Q3 2026 Sequans Earnings Call - SEQUANS COMMUNICATIONS

Hello, and welcome to the third quarter 2026 of Kwan's Earnings Conference Call. My name is Tawanda, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note that this conference is being recorded. I will now turn the call over to David Hanover, Investor Relations. David, you may begin. Thank you, Operator, and thank you to everyone participating in today's call. Joining me on the call from Sequon Communications are George Karam, CEO and Chairman, and Norman Broth, CFO. Before turning the call over to George, I would like to remind our participants of the following important information on behalf of Sequon. First, Sequons issued an earnings press release this morning, and you'll find a copy of the release on the company's website at www.sequons.com under the newsroom section. Second, this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and potential financial financing sources all statements other than present and historical facts and conditions contained in this release including any statements regarding our business strategy cost optimization plans strategic options the ability to enter into new strategic agreements expectations for sales our ability to convert our pipeline to revenue and our objectives for future operations are forward-looking statements within in the meaning of the private securities litigation reform act of 1995 section 27a of the securities act of 1933 as amended and section 21e of the Securities Exchange Act of 1934 as amended these statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time we operate in a very competitive environment and rapidly changing and rapidly changing environments new risks emerge from time to time given these risks and uncertainties you should not rely on or place undue reliance on these forward-looking statements actual events or results may differ materially from those contained in the projections of forward-thinking statements more information on factors that could affect our business and financial results are included in our public filings made with the securities and exchange commission and now i'd like to hand the call over to george caron please go ahead george thank you david and good morning everyone before discussing our core business i will start with a brief update on our balance sheet as we have now fully concluded our bitcoin treasuries as announced on september 24th we sold the remaining 314 bitcoin held on our balance sheet as of June 30th, completing the Treasury exit that began with the pre-redemption of our convertible debt in May. These final sales were executed at an average price of approximately $78,500 per Bitcoin for total proceeds of $24.6 million. As a result, Sequence no longer holds any digital assets. And we have no outstanding debt other than a small amount tied to government-financed R&D projects. We ended the third quarter with $39.9 million in cash equivalents and short-term deposits compared to $21 million in Cash and $314 in Bitcoin at the end of the second quarter. With this exit complete, the Bitcoin Treasurer's chapter is closed and the full strategy and financial attention of the company is now in our semiconductor business. Our priority going forward is squarely on executing our semiconductor strategy, scaling our IoT product business, developing our new defense and drone business, and advancing our 5G RedCap roadmap to create long-term shareholder value. We entered the fourth quarter with a strong balance sheet and the financial flexibility to support our operations and invest in growth. Now turning to our semiconductor business. Our 4G IoT products showed strong momentum in the third quarter. quarter revenue came in at approximately $9.1 million in line with our guidance match. That's up 22% from $7.5 million in the second quarter and up 183% from $3.2 million in third quarter of 2025. The vast majority of our Q3 revenue was generated by product sales, which increased by more than four times year-over-year. Through the first nine months of 2026, revenue totaled 22.6 million dollars. That already exceeds our full-year 2025 revenue of 18.3 million dollars, excluding the 8 million dollar of non-recurring Qualcomm-related deal revenue we recorded in the first half of 2025. We are seeing strong order momentum across our customer base, driven by design wins that have reached mass production, several of which we expect to keep scaling through 2027. This is reflected in its strong and growing backlog extending into the second half of of 2027, which give us solid visibility and confidence in our product growth trajectory. As in the previous two quarters, our Q3 book-to-bill ratio was well above 1. Our product design wind pipeline, measured by potential three-year product revenue, keeps expanding. We update this figure once a year. So for now, we are maintaining the $300 million reported at the end of 2025. However, in the third quarter alone, we added nine design wind projects and eight advanced engagements. As reported at end of the second quarter, $165 million of this pipeline is in mass production and generating gravity. Two additional projects moved to mass production in Q3, and we expect several more to follow in Q4, bringing the mass production portion of the pipeline to more than $180 million by year end. Smart metering, telematics, and asset tracking remain our strongest vertical. And the volume and visibility we are building in these markets reflect the strength of our product positioning and customer relationships. Looking at our product families, our Monarch CAT-M products remain a core growth driver, accounting for more than 80% of Q3 product revenue, with asset tracking and smart metering applications leading the way. We expect this business to keep growing and building from this time. All of the tools that have been used in our production are practically ahead of time, and we are winning a few customers on this project every quarter. Revenue from our Calliope CAT-1 BIS product is driven by our design wins in telematics and security, where several projects have now reached mass production. we expect this momentum to carry into q4 and beyond with significant revenue growth materializing in 2027. for all our cellular iut pipeline for both cat m and cat 1 biz keeps growing with many new opportunities every quarter beyond the design wind pipeline we are currently working on more than a dozen new projects that we hope to win in the near future. In addition, we have begun substantive discussions on several 5G eRETCa projects with customers preparing for the network transition from 4G to 5G, a market we are targeting with a highly competitive chip now in development. As we previously said, our 5G eRETCAP test chip is in-house. We expect to complete end-to-end lab testing late this year, with a plan to engage customers in the second half of 2027 and generate revenue in 2020. As the IoT market transitions from 4G to 5G, eRECCAP remains a key pillar of our long-term strategy. It positions Sequence to capture a significant product design win opportunity and expand our market share in cellular IoT while enhancing our IP leadership and supporting future licensing agreements. Beyond IoT, our IRIS RF transceiver is attracting strong interns across defense, drone, and space applications. Since we began shipping our development kit platform in Q2, we have generated more than 20 leads in these markets, including many Tier 1 customers. The first drone customer we announced last quarter is now ready for production and we expect shipments to begin in Q4. While most of the RF pipeline is still in the engagement phase, it already represents more than $30 million in three years' revenue potential, with very high margins. We are fully committed to scaling this defense and drone business by building out our go-to-market strategy and strategic partnerships, several of which are currently under discussion. to services and licensing this business remains an important source of high margin revenue although the timing of individual engagements can vary from part of sport our goal is to leverage our rf and 5g ip portfolio to address new markets and regions beyond our own addressable mark we have already concluded several licensing deals in the past some of which are now generating royalty revenue that we expect to grow in 2027. We also have several active licensing and strategic engagements under discussion with global customers and partners across a range of end markets and geographies. Individually these opportunities range from several hundred thousand dollars to well over 10 million dollars and their total revenue potential exceeds 75 million dollars. We are making progress on most of them and aim to close some in Q4. These opportunities provide potential upside to our revenue, we advance our path to breakeven and expand our strategic reach into new markets and applications. Now a few words on supply chain and product We continue to navigate a challenging supply and cost environment. While memory remains the primary constraint, we are increasingly seeing pressure across the broader semiconductor supply chain. To mitigate these challenges, we have implemented multiple sourcing options for key components and manufacturing materials, including substrates, flash memory, and assembly and packaging, which puts us in a stronger position heading into 2027. However, we still need to address silicon supply as TSMC will be operating under capacity allocation for all mature nodes in 2027 with significant growth expected next year. our main challenge at the same time we are mitigating cost pressures by passing through increases to customers where appropriate limiting the impact on gross March. This is particularly important for memory components where pricing remains volatile and changes from month by month. We managed all of these challenges well in 2026 and focus in our ability to manage these challenges again in the coming year. Third quarter cash burn came in line with our plan. We remain focused on the spring cost management and on reducing cash burn over time as revenue grows with the objective of reaching break-even as quickly as possible. Overall our third quarter reflected real progress in strengthening our core IUT business, completing the simplification of our capital structure and positioning the company for sustained growth. For the fourth quarter we expect revenue in the range of $9.5 million to $11 million. This guidance assumes the limited contribution from licensing and services. Should we close the major licensing deal during the quarter, revenue could exceed this. We are calculating from a position of strength. We have a simplified balance sheet with approximately $40 million in cash and short-term deposits. no debt other than government financed R&D funding and significant financial flexibility. We have an IoT business with strong underlying momentum supported by a growing backlog and a maturing design wind pipeline that's increasingly converting into production revenue. We have an exciting new market opportunity in defense, drone and space which adds scale, and diversification to our business with significant potential. And we have a differentiated strategic IP portfolio in 5G and RF, which we believe remains one of the most important long-term value drivers for Seco. We remain focused on scaling our product revenue across both our IoT and defense and drone market, advancing our 5GE REDCap roadmap, and executing against the key drivers we believe will unlock the full value of Sequence over time. With that, I will now turn the call over to Norman to report our quarter financial results in greater detail. Thank you, George, and good morning, everyone. I will not turn to the third quarter financials results. The revenue for the third quarter was $9.1 million, an increase of 21.9% compared to the $7.5 million in the second quarter of 2026, and up 183% from $3.2 million in the third-quarter of 2025. Revenue in the quarter was largely product-related, as product sales more than four times higher the year reflecting the continued growth of our core IoT business. For the first nine months of 2026 revenue was 22.6 million dollars compared to the 19.4 million dollars in the same period of 2005. When you exclude the 8 million dollars of non-return from the latest license and services revenue from the prior year period, revenue for the first nine months nearly doubled year-over-year. Cross-margin was 33%, compared to 32.9% in the second quarter and 21.3% in September 2021. Operating expenses consisting of R&D and SG&A expenses were approximately $10.3 million down from $11.99 in the second quarter and switching to $7 million in the first quarter of 2011. This is a reduction of about 14% eventually and 20% in the year-over-year. Savings from our operating cost base reflect the cost of the last quarter. We expect operating expenses in the 2nd quarter of 2026 to be lower than in the than in the first half, while we continued to invest in the second quarter. During the quarter, we completed the sale of our remaining 315 BTC and reported a realized net gain of $6.2 million, compared to a realized Net Gain of $5.3 million in the 2nd quarter. There was no impairment of digital assets in the third quarter, compared to the $3 million in the second quarter. There's no Bitcoin left on our balance sheet, our financial results will no longer be affected by Bitcoin pricing changes, whether through impairments or through reverse gains. Operating loss was $1 million, compared to a loss of $7.2 million in the second quarter of 2020 and a loss of $24.4 million in its third quarter. The $1.0 million operating loss includes a fixed $2 million gain from the fifth quarter and also reflects the high revenue of reduced operating costs. Net loss of the quarter was $1.5 million, or $0.10, for dilution ADS, compared to $9.8 million loss for $0,65 per dilution of ADS in the second quarter, and $16.6 million loss, for $1,090 per dilute of ADF in the third quarter of 2025. Net interest expense was 0.4 million dollars down to 0.3 million dollars in the second quarter, which reflected the total generation of IP of 0.2 billion dollars. On a non-HRF basis, including non-cache impairment of fake computations with the non-Cache license associated with the virtual debt and debt derivative, Non-IFRF net worth was $6,000,000 before full stand for BD8A. This compares to a non-IFRS net worth of $3,000.000 for 24 times the BD 8A in the second quarter, which was about $3.000.00 for BDA 10 for the BDA 8A. Now turning to the balance sheet, the significance is frankly our financial position on this. Cash, cash equivalent, and short-term property, and competitive surpluses, total $39,000 billion. Consisting of $6.2 million in cash and cash equivalent and $32.5 million in short-terms. This is up $18.7 million from $21 million in 2013, reflecting $24.6 million of proceeds from the remaining Bitcoin, In addition, in October, we received a $205 million dollar in eCrims equivalent of $5.2 billion in cash development, which is not completely different from our September survey cash formation. The cash burn in the third quarter was approximately $5 to $9 million, and the inline was $12 million. As of September 30, we have moved Bitcoin, which has been streaming on Bitcoin since 2013, to $2,169.215. We have converted the debt to the routine, and our Bitcoin trade rate is actually 50, which is not almost as good. Our only remaining fine point is government research funding. is carried by part of the $2 million amount of work that was done on chief, by the amount that actually is expected to be imposed on a person of discriminatory values over the next five years. Coming back to the Church's comment on righteousness, we have several discussions that are well-appointed, and we believe a number of these have a potential to contribute meaningfully to Revenue. The time of righteousness and Revenue recognition can be difficult to predict, and that variability is reflected in the cheap value. Before I hand the call back to George, I want to summarize the key points about your program. We are reducing our operating costs. We are working on product cost structure to improve cost management. We no longer hold any good points. We have a strong value sheet, homestead tree, and an overall cash position of approximately $20,000. With this foundation, we believe that Frequence is well-positioned to support the operating and strategic priorities going forward. With that, I turn the floor back to George. Thank you, Norman. As we close, our priorities are clear. We are focused on scaling our IUD semiconductor business, expanding into software-defined radio applications across drones, defense, and space, and advancing our 5G . The third quarter showed solid momentum across the list. Revenue grew 22% sequentially and 183% year over year. Product revenue more than quadrupled, and our book-to-bill ratio was again well above 1, supported by a backlog that now extends into the second half More design wins are moving into mass production, and we expect the mass production portion of our pipeline to exceed $180 million by year end. Beyond IOT, our IRIS RF transceiver is building traction in the defense and drone industries, and our licensing pipeline gives us additional upside on top of our project. We have also completed an important transformation of our balance sheet, with our convertible debt fully redeemed and our Bitcoin treasury exit complete. We have now approximately $40 million in cash and short-term deposits and a simple capital structure, giving us the flexibility to support operations and invest in growth as we move toward a big even run-through. Overall, we believe Sequence is well-positioned with a clean balance sheet, improving visibility into product revenue, a differentiated technology portfolio across 4G, 5G, and RF, and multiple avenues for growth. We remain focused on execution and on creating long-term value for our shareholders. With that, operator, we are ready to open the call for the questions. thank you thank you ladies and gentlemen as a reminder to ask the question please press start one one on your telephone then wait for your name to be announced to withdraw your question please press star one one again please stand by while we compile the q a roster our first question comes from the line of scott searle with rob your line is open Hey, good morning, good afternoon. Thanks for taking the questions. Hey, George, just quickly to clarify on the cash front, I believe there was still an outstanding incoming payment from the French government of $3 million. So I want to clarify whether or not that came into the third quarter. That's expected in the fourth quarter. And just to clarify, 180 million of those design wins now going into production over a three-year estimated time period. So in 27, we're looking at, at some point, ramping up to a $60 million a year product run rate. Is that the correct way to interpret it? Hi, Scott. The first question, in fact, we received $2.5 billion from the French government in October. It's not recorded in the balance sheet at the end of September, obviously. It came almost the first week of October and on a pro forma basis, yes, you can add it. And on the design wind pipeline, you know, the target is to be above 180 by year end. And you're abstract, this represents three years revenue. this will give you the average run rate over the coming trees I will not say 60 million is the number for the first year but in average for the three years you have 60 so will be somewhere you know between 50 plus I would say because it's growing over the three is you still have product ramping every year over those three years and and on the RF front with the iris product line seems like you're starting to get a lot of traction there. I wanted to clarify the comments that you made on the call. I thought you said $30 million. Is that from the initial drone win by itself, that it could ramp up to $10 million a year over time? And it seems like not only the timeline to win, but the timeline to production has actually been pretty fast on this front. So engaging with 20-plus customers now, how do you expect that to, I guess, roll and progress over the course of 27? Yeah, I mean, honestly, the traction is really, I should say, overwhelming. We have a lot, a lot of demand on this platform. We're out of all the EVK we built in the first batch to sell them to customers. Now we're fighting to catch up, you know, to get more and feed more customers. We built, like, we shipped more than 30 units so far, and we have 20 leads customers there. So this is developing. I mean, the $30 million I gave, this is really the potential of the leads we have in hand or an estimate of what we have in hand that we are working on today. It's not the design win we have alone. You know, we have one design win, it's smaller than this. But this design win moved to production, as I said, because we have an initial order to ship in Group 4 for production. And we're expecting for 2027 more orders to come from this customer. And on the last remark, you know, the time to turn risk to production, we need to keep in mind that this radio, we don't have a lot of software there, so it's really, you know, a piece of hardware that you add to a baseband technology and so on. So depending on the situation, if they have their own existing product and they are changing radio to the benefit of the radio sequence, which has a feature allowing, you know on time jamming we can move very quickly and this what happened with the first customer he has an existing product he moved to change the radio and obviously almost in six months to get this product up and running and and now we are seeing revenue if you are in situation where the customer is building from scratch all this platform obviously it will be much longer not limited by By sequence technology, it should be limited by the overall system the customer is using. Very helpful. And lastly, if I could, on the licensing front, it sounds like there's an active pipeline. I want to clarify a couple of things. It's not really built into the fourth quarter guidance at the current time. It sounded like the total opportunity pipeline, I think the number you said was 75 million, but you're also expecting to see potentially some of these opportunities convert in the fourth quarter. Just want to verify that. Thanks. Yeah, indeed. I mean, we have, as we said, you know, decent number of deals that we are engaged with. And to sum them all, we'll exceed $75 million opportunity. Honestly, all of them are likely. So I give them, we don't have a deal which is, you you know, maybe 10% chance to get it. I'm really, the deals we are counting in are, I should say 22% chance, to close it. And some of them are quite advanced and hopefully we can sign something in Q4. Now, obviously from the time you sign to take the revenue, all depends as you know you have the revenue recognition comes into play and sometimes we are not able to factor in the revenue in Q5 because it depends we are able to make delivery in order that can allow us to make some of the revenue, even if he's signing Q4. So we could sign a Q4 and take zero revenue. So that's why we are in the guidance. We're not factoring big deal inside. We're taking, I'll say, normal business that we have in hand, mainly products with a little bit of small licensing deals that they are already secured by the company. Great. Thanks so much. I'll get back in the queue. Thank you. Our next question comes from the line of Josh Nichols with B-Rally Securities. Your line is open. Yeah, thanks for taking my question. Good to see the company fully transition to IoT semiconductor business with the feeling of the Bitcoin treasury part. So two questions I want to ask. Sorry, it was a little bit garbled on my end. But one is you gave a revenue level of like $9.5 to $11 million for 4Q, but that excludes significant license revenue. Looking at that, you talked about some of the pricing headwinds on memory. Should we assume that 4Q gross margin is comparable to 3Q X and E large licensing deals generally? Hi, Josh. I mean yeah first of all I mean you're right I mean this would impact the major licensee there's a little bit of licensing inside more or less small one or some of them already signed and we take some revenue as we move forward but to go back on the question on the gross margin to be honest is really you know I don't know how to what what prediction I can give there but we have a big big problem with those memories that the price change every month really every month little and this is really creating a lot of challenge for us to predict if you want exactly even the price increase we reflect on our customer so it's really like a catch you know we adjust the price and later on on some basis very hard to anticipate a lot of cost increase I mean we take whatever logically we can justify it to customers and sometimes catch up in the middle of the quarter when we have so I believe I remain cautious on the margin in Q4 I don't believe we're settled for the you know now hopefully this will change in 2027 because we have a lot actions with double sourcing that will enter into play for example we put some double sourcing specifically for the flash memory but this is not factored in yet in our shipment to customer because it takes some time to to transition to a new model uh as you need to adjust a little bit the software and so on with the customers and this is coming more in 2027 than q4 so in q4 i remain a little but uh you know cautious on my gross margin, similar to what we have seen in current thoughts. Appreciate the context. Thanks. I'll hop back in the queue. Thanks, Josh. Thank you. Please stand by for our next question. Our next question comes from the line of Jake and Stefan with Lake Street Capital Markets. Jacob, your line is open. Yeah. Hey, guys. Appreciate you taking the questions. nice quarter uh just first i want to touch on the uh advanced discussions that you're having on the 5g uh red cap opportunities uh maybe you know could you help us kind of think through the the sizing of some of those uh newer deals in the pipeline versus uh what you have currently yeah hi jacob i mean first of all you know in terms of design winning in other words the pipeline when we we talk about the 165 that has been publicly announced and drawn in and the target I'm giving for year-end above 180 this doesn't have really that design method is because what we can what we factor design win is really customers they have the chip they integrated they have hardware and they are work on their design and obviously the e-red cap but it's still in the prototype phase on our side and we have not yet something just to touch on. So all the portion of eRedCap comes into the pipeline above this, if you want, like in the above even the design wind and production and literally above the $300 million design wind that we have. It's really an advanced opportunity that we are working on to close and we many of them. It is really a lot. And you have a few elements happening there i mean just understand the market first of all the carrier are transitioning from 4g to 5g refarming more spectrum and as you know all the iut products today that they run on 4g so definitely the past to prepare the future to be future proof on a meter it's not about you need it today you need for you know to predict you know to be ready to have your product operating in in 2035 and so on so that's why there is need an urgency to start taking a 5G product as soon as possible to market. Obviously the carriers are not ready yet. They are deploying their network or preparing to deploy their networks. Ericsson and all the InnoDB vendors, they didn't yet finish their release to those carriers. This will happen really an activity in 2027 and from there on we'll start seeing more and more design. all new design will be switching to 5G you will have the old design maintaining on 4G but the new one definitely I predict end of 27 it will be I need 5G I don't need any more 4G on any new SKU doesn't mean we stop shipping 4G you keep shipping this for maybe 10 years if you want some of them but at least all new design you need to win them with the with the And the opportunity for Sequence there is like, first of all, there is higher ASP on the 5G. Second, the potential of market share could be much bigger because the competitive landscape will be much limited, will be less Chinese or zero Chinese competition, if you want, which was not the case in the 4G war. And this should give the chance for Sequences to have much more potential, I will say, in terms of design win. We are leading with our product, we believe we are ahead of competition to go there, and all this should allow us to increase the pipeline of IoT products and get more 5G skew and continue the growth of the company beyond what we have won in the 4G today. Okay, great. Maybe if I could just ask on some of the cost assumptions, I know you said in the last kind of answer that the gross margin front would be a little bit difficult to predict, but maybe just looking at R&D, you guys have kind of, you know, been able to taper that down over the last couple quarters. From a total operating expense kind of level, how should we think about the business going forward? Is, you now, this kind of $11 million kind of rate sustainable or do you expect to take a little bit more out I mean the definitely in our target to be honest to be below 11 million dollar per quarter and I believe it's the same because you know as we said 4g were investing less and less I mean to some extent even this year was doing very little on 4g but although we introduced new flavors and new maintenance releases and so on next year it will be even at at lower scale and we'll keep investing only into the 5G. Our RF is also mature and ready for the drone and the defense. So there is no big surprise in terms of investment with the current plan we have. And we're really trying to keep controlling our OPEX to keep it as close as possible to 10 million on an average, I would say, for 2027. So this should be the math. on the gross margin not to be confused you know obviously you know we have a chip we have chip and modules in the IOT and obviously we have the radio chip that's adding up so the mix between chip and module depending on the mix of the product this is where we are targeting to be obviously with a little bit of services on top at least the way we are heading there will take us well about 50 on a global basis for the company for that for this year the things are a little bit biased obviously because we are cut structure we have we're losing few points on our cost coming from this discrepancy between the price and cost I would say or variability of the cost unfortunately and obviously because if we have very low level of licensing plus still the RF is lower I would say the chip business is not half-half the chip business is more below one-third and two-thirds module so it's shifted a little bit towards a lower margin this year but hopefully this will be an exception and will improve it in 2027 going forward got it i appreciate all the color thanks george thank you ladies and gentlemen i'm sure no further questions in the queue i would now like to turn the call back over to george for closing remarks So, many thanks, Operator, thanks for all of you for the questions and being on the call and looking forward to have a chance to talk with you on different opportunities. Thanks very much. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.