100% sure about anything. But at least where we are today we are in the green. And I feel like we have many elements that let me feel we are not the first guy risky for this. Now obviously if tomorrow, there is a huge problem between China, US and this is taking over everything and every component and massive are things then will be treated like others and will be suffering like others and this will be new stories.

Thank you. That was very helpful. Could you just talk a little bit more about the product declines in the quarter in the guide? I understand that supply chain from inventory burning and the macros impacting, but do you kind of expect and I understand we have some new products ramping next year. But do you expect kind of bottom in product revenue growth to be next quarter, we could see that moving on to 1Q and 2Q? Thanks.

Nick, I mean in, we see the product getting up next quarter. So, we expecting Q4 to have better product in Q3, if I have to give another guidance, I'm saying in our number, even if we're not specific, in general, our banners. But indeed Q3 was a bottom. And they said the issues that we have nearly really for Sequans really, we have many products all our nascent, like, customers, whether they start, they bought the first few hundred thousand units and they moved them to production. And somehow the production didn't move on time, impacted by what's happening in China, or some projects in design phase and the guys were planning to launch them now, or launch them in September and finally are launching them in January. So, again, I can assure you, none of those projects, as has an impact in the sense cancels or disappearing or everything is that we're talking about delays, simple delays, sometimes -- couple of months or three months, and sometimes maybe six months, but all are delays, and that's why they remain in our pipe and that's why we remain optimistic about renewing with the growth of the product. Okay.

Nick, do you have any further questions?

No, that's all. Thank you.

Thanks Nick.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. And I'd like to turn the call back over to Dr. Georges Karam, President and CEO for closing remarks. Over to you Dr. Karam.

Thank you, operator. Thank you again for joining the call all of you. Please note that we are participating in the Needham Growth Conference in New York City on January 10th. We also plan to attend the ROTC Capital Conference in Orange County, California in mid-March. We hope to speak with you soon or meet at one of these upcoming events. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.