Sequans Communications S.A. Price & Performance (SQNS)

You can find a copy of the release on company's website at wwwsequorns.com under the Newsroom section. Second, this conference call contains projections, and other forward looking statements regarding future events, [indiscernible] our future financial performance and potential financing sources. All statements other than present and historical facts and conditions contained in this release, including any statements regarding our business cost optimization plans, strategic options, the ability to enter into new strategic agreements expectations for massive IoT sales, 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 and Exchange Act of 1934 as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events, and are based on assumptions and subject to risks and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward looking statements.

Actual events or results may differ materially from those contained in 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. And now I'd like to hand the call over to George Tarim, Please go ahead, George.

Thank you, Kim.

Good morning, everyone. I would like to thank you all for joining us today. I'm excited to review our remarkable transformation in 2024. A year that demonstrated our resilience showcased the strength of our cellular IoT intellectual property and product portfolio and have positioned us for sustained growth. The key milestone was the successful completion the $200,000,000 Qualcomm DS, This transaction ensures the future of our four gs IoT business. And advancement of our five gs Redcap and e Redcap solutions while also significantly improving our financial position. Energeth by the momentous event, we doubled product revenue in the fourth quarter compared to the previous quarter. We delivered $11,000,000 in total revenue representing an 9% sequential increase in line with our guidance. Notably product revenue in the fourth quarter increased to $4,700,000 from $2,400,000 in the prior quarter and $4,000,000 in the fourth quarter of twenty twenty Also, we are highly encouraged by the positive response from our customers and partners following the Qualcomm meeting, the strengthening of our financial position has been a catalyst in securing our design win pipeline new customer acquisition and a new project wins. The deal also validates our technology leadership and reinforces the superiority of our which are fully optimized for IoT application for power efficiency radio performance, and cost are critical factors I'm gratified to conclude 2024 with the strong fundamentals that position Sequans on a robust trajectory toward growth and sustainable long term success.

Switching gears to discuss the factors we believe will drive product revenue growth over the next two years let me walk you through the two main drivers. The first is our design win pipeline and how the corresponding project wins will move into mass production in 2025 and 2026, converting [indiscernible] The second is the development of our design in pipeline with the new opportunities and new customers that we are working on to secure and add to our design win pipeline. Despite the challenging ease, we have maintained most of our existing design win projects and customers. Counting three years of future revenue for each once they begin shipment, our design win pipeline represents around $250,000,000 While some of these projects are currently in shipment mode, The majority are still in the design [indiscernible] and are expected to launch within the next two years.

Our design wins spans various IT sectors.

Including smart metering, telematics, security he has an industrial applications. Smart metering a very successful market segment for us, accounts for over 50% of our current pipeline. The time to revenue for most of these projects was delayed by the inventory overhang the industry has faced in the last two years. Where customers have favored the shipment of legacy products over the launch of U. S. Additionally, the transformation of the design win pipeline to revenue was impacted by our large percentage in metering where product qualification requirements are complex prolonging the time to production. We are confident that our customers remain committed to SQAS. And that the launch of more projects in the second half of twenty twenty five and 2026 will support our revenue growth over the next two years. Cat1bis KALA P2 is scheduled to start shipping this year and will be a key driver of growth later this calendar year. Contributing to the increasing revenue from LTM Monarch two our primary product currently shipping. Note that the long term nature of these IoT projects with life cycles spanning up to eight years, ensures sustained revenue once they enter production and will continue driving our revenue growth well beyond 2026.

While working on turning design wins [indiscernible] our next focus is on new business opportunities and adding new customers to grow our design win pipeline. This will add another driver of revenue growth in 2026 and beyond. We have strengthened our sales team and focused our sales strategy on increasing market share in high velocity IUD market segments, where new project wins can generate revenue within two years. Typically faster than metering width. Following our highly productive meetings, at CES twenty twenty five, we have seen significant acceleration in new customer engagements. This marks a major shift from last year. When our financial troubles limited our ability to new customers and projects. I'm pleased to say that our design in pipeline which includes advanced customer engagements, we are working to secure and move to design wins now exceeds $200,000,000 in a projected three years revenue starting from the launch date of each product. Notably, one third of this pipeline is spending award decisions expected in the first quarter. With this strong start to the year, we have increased conviction that our $50,000,000 design win pipeline will also grow this year.

Turning to Sequans competitive advantages, in the IoT market. Our position as European semiconductor company is a key differentiator. With the increasing restriction on Chinese manufacturer, the number of chips and module competitors outside China is shrinking. We expect this to trend we expect this trend to intensify positioning Sequans as a key beneficiary in the evolving market landscape. Additionally, OEM module makers are facing increasing pressure to consolidate or exit the market. Such as the recent announcements from U Blocks. Validating our business model with sales of bus and modules. This enables Sequans to offer differentiated customer support in addition, to an innovative product portfolio now well recognized as best in class. Sequans has a comprehensive product portfolio that spans the full range of IoT applications.

From high speed CAT four for real time video, to mid range CAT1BIS KALI P2 for security and telematics and down to ultra efficient LTM Monarch two for tracking metering and other industrial applications. This robust portfolio ensures we can fully support customer demand on existing four gs networks. Looking ahead as the industry transitions to five gs, our customers will seek RADCAP and ERADCAP two emerging five gs IoT modem categories, set to replace [indiscernible] positioning Sequans at the forefront of this evolution. Our five gs IP expertise combined with the addition of an expanded wireless IP portfolio, and top engineering talent, through our recent acquisition of ACP in Zurich, positions us strongly to execute on our RADCAP and ERADCAP 2026. This strategic advantage enables us to maintain our technology leadership and competitive edge as we introduce new generation of ships with enhanced five gs IoT support extended feature sets, and significant advancements in power efficiency radio performance, and cost optimization. In addition to advancing our cellular IoT business, we are actively pursuing a strategic expansion into new vertical markets Our extensive IP and product portfolio enables us to offer advanced radio solutions for satellite communication public safety, and defense.

We have already established business leads in these sectors and are focused on further developing these opportunities to drive broader product adoption and value added services. Similarly, we expect to expand our addressable market through licensing agreements following the successful model we implemented in China. We are confident in our ability to deliver tangible results from these new initiatives over the next twelve to eighteen months. Our financial strategy remains focused on achieving non IFRS operating income breakeven, by 2026. Driven largely by the acceleration of Monarch two and Kalaidi two which will fuel product revenue growth in 2025. While not all design win projects are currently in production, our $250,000,000 design win pipeline represents more than four years of product revenue. Decreasing to an annual average of approximately $60,000,000 from 2025 to 2028. As these projects transition, into production, in 2025 and 2026, we expect annual revenue contributions will progressively rise progressively rise surpassing this average in the later half of the period. Additionally, in 2026, we expect to see revenue contributions from new design wins secured this year, sourced from our current hundred million dollars pipeline of design and project Last, in addition to product revenue, we anticipate revenue generation from licensing and services through partnerships and strategic initiatives we are conducting.

These factors combined with financial discipline, we ensure that we remain on track to achieve our financial goals in 2026. In summary, Chiquant is built on a solid [indiscernible] for sustained growth with a clear path to future profitability, driven by a robust design wind pipeline and a new customer engagement. Our advanced product roadmap reinforces our technology leaderships and our strategic initiatives to develop vertical markets and expand our licensing business position us well for the future. As we continue to innovate and expand, we remain committed to delivering long term value to our stakeholders while shaping the future of IOD. I'll turn the call over to Deborah to review the fourth quarter and annual 2024 preliminary financial results, I need.

Thank you, George, and good morning, everyone. Before we get started, please note that the financial results released today are preliminary. Our final results are subject to finalization of audit procedures, and preparation of full disclosures to be filed in our annual report on Form 20 F in April. Revenues for the full year 2024 increased 9% from $33,600,000 in 2023, to $36,800,000 Gross margin for 2024 remains strong at 75.5%, versus 71.8% in 2023, primarily due to a product mix weighted more towards chipset sales and modules compared to 2023. Product gross margin for the year was 35.1% compared to 6.2% in 2023. Over time, we expect product gross margins to be in the mid-40s as we transition from more module sales to chipset sales. In addition to lowering our operating expenses, we benefited from the $152,900,000 gain from the Qualcomm transaction in 2024, which was the main driver behind our achieving an IFRS operating profit of $69,500,000 up from an operating loss of 29,800,000.0 for the full year of 2023. On a non IFRS basis, our net profit was $77,500,000 in 2024, or $2.73 per diluted ADS, compared with the non IFRS net loss of $30,600,000 or $1.36 loss per diluted ADS in 2023.

Turning to our fourth quarter results. Revenues for the fourth quarter of twenty twenty four increased 130% to $11,000,000 up from $4,800,000 in the fourth quarter of twenty twenty three an increase sequentially 9% Product revenue reached $4,700,000 in the quarter and accounted for 43% of total revenues. Compared to 83% in the fourth quarter of twenty twenty three and twenty three percent in the prior quarter. Product revenue doubled sequentially and increased 19% from the year ago period. Licensing and other revenue was $6,200,000 an increase compared to $802,000 in the prior year quarter and a 19% decline compared to $7,700,000 in the third quarter of twenty twenty four. This quarter, we recognized $5,500,000 versus $6,700,000 in revenue in Q3, from partial deliveries of IP under a five gs broadband license to Qualcomm as part of the overall transaction.

We expect the nearly $8,000,000 remaining in licensing revenue under [indiscernible] to be recognized over the course of 2025. Gross margin in the fourth quarter of twenty twenty four was 68.1%, compared to 82.5% in Q3 twenty twenty four, which reflected the higher product revenue contribution in the quarter. Product gross margin was 37.6% in Q4, versus 36.9% in Q3, reflecting a higher portion of chip sales offset partially by the inventory provisions for two products approaching end of life.

IFRS operating loss was $5,300,000 in the quarter, compared to operating profit of $87,100,000 in Q3 twenty twenty four and compared to losses of $12,600,000 in the fourth quarter of twenty twenty three. As a reminder, the third quarter twenty twenty four operating profit was due to the net gain on the sale of the four gs assets sold to Qualcomm of $152,900,000 Our estimation of the value of the assets sold is $175,400,000 This growth gain was reduced by the net book value of $18,400,000 for the R and D capitalized for the Monarch two and CalliV2 platforms. And by deal related fees and expenses. We recorded net interest income in Q4 compared to interest expense in prior quarters due to our investment of excess cash from the Qualcomm Dion after repayment of all matured debt and accrued interest, October.

On a non IFRS basis, our net loss for Q4 twenty twenty four was $2,100,000 or $0.08 loss per diluted ADS compared to an $80,500,000 profit or $2.91.2.91 dollars profit per diluted ADS in the prior quarter and a non IFRS net loss of $13,700,000 or $0.56 loss per diluted ADS in the fourth quarter of twenty twenty three. Loss per ADS in prior periods has been restated to reflect the ratio change made on October 9, 2024. Cash and short term deposits totaled $62,100,000 at the end of Q4, compared to $173,600,000 at the end of Q3. Subsequent to the end of the third quarter, we repaid approximately matured debt and accrued interest. We also paid down overdue supplier accounts fees and costs related to the Qualcomm transaction and an initial payment related to the acquisition of ACP.

Turning to the outlook for the first quarter of twenty twenty five. We expect total revenue to be in the range of $7,000,000 to $8,000,000 with product revenue contributing about 50% reflecting Q1 seasonality. Note that as of the December, 2024, there is close to $8,000,000 of licensing revenue related to the Qualcomm deal That will be recognized as we make final deliveries of IP technology blocks. The portion that will be recognized in Q1 twenty twenty five expected to be lower than the $5,500,000 recognized in Q4. And recognition of the final portion will depend on the timing of the delivery of the last IP components.

We are implementing actions to reduce our net cash operating expenses to be below $10,000,000 per quarter on average in 2025. Our net cash operating expenses exclude non cash expenses such as depreciation, amortization, and equity compensation expense and include cash received from R and D tax credits and government funded R and D [indiscernible] The cost reduction actions are expected to be implemented over the course of the first part of the year. In addition, we are are expecting to receive funding from government R and D financing of around $7,000,000 in 2025. Turning now to some housekeeping items. 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 webcast and presentations page. The same location where you will find the audio replay. Seaclines will attend the thirty seventh Annual ROTH Conference which is to be held in Laguna Beach, California George and I will host one on ones and a fireside chat with our ROTH analyst Scott Searle, on Tuesday, March 18.

Please contact your ROTH representative to register or for more information. And lastly, we expect to file our annual report on Form 20 F by the April, which is the deadline for foreign filers. We will take advantage of the audit procedures around this to also file a Form S-eight to register equity plans and to file a shelf registration statement on Form F3. We've always kept the shelf active whether we needed it or not. But the last one expired in November 2023 and we have not had the opportunity to renew it before now. And now I'll turn the call back to George. Thank you, Deborah.

Operator, we are ready to open the call for Q and A, please.

And your first question comes from the line of Scott Searle with ROTH Capital Partners. Please go ahead.

Hey, good morning, good afternoon. Thanks for taking the questions. Nice see the design activity starting to reaccelerate. George, maybe to just dive in on the $250,000,000 pre existing wins. I thought I heard you say $50,000,000 to $60,000,000 of that should start to be the annualized number as we get out into '26 and beyond. Just wanted to clarify that. And then in terms of The ramping pipeline leading up to CES and post CES of $200,000,000 plus. Can you give us an idea in terms of some of the applications that you're starting to see that inbound interest on, it sounds like they are fast return design cycles. So maybe if you could talk a little bit about some of the applications, some of the design cycles as well as the technology implementations right now? Is it Is it mostly Cat one bis? Are you starting to have those red caps? Discussions?

Hi, Scott. Thanks for the questions. Starting on the €250,000,000 Your understanding is right. I mean, we're talking about because the pipeline of $250,000,000 as we said, represents three years revenue for each project. As all of them are not in production, we cannot talk about $250,000,000 to do over three years. In reality, it's more than four years if you look to the detail of the project. And I mentioned that more than 50% of this is coming from metering and those are projects that they tend to have quite long time to revenue, I will say, ramp. So as such, if you divide $2.50 over four years, four years plus, we're talking about an average of 60 which obviously we see it in the second half of this period of four years, which means our planning and again, I'm giving those guidance to to help investors understanding how the company, why we are confident about our financial goal for 2026 is essentially the design win in hand, which is very solid and customer committed, and we sold out and downs Sequans, We are on it and they are real.

Unfortunately, it took longer than expected for many, many reasons that I explained. But they are happening and once they turn to production, they will be there for many, many years. And on this basis, if you compute all this, you will see like the company has in hand an average $60,000,000 over four years. Obviously, we are not there today. We'll be there in approaching in 2026 and we'll exceed it beyond 2026. That's what I was saying. And obviously, this helped one input, I would say, for the breakeven point.

The other one is the one you were mentioning. So far, in the last two years, I could say almost our design in pipeline, seriously, I could not talk about few tens of million dollars with some customers still fighting on to Wyndham. Things has changed extremely [indiscernible] I'm extremely pleased by reception of the customer to the story of SQAN's post Qualcomm deal.

They understood it. They got it. They saw the the competitive landscape, what's happening, and they saw the value of the technology of SQNANCE and the value of the offer of SQNANCE as a customer support. This attracted many customer and almost in a couple of months we are talking about $200,000,000 pipeline. Many of them I said like almost one third of them will be decided soon. So maybe maybe in six months, we'll be giving more clarity on what we have there. But indeed the point you were mentioning, we had very big win in metering and metering is not like we're stopping, we keep working on this. We want to win more projects. But there are like time to revenue of those projects could be even four years. While many other area, when you go for example to telematics, to security, to industrial, some industrial applications They tend to be two years will be okay, the timeline. Sometimes it could be eighteen months to two years. So these are the application we are seeing. And we are seeing a lot of traction around our CAT one BIST product. As you know, this is a kind of unique chip outside of China because no one has invested in and we have almost no competition.

Other than Qualcomm who who get this technology in hand and obviously in the future will be competing with us with the same product. At least as we are speaking today, everyone understand not only SQN Sequans it and this is attracting a lot of customers. And part of the ERAD cap the e RADCAP story is really customer want to hear this for the future. So it's not like you need it now, it's not we need this to sell and make revenue. But we need this freely to support our customer transitioning for the future and that's why we're investing in this to be ready in 2026 to bring an evolution [indiscernible] For those customers.

Thanks. That's very helpful. George, if I could follow-up on your comments both on China and U Blocks. I'm wondering how many of those conversations are direct result of the geopolitical environment with China? And as it relates to U Blocks, is the opportunity there for you to pick up those design wins going forward from a module perspective? Or are you looking to attack it from a couple of different angles with your existing module partners? Yes.

I mean, it's Scott, definitely, it's always hard to say why your customer is coming to, but but the dynamic around China. And the dynamic about U Blocks, so I call it like the limited number of OEM or let's say even the sustainable business model of those guys where they are stuck a little bit between the chip price and the EMS and the value that they can offer to this. It's positioning Sequans really in a unique position and customer understood that they need to play with Sequans to have a real double sourcing strategy, if I have to call it like this or at least an angle of innovation and flexibility of what we are providing. Yes, definitely on the deals we are talking it's not like they are new customer and we didn't know those guys. But the tension around it and the position of Sequans and the shortlist and so on Obviously, it's influenced by what's happening around or helping us. So I don't want to cry victory before getting them in design win, but we feel very good about this and this is helping us.

Great. And And maybe lastly, if I could, licensing, it sounds like there are discussions cropping up on that front again. And and not to get too far ahead of any culmination of new relationships, but REDCap puts you guys in a very unique position going forward versus the competitive landscape. How are licensing deals progressing on that front? How is Redcap doing in general? I think it's very important in terms of the product and differentiation roadmap for you guys. But it sounds like customers are responding to that. And lastly, Trevor, from a cash flow perspective, it sounds like you guys are tightening up a little bit. Just want to get your thoughts in terms of cash burn until breakeven in 2026? Thanks.

Okay. Scott, I mean, obviously, this is a very important element for us. And I'm I'm talking even beyond licensing. We'll develop this more as soon as we have more I would say we'll be in the position to talk about it. But we're attacking we did very good deals in the past on vertical and licensing.

And we are really learning from our lesson to make it much more sustainable and stable there. So definitely we are progressing on this front. And we'll have more say to the market this year about the results. Hopefully, we'll be able to achieve [indiscernible] helps obviously not only the cash burn but help us I said, we have market that we do know how to address it or segment market, we do know how to address it today. Other than through partnership, And we have technology that can go to a market, which is not the cellular happy to pay customization of the software around it and buy The product because it's not only licensing by chips and modules, at high ASP or higher margins. So this is something definitely we want to develop to create like a second leg for the company that obviously will help our breakeven points, if you want, going forward and the growth of the company down the road. And obviously, the fact that we have a REDCap please keep in mind that all our investment in five gs we have done in the past five gs broadband we didn't throw this away. I mean, we have this IP and we own it this is really our red cap.

But also what the acquisition of ACP helping us to accelerate mainly the RF investment. IP, but other IP as well. To bring the Radcap any efficient way to market, I will say right on time, but also with minimum effort and R and D spending. So all this is really very positive and I'm very optimistic about bringing good news to market with those elements. No cash, is it?

Yes. On the cash, so Scott, we've sized the company in the operating structure. So that we feel comfortable that even in a conservative scenario, we have adequate cash to take us to the breakeven point. Even if that is in the the second half of twenty twenty six, As I mentioned, we're looking now at an operating cash structure that [indiscernible] average $10,000,000 per quarter.

We also have continue to have good financing coming in from from the government projects and expect that in 2026 as well. And we're also expecting to collect the all of the escrow amount from the the Qualcomm deal at the September which is $10,000,000 coming in as well.

So I think we we feel pretty comfortable about the cash position.

Okay, great. Thanks so much. Look forward to seeing the product revenue continue to ramp. Thanks, Lucas.

And I'm showing no further questions questions at this time. I would like to turn it back to our CEO, George Karam for closing remarks.

So thank you again for joining the call. All We remain confident, as I said, in our ability to achieve operating income breakeven by 2026. Our optimism is fueled by key design wins in our pipeline moving to mass production as seen in Q4 and the addition of new customers in 2025.

We are focused on increasing our market share in underpenetrated IUD markets with faster time to revenue, We are developing new vertical markets and delivering the best next generation products. This strategic focus on product differentiation, innovation and market expansion will drive growth in the years ahead. I extend my heartfelt thanks to our team, partners, and investors for their unwavering support and dedication. Thank you very much. Operator, we can close the call.

Presenters and ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.