Sequans Communications Announces Second Quarter 2011 Financial Results

PARIS--(BUSINESS WIRE)--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 [phone] 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 [phone] 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 (xii) 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