Full Year 2022 Sequans Communications SA Earnings Call
Speaker 1: The.
Speaker 1: The.
Speaker 2: Greetings, and welcome to the sequence communications SA fourth quarter 2022 financial earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Rogers, Managing Director of Haiti-Nair. Thank you, Kim. You may begin.
Speaker 2: Thank you, Maria, and thank you to everyone participating in today's call. Joining me on the call today from Sequence Communications are George Carram, Chairman and Chief Executive Officer, and Deborah Schoet, Chief Financial Officer. Before I turn the call over to George, I'd like to remind our participants of the following important information.
Speaker 3: and other forward-looking statements regarding future events or our future financial performance and potential financing sources.
Speaker 3: All statements other than present and historical facts and conditions contained in this call, including any statements regarding future results of operations and financial positions, business strategy and plans, expectations for future product sales, potential for future strategic licensing deals.
Speaker 3: or other strategic transactions, the impact of the 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, our forward-looking statements.
Speaker 3: 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.
Speaker 3: with undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements.
Speaker 3: More information on factors that could affect our business and financial results are included in our public filings made with the Security and Exchange Commission. And now I'd like to hand the call over to George Karam. Please go ahead, George.
Speaker 4: Thank you, Kim. Good morning, ladies and gentlemen. Welcome to our fourth quarter and full year 2022 financial results conference call.
Speaker 4: I'm pleased to report that we ended 2022 with solid financial performance results.
Speaker 4: showing $60.6 million of yearly revenue.
Speaker 4: and 71% gross marsh.
Speaker 4: Year over year this represents 19% growth in revenue and 17.4% basis point increase in gross margin.
Speaker 4: Consequently, we achieve NANAFRS operating profit of $1.6 million for the full year 2022, compared with the NANAFRS operating loss of $13.2 million in 2022.
Speaker 4: These results are a particularly outstanding achievement given our industry's supply chain and inflationary challenges in 2022.
Speaker 4: In fact, the supply chain disruption was the principal cause of the delay we faced on our Design Wind project launches in 2022.
Speaker 4: The significant factor in achieving a year of growth and improved operating results was our ability to leverage our 5G asset and its scarcity value to create a new IP licensing business that was able to compensate for product shipment delays.
Speaker 4: and boost our gross profit. Looking back at the key highlights 2022.
Speaker 4: There were three notable accomplishments.
Speaker 4: that benefited our results and more importantly, will position sequence for sustainable long-term growth in the cellular 4G, 5G IUT mark.
Speaker 4: I said before, the first milestone was securing 5G licensing grabbing.
Speaker 4: We closed the multi-year strategic 5G licensing partnership for our Taurus 5G platform valued at more than $50 million.
Speaker 4: The deal adds licensing revenue over three years and will position to royalty payments for up to ten years once the tour is platformed.
Speaker 4: start shipping to customers. The licensing revenue from this deal supported our revenue growth, increased gross margin, and narrowed our net loss in the second half of 2022.
Speaker 4: The second key highlight was the growth of our product sales pipeline to over $700 million of three-year life revenue with $350 million in design wins primarily driven by our LTM BIUT Monarch 2 platform.
Speaker 4: These design wind projects are expected to convert into a $100 million in annualized 100% high speed crab you add for room.
Speaker 4: We also have further potential.
Speaker 4: From the other half of the pipeline that covers the advanced design in opportunities.
Speaker 4: which have at least a 50% probability of converting to design wins.
Speaker 4: The third key accomplishments was the continued innovation in our product line that positions sequence with the comprehensive 4G5G portfolio optimized for IUD.
Speaker 4: The market reception of our second generation Cat1 chip, Kali P2.
Speaker 4: has been incredible and the platform is already adding new design wins and design ins to our revenue pipeline.
Speaker 4: In tandem, innovation in our LTM and BIUT MORAC 2 platform added new features and improvements
Speaker 4: for furthering our leadership in this sector.
Speaker 4: Lastly, we made tremendous progress on our Taurus 5G platform and planned to sample the 5GNR platform this year. Let me go into each of these in more detail.
Speaker 4: Taking a closer look at the financial results, the fourth quarter revenue increased year over year by 15%.
Speaker 4: in line with our expectations. The contribution of licensing revenue and the mix of products between chips and modules lifted our gross margin to over 75%, significantly exceeding our forecast.
Speaker 4: The improvement in gross margin delivered is substantially proven in our bottom line, improving our net loss by $2.8 million compared to the fourth quarter of 2021.
Speaker 4: For the full year, the primary growth drivers were the nearly 40% increase of massive IUT-LTM ring.
Speaker 4: despite project delays.
Speaker 4: and over 50% growth in broadband IUD from our 5G licensing grant.
Speaker 4: These gains were offset by the expected decline in our first generation CAT1 product revenue, mostly due to higher than normal revenue in 2021 from this product line. As one main customer, carry Oktober scared of cats.
Speaker 4: built over six months of inventory to avoid a potential supply shortage.
Speaker 4: Consequently, the net result is in nearly 20% total revenue growth in 2022. Despite the various delays we had with customers, products, lunches that were expected in the second half of the year.
Speaker 4: The delays were mostly due to the supply challenges.
Speaker 4: our customers were facing with their legacy products.
Speaker 4: which caused them to prioritize fixing shortages in existing old generation products and reduce the priority of new projects with sequels.
Speaker 4: The good news is that none of these new projects was cancelled.
Speaker 4: And as the supply shortage issue appears to be behind us, customers are pushing to finish developing their new products.
Speaker 4: We expect the mass production launches to start in 2023 and early 2024.
Speaker 4: Turning now to look at the 700 million dollar products pipeline and our success in various months.
Speaker 4: Today, over 80% of the product sales pipeline is in massive IUTs.
Speaker 4: The broadband IoT portion is expected to accelerate in the future with the launch of our 5G source platform.
Speaker 4: Keep in mind that the sales pipeline KPI represents the sum of three years of revenue of all sales opportunities.
Speaker 4: starting from the market launch date of each customer product.
Speaker 4: Half of the sales pipeline is from secure design wind projects.
Speaker 4: with some in mass production already generating revenue and others in the design phase with revenue to come once our customers launch their products.
Speaker 4: The other half is about advanced design in opportunities we are working on to win. Note that we are not counting here all opportunities our sales team sees but only those with at least a 50% chance to be won.
Speaker 4: Kalai P2 platform is already adding to the DesignWind pipeline.
Speaker 4: This will be our next product growth level.
Speaker 4: with design wins expected to accelerate this. LIP2 has the potential to double our addressable massive IUT mark.
Speaker 4: Given that sequence recognized early on that CAT1 would be required in many IUT applications
Speaker 4: and would complement LTM and BYUT. We now have a competitive advantage.
Speaker 4: that will enable us to take significant parking share in this segment.
Speaker 4: In terms of massive IOT applications,
Speaker 4: We have secured many customers and projects in Smart City.
Speaker 4: specifically in the smart meter.
Speaker 4: These applications represent over 40% of our massive IUT design win pipelines.
Speaker 4: The power consumption performance of 1R2 was a critical advantage in this segment.
Speaker 4: now estimated to be about 30% of the massive IUT market, and expected to grow threefold in the next few years.
Speaker 4: Also, the Cat1 product category is required for some smart metering.
Speaker 4: Specifically electrical meters in Japan.
Speaker 4: With nine customers and metering, mostly Tier 1 players, we should be able to grow our market share to over 40% and secure a sustainable revenue source for the next 10 years.
Speaker 4: That's it.
Speaker 4: Keep in mind that meter qualification can take at least a year longer than other
Speaker 4: IoT devices before deployment.
Speaker 4: Thus, the metering segment traveling around is slower than other applications.
Speaker 4: We are entering 2023 with a couple of metering projects in mass production.
Speaker 4: A few others planned to launch in 2023, and several more to launch in 2024 and even early 2025.
Speaker 4: Patience is the price to pay to enter the sludge and persistent market.
Speaker 4: Another key massive IUT vertical.
Speaker 4: where we are having great success is asset tracking and telematic fleet management.
Speaker 4: sequence platforms are ideal for these applications where both LTM and KET1 are required.
Speaker 4: Today, applications in this vertical represent about 20% of our current massive IUT design wind pipeline.
Speaker 4: The balance is made up of winds in a smart home and security, both important segments, and other smaller vertical like medical and a few other industrial applications.
Speaker 4: Let's analyze how the three-year life revenue of our design wind pipeline will convert to early revenue.
Speaker 4: Considering our massive IUT design wind pipeline,
Speaker 4: We estimate that when all the customer projects are launched,
Speaker 4: The annualized peak revenue of in-hand design wins will exceed $100 million.
Speaker 4: Reaching this level depends only on the launch date and the ramp-up rate of each project.
Speaker 4: Currently, less than 20 percent of our design win projects are in full production.
Speaker 4: Based on customer's plan, we anticipate launching another 45% in 2023 towards the second half of this year and the balance in 2024.
Speaker 4: This gives us a high level of confidence.
Speaker 4: that despite the level of product shipment we have today, and the headwinds from excess inventory in the channel, we could obtain the $100 million.
Speaker 4: in 2025 just by supporting our current customers to move their projects into production.
Speaker 4: This would not include future design wins and more specifically those currently in the advanced design stage that constitute the other half of the $700 million in our sales pipeline.
Speaker 4: I haven't focused on this portion in past calls.
Speaker 4: But I want to call your attention to the potential this portion of the pipeline has for future revenue.
Speaker 4: If in 2023 we can move 50% of advanced design in projects to design wins, the design win portion of the three-year life revenue pipeline KPI would grow to over $500 million by year end.
Speaker 4: This would increase the design when annualized peak revenue to $150 million mainly based on sales of Monarch II and Calliope II.
Speaker 4: The success of Kala'ipi2 significantly contributed to our design in Pipeline in 2022.
Speaker 4: About 60% of the advanced design in pipeline is CaliP2, which also reflects the higher ASP of CAT1 vs LTA.
Speaker 4: We are uniquely positioned
Speaker 4: There is a big CAT1 market and we primarily compete with Chinese technology.
Speaker 4: Keep in mind that our channel partners have helped us grow our SysPipine.
Speaker 4: And this will continue in 2023, specifically with Renesas, who will be launching new modules integrating our chips.
Speaker 4: The RNSS partnership has been highly successful for sequence.
Speaker 4: They assisted us in increasing our market reach and solidifying our brand strength.
Speaker 4: Together we can provide bundled technology to customers combining sequence cellular IoT with other IoT technology from RunSS as they have a large product portfolio.
Speaker 4: Together, we closed many Tier 1 design wins and are working on many more potential wins for 2020.
Speaker 4: Our third key accomplishment in 2022
Speaker 4: with our continued innovation and product launch.
Speaker 4: The most exciting news here was the KaliP2 launch.
Speaker 4: An interest has exceeded our expectations.
Speaker 4: inclusive program should have
Speaker 4: was to expand our market share in CAT1 beyond what we achieved.
Speaker 4: to expand our market share in CAT1 beyond what we achieved with our first-generation Calliope platform.
Speaker 4: giving us a comprehensive massive IoT product roadmap that offers multiple cellular IoT variants for a broad scope of use cases.
Speaker 4: Ideal applications for Cali-P2 are in smart home and security that choose video and voice where LTM capabilities are limited.
Speaker 4: We also see an opportunity for CAT1 speed in some electrical metering and telematic applications.
Speaker 4: Particularly, one mobility is required.
Speaker 4: Since the CAT1 standard was conceived as a derivative of the CAT4 category,
Speaker 4: Must cellular networks have better coverage with Ket1 than LTM or NBIUT, particularly in Europe ?
Speaker 4: To ensure better coverage, many mobile applications
Speaker 4: even with low batteries, consider the small price premium worth the better coverage of vegetable oil.
Speaker 4: Today we have secured 3-tier-1 design winery with Kali P2, an R-Engage and over a dozen additional advanced opportunity.
Speaker 4: some of which may close the score.
Speaker 4: The LIP2 positions us to become the market share leader in Cat1, and my confidence level in delivering returns on this investment is extremely high.
Speaker 4: Other innovations with delivered in 2022 include improving our Mark II platform offer with the new advanced features.
Speaker 4: to maintain our leadership in the LTM and the Agutis.
Speaker 4: to new capabilities.
Speaker 4: A GNSS and ISM have been added.
Speaker 4: with higher ASP, they bring 15% more revenue per unit, as well as improve the gross mass.
Speaker 4: TQANPS GNSS supports most of the IoT tracking use cases and is fully integrated with more like two softwares.
Speaker 4: It provides a very competitive low power GNFS solution.
Speaker 4: delivering accuracy on part with legacy GNSS chips.
Speaker 4: We have customers adopting this.
Speaker 4: and we'll have one of our two shipments with GNSS enabled this year.
Speaker 4: Another key technology differentiator we released in 2022 is our ISEM enabled more to ensure SIM-IP is embedded directly into the chip.
Speaker 4: TQAN was the first to put this capability on a modem chip. We are working with several partners to bring an end-to-end solution to market with remote and provisioning for IoT devices.
Speaker 4: A few alpha customers are now engaged.
Speaker 4: and we should start shipping ICM enabled more like to this year. We are also seeing strong interest in metering and other IEC applications that may remain in use for years and may need to change some provisioning during the device's lifetime.
Speaker 4: Another improvement of the MARAC-2 platform was a 20% reduction of porconsumption in connected mode operation, which is crucial for gas metering applications.
Speaker 4: Also, we have enabled the integrated low-power sensor hub feature resulting in a lower-cost solution.
Speaker 4: Last but not least, we have made significant progress in developing our 5G Taurus platform.
Speaker 4: We sampled the radio transceiver chip last year.
Speaker 4: an R-On track to sample the base-1 ship this year. We have engaged many customers building various 5G broadband devices.
Speaker 4: And the feedback on tortoise specifications and cost structure is highly attractive to them.
Speaker 4: We are very excited about bringing this platform to market this year and start adding another growth level to our sales pipeline.
Speaker 4: For Fagetor's addressable market, we'll exceed $1.5 billion of chip sales by 2025.
Speaker 4: thus doubling the size of our massive IUD market.
Speaker 4: One last item I want to discuss is IPLite I think which is a new growth lever for signals. I think this is a new growth lever for signals.
Speaker 4: We successfully launched an IT licensing platform with our 2022 5G licensing and RYLD partnership.
Speaker 4: This deal is progressing very well and we met all the deliverables and milestones as planned.
Speaker 4: Besides the three-year lasting revenue, we firmly believe this program will generate a royalty revenue beyond the three-year period.
Speaker 4: Our partner had a substantial market share in two market segments where the sales of the tourist platform should provide sequence an additional $5 to $10 million offer yearly yearly
Speaker 4: Also, we are having new discussions with our partner to expand our collaboration on a couple of fronts.
Speaker 4: Particularly, we are discussing an exciting massive IUD opportunity with the product revenue to see course.
Speaker 4: We hope to update you on this development in the near future.
Speaker 4: Now, from this first licensing win, we plan to scale this FGIP platform to new applications and more importantly, we are engaged in discussions for several new potential IP licensing opportunities for our 5G tourist technology. Our discussions are advancing. Thank you.
Speaker 4: and we are targeting to close at least one licensing agreement.
Speaker 4: closed at least one license agreement by the end of the second quarter.
Speaker 4: The CIP licensing and Arroyo T Business is practically a full margin business that will add our product revenue to improve gross margin and profitability.
Speaker 4: We are convinced that the scarcity value of our 5GIP can be leveraged to drive our growth and profitability and this will create more value for shareholders.
Speaker 4: as we look to 2023
Speaker 4: We anticipate product revenue growth to resume in the second half of the year.
Speaker 4: for not experiencing a demand issue as evidenced by the significant increase in our fiscal pipeline over the year.
Speaker 4: The issue we face is a matter of timing related to our customer lunch.
Speaker 4: across the semiconductor industry.
Speaker 4: High inventory supplies are pressuring forecasts for the first half of 2023. We are also seeing this, particularly with one key customer who was regularly buying 2 to 3 billion dollar per quarter.
Speaker 4: Industrial consensus sees a bottoming of this effect in the second quarter and a resumption of growth in the second half of the year. Our outlook for the year, Endeavour's quarter.
Speaker 4: which has historically been a seasonally lower quarter for us, aligns with this market view.
Speaker 4: In summary, 2022 was a solid year in terms of our financial performance.
Speaker 4: significant growth of our design wind pipeline.
Speaker 4: Dexceleration of our competitive position in the product landscape.
Speaker 4: and the monetization of one of our most valuable assets.
Speaker 4: We are tapping multiple growth levers. We have built, differentiated, innovative and comprehensive product portfolio, covering all massive IoT market segments.
Speaker 4: We have a growing sales pipeline with Tier 1 customers.
Speaker 4: The risk of losing design wind projects is low.
Speaker 4: Our team and channel partners focus on bringing more opportunities into the pipeline.
Speaker 4: sequence had significant wins in 2022, giving us a solid foundation to build over the next few years.
Speaker 4: Taurus 5G is a unique asset with great potential for both product and licensing revenue streams.
Speaker 4: sequence has a well-defined diversified strategy to group.
Speaker 4: In 2023, we intend to further monetize our pipeline, winning new projects.
Speaker 4: Draws at least one more IP licensing deal.
Speaker 4: and sample our Taurus 5G solutions.
Speaker 4: Finally, let me stress that sequence unique position in the cellular IUD space makes us attractive to many potential partners.
Speaker 4: We have numerous avenues open to us and the board has formed a special committee to explore strategic options as well.
Speaker 4: We will evaluate every tool in our toolbox to unlock shareholder value.
Speaker 4: My confidence level has never been higher for our enduring success.
Speaker 4: So now turn the call over to them.
Speaker 3: Thank you, George, and good morning, everyone. Revenue is for the full year 2022, increased 19% from 50.9 million in 2021, 60.6 million in 2022. Growth margin improves to 70.8% versus 53.4% in 2021, due to the significant increase of licensing in the revenue mix.
Speaker 3: Product gross margin improved as well, moving from 27.7% in 2021 to 32.7% in 2022.
Speaker 3: Our top line and margin improvements combined with only a 2.7% increase in operating expenses meant that we were able to reduce our IFRS operating loss to $3.8 million, down from 18.3 million in 2021, as well as reduce our IFRS net loss to $9 million from $20.3 million in 2021.
Speaker 3: On a non-ISRA basis, we achieved operating income of 1.6 million in 2022, compared to an operating loss of 13.2 million in 2021.
Speaker 3: And we achieved the net loss of 5.4 million in 2020.
Speaker 3: to down from 19.5 million in 2021.
Speaker 3: Moving to Q4, our remedy for the fourth quarter was in line with our guidance at 15.9 million. This is an increase of 15% versus Q4 2021 and down slightly compared to 15.5 million in this quarter of 2022. Product revenue increased sequentially.
Speaker 3: but declined compared to the same quarter last year. Revenue from massive IoT product sales in Q4 2022 continued to account for nearly all of our product revenue. Licensing revenue, all in the broadband IoT segment, declined slightly from the elevated Q3 2022 level as expected.
Speaker 3: Year over year licensing revenue increased significantly due to the revenue recognized from the strategic privacy licensing deal.
Speaker 3: So the quarter we had one customer and one channel partner that each represented 10% or more of our revenue.
Speaker 3: IFRS operating expenses were $13 million and a quarter, up 11.7% from $11.6 million in late 2020 and no Songs, wonderfully Rao wise.
Speaker 3: The increase was primarily due to a nearly $700,000 increase in non-tash stock based compensation expense, hitting mainly in the GMA line, and the impact of our large 5G government grant being fully recognized by October 2022, and therefore no longer reducing R&D spend beginning in Q4.
Speaker 3: Year over year IFRS operating expenses increased 8.8% compared to 11.9 million in Q4 2021.
Speaker 3: Non-ISRS operating expenses, which exclude stock-based compensation expense, were 11.2 million in Q4 2022, subsequently from 10.5 million in Q3.
Speaker 3: Our fourth quarter operating loss was $986,000, a significant improvement compared to a $4 million operating loss in the fourth quarter of 2021. And the prior quarter operating income was $1.2 million. The sequential change in the quarter is due to a slightly lower gross margin on lower revenue.
Speaker 3: along with the increase in operating expenses. Our net loss in Q4 was $5 million or 10 cents per diluted ADS and included non-cash income of $1 million from the revaluation of the embedded derivatives related to our convertible debt.
Speaker 3: In the fourth quarter of 2022, we recognized income tax expense of $907,000. Our net loss compared to the net loss in the fourth quarter of 2021 of $7.7 million or 21 cents per ADS.
Speaker 3: which included a non-cash loss on any violation of the embedded derivatives of $1.2 million.
Speaker 3: In PEW3 2022, we had a net loss of $2.9 million or $0.06 per ADS, which included a non-cash loss under the evaluation of the embedded derivatives totaling $1.2 million, as well as income tax expense of $1.6 million.
Speaker 3: The majority of the sequential increase in net loss was due to non-operational, below-the-operating-line fluctuations in non-cash items, including the unrealized foreign exchange loss in Q4 versus a gain in Q3.
Speaker 3: On a non-IRF-RF basis, our net law circuit 4 was 2.8 million or 6 cents per diluted ADS compared to a non-IRF-RF net profit of 424,000 or 1 cent per ADS in the third quarter. And in that law, it's 3.5 million or 9 cents per diluted ADS in the fourth quarter of 2021.
Speaker 3: In Q4, we had a loss on foreign exchange of $1.5 million or $3 cents for ADS, primarily related to the evaluation of Euro-denominated net liabilities on the balance sheet. This compares to foreign exchange gains of $1 million in Q3 and $135,000 in Q4 2021.
Speaker 3: Investors should be aware that possible changes in foreign exchange rates related to balance sheet items and the market market of our embedded derivative related to the convertible debt can cause significant differences in that income or loss from quarter to quarter. While the impact of swings in the value of the embedded derivative is excluded from our non-ISRS presentation.
Speaker 3: Foreign exchange gains and losses whether realized or unrealized are not. We ask in short-term deposits total $10.7 million at the end of Q4 compared to $5.8 million at the end of Q3.
Speaker 3: We have close to $7 million in milestone payments from our 5G licensing agreement scheduled to be received in each of Q1 and Q2 this year, as well as later in the second half.
Speaker 3: Cash East Buy Operations for the full year 2022 was $1.8 million. I wish approximately two million came from the buildup of the inventory to about normal levels.
Speaker 3: We expect the XS inventory to be absorbed over the first half of 2023, and therefore purchases of the inventory during this period should be extremely low.
Speaker 3: Turning to the outlook for Q1, we are targeting revenues of around $12 million, reflecting the impact of excess inventory in the channels, but primarily at one key customer, as well as the delay by our customers in the launch of design lens in demand production.
Speaker 3: However, as the revenue mix should still be weighted toward licensing revenue, we are targeting gross margin to be about 70%.
Speaker 3: We expect non-IFRS operating expenses in 2023 to average about $12 million for quarter assuming a stable Euro dollar exchange rate.
Speaker 3: We expect interest expense in Q1 2023 on an IFRS basis to be approximately $2.5 million.
Speaker 3: This comprises the contractual interest expense of around 1.1 million and the IFRS adjustment that we deducted come to our non-IxRESP that result of about 1.4 million. Most of our interest expense is pick-related interest on our convertible debt and is not paid in cash.
Speaker 3: We are not providing guidance on any impact of revaluing the intended derivative or possible foreign exchange gains or losses given this is largely determined by market conditions.
Speaker 3: Finally, for modeling purposes, a number of ADS is outstanding today is 48.4 million.
Speaker 3: 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.
Speaker 3: You know, this call we will post a written version of our formal remarks in the Investory Relations section of our website on the webcasts and presentations page, the same location where you will find the audio replay. And I'll turn the call back to George.
Speaker 2: Thank you, Deborah. Operator, we are now ready to open the call for training. Please, glad. Thank you. We will now be conducting a question and answer special.
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Speaker 2: Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. One moment please, O.E. poll for questions.
Speaker 2: Our first question comes from Scott Sur, with the Rock. Please proceed with your question.
Speaker 5: Good morning, good afternoon, thanks for taking the questions. Hey, just a quick clarification first, George, on the $700 million pipeline in that $350 million design win opportunity, it's not like there's no 5G in that currently and a majority of that is cat M driven at the current time.
Speaker 4: The CAT-1 production is starting to really ramp up in that design activity, is that correct? It's 80% of this is mass-vality Scott. I mean, the remaining is broadband, 20%. So, in other words, we take mass-vality only. We are a little bit below 300 million, like to 80 to 90 million dollars.
Speaker 4: and broadband has some 5G, but it's really longer run because we have some design win, as you remember, from day one on this deal and we have some product revenue expected in the pipe to come once the product collages.
Speaker 4: But indeed 80% of the 700, when I said 300 I'm counting the design win. If you take the 700 completely with design win and design end, 80% of this is pure massive IUT, which means Monarch 2, Melee and Kaleid2.
Speaker 5: Perfect. And maybe just look into the product ramp up in the second half of this year. It sounds like part of that is related to the expectation of new projects going into production. I think you said 20% are in production now and you expect 45% in the second half. One or two things, you know, it seems like there's a lot of comfort.
Speaker 5: for that ramp up in the second half. What sort of visibility do you have to the one large customer in terms of their inventory build that gives you comfort on that front? And then do you have actual timelines of when you expect these projects to kick in to revenue in the second half of this year or some of that still fluid?
Speaker 4: I mean, a few few, a few element in your questions for I mean, one which is related really to the inventory with one specific customer reality all the customers that they both they both last year have some inventory and you know this is really the reality of the industry. Most of them they had maybe one quarter to like five months if you want extra inventory.
Speaker 4: In our case, then the Mish, I will say we have a couple of them here and there. Maybe if they add all up, maybe it will be around $1 million, $1.5 million. But we have one major one who typically does.
Speaker 4: an average $2.5 million per quarter. He... they... they... they, they... the extra old saying he pushes more than needed last year, as everybody was really building inventory and their customer is building inventory and he's reaching here and with... to much inventory, that's why...
Speaker 4: We put on hold the cells to this guy in Q1 and Q2 to some extent some of Q2 even if we have by the way back We have some back from them that we are not shipping as planned originally for Q1 Q2 Just to let them absorb all the city inventory there
Speaker 4: So this is what I will call it really one case not related to our ramp, not related to the project, the design wind momentum we have Creating a challenge for us at the beginning of the year extra challenges
Speaker 4: The others, as I mentioned, and I wanted really to spend hopefully enough time so everyone can appreciate how we move from a design wind pipeline, which is big, but as I said, this is really three years of revenue for each project. So obviously, if you average this, you need to average this on maybe
Speaker 4: 4.5 years depending on the on the on the lunch of every projects and and the level of product revenue we have it today and this is really the reason is that the design when even when we consider this design when and even if we can go to 100 million. They are not all in production and we have as we said 20% however.
Speaker 4: all the projects that they were in the pipe last year and they continue and they are accelerating and we have visibility and very honestly, the delay we got on those in the majority of them, they were related to the focus of those customer on fixing their supply issue with the old generation product. And we have abye mode press-tempo networking
Speaker 4: also good visibility and feeling like at least 45% of those projects will be in full production when we exit 2023. That will give us good drum for next year from there and where we can add more projects.
Speaker 4: So we have good visibility, we are very comfortable on this. Obviously, Casamara has worked on their projects, the things are moving. Most of them, they are in the last phase, if you want an execution. So we feel good about timing.
Speaker 5: Very good, very helpful. And lastly, if I couldn't then I'll hop back in the queue, but on combination of the 5G IP, licensing special committee and kind of the balance sheet. I'm first just to clarify, it sounds like you have expanded discussions going on with your existing 5G China-based customer. That is not one of the advanced discussions that I've heard. So I'm like there could be an expansion there in addition to...
Speaker 5: the advanced discussion to sounds like with one or two other guys that you would expect by the middle of this year. I want to clarify that.
Speaker 5: I want to understand kind of the magnitude of what those potential payments upfront could be for that new customer and then just if you could from a Cash coming onto the balance sheet standpoint. There were some payments I believe in the fourth quarter related to the existing 5g relationship. What is the timeline of new payments?
Speaker 5: look like in 2023 and if you could on the strategic committee, what is the composition of the committee, what is the mandate on that front? Thanks so much.
Speaker 4: I mean, scrap on one thing, obviously, I want really to stress that the partnership we have, and I know that because we didn't announce the name and maybe, you know, for whatever reason, people are not really valuing at its value, I would say, this partnership. This partnership is really working very well.
Speaker 4: has potential, as I said, licensing and royalty because the customer is very solid and has business
Speaker 4: So as soon as the product will move to production, we'll start getting royalty. And we have engagement and other opportunities in discussion with them, even some related to product revenue, you know, extra business that will help. And when I was referring to new IP licensing deals, they are beyond this partner.
Speaker 4: and other deals that will be adding to this one. And the order of thanks is of this. We let this happen because the licensing model, we can have a licensing that can start at $15 million and can be $60 million. The question about the licensing.
Speaker 3: It's got on the cash. I mentioned that we're under the 5G license agreement. We're scheduled to receive close to $7 million in each of Q1 and Q2 and then later in the second half of the year. Great. Thank you. Thank you.
Speaker 3: I mentioned that we're under the 5G license agreement. We're scheduled to receive close to $7 million in each of Q1 and Q2 and then later in the second half of the year. Thank you. Thanks, folks.
Speaker 2: Our next question comes from Craig Ellis with B. Riley. Please proceed with your question.
Speaker 5: Yeah, thanks for taking the question and congratulations on a number of the years, milestones, you should look back. I sure wanted to start just by clarifying an issue on the supply chain. So, you've been clear in terms of the impact of the current environment and supply chain issues on your customers and frankly.
Speaker 5: We're seeing that impact across a range of companies that are involved in the IOT. The question though is more about your own supply and how you're looking at supply potential from your Foundry partners and an agreement partners in 2023 and then.
Speaker 5: just as much in 2024, how competent are you that those foundry partners can be? What looks like a really steep ramp coming as we exit 23 into 2024 on the mass bioT side? Hi Greg. We're feeling really that the supply is easing from this point of view. Another will solve this even if the tension remains.
Speaker 4: already and this is by the way consume some of our cash. We're sitting on, you know, more than what we will be sitting on in terms of inventory as well. And that let me feel like 2023 will not have any problem. And from there, you know, for 2024 obviously it's too early to speak about it, but again, you know, with the partnership we build with the Renaissance and so on.
Speaker 5: I don't expect really any children and hopefully will be there to support the ramp of our guidance. That made sense. And then for the second question, I wanted to follow up on a question that's got to ask. I don't think I heard a response just related to
Speaker 5: the strategic options, you know, what's the board involvement? Is there a time frame to the mandate that you've given them? Etc. Can you just flesh that out a little bit for us?
Speaker 4: I mean, Craig, I mean, unfortunately, I mean, as good imagine for those contacts, I cannot give more details. So very honestly, obviously, three board members, I mean, we could give the name, but I don't believe it's important. But obviously, tricky guys that they are involved when they help me. And this is what I could say more than this, I believe.
Speaker 5: One will be the right point. We'll talk about it. And then lastly, when we look at the part of the funnel that's that incremental 350 million that hasn't been as much of a focus part of this call, but is becoming much more so.
Speaker 5: As we think about the end market exposure of those opportunities, George, how does it compare to what we've been looking at previously where there's a real high smart meter ring, home, et cetera, quotient? Would it be similar mix or significantly different mix from an end market standpoint?
Speaker 4: So I mean, it's really going in the same direction when I look to it like backward beginning of last year. We're talking about where we are seeing potential when in 2022 to be honest. We had more and more metering projects. We want to plot. I mentioned nine customers, not mine projects. I can tell you close to 20 projects above 20 projects.
Speaker 4: the company has and we have more in the pipe. It's really a place where we ended by the fact that we have the two product, Cat1 and CatM and very low power. You know, it's a small plus, adding many pluss at the beginning, it was very complicated to win in this segment because you need to prove yourself as a brand, you can stay there for 10 years, but it's really playing very positive for us. So this remains a very solid segment.
Speaker 4: Telematic and asset tracking will be the second one and then you will have more security that's the third one, but we're seeing this is very diversified. As well and as I said is diversified in product as well because we have cat one and cat and addressing this one. That's helpful and then just lastly before I hop in the queue.
Speaker 5: Given that you've got nine customers and 20 projects with metering, are you basically penetrated in all the major metering companies globally or where do you stand? Yeah, go ahead.
Speaker 4: Absolutely, I don't want to be, I'll say, I'm a little bit prudent of saying I have all the top guys, but I could claim this.
Speaker 5: From the top then. Congratulations on that. Yeah. Thanks, George. Thank you.
Speaker 2: Our next question comes from Aragiy Gil with Needham and Company. Please proceed with your question.
Speaker 6: Hi, this is Nick D'Auelan from Roger Keele. My question is, you talked about how KoliAP2 now has a competitive advantage and you have second market share gains. Could you just talk a little bit more about that? Yeah.
Speaker 4: I mean, you know, Calletti too, what happened in the market that many people thought that sometimes when LPM was coming, that LTM will jeopardize the Cat1 market. And honestly, even me, I was thinking like this at the beginning. So for a while, no one was investing in Cat1 next generation.
Speaker 4: milking whatever they have in hand and relying on LTM and B.I.Ud.
Speaker 4: But as soon as we start playing, working with the customers and so on, and realizing the limitation of the LTM in some use cases, I felt like this is something we invest in and there is really space that remains extremely big, and SQL can make the difference. So we moved early in this, we invested when no one was investing there to come with this platform.
Speaker 4: And practically the only guys who invested in this is Chinese. We have some people that even licensed Chinese technology to bring it to Europe . And with this, you know, give us really a competitive advantage because...
Speaker 4: As you know there is a sensitivity of playing Chinese, non-Chinese in many markets. So Sequence is unique in this. And obviously it's a great product, very new and that it reduces the cost structure by at least 30% versus the first generation. So if you take a module first generation, a module second generation, you can cut the cost by 30% which is major.
Speaker 4: For all new projects where they need Cat1, we are in very, very good position. And obviously you have some projects where they use even Cat1 for coverage reason, not only for speed.
Speaker 4: So this is really why we feel very good about it. We have done three big wins last year in Q4. We are developing the project to them, really major one. We have one of them exceeding $10-$50 million yearly revenue. And we have in the pipe a dozen of them.
Speaker 4: very very advanced, some maybe should close this quarter. My self-team is, you know, we are able to deliver on this, this quarter should close two, three more deals on this Catalan. So we are very optimistic on this.
Speaker 6: Thanks for that. And then another maybe technical question. Why do the metering applications take longer to qualify? You mentioned that a year longer is about two years to qualify these metering applications.
Speaker 4: I mean, I say maybe two years, sometimes three years, you know, depending what is the reference. But to be honest, you know, you could have some of them a little bit faster.
Speaker 4: And all what they are doing is it changing what they call the communication unit. In other words, the meter is there and you add the communication. But we keep in mind that any deployment with utility, any projects that the metering company win, they have to deploy and commit for 10 years, 10 years with equality, with penalty on the quality and so on. So that's why the process.
Speaker 4: It's very, you know, it's really a process where you have qualification phases and so on that makes things more complicated to get there. But once you are in, in general, it doesn't move and it's all for ten years. So this is really the counterpart, which is very positive versus the ramp on it. And we have, I mean, thanks God, because this is a very important market.
Speaker 2: It appears that there are no further questions at this time, so I would now like to turn the floor back over to Dr. Cream for closing comments.
Speaker 4: Okay, thank you again for joining the call. We look forward to catching up with you next year on our first quarter 2022, earning a call.
Speaker 4: We are participating in the upcoming ROD capital conference on March 14th and 15th in Nana Poins and the Beirai L.A. institutional investor conference on May 25th and 26th in L.A. We look forward to seeing you at one of these upcoming events. Thank you for all of you and thanks operator.
Speaker 2: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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