Description

Sequans (NYSE: SQNS) is a microcap opportunity that we believe is likely to provide significant octane for small-cap managers and personal accounts. This has been that “promising company” since its IPO back in 2011 (7.7mm shares for $10/share) and enthusiasm over the potential market for its chip designs drove the stock to the high $60s. After reaching that all-time high, the stock has been on a steady downward grind until recently bottoming just below $2 per share. While initial investors and even subsequent investors have largely thrown in the towel, the company is finally achieving the potential for which investors had once hoped (see 50% of $750m 3-year pipeline secured by Design Wins). It reminds us of how AMD languished behind Intel for years before emerging as the leader. While we would not suggest that SQNS is going to supplant any of the major chip companies anytime soon, we do believe it has finally made the transition to inserting itself and becoming a key player and has leading-edge technology that will either result in a massive sales ramp or one of the big players taking it out for the IP. 5G/4G Cellular IoT market is projected to exceed $3 billion by 2025, growing at a CAGR of 38%. From its current valuation, our base case has this stock doubling over the next year and in a bullish scenario can see this achieving $6-8 per share over the next 18 months.

SQNS is a high-performance, leading-quality developer and provider of 5G and 4G chips and modules for high-growth IoT devices. When SQNS was launched, it was initially targeting high-speed wireless in collaboration with Alcatel and Swisscom. The initial customers included such as Acer, Cisco, and Huawei to set up 4G wireless networks. Most of the initial production was in Taiwan and Singapore. Georges Karam (from Juniper Networks) was the original founder and remains CEO but he has added some IT talent as well as expanding R&D in both France and Israel. For 5G/4G massive IoT applications, Sequans provides a comprehensive product portfolio based on its flagship Monarch LTE-M/NB-IoT and Calliope Cat 1 chip platforms, featuring industry-leading low power consumption, a large set of integrated functionalities, and global deployment capability via major and strategic partners. For 5G/4G broadband and critical IoT applications, Sequans offers a product portfolio based on its Cassiopeia 4G Cat 4/Cat 6 and new high-end Taurus 5G chip platforms (the world's first chipset specifically optimized for 5G Broadband IoT Devices), optimized for low-cost residential, enterprise, and industrial applications. We believe Sequans has the best performance, most optimized, broadest product scope, competitive pricing, and full partnerships/distribution in place for large & fastest growing 5G/4G Cellular/Broadband IoT Markets. SQNS is a fabless semiconductor company based in Paris, France with offices in the USA, UK, Hong Kong, Singapore, Finland, Taiwan, South Korea, China, and Israel. 

In Q3 2023 revenue ramp begins along with 4Q 23’ Sampling of a new high-end Taurus 5G B-band IoT chip line (which has numerous competitive advantages and proprietary IP) and IP licensing discussions should begin to kick in significantly by year-end. We anticipate shareholders will see solid and consistent revenue growth in 2024 with an achievable 20% operating margin at Scale. Growth is coming from new customers entering new markets, and launching new, higher ASP products including 5G Taurus. License and service revenue supports a higher gross margin. Cash on the balance sheet is up due to a recent $20m private placement ($2.06 per share) and a potential $50m in non-dilutive European Chip Act and French government funding available if they choose to secure it. We believe SQNS will likely obtain government funding, but it is not a vital part of the story. There are a number of likely catalysts approaching and the timing seems crucial at this point, as many of the original investors have capitulated and the stock has reached the point at which the risk/reward seems very asymmetric. We believe Sequans has the right products for the right markets and distribution at the optimal time. Despite reaching this point taking longer than expected (primarily industry-specific, not company-specific issues) and some dilution from the capital raise, some shareholders suffering from “next year” fatigue have exited the stock clearing the way for new investors to accumulate positions with the company finally beginning to ramp and looking toward $0.50 per share in EPS for calendar 2025. At today’s $2.25/share, SQNS now trades at 4.5x calendar 2025 EPS when fabless semis typically trade closer to ~18x.

Industry & Customer Targets are:

• Massive IoT (smart city, asset tracking, eHealth) - low throughput, low power, low cost

• Broadband & Critical IoT (high growth and largest market) – high throughput, low latency

The 5G/4G Cellular IoT market is projected to exceed $3 billion by 2025, growing at a CAGR of 38%. Broadband IoT product pipeline (Taurus for 5G Broadband & Critical Iot Chip) sampling in late 2023. Targeting: Private networks (airports, mining, campus, mobile routers, fixed wireless access, IoT, industrial -5G IP Platform for Cellular IoT - license and royalty revenues stream being discussed with strategic partners.

Large & Fast-growing 5G/4G Cellular/Broadband IoT Markets -Sequans will both pioneer new markets (5G Broadband & Critical IoT) and grow share in existing high-growth markets. MIot Growth is driven by applications in Smart City, Asset Tracking, eHealth/Fitness/Consumer, Smarthome, and additional markets. Targeting $1.5 billion SAM by 2025.

Sequans Introduces Taurus 5G NR: The World's First Chipset Specifically Optimized for 5G Broadband IoT Devices (May 23, 2023) here

Near-term Potential Catalysts:  Next week, the CEO of SQNS will present virtually to some of the Roth Conference (London) attendees immediately post-conference. We believe he will provide a compelling update that will have the tech world and investors enthusiastic about the capability of their chip designs. Further, revenues start rising sequentially in the quarter beginning July 1, 2023 (3Q).

Next Quarterly EPS call (2Q 23’): 1st Week of August 2023 (they will be in 3Q during the call, which is significant as 3Q is when the long-awaited sequential revenue ramp begins).

Investor Presentation May 2023: https://sequans.com/wp-content/uploads/2023/05/Sequans_Investor-Presentation_May-2023_Final90.pdf

SQNS Qtrly REPLAY (May 2023): https://sequans.com/webcasts-and-presentations/

+ https://finance.yahoo.com/news/sequans-communications-announces-first-quarter-100000167.html

Additional Potential Upside (not in current numbers and not being discussed by the company publicly): With 5G data plans on a reliable 5G network, 5G laptops can maintain continuous, secure, and high-speed connectivity wherever you are, eliminating the need for Wi-Fi or hotspots, reducing connectivity downtime. A new report claims AAPL will update that device with an M3 chip later this year instead of simply killing it off. The news comes from 9to5Mac, and the website says its sources have confirmed the 13-inch MacBook Pro is going to get a refresh with a new M3 chip. Today, only ~4% of PCs are connected to cellular, but we believe this is likely to rise to ~10% by the end of 2026. However, Apple may get more aggressive on this prompting competitors such as Lenovo, Dell, and HP who would need to increase their own 5G chip sourcing to add to their laptops. They could potentially engage Sequans to produce this chip (if they are not already). Once Taurus is launched, Sequans will address this business by selling modules with the Chinese strategic partnership announced in August. This will be their first market entry with a better cost module. If successful, Sequans could secure an up-front investment to ramp up this business for laptop manufacturers. Global notebook shipments are expected to reach 214 million units in 2027.

Thales and Sequans are bringing to the market an optimized iSIM technology for IoT devices that simplifies connectivity plan provisioning and management.

We like 5G Taurus strategic deal revs and 2H23 sampling, MIoT’s strategic pipeline growth and blue-chip customer-led 2H23 conversion potential, and longer-term prospects for $100M in annual MIoT sales. Both 4G and Taurus 5G lines do have patent protection and a first-mover advantage. They have both the right products for the right markets and the right distribution at the right time. No more substrate or other supply issues (most issues were industry-specific; not company-specific. TSMC supports them).

VALUATION

Sequans http://www.sequans.com  - Target price: 4-5x EV/sales would value SQNS at $6-8/share. Further, 17x our CY25E EPS of $0.50 translates to the middle-low-end of the public comp range of 3-9x EV/CY23E sales (~6x) and recent semiconductor M&A of 4-10x and target of $8.50/share. The market leader in the oligopoly for IoT-optimized silicon solutions (and in the future 5G). Industry firsts in broadband LTE (TDD, carrier aggregation, Cat 4, Cat 6) as well as IoT-optimized solutions (Cat 1, Cat M1/NB IoT). Sequans has the Broadest Product Scope in 4G/5G IoT. note: “5G” is not just for mobile phones, it’s for IoT!

COMPS: "mini-Qualcomm," PXLW, MMAT, QUIK, RGTI, GSI, etc. (in 4G/5G: Qualcomm is not optimized, Mediatech, GTC, Altair Nordic)

CUSTOMERS & INDUSTRIES: direct, strategic, distributors (ex: Renesas, Gentech, Gemalto, Toshiba, Honeywell, Itron, Avnet, Microchip, Verizon, etc.) in the logistics, robotics, carriers, private networks, Smart meters, security, telematics, e-health, smart homes, wearables, payments, and additional industries.

Technology Partners / MCU Vendors -Majority of IoT devices integrate an MCU •Current Relationships Cover 55-60% of Microcontroller Market •Strengthens our position with Tier 1 customers •Integrating Monarch Platform for rapid go-to-market.

ex: Massive IoT sales pipeline growth driven by smart city/metering segment market leadership, new design wins with Cat M/NB Monarch 2 and recently launched Cat 1 Calliope 2. (Market leader with comprehensive 4G/5G technology for Massive, Broadband & Critical IoT).

-Massive IoT - Go-to-Market:  Module Partners: Gemalto, Renesas

-OEM/ODM: Toshiba, Itron, Honeywell, Comcast, Geotab, WNC, Invoxia, Withings, etc.

-Global Distributors: Avnet, Digi-Key, Mousen, Richardson, etc.

-Technology Partners: Microchip, NXO, Renesas, Skyworks.

-Majority of IoT devices integrate an MCU. Current Relationships Cover 55-60% of Microcontroller Market

-5G Taurus platform targeting >$1.5 Billion SAM in 2025, sampling later this year and already generating significant interest from multiple tier-one customers.

Broadband IoT - End Markets:

-OEM/ODM & Partners: Gemtek, Renesas, etc. Millions of CPE, Gateways, and Mobile Routers are Deployed Worldwide.

-End Markets: Emerging Markets, Tier 2/3 Carriers:  Globe, Xplornet

-Developed Markets: Tier 1 Carriers: Verizon, AT&T, T-Mobile

-Enterprise, Private Networks, CBRS: amic, Cambium Networks, Puloli

Relevant Financial Metrics:

·         June 15, 2023, price $2.23

·         Market Cap ~$130 M

-Q1 2023 financials:

·         Weighted average number of diluted ADS (Non-IFRS) at 3/31/2023: 48,382,629

·         Cash and cash equivalents and short-term deposits at March 31, 2023 totaled $5.3 million compared to $10.7 million at December 31, 2022. The quarter-end cash balance does not reflect the $20 million proceeds from the private placement ($2.06 per share), which closed on April 12, 2023.M

·         Debt: ~$57M

·         EV: ~$162M ($130M Mkt cap + 57 debt - 25 cash (including PP proceeds)

·         EBIT – $(4.0) M

·         EPS – $(0.10) – Company will give guidance for 3Q 2023.

·         Cash Flow (estimate) 2024 – likely break-even ex-corporate overhead in mid-2024, likely C/F positive later in 2024.

EV/Sales (TTM) – current (23’) 2.50 and ~2.17x EV/24E sales

Cash Flow (estimate) 2024 – would be break-even ex-corporate overhead in mid-2024, likely C/F positive later in 2024.

We believe that this story presents an attractive entry-level and from a timing perspective is opportunistic for both 2H 2023 revenue ramp 2024 revenue growth and/or potential takeout candidate. Clearly, there are investors experiencing investor fatigue, having owned this company for years waiting for the ever-elusive ramp. However, most issues were industry-specific and affected most other smaller fabless semi-companies as well. We understand the desire to monetize this investment by many existing shareholders but believe the lengthy wait is about to be rewarded. We expect a mixed and slow 2Q prior to a 3Q ramp (Quarter beginning July 2023), but believe shareholders are largely anticipating this. We anticipate multiple large deal pipeline conversions with Design wins. SQNS apparently already has had one bid for takeout so possible the company is gone within a few quarters (although that would likely leave a significant upside on the table). Cash is strong as they did Private placement for $20m and have a potential $50m in non-dilutive government funding available if they want it. Takeout multiple /58m fully diluted shares = 4-10x EV/sales industry takeout multiples (would value SQNS at $6-8/share (@ 4-5x EV/sales). In the event of no takeout, company design wins translate to $0.52/share for CY2025 and a 17x multiple arriving at $8.84/share.

> $750 million of 3Y LNR (local negotiated rate) projects revenue with ~50% secured in Design Wins. Should get to that $100m annual run rate in next 1-2 years (21% is shipping now, 30% will ship subsequently and the balance)

> $100 million of annualized product revenue potential from current customers in 1-2 years (and our takeout valuation is only based on $70m of 2024 sales). Thus, when Taurus sales kick in late in 2024, sales should ramp. Now, 2H23’s tier-1 metering ramps clear and low forward Price/Sales (bottom 1/3 of long-term range).  

Recent Company Achievements:

• 2019 – major $35+ million strategic partnership with Fortune Global 500 company

• 2020 – announced a technology access and license agreement with Renesas

• 2020 –  Sequans Accelerates 5G Development With Expanded Team in Israel

• 2021 – appointed leader of 5G project consortium funded by French government

• 2022 – recent $50+ million strategic partnership expands addressable market to China, with potential for royalty revenue over 10 years starting in 2025

• 2023 –Growing pipeline • > $750 million of 3Y LNR projects revenue with ~50% secured in Design Wins

• $100 million of annualized product revenue potential from current customers

• Scarcity of SQNS 5G IP platform for Cellular IoT attracting new strategic partners for large addressable markets that Sequans could not easily pursue alone

• IP licensing agreement can provide license and royalty revenue streams over multiple years 

• Market leader with comprehensive 4G/5G technology for Massive, Broadband & Critical IoT

• Four primary growth drivers 2023 - 2026

• Massive IoT with Monarch 2 design wins in pipeline moving to mass production

• Cat 1 Calliope 2 launch expanding pipeline and doubling Massive IoT SAM

• 5G IP Licensing and royalty revenue stream with new deals under discussion

• Broadband IoT product pipeline expands with the launch of 5G Taurus in 2023

• Growing pipeline • > $750 million of 3Y LNR projects revenue with ~50% secured in Design Wins

• > $100 million of annualized product revenue potential from current customers

From May 2023 SQNS PowerPoint Presentation

 https://sequans.com/wp-content/uploads/2023/05/Sequans_Investor-Presentation_May-2023_Final90.pdf

Taurus for 5G Broadband & Critical Iot - launch Fall 2023. Private networks (airports, mining, campus, mobile routers, fixed wireless access, Iot, industrial

5G IP Platform for Cellular Iot - license and royalty revenues stream being negotiated with strategic partners

Smart Cities and other industries driving them now

2022 - $50m strategic partnership expands the addressable market to China, with potential revenue over 10 years starting in 2025

Four primary growth drivers 2023 - 2026

1. Massive IoT with Monarch 2 design wins in pipeline moving to mass production

2. Cat 1 Calliope 2 launch expanding pipeline and doubling Massive IoT SAM

3. 5G IP Licensing and royalty revenue stream with new deals under discussion

4. Broadband IoT product pipeline expands with the launch of 5G Taurus in 2023 into 24’

Growing pipeline

• > $750 million of 3Y LNR (local negotiated rate) projects revenue with ~50% secured in Design Wins

• > $100 million of annualized product revenue potential from current customers

**Regional info is in the 20-F. See the table at the top of page F-26, copied below:

Catalyst

1. Positive SEQUENTIAL revenue growth in 3Q (starting July 1. 2023)
2. Sampling 5G Taurus in 3q. Buzz will get around how good it is. It's a game-changer. Expect partner and customer announcements on Taurus before year-end.
3.  
   Potential Apple announcement of adding an M3 chip to their 13-inch Macbook Pro will excite everyone about SQNS Taurus and a potential deal between HP, Dell, or Lenovo with Sequans for a 5G chip for their laptops. This is clearly neither in estimates nor expectations.
4. Receiving some of the chip stimulus money from the French gov (recently announced as officially available) - potentially $30-50M in non-dilutive capital