Business Context and Reporting Period
Company: Sequans Communications S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Filing Date: February 14, 2013
Reporting Periods Covered:
- Unaudited interim results for the three and nine months ended September 30, 2012.
- Unaudited full-year results for the year ended December 31, 2012.
- Unaudited results for the fourth quarter ended December 31, 2012.
Business Overview: Sequans is a fabless designer and supplier of 4G LTE and WiMAX semiconductor solutions for wireless broadband. The company operates in a single segment focused on baseband processors and RF transceivers.
Key Financial Metrics
| Metric (in thousands USD) | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 | Full Year 2012 | Full Year 2011 |
|---|---|---|---|---|---|---|
| Total Revenue | $7,982 | $26,230 | $19,124 | $82,227 | $22,254 | $93,714 |
| Gross Profit | $3,834 | $14,047 | $10,004 | $41,328 | $10,297 | $47,300 |
| Gross Margin | 48.0% | 53.6% | 52.3% | 50.3% | 46.3% | 50.5% |
| Operating Income (Loss) | $(5,962) | $1,851 | $(22,933) | $6,063 | $(32,769) | $1,075 |
| Net Profit (Loss) | $(5,764) | $3,233 | $(23,111) | $5,186 | $(33,024) | $(429) |
| Diluted EPS | $(0.17) | $0.09 | $(0.67) | $0.16 | $(0.95) | $(0.01) |
| Cash & Equivalents (Period End) | $36,430 | $65,476 | $36,430 | $65,476 | $28,751 | $57,220 |
| Operating Cash Flow | $(3,285) | $5,897 | $(16,057) | $5,835 | $(22,869) | $2,763 |
Material Changes vs. Prior Period
- Revenue Collapse: Full-year 2012 revenue dropped 76.3% to $22.3 million from $93.7 million in 2011. This was driven by a 79% decline in product revenue due to the collapse of the WiMAX market in the United States.
- Customer Concentration Shift: Revenue from the largest customer (HTC) fell from 79% of total revenue in the first nine months of 2011 to 35% in the same period of 2012.
- Profitability Reversal: The company swung from a net profit of $5.2 million in the first nine months of 2011 to a net loss of $23.1 million in the first nine months of 2012. Full-year 2012 resulted in a net loss of $33.0 million.
- Expense Management: Sales and marketing expenses decreased significantly (42% for the nine months) due to headcount reductions and internal reorganizations. However, Research and Development (R&D) expenses increased 10% year-over-year for the nine-month period due to costs associated with preparing new LTE products for mass production.
- Liquidity Burn: Cash and cash equivalents decreased from $57.2 million at year-end 2011 to $28.8 million at year-end 2012, reflecting a cash burn of approximately $28.5 million primarily used to fund operations and R&D.
Guidance, Outlook, and Risks
Outlook and Commentary:
- Management expects WiMAX product revenue to continue declining due to market changes in the U.S., specifically Sprint's shift from WiMAX to LTE.
- The company is transitioning to LTE products, with increased LTE shipments partially offsetting WiMAX declines in Q4 2012.
- Management believes available cash ($28.8 million as of Dec 31, 2012) is sufficient to fund operations for the next 12 months.
- Tax Audit: French tax authorities are reviewing tax declarations for 2009, 2010, and the nine months ended Sept 30, 2011, including research tax credits. No conclusion had been reached as of Sept 30, 2012.
- Legal Proceedings: A class action lawsuit regarding the IPO (Donald Dean Johnson v. Sequans Communications S.A.) is pending in the U.S. District Court for the Southern District of New York. The company intends to vigorously defend itself.
- Foreign Exchange: The company faces significant transactional currency exposure as nearly 100% of revenue is in USD while approximately 48% of operating expenses are in Euros. A 10% fluctuation in the USD/EUR rate could impact operating expenses by approximately $1.6 million.
- Inventory Provision: Q4 2012 gross margin was severely impacted by a $0.9 million provision for excess inventory.
Investor Verification Checklist
- Cash Runway: Verify if the $28.8 million cash balance at year-end 2012 is sufficient given the $22.9 million operating cash burn in 2012 and continued R&D investment needs.
- LTE Transition: Assess the timeline and revenue contribution of new LTE products to replace the declining WiMAX revenue stream.
- Tax Liability: Monitor the outcome of the French tax authority review regarding research tax credits for 2008-2011, which could result in significant liabilities.
- Customer Diversification: Evaluate the risk of reliance on a few large customers (HTC and a China-based customer) following the loss of volume from the U.S. WiMAX market.
- Inventory Valuation: Review the $0.9 million inventory provision in Q4 2012 and assess if further write-downs are necessary for remaining WiMAX inventory.