Sequans Communications Announces Second Quarter 2011 Financial results
July 28, 2011

PARIS, France–July 28, 2011–Sequans Communications S.A. (NYSE:SQNS), a 4G chipmaker supplying LTE and WiMAX chips to equipment manufacturers for mobile operators worldwide, today announced financial results for the second quarter ended June 30, 2011.

Second Quarter 2011 Highlights:

Revenue: Revenue of $30.6 million increased 21% sequentially from the first quarter of 2011 and 84% compared to the second quarter of 2010.

Gross margin: Gross margin of 46.6% was lower than the gross margin in the first quarter of 2011, which was 51.2%, due to a significant sequential increase in volume with a key customer, which triggered a previously negotiated volume-based price reduction, combined with a delay in the introduction of lower cost components into production.

Operating income (loss): Operating income of $1.9 million decreased 18% sequentially from the first quarter of 2011, primarily due to the increase of non-cash stock-based compensation expense. Operating margin in the second quarter was 6.2% compared to 9.1% in the first quarter of 2011. In the second quarter of 2010, the operating loss was $0.2 million.

Net Profit: Net profit was $0.1 million, or $0.00 per diluted share/ADS, compared to a net profit of $1.9 million, or $0.07 per share/ADS in the first quarter of 2011 and a net profit of $0.6 million, or $0.02 per share/ADS in the second quarter of 2010.

Non-IFRS Net Profit: Excluding stock-based compensation and the change in the fair value of the option component of convertible notes, non-IFRS net profit was $2.8 million ($0.08 per diluted share/ADS), compared to a non-IFRS net profit of $2.4 million ($0.08 per diluted share/ADS) in the first quarter of 2011, and a non-IFRS net profit of $0.7 million ($0.03 per diluted share/ADS) in the second quarter of 2010.

In millions of $US except percentages, shares and per share amounts   Key Metrics  
    Q2 2011   %*   Q1 2011   %*   Q2 2010   %*  
Revenues   $30.6       $25.4       $16.6      
Gross profit   14.3   46.6%   13.0   51.2%   8.5   50.9%  
Operating income (loss)   1.9   6.2%   2.3   9.1%   (0.2)   (1.4%)  
Net profit (loss)   0.1   0.2%   1.9   7.5%   0.6   3.6%  
Diluted EPS   $0.00       $0.07       $0.02      
Number of diluted shares/ADS   35,209,641       29,164,738       24,588,406      
                           
Cash flow from (used in) operations   (0.3)       0.3            
                           
Additional information:                          
Stock-based compensation included in operating result   1.1       0.5       0.3      

Change in the fair value of convertible notes option component included in financial result

  1.7                  
Non-IFRS diluted EPS (excludes stock-based compensation and change in fair value of the option component)   $0.08       $0.08       $0.03      
                           
* Percentage of revenues                          

“The revenue growth in the second quarter reflects our expanding role in mobile WiMAX applications in the first half of the year,” said Georges Karam, Sequans CEO. “From supplying the 4G chip for the first WiMAX smartphone a year ago, we have expanded to powering 7 different 4G devices for operators in three countries. As expected, the significant volume increase associated with the launch of new 4G smartphones and tablets triggered a price reduction in the second quarter. This will temporarily impact gross margin until more linear product cost reductions are fully reflected in our results.

“After rapid volume growth in the first two quarters of 2011, we recently have seen more cautious order patterns, which we believe are driven by some uncertainty related to several new WiMAX smartphone models being introduced into the U.S. market. This is occurring during a particularly dynamic phase in the evolution of 4G as various carriers plan their migration to LTE. With both a smartphone-optimized LTE chip and a dual-mode WiMAX/LTE chip in our roadmap for the second half, we are well-positioned to participate in any strategy operators choose, but LTE is not expected to contribute materially to our revenue until the second half of 2012.

“During the second quarter, we made good progress in diversifying our customer base. A new portable router began shipping in Korea and we won new WiMAX business in Japan. We also achieved early success in LTE with new design wins in some of the smaller geographic markets, while continuing with LTE testing and trials in China and India. We are executing to our plan, our roadmap is on schedule, and our initial traction in LTE enhances our confidence that we are on track toward our 3 to 5-year target financial model which includes gross margin of at least 50% and operating margin of 20% or higher.”

Outlook

The following statements are based on management’s current assumptions and expectations. These statements are forward-looking and actual results may differ materially. Sequans undertakes no obligation to update these statements.

For the third quarter of 2011, Sequans expects revenue to be in the range of $25 to $28 million, with gross margin increasing to close to 50%. Based on this revenue range and gross margin, non-IFRS net profit per diluted share/ADS is expected to be between $0.00 and $0.05 for the third quarter of 2011, with approximately 36.7 million weighted average number of diluted shares/ADSs. Non-IFRS net profit per share/ADS, excludes any gain or loss from the option component of bank convertible notes, which will be outstanding until October 2011. The amount of any such gain or loss will depend on the price of Sequans’ ADSs at the end of the quarter. Non-IFRS EPS guidance also excludes the impact of stock based compensation.

Given the lack of visibility, Sequans currently expects revenue in the second half of 2011 is likely to be lower than $50 million.

Conference Call and Webcast

Sequans plans to conduct a teleconference and live webcast to discuss the financial results for the second quarter of 2011 today, July 28, 2011 at 8:00 a.m. EDT / 14:00 CEST. To participate in the live call, analysts and investors should dial 800-230-1093 (or +1 612-288-0337 if outside the U.S.). A live and archived webcast of the call will be available from the Investors section of the Sequans website at www.sequans.com/investors/. A replay of the conference call will be available until August 28, 2011, by dialing toll free 800-475-6701 in the U.S., or +1 320-365-3844 from outside the U.S., using the following access code: 208917.

Forward Looking Statements

This press release may contain projections or other forward-looking statements regarding future events or our future financial performance. All statements other than present and historical facts and conditions contained in this release, including any statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for future operations, are forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 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 and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not 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. Some of the factors that could cause actual results to differ materially from the forward-looking statements contained herein include, without limitation: (i) the contraction or lack of growth of markets in which we compete and in which our products are sold, including WiMAX and LTE markets, (ii) unexpected increases in our expenses, including manufacturing expenses, (iii) inability to adjust spending quickly enough to offset any unexpected revenue shortfall, (iv) delays or cancellations in spending by our customers, (v) unexpected average selling price reductions, (vi) the significant fluctuation to which our quarterly revenue and operating results are subject due to cyclicality in the wireless communications industry and transitions to new process technologies, (vii) our inability to anticipate the future market demands and future needs of our customers, (viii) our inability to achieve new design wins, and (ix) other factors detailed in documents we file from time to time with the Securities and Exchange Commission. Forward-looking statements in this release are made pursuant to the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995.

Use of Non-IFRS/non-GAAP Financial Measures

To supplement our unaudited consolidated financial statements prepared in accordance with IFRS, we disclose certain non-IFRS, or non-GAAP, financial measures. These measures exclude non-cash charges. We believe that these measures can be useful to facilitate comparisons among different companies. These non-GAAP measures have limitations in that the non-GAAP measures we use may not be directly comparable to those reported by other companies. We seek to compensate for this limitation by providing a detailed reconciliation of the non-GAAP financial measures to the most directly comparable IFRS measures in the table attached to this press release.

About Sequans Communications

Sequans Communications is a 4G chipmaker, supplying LTE and WiMAX chips to equipment manufacturers for mobile operators worldwide. Founded in 2003 to address the WiMAX market, the company expanded in early 2009 to address the LTE market. Sequans chips are inside 4G networks around the world. Sequans is based in Paris, France with additional offices throughout the world, including United States, United Kingdom, Israel, Hong Kong, Singapore, Taiwan, and China. www.sequans.com

Condensed financial tables follow

SEQUANS COMMUNICATIONS S.A.  
                   
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
                   
        Three months ended  
(in thousands of US$, except share and per share amounts)   June 30,   March 31,   June 30,  
        2011   2011 (*)   2010  
                   
Revenue :              
  Product revenue   30,006   24,845   15,700  
  Other revenue   601   545   938  
Total revenue   30,607   25,390   16,638  
Cost of revenue              
  Cost of product revenue   16,287   12,300   8,077  
  Cost of other revenue   44   85   85  
Total cost of revenue   16,331   12,385   8,162  
Gross profit   14,276   13,005   8,476  
Operating expenses :              
  Research and development   6,767   5,978   4,260  
  Sales and marketing   3,488   3,129   3,545  
  General and administrative   2,126   1,582   898  
                   
Total operating expenses   12,381   10,689   8,703  
Operating income (loss)   1,895   2,316   (227)  
Financial income (expense):              
  Interest income (expense), net   (151)   (184)   (13)  
  Foreign exchange gain (loss)   103   (206)   716  
  Change in the fair value of convertible notes option component   (1,651)     119  
Profit before income taxes   196   1,926   595  
Income tax expense (benefit)   138   30    
Profit   58   1,896   595  
Attributable to :              
  Shareholders of the parent   58   1,896   595  
  Minority interests        
Basic earnings per share   $0.00   $0.07   $0.03  
Diluted earnings per share   $0.00   $0.07   $0.02  
Number of shares used for computing:              
— Basic   33,435,416   27,723,199   23,777,885  
— Diluted   35,209,641   29,164,738   24,588,406  
                   
(*) As adjusted to reflect the classification of foreign exchange gains and losses related to hedges of euro based operating expenses from financial result to operating expenses. The effect on the three months ended March 31, 2011 was to reduce operating expenses by $57. There was no outstanding hedging transaction during the three months ended June 30, 2010.  
SEQUANS COMMUNICATIONS S.A.  
               
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
               
        Six months ended  
(in thousands of US$, except share and per share amounts)  

June 30,

 

June 30,

 
        2011   2010  
               
Revenue :          
  Product revenue   54,850   24,555  
  Other revenue   1,147   2,261  
Total revenue   55,997   26,816  
Cost of revenue          
  Cost of product revenue   28,587   12,191  
  Cost of other revenue   129   170  
Total cost of revenue   28,716   12,361  
Gross profit   27,281   14,455  
Operating expenses :          
  Research and development   12,745   8,774  
  Sales and marketing   6,617   6,400  
  General and administrative   3,707   1,694  
               
Total operating expenses   23,069   16,868  
Operating income (loss)   4,212   (2,413)  
Financial income (expense):          
  Interest income (expense), net   (336)   (217)  
  Foreign exchange gain (loss)   (104)   1,733  
  Change in the fair value of convertible notes option component   (1,651)   137  
Profit (Loss) before income taxes   2,121   (760)  
Income tax expense (benefit)   168    
Profit (Loss)   1,953   (760)  
Attributable to :          
  Shareholders of the parent   1,953   (760)  
  Minority interests      
Basic earnings (loss) per share   $0.06   ($0.03)  
Diluted earnings (loss) per share   $0.06   ($0.03)  
Number of shares used for computing:          
— Basic   30,595,087   23,737,438  
— Diluted   32,369,312   23,737,438  
SEQUANS COMMUNICATIONS S.A.  
             
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION  
             
      At June 30,   At December 31,  
(in thousands of US$)   2011   2010  
             
ASSETS          
  Non-current assets          
  Property, plant and equipment   8,027   5,291  
  Intangible assets   3,952   3,144  
  Loan and other receivables   1,510   1,485  
  Available for sales assets   753   432  
  Total non-current assets   14,242   10,352  
  Current assets          
  Inventories   11,132   8,768  
  Trade receivables   16,665   14,163  
  Prepaid expenses and other receivables   2,533   3,333  
  Recoverable value added tax   1,117   1,361  
  Research tax credit receivable   3,337   2,001  
  Cash and cash equivalents   61,857   9,739  
  Total current assets   96,641   39,365  
Total assets   110,883   49,717  
             
EQUITY AND LIABILITIES          
  Equity          
  Issued capital   908   710  
  Share premium   129,073   68,972  
  Other capital reserves   6,791   5,194  
  Accumulated deficit   (52,309)   (54,262)  
  Accumulated other comprehensive income (loss)   341   85  
  Total equity   84,804   20,699  
  Non-current liabilities          
  Government grant advances and interest-free loans   214   1,278  
  Provisions   224   184  
  Other non-current financial liabilities   1,651    
  Total non-current liabilities   2,089   1,462  
  Current liabilities          
  Trade payables   13,064   15,508  
  Interest-bearing loans and borrowings   3,666   3,564  
  Government grant advances and interest-free loans   1,003   1,889  
  Other current liabilities   5,505   5,270  
  Deferred revenue   513   893  
  Provisions   239   432  
  Total current liabilities   23,990   27,556  
Total equity and liabilities   110,883   49,717  
SEQUANS COMMUNICATIONS S.A.  
                 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
         

Six months ended June 30,

 
(in thousands of US$)   2011   2010  
                 
Operating activities          
  Profit (Loss) before income taxes   2,121   (760)  
  Non-cash adjustment to reconcile income (loss) before tax to net cash from (used in) operating activities      
    Depreciation and impairment of property, plant and equipment   1,829   1,202  
    Amortization and impairment of intangible assets   897   533  
    Share-based payment expense   1,597   544  
    Decrease in provisions   (153)   (403)  
    Change in fair value of convertible notes option component   1,651   (137)  
    Financial expense   49   365  
    Foreign exchange loss (gain)   474   (2,003)  
    Interest free financing benefit   178   (216)  
  Working capital adjustments          
    Decrease (Increase) in trade receivables and other receivables   (1,938)   (3,514)  
    Decrease (Increase) in inventories   (2,364)   (1,019)  
    Decrease (Increase) in research tax credit receivable   (1,336)   (595)  
    Increase (Decrease) in trade payables and other liabilities   (2,216)   5,093  
    Increase (Decrease) in deferred revenue   (380)   (708)  
    Increase (Decrease) in government grant advances   (311)   22  
  Income tax paid   (160)   (61)  
Net cash flow used in operating activities   (62)   (1,657)  
                 
Investing activities          
  Purchase of intangible assets and property, plant and equipment   (6,236)   (2,551)  
  Purchase of financial assets   (346)   (808)  
Net cash flow used in investments activities   (6,582)   (3,359)  
                 
Financing activities          
  Proceeds from issue of shares and warrants, net of transaction costs   343   137  
  Proceeds from borrowings     1,753  
  Repayment of borrowings   (36)    
  IPO proceeds, net of costs   59,956    
  Interest paid   (184)   (153)  
  Proceeds from interest-free loan     789  
  Repayment of interest-free loans   (1,321)   (913)  
Net cash flows from financing activities   58,758   1,613  
                 
  Net increase (decrease) in cash and cash equivalents   52,114   (3,403)  
  Net foreign exchange difference   4      
  Cash and cash equivalent at January 1   9,739   7,792  
Cash and cash equivalents at year end   61,857   4,389  
SEQUANS COMMUNICATIONS S.A.  
                                 
UNAUDITED RECONCILIATION OF NON-IFRS FINANCIAL RESULTS  
                                 
         

Three months ended

 
  (in thousands of US$, except share and per share amounts)  

June 30, 2011

      March 31,   June 30,  
                          2011   2010  
          IFRS (as reported)   Adjustments (*)   Non-IFRS       Non-IFRS   Non-IFRS  
                                 
  Revenue :                          
    Product revenue   30,006       30,006       24,845   15,700  
    Other revenue   601       601       545   938  
  Total revenue   30,607     30,607       25,390   16,638  
  Cost of revenue                          
    Cost of product revenue   16,287   60   16,227       12,288   8,073  
    Cost of other revenue   44       44       85   85  
  Total cost of revenue   16,331   60   16,271       12,373   8,158  
  Gross profit   14,276   (60)   14,336       13,017   8,480  
  Operating expenses :                          
    Research and development   6,767   287   6,480       5,842   4,165  
    Sales and marketing   3,488   244   3,244       2,948   3,402  
    General and administrative   2,126   543   1,583       1,448   877  
                                 
  Total operating expenses   12,381   1,074   11,307       10,238   8,444  
  Operating income (loss)   1,895   (1,134)   3,029       2,779   36  
  Financial income (expense):                          
    Interest income (expense), net   (151)       (151)       (184)   (13)  
    Foreign exchange gain (loss)   103       103       (206)   716  
    Change in the fair value of convertible notes option component   (1,651)   (1,651)            
  Profit (Loss) before income taxes   196   (2,785)   2,981       2,389   739  
  Income tax expense (benefit)   138       138       30    
  Profit (Loss)   58   (2,785)   2,843       2,359   739  
  Attributable to :                          
    Shareholders of the parent   58       2,843       2,359   739  
    Minority interests                      
  Basic earnings (loss) per share   $0.00       $0.09       $0.09   $0.03  
  Diluted earnings (loss) per share   $0.00       $0.08       $0.08   $0.03  
  Number of shares used for computing:                          
  — Basic  

33,435,416

 

 

  33,435,416       27,723,199   23,777,885  
  — Diluted   35,209,641       35,209,641       29,164,738   24,588,406  
                                 
 

(*) Adjustments related to stock based compensation expenses according to IFRS 2 and to the change in the fair value of option component according to IAS 39

 
   
   
SEQUANS COMMUNICATIONS S.A.  
                             
UNAUDITED RECONCILIATION OF NON-IFRS FINANCIAL RESULTS  
                             
         

Six months ended

 
  (in thousands of US$, except share and per share amounts)  

June 30, 2011

      June 30,  
                          2010  
          IFRS (as reported)   Adjustments (*)   Non-IFRS       Non-IFRS  
                             
  Revenue :                      
    Product revenue   54,850       54,850       24,555  
    Other revenue   1,147       1,147       2,261  
  Total revenue   55,997     55,997       26,816  
  Cost of revenue                      
    Cost of product revenue   28,587   72   28,515       12,182  
    Cost of other revenue   129       129       170  
  Total cost of revenue   28,716   72   28,644       12,352  
  Gross profit   27,281   (72)   27,353       14,464  
  Operating expenses :                      
    Research and development   12,745   423   12,322       8,550  
    Sales and marketing   6,617   425   6,192       6,132  
    General and administrative   3,707   677   3,030       1,649  
                             
  Total operating expenses   23,069   1,525   21,544       16,331  
  Operating income (loss)   4,212   (1,597)   5,809       (1,867)  
  Financial income (expense):                      
    Interest income (expense), net   (336)       (336)       (217)  
    Foreign exchange gain (loss)   (104)       (104)       1,733  
    Change in the fair value of convertible notes option component   (1,651)   (1,651)          
  Profit (Loss) before income taxes   2,121   (3,248)   5,369       (351)  
  Income tax expense (benefit)   168       168        
  Profit (Loss)   1,953   (3,248)   5,201       (351)  
  Attributable to :                      
    Shareholders of the parent   1,953       5,201       (351)  
    Minority interests                  
  Basic earnings (loss) per share   $0.06       $0.17       ($0.01)  
  Diluted earnings (loss) per share   $0.06       $0.16       ($0.01)  
  Number of shares used for computing:                      
  — Basic   30,595,087       30,595,087       23,737,438  
  — Diluted   32,369,312       32,369,312       23,737,438  
                             
  (*) Adjustments related to stock based compensation expenses according to IFRS 2 and to the change in the fair value of option component according to IAS 39  
   
   

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