Sequans Communications S.A. — 2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS in U.S. dollars. The filing was signed April 12, 2018.
Business context
Sequans is a fabless designer and supplier of 4G LTE semiconductor solutions, focused on LTE-only broadband and Internet of Things (IoT) devices. Manufacturing depends on third parties, including sole-source wafer foundry TSMC. The company reported 80,024,707 ordinary shares outstanding at year-end.
Financial performance and position
| Metric (USD millions, except per-share data) | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $48.3 | $45.6 | +6% |
| Product revenue | $37.4 | $34.6 | +8% |
| Other revenue | $10.9 | $11.0 | -1% |
| Gross profit / gross margin | $21.1 / 43.8% | $20.0 / 43.8% | Profit +6%; margin flat |
| Operating expenses | $40.7 | $39.7 | +2% |
| Operating loss | $(19.5) | $(19.7) | Slightly narrower |
| Net loss / loss per share | $(26.2) / $(0.34) | $(24.8) / $(0.39) | Net loss increased |
| Cash used in operating activities | $(28.6) | $(15.6) | Cash outflow increased |
| Cash used in investing activities | $(6.5) | $(5.3) | Cash outflow increased |
| Cash from financing activities | $17.8 | $32.8 | Lower inflow |
At December 31, 2017, cash and cash equivalents were $2.9 million; cash, cash equivalents and short-term deposits totaled $3.3 million. Current assets were $39.7 million and current liabilities $27.9 million. Total assets were $57.1 million and equity was $4.1 million. Reported loans and borrowings were $30.7 million, including $17.1 million of convertible debt and $7.4 million drawn on receivables financing. The company reported an accumulated deficit of $235.7 million.
Changes and quarterly performance
- IoT revenue grew 43% to $12.0 million, about 25% of total revenue; broadband revenue fell 7% to $27.9 million. Management attributed part of the broadband decline to a major U.S. operator’s subscription-pricing change, which slowed sales of products sold by two customers.
- Product gross margin declined to 33.8% from 34.7%, partly due to a higher mix of lower-margin modules. Overall gross margin stayed at 43.8%, supported by improved margin on other revenue.
- Development-services revenue decreased to $7.7 million from $9.3 million as prior projects were completed; license revenue rose to $3.0 million from $1.5 million.
- Unaudited fourth-quarter revenue was $11.3 million, versus $14.0 million in fourth-quarter 2016; net loss was $7.6 million, versus $5.4 million. Fourth-quarter 2017 gross margin was 42%.
- Operating cash use rose substantially, with working-capital movements including higher receivables and lower trade payables and grant advances contributing to the outflow.
Outlook, risks and unusual items
- Management expected strong IoT growth in 2018, including continued Cat 1 shipments and a Cat M ramp, particularly in the second half. It expected broadband to remain an important growth source. These are expectations, not quantified revenue guidance.
- Management expected 2018 operating expenses to be slightly higher than the 2017 quarterly average and investment in tangible and intangible assets to increase slightly. It stated that funding, including the January 2018 equity offering, should support at least 12 months of operations, while warning that additional financing could be needed if plans or results fell short.
- In January 2018, after year-end, Sequans raised $23.0 million gross and $20.9 million net through a public offering. The offering issued 14.375 million shares at $1.60 per share, diluting existing shareholders.
- Convertible notes were amended in October 2017: maturities were extended by one year and the 2016 notes’ conversion price was reduced from $2.7126 to $2.25. The amendments generated a reported $0.3 million net financial expense. Notes carry 7% annual interest paid in kind.
- Two securities class actions alleging misstatements concerning revenue recognition were consolidated. The company said it could not estimate the outcome or financial effect and intended to defend the case.
- Key risks include ongoing losses and cash burn, customer concentration (top ten customers were 78% of revenue in 2017), dependence on TSMC and other suppliers, volatile demand and product pricing, competition and technology transitions, and possible dilution or further financing needs. The filing also cites currency exposure; a 10% euro/U.S. dollar exchange-rate movement was estimated to affect 2017 operating expenses by about $2.3 million.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. It also describes a $2.8 million reversal of previously recorded WiMAX inventory provisions after the fully depreciated inventory was scrapped.
Important facts for investors to verify
- Whether the January 2018 offering proceeds, cash burn, and available financing adequately support the company’s stated liquidity horizon.
- Actual timing and scale of Cat M/IoT growth and whether announced design wins convert into recurring shipments and revenue.
- Customer concentration, receivable collection, and the effect of the major operator’s pricing changes on broadband demand.
- Convertible-debt maturity, interest accrual, conversion terms, and resulting dilution; also monitor any additional capital raising.
- Progress and potential financial exposure in the securities litigation, whose outcome was not estimable in the filing.
- The filing gives different 2017 LTE shipment figures in separate passages—approximately 3.3 million in the summary and 3.4 million in the operating review—so the exact unit figure should be checked against the underlying disclosures.