Q2 2021 Sequans Communications SA Earnings Call
Welcome to sequence second quarter 2021 results conference call at this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time as a reminder of this conference is being recorded I would now like to turn the call over to Kim Rogers of Hayden IR Mr.
Rogers you may begin.
Thank you Maria thank.
Thank you to everyone participating on today's call joining me on the call from sequence of Communications are George Karam, Chairman and Chief Executive Officer and Deborah.
Chief Financial Officer, before I turn the call over to George I'd like to remind our participants of the following important information on behalf of CCAR.
She coins issued the earnings press release this morning, and was posted to the company's website at Www Dot sequins Dotcom Backflash investors under the news section.
Before we start I'd 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.
<unk> from massive Iot and portable router sales the impact of COVID-19 on our supply chain and on 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 look.
The statements within the meaning of the private Securities Litigation Reform Act of 1995 section 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of 1934 as of met that day.
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 our 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 on our public filings made with the security and Exchange Commission.
And now I'd like to hand, the call over to George crime. Please go ahead George.
Thank you Kim.
Good morning, ladies and gentlemen.
Welcome to all of our second quarter 2021 financial results Conference call.
The massive Iot was the primary driver of growth from the second quarter.
This category increased 14% sequentially.
Mm, 120% year over year.
Despite the order fulfillment delays, we faced in the quarter due to supply chain challenges.
The thought impacting industries and many sectors that all the.
Broadband C brs business and the new vertical deal have also contributed to our gross in the quarter.
Supply chain issues limited our ability to achieve our quarterly gross target.
Got it.
Normalizing our revenue comparison for the absence of any contribution from the Verizon Jetpack portable router, which we believe shows the true performance of sequence of current business.
Our second quarter revenue increased 14% sequentially and 88% here over the years.
The increase in service revenue in the quarter lifted our gross margin.
Along with the benefit of a 1 time net reduction in R&D.
Our operational loss this quarter.
There are a couple of key growth drivers that they want to discuss.
Primarily products and partnerships, which are expanding our penetration into the many of our youth the MX.
That's the drill down into products per foremost starting with massive are huge.
Yeah.
The considerable momentum in massive Iot with tier 1 customers is fueling our growth.
We are having continued success with our first generation products.
On our second generation products are getting fantastic cash.
We continue to build out all of this massive Iot pipeline.
With 10 product this quarter moving from engagement phase 2 design wins.
And more than 10 of existing design wins.
Brushing the manufacturing stage with the customers, placing preproduction or production on orders.
Demand continues to increase.
In Q2, we added well over a dozen of new interesting projects.
We have anticipated securing this year.
During projects from our MCU on module partners.
Oh, the first generation Cat, 1 calliope business is exceeding our plan.
And we are shipping to tens of other customers in the U S and Japan.
Calliope 2 our second generation Cat 1 chip is now sampling.
And undergoing testing in our labs.
It always out of 5 <unk> compliance single chip.
Designed for low low power and cost effective support for.
For the Iot applications that require voice over LTE and all these the rate above guidance I'm speed give or take more then how did you sort of bits per second.
We had a hole in the smart city or smart home Iot devices.
Calliope 2 reduces the solution cost versus the cat 1 first generation by over 30%.
And it brings a lower part of advantage on Bard was kept them and be it technology.
We are seeing excellent customer traction.
And the collapse of 2 platform has started contributing to our pipeline with more than half of dozen customer opportunities currently in advanced engagement.
The Calliope, 2 software and module footprint all of it.
Compatible with all of our monarch, 2 LTM NB Iot platform, which enables easy integration among get 1 L. P M and NB Iot low power cellular Iot technologies.
But the calliope 2 on more of 2 platforms sequence has the most of the advanced comprehensive and unique offering for the massive Iot market.
And the cats and the category shipments of our first generation monarch are tracking to our plan with.
With the majority of all of them in the U S.
Since launching our second generation monarch 2 of last year.
The majority of all fall out of new Cat M. NB design wins at the base from this new platform.
In addition to cost improvement monarch, 2 brings many advanced features including over 50% reduction in power consumption.
That enables the sort of long battery life essential for most of the Iot devices.
We have already secured many of monarch 2 design wins in numerous innovative Iot applications, including metering healthcare smart home tracking kind of environmental monitoring.
The niche application, we have multiple customers with at least 1 being a major player in such a space.
We are happy to say that more of 2 production is ramping and we are shipping in volume towards the earlier design wins.
1 of our 2 design wind projects are progressing as expected with almost no exception and all of the projects are of placing orders for either of the production ramp fees or for the full production and building out of backlog.
I'm pleased to see that we continue to add the new customers and all of the market segments of parts of our huge.
This quarter was reached with the new opportunities in meter, Inc, tracking and weird animals.
1 of our 2 is now the primary drivers of our sales pipeline development and fueling our future growth.
Switching to broadband Iot overall.
Over all of the sector of our business had a mixed performance profile on.
On 1 side, Jeff back as the headwind, but see bad <expletive> and totals 5 G are doing of anyway.
Starting with the legacy cash forecast 6 business.
Jeff back because of significant headwind for year over year of growth with the greater than $20 million of decline over last year.
We are picking up with the growth in massive Iot broadband shipyard as 10 verticals.
Our business in emerging markets is flat with all of our existing ODM customers in Asia.
All other well recently 1 of new customer in the region that we believe can deliver growth an increase of our market share.
In addition.
We are pursuing a new cash forecast 6 deals in the U S and Europe that could bolster growth next year.
The <unk> continues to be on attractive market for us.
It offers the short term driver to strengthen our broadband Iot business in the U S and gives us the ability to expand our broadband business to the enterprise space, making it less carrier centric.
We are making progress with the educational institutions for remote learning applications.
A lot of public and private facilities and campuses that required of private networks.
Sequence Cassiopeia cat 4 cat 6 <unk> modules.
Our optimized the accelerated broadband Iot deployment on the private <unk> networks.
And we have the leading product in this category for these applications.
Overall, we are making considerable progress in our <unk> business with increasing volumes and several customers now in production.
We expect the exit the year as planned with the quarterly run rate of more than $1 million on revenue.
We are especially excited about our recent headway with 1 customer of building <unk> tablet, that's moving to full production.
For the sequence the long term gross of broadband Iot will be driven by our 5 G of tourist platform, which is under development.
Means on the schedule for the product revenue to begin in 2023.
Mobile broadband and fixed wireless access.
Continue to be the primary focus which will be followed by high end industrial end of private 5 applications.
With potential expansion into other markets through partnerships.
We are on track with our major strategic foundry partner.
And fully engaged with the NSS for the <unk> module development.
As we approach the Taurus platform something debt in 2022, we anticipate attracting more strategic partner of <unk> customers to support us even during the development phase.
The vertical categories performed well in the second quarter.
Finally for the over satellite projects are the main driver of this business category.
With contributions from other projects for public safety military and avionics applications on.
I'm pleased to announce that we have closed the new deal with the Sky 5.
Whereby whereby we are adapting our cassiopeia platform for the specific use case in satellite and avionics.
Please remember that the revenue reported for this category.
So includes the all of our $35 million I know the deal from our measure of <unk> strategic partner that.
So thats recognized over the period of Taurus platform development.
Let me move now to our go to market partnership.
Partnership sort of becoming a significant growth driver for <unk> as they are key for all of our massive Iot business.
We continue to develop the close working relationship with NSS NXP on microchip and on.
We are now also engaged with the fewer new MCU partners.
Our current relationships cover of up to 60% of the MCU market and give us tremendous market reach.
These partnerships also strengthen our position with tier 1 customers.
Providing access to larger projects.
Yeah.
Meaningful progress has been made by our teams on various projects and design opportunities with our partners.
In particular, we launched the NSS monarch based module and me.
The sales pie of generated by the lunch it looks very promising.
As has already landed the few design wins and attracted several deals with meaningful revenue potential.
The <unk> towards an outstanding module partner on bus kept 1 and got them NB platforms.
The business from them and boss categories.
Is it growing.
And we are eager to begin shipping to them, our second generation platforms monarch, 2 and calliope 2 for the future modules.
We are engaged with other module partners looking to differentiate the product offering with sequence of second generation platforms, and we anticipate extending our relationships and securing new projects in the future.
Our skyhawks relationship continues to develop.
We previously announced the joint offer for a tiny form factor.
N B system in package, featuring special packaging to sustain harsh environment phone in the water and gas meter applications.
The first generation Sip.
Our system in package was based on monarch and is now shipping to a few customers who are in production.
We are now developing with skyhawks of second generation Sip based on monarch, 2 with the goal of achieving the full benefit of power and cost improvement brought by our newest get them and be it technology.
This new system in package has been selected for the measure of metering design wind project with substantial revenue potential.
Our product and go to market strategies are delivering north of the results as evidenced by the high massive Iot growth.
And the advancements in our Crs business.
Our next generation products are advancing and gaining solid traction in multiple markets.
The highlight in 2021 has been the success, we've had with our partnerships that are allowing us to scale, our sales capability and expand penetration in this large fragmented market with many enterprise and industrial customers.
These growth levers will continue to work together to strengthen our market position and are expected to drive our growth for the remainder of this year and for the future.
Let's shift gear gears to talk about the supply chain challenges that are impacting the semiconductor industry.
And the end market across the globe.
I'm sure you're familiar with this team.
And I've heard this from other companies 4.
<unk>. This is obscuring the magnitude of our performance and masking the acceleration and the massive Iot demand.
We are a leader in the Iot cellular market, we are moving forward with discipline and energy toward our goals.
Confident that we have a meaningful long term opportunity theoretically grow our business.
If we did not have the headwind from the supply chain challenges, we would be covering more ground faster.
The long lead time components that we used to build our cat 1 cat M N B and C that as modules on having the biggest impact on our module business.
Unfortunately, these challenges are increasing in Q3, specifically for our massive Iot modules.
Sequence of operations team is working with our suppliers to expedite.
We can this year and anticipating our 2022 production to limit future impact.
With TSMC, we have secured most of the wafers, we need through the end of the year.
We are now shifting focus to the challenges we could face in 2022 as the semiconductor supply constrained environment may extend the 1 Maurice.
We continue to stay close to the TSMC with regular dialogue and are optimistic that the industrial will have some relief in the second half of 2022.
Last but not least let's address the substrate shortage.
In addition to some price increases.
Lead times have gone from 60 days up to more than 300 days.
We did quantify of various sources to have more options for our ships.
But this was not enough to cover all of our demand for the second half of 2021.
The major issue of specifically limiting Q3 chip products.
We have placed purchase order to cover a large portion of 2022 production and we are hopeful that we will receive our allotment.
<unk> 2022, putting us back on track.
Orders are not being completely fulfilled and we are delaying shipments until we can get the items of manufacturers that said the year on year the growth outlook for massive Iot the remains strong for the second half of 2021, despite supply chain headwinds.
Thus far we of being able to support the new customers in our pipeline.
With a lot man of chips, all modules needed to support the production ramp.
Despite the overall demand for materially exceeding the available supply.
We do not believe the supply chain issues are putting us at the competitive disadvantage the.
The dynamics driving our growth are still in place and sequence is emerging as category leader.
Our top 10 massive Iot customers could generate annual revenue close to $50 million next year kind of grow 50% per year in the next 2 years.
Importantly, given the robust demand we are experiencing we believe our overall growth trajectory and the investment thesis for our business remain intact.
And we anticipate achieving our medium and longer term growth objectives.
As the industry wide supply challenges.
Some of it.
Let's now transition to the most compelling aspects of the cost story.
Our pipeline for future of our future business.
This quarter, we have grown our sales product pipeline.
The 1 over $600 million.
With the design win portion of accelerating.
Increasing by 18% to 280 million debt.
We are now working on nearly 100 design wind projects with over 40 projects in the production fees.
Primarily in massive Iot application.
As well as several of <unk> products.
The remaining 60 design wins are advancing to revenue generation as customer projects move to manufacturing.
And 15 of them placed pre production and production orders in the second quarter.
Yes.
Although demand currently exceeds the availability of material for chips and modules.
We are managing our capacity to serve of new customers, who are on the design phase.
And of requesting chips and the preparation for the production of around.
Our bookings are building up and we have good visibility on the projects not yet in production fees, where some customers are securing the supply in advance and of placing production orders.
In summary.
We have a record backlog.
Knowing pipeline and.
And the increasing design wins, many of which began contributing to revenue this year.
Along with continuous strategic traction in our <unk>.
We are of a sound balance sheet with over $30 million in cash at the end of the quarter.
Our significant progress in massive Iot and of broadband Crs and our growing relationships with modules and MCU partners.
<unk> sequence for continued leadership in cellular solutions for massive and of broadband.
The development of our revenue streams in the past 2 years demonstrates that our business is evolving from being the majority of carrier centric business.
To being dominated by mass of IUD and CVR S. Both of which are about enterprises and industrial businesses.
This evolution is expected to result in a larger base of diversified customers with customer project spending to have 5 to 10 years lifetimes.
Our current the analysis of our sales pipeline indicates that absent supply issues with.
Could approach $100 million on revenue of 2022.
On the grow on average of 50% per year for the following few years.
With tremendous confidence we continue to execute our long term strategy on 3 fronts.
Continuing the growth in massive Iot and Crs program of Iot.
The expansion of our go to market channels and ongoing development on our <unk> product line.
I'll turn now.
The call over to them.
Thanks, George and good morning, everyone on our revenue for the second quarter of last $12.9 million, an increase of 5.1% versus Q2 of 2020 and an increase of 4.4% sequentially.
As I previously announced 10% gross target primarily due to the continued supply chain constraints from materials.
However, and more importantly, get and price solutions remain strong and with orders in hand revenue, we expected to recognize in the second quarter has not been lost that mainly shifted out 1 or 2 quarters.
Revenue from massive Iot in Q2, 2021 increased by approximately 14% from Q1, 2021 and added 20% compared to Q2 and euro debt.
Those cat, 1 and cash and revenue increased in 2021 and massive Iot accounted for over half of total revenue.
As expected broadband Iot revenue decreased from Q1, 2021, and from Q2.2020 day to lower revenue related to jetpack portable routers.
However, excluding the jetpack business broadband Iot and grew 7% quarter on quarter in light of 5% year on year.
The vertical category, which includes the service revenue generated by our major citing the strategic.
Increased in Q2.2021 compared to the Q1 and the Q2.2020.
For the quarter, we had 2 customers and a channel partner of the each represented 10% on the wire.
Revenue.
As massive Iot design wins moving into production, we expect the number at the end customers' share diversified.
Gross margin in Q2, 2021 increased materially to 56, 6% from 48, 3% in Q2, a year ago and up from 51% in the first quarter of 2021 due to a shift in revenue mix that included higher service revenue and compare the Q2.2020 are low.
The level of module sales.
<unk> operating expenses decreased from Q1, $10.7 million in Q2, reflecting a net benefit of $1.2 million from the 1 time R&D grant and other onetime items.
Non <unk> operating expenses, meaning without stock based compensation expense.
Total of $9.6 million in Q2, 2021 down from $10.9 million in Q1.
Our second quarter operating loss of $3.4 million compared to an operating loss of $5.8 million in the first quarter of 2021 and of 5.6 million dollar loss in the second quarter at 2020.
Our net loss in Q2 was $1.3 million or <unk> <unk> per diluted avs and included non cash gains of $6.6 million from the revaluation of the embedded derivatives related to our convertible debt and from the reimbursement of debt.
This compares to the net loss of $11.4 million or 33 cents per diluted EPS in Q1, which included a noncash loss on.
On the revaluation of embedded derivatives of $4.1 million.
And the net loss in the second quarter last year was $19 million of 70 cents per Ats, which also included a noncash loss on the revaluation of the embedded derivatives of $91 million.
On a non iff's basis, our net loss for Q2.
$5.6 million or <unk> 15 per diluted EPS.
Compared to the non I address net loss of $5.1 million as of <unk> in the first quarter and the net loss of $7.5 million or 28 cents per diluted EPS in the second quarter of 2020.
In Q2, we had of foreign exchange loss of $964000.
<unk> per Ats alive.
The question of which was unrealized non cash related to the revaluation of euro denominated net liabilities on the balance sheet.
This compares to net foreign exchange gain of $1.4 million in Q1, and a loss of 505000 in Q2.2020.
Investors should be aware the possible changes in foreign exchange rates related to the balance sheet items and the marking the market of the embedded derivative 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 are excluded from our non <unk> presentation, foreign exchange gains and losses, whether realized or unrealized or not.
Yeah.
Cash flow generated by operations for the first 6 months of 2021 was $6.5 million compared to $9.2 million used in operations in the first 6 months of 2020.
Cash and short term deposits totaled $33 million at the end of Q2 compared to $18.5 million at the end of 2020.
Turning to some of the balance sheet items accounts receivable at June 30 of 2021 decreased to $7.4 million from $17.3 million at the end of 2020 Dsos were 32 days compared to 73 days at the end of 2020, reflecting an improvement in the on time and the performance.
Of our customers.
Inventories decreased to $5.2 million compared to $6.2 million at the end of 2020.
Selecting lower finished goods.
Current trade payables increased to $16.2 million versus $15.7 at the end of 2020 and short term debt from financing receivables decreased to $10.8 million from $14.2 million at the end of 2020.
Our convertible debt, which is now classified as long term increased to $32.9 million from $26.1 million.
Reflecting on 1 hand, the conversions and the repayment of the convertible notes issued in 2015 and 2018.
On the offset by the issuance of new convertible debt in April of 2020 line.
Turning to the outlet for Q3, where our customer demand would allow for sequential revenue growth given.
Given the increasing impact of the continued supply chain constraints from materials on our ability to ship orders, we are not giving guidance for the quarter ending September 30 of 2021.
We do continue to expect that non <unk> operating expenses expenses should average of 11.
Turning to $11.5 million per quarter in 2021, assuming a stable on euro dollar exchange rate.
And we expect non <unk> financial expenses to the around $2.3 million in Q3.
Excluding any foreign exchange gain or loss.
Takes into account the current level of debt and assumes interest accrued at the pick rate of 6% on the new convertible debt.
Unless we exercise the option to pay the annual coupon on the new debt and cash can benefit from a lower rate of interest of just over 5%.
We expect that cash payments of interest expense going forward will be minimal given the lower rates of interest on our government debt.
Receivable financing.
Finally for modeling purposes, the number of <unk> outstanding today is 37.4 million.
At the conclusion of this call we will post a written version of our formal remarks in the Investor Relations section of our web site on the.
The webcast and presentation page the same location of where you'll find the idea of replay.
I'll turn the call back to George.
Operator, we are now ready to open the call for Q&A. Please.
At this time, we'll be conducting a question answer session. If you would like to ask a question. Please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question of.
You May press star 2 if he would like to remove your question from the queue from <unk>.
Participants using speaker equipment, it may be necessary to pick up of your handset before pressing the star keys, 1 moment, please while we poll for questions.
Our first question is from Mike Walkley with.
Canaccord Genuity. Please proceed with your question.
Great. Thanks for taking my questions and I hope everybody the well on the call.
Hum.
I guess first question from me thanks for breaking out the jetpack to help us understand the underlying growth rates of the business.
Given the issues of your end customers should we assume that remains kind of zero for the foreseeable future.
Do we think about overall broadband revenue in the second half of 'twenty 1.
Hi, Mike.
Obviously.
Debt.
The distribution is still I mean, we don't have really any.
But I would call it the final statement of what could happen for this business from the future of if we can come back on I believe the dispute has not ended yet and for the time being I could not comment on the likelihood of getting this business as is back it doesn't mean that we're not have other business with Verizon on other deals and so on the 3 out of <unk>.
On.
Debt could be coming as the new business to replace the old 1, but the business as such.
Cannot comment on it for now and we made the assumption.
Debt nothing is going to come back from the second half of the year.
Since last quarter, the that's what I mentioned on the call.
And for the rest of the business.
We're talking about.
The E.
Our <unk> business is doing well as I said because of this is really going on line of our target the.
At $4 million of this year, and we should exit that higher level of the year you know for the next year. So things are going very well with the broadband business.
The emerging business is kind of flat this year.
We were running around the.
Kind of when also per $1 million per quarter.
And but we are adding of new customer as well recently, so the citizeness channel for the for the.
So you should look to this for the year.
Here the <unk>.
Normally it should be.
Kind of low 2 digit or very close to low 2 digit without the jetblue.
Okay great.
Helpful. And then I guess the follow up question with the <unk>.
Shifting to more of a massive Iot and your product the revenue mix.
Offset by maybe some expedited shipments and the supply issues, how does that impact maybe the of the product gross margins.
Half of the year.
Well, obviously, we had some expedite fee to pay and some price increases I mentioned, specifically for the substrate. This really it was major even on a subset, but thanks God debt the portion.
A portion of the cost of the substrate and the total cost of the chip is minor.
The minor of it's very small.
And on the other side I mean, we will follow the policy as well too.
For all new order increased the increased our pricing is always the customers. So the customer accepted as well.
The price increase that will reflect to compensate some of the discuss so we we don't see a major impact on our product gross margin and on.
In the second half of it yet.
That said with the with the revenue mix, we're expecting in Q3.
I expect gross margin will be somewhat lower in Q3.
Temporarily debt of around.
For the year, so on and the trend of not.
Not any impact on your overall targets.
Okay. Thank you everyone last question from me and I'll pass the line just to sort of your massive Iot business.
I know, you're not giving guidance, but can you give us just kind of.
Of that process in terms of how much supply could limit the ability to ramp and what the ramp might look like in the second half of the year absent some of the supply constraints.
Well, Mike as I said really the demand is huge and on and just as I mentioned to give you just the the amount of ramp.
It was explicit by saying we have like 15 projects.
Moving to production now and adding up and and so the demand is really not the gating item of the backlog is strong and and we could have really we the principal without the supply challenges that we have we could have a decent target easily of shift quarter to quarter of growth because of the book is there you know the true.
They have really by giving.
A number is really that I don't have the full picture on my supply in the sense like we're fighting to expedite some stuff to solve to solve some of the.
The station to the stock by calling the partners that we work with the accelerated and so on and until the last minute.
We have visibility every day I will say some improvement here some of whom of there without giving us the full picture.
So obviously the.
This will continue we expect the best slated to continue.
Standing well at least versus the.
The Q2, you know and growing from there, but the amount of this growth between and or is it going to be flat quarter to quarter or am I able to to make it further growth.
Kind of going from the fact that they don't have.
The in hand to ship the small limited to am I able to build the all of this new capacity.
Fair enough of good luck, managing the supply chain and I'll pass the line.
Thanks, Mike.
Yeah.
Our next question is from Scott Searle with Roth Capital. Please proceed with your question.
Good afternoon, Thanks for taking my questions.
George just to jump in in terms of just wanted to clarify quickly again that you said unconstrained for next year in 'twenty, 2 you'd be approaching $100 million in sales based on the pipeline and growing thereafter at a 50% CAGR for the next couple of years I think that's what you said also in the release you talk about returning to that target.
Growth rate of 50 per cent sometime in the medium to long term. So I'm wondering if you could clarify that put some color around when you expect that to come back and it sounds like youre expecting some of the substrate issues, perhaps to start to improve sequentially from the third quarter to fourth quarter. I was wondering if you could provide some color on that.
Hi, Scott.
I gave.
I said few things Sandy in the script, 1 which is to say first of all I give you the color about the just business in hand, what we have in hand, winning and I said like justify it looks of the mess of Iot projects secured in other words really custom.
Customer, whether we are shipping to them or are they are we're going to ship to them. This year.
Big just only on my my top 10 debt customers I can build a funnel of $50 million on massive Iot for the next year and obviously to continue growing from that and obviously, if we look to the wall pipe in order complete pipe taking of die cost not only massive Iot design.
The design win in hand, but also the design and we did the closed the year of did it didn't finish with the still hope to close the new projects to land the new projects in Q3 and Q4.
So we have the potential to add much more on massive Iot if you add to this as well the broadband business that we have in hand and design win in the seabed as in the vertical well, we could be approaching the $100 million, it's really the pipe easy to see this now we could be a little bit below a little bit above depending on the variation of it.
Would have with the remaining deals the 2 out of closing if you want.
For the for the short term and this is definitely a solid you know and if I project from my by the projection you know if I take the pipeline of look for 'twenty 2 'twenty 3 'twenty 4 we see this trend continuing for the coming 3 years.
And quite solid so the 3 that the all the issue we have is really.
On the supply chain, you know, but honestly.
We did a lot of things on the splitting next year.
On the.
We feel good with TSMC for the.
I tend to say, maybe the first half.
And I'm, hoping that beyond this life will get better it's not going to continue like this I mean, the capacity build the TSMC is building the people are going to realize that the anticipated too much and they will start using the inventor and hopefully have more room to support out of <unk>.
Growth rate, because we need really we have of high growth versus other company.
The.
So this is 1 angle on the substrate the towards the question of lead time more than really the lead time, we as I said it moved to 300 days overnight. So this block us from securing all the say short term, but for the next year with secured debt capacity.
And we are moving to.
2 of mode, where we are considering long lead time because of them.
More than 9 months on the module so sort of put we did all of what you have to do to secure if you want next year. So I don't want to say.
100% confident but.
We shouldn't be far much better than what we are today and the prevalent for Q3 is really the not so much a tie.
Tim if you want and whatever you have to do you need to.
It was not enough for us to get for example of the substrate all of what we need on time on some of the component. Even if you are not giving up you know we will continue pushing and hopefully we can secure.
The more than what I am thinking will be the minimum for us this quarter.
Got you very helpful and if I could the follow up on Mike's question related to gross margins. If you look on the mix right. The product gross margins were in the thirties.
Wondering if you could help us understand in a normalized environment.
How do you feel about the gross margin profile for the next generation products in particular.
Cat, 1 and monarch 2 are they going to be getting up to the 50% plus gross margin level.
You know I continue on.
2 to repeat the same on the chip level, we don't have any challenge and we have the profile at 50%, obviously, the very around it the could be little bit higher at the plus depending depending on where do we stand on saying the cycle of the product, but we don't we are really on this profile of the product gross margin is always impacted by.
On the percentage of modules of the strip the 2 could have on mainly our cat 1 module they have lower margin.
Then versus GAAP and journal. So this this could.
The impact our gross margin profile on the product.
The wishes.
Couple of cents to the service revenue will bring us back to the 50%. So that's how we see it now down the road you know on 1.
1 of I believe we are achieved we will be adding about 100 million dollar in and our challenge becomes really the profile because you could imagine that the company going let's say of $150 million on the service revenue staying at the.
The <unk> $20 million, but the rest of the product.
Big chunk of our product is modules than this kind of create a different profile in terms of gross margin and reduce us below 50%, but the solution for this is already in.
In place and also implemented and this can be moved through partners and distributors to turn the any module business that we have to turn on a completely to chip business and just on milk I'll say the business and keep it with the gross margin of close to the 50 or above 50% and closer to 50%. So this is really not at all of the challenge.
On a concern for me.
It's a part of the execution plan that we're working on and in the short term the snap on issue because as we said the percentage of services is by far the compensating the module.
Low margin, okay, great and lastly, if I could on on the strategic front.
You've added Sky fives of the list, but could you update us on what debt the strategic opportunity pipeline looks like and the timing of some additional opportunities I think as well you indicated now youre working with the MCU providers that represent about 60% of of global units.
Are there some other things going on on that front as well with the additional potential on to your partners. Thanks.
Yes.
Definitely the the go to market I believe this is remains 1 of the solid the angle of sequence and the key component there as the partner with the MCU vendors as well people like skywalk sense of module vendors as well to accelerate I will say or the ease our go to market in this fragmented market, which is more of it.
Not the carrier centric, it's more of businesses that you need to address them in the numbers of very large.
And here obviously, the the partners we are working with.
The rest of ship is of great and as I said, we start seeing results on the pipe.
And we have a new <unk> partner of the 2 hour work on you can name a couple of the big guys left the didn't mention their name you could assume debt. We're engaged with them we have projects with them not public yet, but it will be sort of become public 1 time will come but the simple similar relationship is really expanding of the games sequence is really can be.
Be seen as the cellular provider to all of those MCU partner the day Miss seller.
Complement the connectivity that of wireless connectivity with the MCU.
Great. Thank you.
Our next question is from Raj Bindra Gill with Needham and company. Please proceed with your question.
Good morning. This is actually the dentist to ask the questions on behalf of Rajiv.
Georgia have.
The here later ones here for you could you speak a little bit more about these other substrate issues I know what specific component are you missing on the what are you kind of having trouble putting together and additionally, I think you'd mentioned something about you know first half improvements or the some kind of comments from T. S. M. Here what are you referring to on can you provide any more kind of gen.
The commentary about maybe the wafer supply situation.
Hi, Dennis.
The on a subsidiary of <unk>.
Obviously, you on when you build the chip you need the died the wafers from TSMC and then you need to package. It and you go through of packaging houses, where they use some substrate.
The 2 finished at some level say of the price so just really.
You know maybe negligible piece of the of the of the product, but unfortunately with all the supply shortage in the.
For many many reasons very hard even long list to go with it but the the lead time of those component of all access to the subsidy it came from something really.
60 days.
Solved by the TSMC in other words on the normal days, you would never think about it and it became like 300 days and obviously.
This happened almost overnight. So if you don't have in the pipe substrate reserve for your chips enough you will have a problem because we are not able to finished assembly of the chips and this is by definition impact all of our chips broadband massive Iot on something that happens it depends depending on the situation we.
I'll say, what we are selling the masters is obviously a massive Iot. So the demand is the big there. So obviously the challenge we have more challenge on methylated and of broadband because in terms of inventory. What we had in hand was more of enough to absorb then on the rest of Iot and as I said, what we did there is the central essentially selecting new substrate supply.
Sears go through qualification process, which as you know it takes 3 months to get something like this qualify it and from there have more options, but unfortunately, the lead time is very very hard I mean, we improved some of them below 300 days otherwise on unable to ship anything in Q3, but this was not enough by paying some expedite fee and so on so this is the.
Really the the challenge on obviously, if you if you have the wafers and you don't have the substrate you on.
On a problem, but the substrate is not limited and it sounds like it's on.
It's just only the lead time in other words, we placed the order already for next year, we cover.
And of quantity that we believe we are good but for the short term it was not enough to get everything we need.
And on the wafer and on what they said on TSMC.
I believe obviously the claims today is still that the charters will remain all of next year, but we know we know all debt the capacity more capacity will be ready for production in Q4 next year. So if you put the equation you could say like okay. If there is of new capacity coming in Q4 people.
Ordering 1 quarter ahead of time to keep their inventory of strong they are going to start using the inventory to optimize the <unk>.
Inventory in general and on the <unk>.
Balance sheet and this hopefully will alleviate the demand in the second half next year. That's my theory, then it's not really.
Uh huh.
Im reading.
Breathing this by looking towards happening in the market I believe the challenges are going to continue next year, but I am hoping like mid next year, we'll start getting the relief.
And on the on the wafer chucks.
Got it. Thank you and then I think you there was 1 of the comments you've made about I think of it with monarch, 2 and Calliope 2 and up.
Shipments I think were you referring to shipments to Renaissance from could you speak more about that and provide some clarity there.
I mean.
No I mean, the Calliope 2 is not shipping yet capital with samples in the standard test. However, we have engagement with customers on building the part 1 of our tours definitely shipping in the 4 first design win we got the at the beginning of the.
The year or late end of last year and this is moving into production and if I talk about our NSS Renaissance adopted reselling of module with sequence using monarch and monarch, 2 and the first generation of modules using monarch has been of lunch day launched this in May So it's public information and obviously they have.
As I mentioned nice pipe and many design wins. So it was very successful launch.
I have to phrase it.
With.
The minimum wards.
And obviously this is moving to business, but on the same time, we are working now with them on monarch, 2 because they will be launching as 1 of the platform with monarch 2.
To complement the offer to market and later on the <unk> launch as well collect the 2 plus other assets we have.
On the comprehensive partnership covering all of the portfolio of sequels, including by the way <unk> told us in the future.
Got it that was really helpful. Thank you Kurt.
Okay.
Our next question is what the Craig Ellis B Riley Securities. Please proceed with your question.
Yes, thanks for taking the question and George and Deborah Thanks for all of the detailed information so far so I just wanted to start with the clarification I know, there's a lot of interest the quants and more broadly around what exactly is happening with the supply chain gets and takes them you've detailed that considerably but is it possible. If we look back of the.
Second quarter to quantify the revenue impact.
Either way per or substrate or backend issues that were in play in <unk> revenue.
And took the revenue in the debt it depends on the reference I have to say because you know we could we could do a couple of million dollars more even on Q2 honestly from the beginning of the quarter because I knew what were my limitation was.
I believe at the end we were like we had some.
Some unfortunate issue on the lost the.
A couple of days with some of the supply out of the didn't ship on time day to have a couple of these delays and so on that was impacting by around 700 thousands of them.
I have to give the number for the quarter, but we could do more horizontally. If you want it's not the.
It was just only from the minimum of that hoping we get external impact.
Some of issues I'll say, because you know that you need to keep in mind that the supply chain..1 of the challenge is not only debt you have limitation on you cannot scale, but once someone is promising use something.
This promise is valid until cash.
You need to wait until he delivers on all of his through or not because anything unusual happening in the in the production.
Could impact them because everything is on the edge and an issue there could delay.
A week 2 weeks, they're here on that and can impact the production promise 2.
That's helpful. The charge and then the follow up.
You've mentioned the new MCU partner unannounced, but work is underway so exciting to see that potentially another large.
Player of joined share your list of existing partners. The question is really this web with both of the MCU partners some of the distributors.
In this environment that we've been in for.
2 to 3 quarters of our component constraints are really tight.
How is that impacting just the day to day with you and your teams as you work with those entities.
Typically I think most of the work would be on design wins and converting design wins to revenue, but now we have the.
The supply chain issues, you're clearly getting very good incremental momentum with new design wins, and bringing new net new projects towards the revenue generating phase, but what does that mean as you work with your partners with the with the overhang of the supply issues that we have on what bought mean when it's not there.
Well.
You're absolutely right Rick I mean, all of this is some piece of it is not impacted at all because it's part of the design win and totally conversion customers.
But definitely as we have for example in Q3, we have some measure of shipment to some MCU partners without naming which 1 but we have some design win the coming from the <unk> 1 we have order in.
The they want them in Q3, and I don't know if I'll be able to deliver before the end of September or October of how much I delivered on sept of it how much of October. So we have those challenges. The other part of I will say to the challenges we have as well with our direct customers that we want obviously the way we out of managing this and this is very important we are giving some priority.
You want we were net cutting customer because we have some customer for example, lets us from a customer asking for 100000 units and I have let's say 5 other customers. They are in the pre production each of us asking for a <unk> unit.
So obviously, we don't want to cut those 5 because we want them to move and to some extent we out of cutting the guy who has 100 K to give him 90 can take 10-K from him to distribute it to 5 other customers. So we're doing all of those.
You know the optimization.
The main interest debt is to keep all our customer moving without delaying their lunch and this is okay. I mean, I don't see on Asia today.
And customer appreciates, let you out of doing for them well of a lot of positive feedback because everyone is living in the same environment.
That's really helpful. And then George you mentioned that.
That you're on track for part of sampling and in the second half of 'twenty, 2 and then revenue generation in 'twenty..3 can you just talk about some of the key milestones between here and there to help illuminate what the what some of the.
The bigger issues of milestones are that the team needs to get through so that we are on track with that important project.
I mean, obviously the first milestone you know, which is really getting the tape out of the chip. We we have something happening. This year and are we still on time, we have RF and baseband chip.
Don't want to give more details for competitive reason, but that 1 on.
1 of our tape out will be going to this year as planned and the other day part would be the beginning of next year as planned. So this is really key and then obviously, we expect like the mid next year to start getting the solution you know in the Q3.
The showing the full solution with all of the software and all of the integration happening and to start the preparing for certification with carriers.
Got it and then lastly, not to ignore your debt Brian.
The thing is we look at the third quarter that we should be aware of with respect to either cash benefit of cash use beyond just the things that we would see as we look down the P&L and think about typical working capital Gibson takes.
I know in the third quarter are there now and revenue.
The items that are that are expected.
Got it thanks team.
As a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad.
Our next question is with Tristan <unk> Baird. Please proceed with your question.
Okay.
Yeah.
Okay.
Tristan are you there.
Yes can you hear me now.
Yeah.
I worry about.
Yeah, a quick question on the gross margin you talked about.
How the impact of the supply demand imbalances unit will have.
It would still be pretty neutral to gross margin. The here, even though there's a bit of an impact in Q3.
What about next here.
Do you think you can.
Basically mitigate.
The supply demand situation by improving the mix.
What about your ability to pass on some of the cost increases to customers you know until you get.
The better way for the availability, which you mentioned would be second half of next year or is it going to be margin neutral event as well for next year.
Well first of all I mean the.
The the good news is that the TSMC and maybe this is something good about TSMC I mean, the announced publicly they they didn't increase the price and also so at least the biggest.
Bulk of the cost of the chips.
Coming on the wafer level this didn't increase.
We had an increase on the substrate on.
On other material for the modules and as I said all of this the globally, we are able to contain it.
And we managed to pass the price increase we know we have already orders.
For next year at higher price from the same customer or whether they accepted the our price increase that we took to some of them to customers. So we applied this to all of our customers you know established.
With the price increase and we promise to bring back the cost of the price to the same level as soon as our cost will go down so but honestly, it's not really a major concern.
And it will be on the on the on the limit if there is an impact until the really on the edge.
Okay.
Okay and then.
What are the are the potential for me revenue standpoint.
Hi, Chi tourists line when <unk> seen 23, what are the.
The initial indications from the customer end and do you think that the.
How do you think the revenue stream eventually is going to compare with what you've been able to achieve you know in the past few years with you of faulty Madam.
I mean, the the good things about the <unk> I mean, if you're on from this angle of the 5 GSP is very high.
We're talking about the today are well above $50. The chipsets of this evening will go down we believe this will go below 50.
So the ASP will be high end.
And just to convert it to a router on for free if you can barometer on fiber to the router on oncology.
Whether on for <unk> today on when we were selling the jetpack you do like the.
The $10 and average, let's say ESP.
The.
But the device and you are going to make at least 3.4 X.
This level.
1 of this will be shipping. So we are quite bullish on this and we obviously it depends on the market share and the number of units will be selling now 'twenty to 'twenty 3 will be the beginning obviously is that the.
And then the photo to the full year in terms of production. We know you know that we have already.
Customers waiting for us.
And the way.
We have potential vessel. So this could start maybe making.
Is the <unk>, the $10 million to $15 million and then from there on a scale to $50 million of the following year just coming from the factory.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to the Doctor Cram for closing remarks.
So think of again for joining the call today, we look forward to catching up with you and again, our third quarter earnings. Thank you very much. Thank you operator.
This concludes today's conference you may disconnect your lines at the time. Thank you for your participation.
Okay.