Sequans Communications Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 7, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Sequans Fourth Quarter and Full Year 20 23 Results Conference Call. All participants are in a listen only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to Kim Rogers. Please go ahead.

Speaker 1

Thank you, Julie. And thank you to everyone participating in today's call. Joining me on the call today from Sequans Communications are George Karam, Chairman and Chief Executive Officer and Deborah Choate, Chief Financial Officer. Before turning the call over to George, I would 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.

Speaker 1

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 within this release, including any statements regarding our business strategy, 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 1993 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 operate in a very competitive and rapidly changing environment. New risks emerge from time to time.

Speaker 1

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 included 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.

Speaker 2

Thank you, Kim. Good morning, everybody. Welcome to our Q4 and full year 2023 financial results conference call. I'll begin with comments on our business followed by a review of the strategic options we are pursuing. Q4 2023 revenue was $4,800,000 of which approximately $4,000,000 was product revenue, which is a significant increase as compared with the prior quarter.

Speaker 2

The reduction in licensing revenue was due to the revenue recognition profile of our primary 5 gs licensing deal. However, we are pleased that channel and customer inventory issues begun to clear up in the 4th quarter, driving an increase in product shipments with customers launching new projects into mass production. Based on customer forecasts and backlog, we expect total Q1 revenue to be over $7,000,000 followed by sequential revenue growth for the remaining quarters of 2024, mainly driven by product revenue ramp. We expect to reach total revenue levels similar to those of 2022 as we exit 2024. This renewed top line momentum is fueled primarily by multiple new customer product launches in asset tracking, smart metering and fleet management using our LTM and BIUT Monarch II and CAT I Calliope II platforms.

Speaker 2

The momentum is expected to continue into 2025 as the anticipated movement of design wins to production accelerates. Also later in 2025, we expect our initial 5 gs chipset sales to begin coming online. Let's take a high level look at how we expect to achieve this revenue. Our product growth challenge in 2023 was primarily due to delays in customer projects moving from design into mass production. Despite these delays, our design win pipeline continued to grow from the addition of new projects from new and existing customers.

Speaker 2

In the Q4 of 2023, we were encouraged as customers finally moved several projects into production. Notably, our top customers are some of the largest players in asset tracking, smart metering and fleet management, 3 of the largest and fastest growing segments the massive IoT market. Allow me to share a few examples of our success in those segments. Our largest partner in asset tracking, holding a leading position in a specific segment is expected to grow 4x in 2024, thanks to multiple projects that launched last year. With this partner, we have a confirmed backlog of 2,000,000 units for 2024 with the potential for further upside on our LTM and Biot Monarch 2 platform.

Speaker 2

In addition, we recently secured another project with this partner to address a new market segment using the CAT1 Caliope2 platform. Going forward, this customer has indicated continued growth in 2025 based on their potential and customers' demand. In the Smart Metering segment, Sequans has a strong footprint with several customers in multiple regions of the world. Specifically, we have a dozen active projects with 3 Tier 1 customers in addition to servicing a multitude of smaller customers. Unfortunately, the conversions of those design wins into production has taken longer due to metering project complexity.

Speaker 2

We can now report that 2 of these Tier 1 launched their first products based on Monarch 2 late last year and we have backlog covering the next 6 months of shipment. Further revenue growth in 2025 with this customer base is expected as subsequent design win projects are planned to launch for launch in the current year. In the fleet management space, we have secured the commitment and commenced design with a noteworthy Tier 1 customer utilizing our CAT 1, CaliP2 platform. This customer has entrusted us with 4 separate projects, all using the CalliP2 solution and in one case replacing a competitor's platform. The initial product launch from this customer is anticipated in 3Q 2024 to be followed by further launches in early 2025.

Speaker 2

Their launch ramp is expected to deliver yearly revenue in the tens of millions of data. In fact, the number of customers needing to grow their footprint while working with the trusted solutions for U. S. Government applications provide Sequans with a tremendous advantage, particularly with our CAT1 KALI P2 offering. Also the KALI P2 platform is an ideal solution for smart home applications where we see an increasing interest, specifically thanks to its capability of supporting the voice over LTE feature.

Speaker 2

In summary, the scope of new project launches forecasted in massive IoT gives us confidence in substantial revenue ramp in the second half of twenty twenty four and further acceleration of our revenue growth in 2025. On the broadband IoT front, the expected commencement of 5 gs Taurus platform shipments in late 2025 will build on our massive IoT growth trajectory. Our 5 gs Torus chipset is out and currently under testing and we are expecting to commence sampling with our lead customers later this year. I'm excited to share that after securing our 1st Tier 1 Alpha customer in the Q3 of 2023, we expect to land another Alpha customer in the coming months. In addition, several prospective customers are showing strong interest in our 5 gs platform.

Speaker 2

This positions us for 5 gs product revenue to begin in late 2025, followed by a significant ramp up anticipated in 2026. To conclude on the business side, we feel very confident of our progress. Our overall product design pipeline continues to grow and the design win portion, and I'm referring here to the design win portion only, now represents more than $400,000,000 of potential 3 year life prep. Switching now to our strategic discussions. As previously announced, Piranesa terminated the MoU due to unfavorable tax ruling in Japan.

Speaker 2

Originally, we had hoped to obtain the tax ruling results in less than 4 months. But unfortunately, this took much longer. Subsequently, the MOU was amended twice to allow more time. In the end, the ruling was unfavorable, which was a disappointing surprise for us. I want to emphasize that despite the termination of the MOU, our relationship with Renaissance remains strong and they continue to be an important business partner reselling Sequans products.

Speaker 2

We remain currently engaged in ongoing discussions with them regarding our collaborative path forward. In addition, immediately following Renesas termination announcement, we received inbound interest from several parties with attractive strategic alternatives. Currently, Sequans Board of Directors is actively engaged with potential partners to explore these various options, some of which are more advanced than others. In the meantime, we are in discussions with our lenders to extend the terms of our debt and we will resume the previous discussion we had for other government financing alternatives. Lastly, we are pleased to report that we have received approval just this week from the French government for €11,000,000 or about $12,000,000 of new funding.

Speaker 2

We are fully aware of the challenges confronting us, and I want to make it unequivocally clear, addressing these issues is the top priority for both our exec team and the Board. Every decision we make is geared towards not just sustaining, but enhancing our operations, deepening our engagements with customers and ensuring our financial health. Due to the sensitivity of the ongoing discussions, we are unable to provide further details on the strategic process at this time. Therefore, we trust you understand that we will not be conducting a Q and A session today. We appreciate your continued trust and support as we move forward.

Speaker 2

I will now turn the call over to Deborah to review the results in details. Deborah?

Speaker 3

Thank you, George, and good morning, everyone. Although revenues for the full year 2023 decreased 44.5 percent from $60,600,000 in 2022 to $33,600,000 in 2023. We were pleased to see product revenues rebound in the 4th quarter as customers work down their inventory levels and new projects from multiple customers moved into mass production. Gross margin remained strong at 71.8 percent versus 70.8% in 2022 due to the contribution of high margin licensing revenue. Over time, we expect product gross margins to be in the mid-40s as we transition from more module sales to more chipset sales.

Speaker 3

And as product sales become an increasing part of the revenue mix, overall gross margin should return closer to our target overall margin of 50%. Operating expenses in 2023 increased by $7,400,000 to $54,100,000 compared to $46,700,000 in 2022, reflecting both the increase in our investment in 5 gs, but also the temporary increase of expenses of approximately $3,500,000 from deal costs related to the Renaissance tender offer. The combination of lower revenue and higher operating expenses resulted in an IFRS operating loss of $30,000,000 up from an operating loss of $3,800,000 in 2022. On a non IFRS basis, the operating loss was $22,700,000 in 20.23 compared with an operating gain of 1.6 $1,000,000 in 2022 and a non IFRS net loss of $30,700,000 in 2023 compared with a loss of $5,400,000 in 2022. Moving to the Q4, product revenue increased sequentially by more than 4x as our business began to recover from the consequences of high customer inventory of earlier generation products, which had a significant impact on our business in 2023.

Speaker 3

But more importantly, the revenue increase reflects the launch of new customer products into production. Revenue from massive IoT product sales in Q4 2023 continue to account for nearly all our product revenue. Licensing revenue, all in the Broadband IoT segment, was very low in Q4 as expected, due to the revenue recognition profile of our agreement with our 5 gs licensing partner. We expect licensing to rebound from Q4 targeting licensing and service revenue of over $3,000,000 in Q1 2024. For the Q4, we had 1 customer and 1 channel partner that each represented 10% or more of our revenue.

Speaker 3

IFRS operating expenses were $13,300,000 in the quarter, down 8% sequentially from $14,500,000 in Q3 2023. The decrease was primarily due to the decrease in renaissance deal fees from a high point in Q3. Year over year IFRS operating expenses increased 3% compared to $13,000,000 in Q4 2022. Non IFRS operating expenses, which exclude stock based compensation expense, were $11,400,000 in Q4 2023, down sequentially from $12,800,000 in Q3 and compared to Q4 2022 of 11,100,000 dollars The combination of all these elements resulted in a 4th quarter operating loss of $12,800,000 compared to a $7,800,000 loss in the 4th quarter operating loss in the prior quarter and versus an operating loss of $986,000 in the Q4 of 2020 2. On a non IFRS basis, our net loss for Q4 was $13,800,000 or $0.23 per diluted ADS compared to a non IFRS loss of $6,800,000 or $0.16 per diluted ADS in the 3rd quarter and a net loss of $2,800,000 or $0.06 per diluted ADS in the Q4 of 2022.

Speaker 3

Cash and short term deposits totaled $5,700,000 at the end of Q4 compared to $6,700,000 at the end of Q3. Subsequent to year end, an additional loan of $9,000,000 was received from Renaissance. And as George mentioned, we received notification recently that the French government has approved €11,000,000 in new R and D financing, of which nearly €7,500,000 is in the form of a grant and the rest in the form of a low interest loan that is repayable only once the product begins to generate sales. We are awaiting the contract, but expect a 25% upfront payment or about €2,700,000 to be made during the Q2. Turning to the outlook.

Speaker 3

We are targeting Q1 2024 revenues of over $7,000,000 with at least 60% gross margin and for a trend of sequential revenue growth for the remaining 3 quarters of 2024. In conjunction with the evaluation of the strategic opportunities that George enumerated, we have also identified potential cost optimization actions, leveraging our operating cost structure flexibility that should strengthen our financial position without a major impact on our product strategy. And lastly, we intend to reactivate our discussions with the European Investment Bank. 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 now I'll turn the call back to George.

Speaker 2

So thank you again for joining the call today. We'll keep you up prised of any strategic developments as they occur. Again, we appreciate your continued trust and support as we move forward. Thank you, operator. You can close the call.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.

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Key Takeaways

  • Q4 2023 revenue rebounded to $4.8 million (with product revenue of $4.0 million), a more than 4x sequential increase, and management expects Q1 2024 revenues to exceed $7 million with continued sequential growth through 2024.
  • Strong massive IoT momentum: a confirmed backlog of 2 million units with the largest asset-tracking partner, multiple smart-metering Tier 1 launches, and fleet-management projects poised to deliver tens of millions in annual revenue starting late 2024.
  • Broadband IoT (5G) roadmap on track: the Taurus chipset is under test, sampling will begin later this year, a second Tier 1 Alpha customer is expected imminently, and initial 5G product revenue is anticipated in late 2025 with a major ramp in 2026.
  • Strategic review under way after Renesas terminated the MoU due to an unfavorable tax ruling; the Board is evaluating multiple partnership or financing alternatives, has secured €11 million of new French government funding, and is negotiating debt extensions.
  • Full-year 2023 revenue fell 44.5% to $33.6 million with an IFRS operating loss of $30 million; CFO targets mid-40% product gross margins (driving overall margins toward 50%) and plans cost-optimization actions alongside potential EIB financing.
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Earnings Conference Call
Sequans Communications Q4 2023
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