Q3 2026 Sequans Earnings Call - SEQUANS COMMUNICATIONS

Financial Performance:

• Q3 2026 revenue reached $9.1 million, representing a 22% sequential increase from Q2 2026 ($7.5 million) and a 183% year-over-year increase from Q3 2025 ($3.2 million).
• Product revenue alone exceeded $7 million, more than quadrupling year-over-year, accounting for the vast majority of total revenue.
• Gross margin improved to 33% in Q3, up from 32.9% in Q2 2026 and significantly higher than the 21.3% reported in Q3 2025.
• Operating expenses were reduced to approximately $10.3 million in Q3, down from $11.9 million in Q2 2026, driven by cost optimization and the wind-down of non-core activities.
• Net loss narrowed to $1.5 million ($0.10 per diluted ADS), compared to a $9.8 million loss in Q2 2026 and a $16.6 million loss in Q3 2025.
• Operating loss was $1.0 million, positively impacted by a $6.2 million realized net gain from the sale of the remaining Bitcoin treasury.
• Cash and short-term deposits totaled $39.9 million at the end of Q3 2026 (up from $21 million in Q2), fueled by $24.6 million in proceeds from the complete sale of 314 Bitcoin.
• Debt is effectively zero, with only minimal obligations tied to government-financed R&D projects; convertible debt was fully redeemed in May.
• Cash burn in Q3 was estimated between $5 million and $9 million, aligning with internal plans.

Guidance and Future Outlook:

• Q4 2026 revenue is guided to range between $9.5 million and $11 million, excluding the potential impact of major new licensing deals.
• Full-year 2026 revenue for the first nine months totaled $22.6 million, already surpassing the full-year 2025 total of $18.3 million (excluding non-recurring Qualcomm revenue).
• Management targets a Q4 2026 operating expense run rate of approximately $10 million, with a goal to sustain expenses below $11 million annually in 2027.
• Long-term gross margin target is approximately 50%, contingent on a shift toward higher-margin chip sales and increased licensing revenue in 2027.
• 5G RedCap commercialization is projected to begin in late 2027, with revenue generation expected to follow thereafter.
• The company aims to reach breakeven status as quickly as possible, supported by the transition of design wins into mass production.
• Fiscal 2027 outlook includes scaling defense/drone applications and leveraging the 5G RedCap roadmap to capture new market share.

Business Segments and Product Lines:

• 4G IoT: Remains the core revenue driver; Monarch CAT-M products accounted for >80% of Q3 product revenue, primarily serving smart metering, telematics, and asset tracking.
• Calliope CAT-1 BIS: Generated revenue from telematics and security design wins now in mass production, with expectations for significant growth in 2027.
• Design Win Pipeline: Total potential three-year revenue pipeline stands at $300 million; $165 million is currently in mass production, with an expected increase to over $180 million by year-end 2026.
• Defense & Drone: The IRIS RF transceiver has generated >$30 million in potential three-year revenue from leads, including one Tier 1 customer ready for production in Q4.
• 5G RedCap: End-to-end lab testing for the in-house 5G RedCap test chip is scheduled for completion late 2026, targeting customer engagement in H2 2027.
• Licensing & Services: A pipeline of active engagements totaling >$75 million in potential revenue is under discussion, with some deals potentially closing in Q4 2026.

Market and Competitive Landscape:

• The IoT market is transitioning from 4G to 5G, with carriers expected to begin deploying 5G networks and requiring 5G SKUs for new designs starting in 2027.
• Management anticipates limited Chinese competition in the upcoming 5G RedCap space compared to the crowded 4G landscape, potentially allowing for higher ASPs and increased market share for Sequence.
• Sequons' position in the defense, drone, and space sectors is expanding, leveraging IRIS technology for software-defined radio applications.
• Market momentum is evidenced by a book-to-bill ratio consistently above 1.0 and a backlog extending into the second half of 2027.

Risks and Challenges:

• Supply Chain Constraints: Memory remains a primary bottleneck, with volatile pricing requiring frequent cost pass-throughs to customers; TSMC capacity constraints on mature nodes are expected to persist through 2027.
• Margin Volatility: Near-term gross margin stability is threatened by fluctuating component costs, particularly flash memory, though double-sourcing strategies are being implemented for 2027.
• Execution Risk: The timeline for 5G RedCap revenue depends on carrier network deployment schedules, which may delay mass adoption until 2027 or later.
• Licensing Revenue Timing: Revenue recognition for licensing deals is variable and difficult to predict, with deals signed in Q4 potentially not contributing to revenue until 2027.

Management Commentary and Tone:

• Management expressed high confidence, describing the completed Bitcoin exit and debt redemption as a "strong balance sheet" foundation that allows full focus on the semiconductor business.
• The tone was optimistic regarding the IoT product roadmap, citing "overwhelming" traction in the defense sector and a robust, growing design win pipeline.
• CFO Norman Broth and CEO George Karam emphasized financial discipline, cost management, and the strategic shift away from digital assets to pure-play semiconductor growth.
• The leadership highlighted the simplification of the capital structure as a key enabler for future investment and shareholder value creation.

Analyst Questions and Answers:

• Government Funding: Clarified that a $2.5 million payment from the French government was received in October 2026 (post-Q3), not during the quarter, but adds to the pro-forma cash position.
• Revenue Run Rate: The $180 million mass production pipeline represents a three-year revenue estimate, implying an average annual run rate of roughly $60 million, though first-year ramp may be lower ($50M+).
• Defense Market: The $30 million defense pipeline is based on current leads and engagement potential, not just the single confirmed design win; the first customer shipment is set for Q4.
• Gross Margin Outlook: Management advised caution on Q4 gross margins due to unpredictable memory costs, expecting improvement in 2027 when new supply chain strategies (double-sourcing) take effect.
• 5G RedCap Sizing: The 5G RedCap opportunity sits above the current $300 million design win pipeline; carriers are preparing for the transition, with significant design wins expected to shift to 5G post-2027.
• R&D Spend: Operating expenses are targeted to remain around $10 million in 2027 as 4G investments taper off and RF/5G activities mature.

Other Key Points:

• The company has officially exited the Bitcoin treasury strategy, selling all 314 Bitcoin held on the balance sheet by end of Q3 2026.
• No digital asset impairments were recorded in Q3, eliminating volatility associated with cryptocurrency price fluctuations from future financial results.
• The company is actively seeking strategic partnerships to scale the defense and drone business, with several discussions ongoing.
• Sequons maintains a "clean" capital structure with no convertible debt and minimal outstanding obligations, providing financial flexibility to execute its long-term strategy.