SQNS - Sequans Communications S.A. (SQNS) Renesas Tender Offer Transaction Conference Call (Transcript)
2023-08-08 11:45:26 ET
Start Time: 08:30
End Time: 08:56
Sequans Communications S.A. (SQNS)
Renesas Tender Offer Transaction Conference Call
August 07, 2023, 08:30 AM ET
Company Participants
Georges Karam - Chairman and CEO
Deborah Choate - CFO
Kim Rogers - MD, Hayden IR
Conference Call Participants
Presentation
Operator
Welcome to the Sequans Communications' Ranger Announcement Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session.
I would now turn the call over to your host, Kim Rogers of Hayden IR. Kim, you may begin.
Kim Rogers
Thank you, Ross, and thank you to everyone participating in today’s call. Joining me on the call today from Sequans Communications are Georges Karam, Chairman and Chief Executive Officer; and Deborah Choate, Chief Financial Officer.
Before turning the call over to Georges, I would like to remind our participants of the following important information on behalf of Sequans. Please note that Sequans issued a press release announcing a proposed acquisition by Renesas and their second quarter 2023 earnings press release this morning, which were posted to the company’s website at www.sequans.com under the Newsroom section. A transcript of this call will also be posted to the company’s Investor Relations website under the Webcasts & Presentations section.
Before we start, I would like to remind everyone that this conference call contains forward-looking statements, including statements regarding the proposed Renesas tender offer. All statements other than present and historical facts and conditions contained in this call, including any statements regarding the proposed tender offer and acquisition by Renesas, our business strategy and plans, 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 those forward-looking statements. Actual events or results may differ materially from those projected or implied in the forward-looking statements. More information on factors that could affect the proposed acquisition by Renesas, our business and financial results are included in our public filings made with the Securities and Exchange Commission.
And now, I’d like to hand the call over to Georges Karam. Please go ahead, Georges.
Georges Karam
Thank you, Kim. Good morning, everyone. Thank you for joining this conference call today. In a press release that was issued just before the start of this call, Renesas and Sequans jointly announced that the two companies have entered into a memorandum of understanding, or MoU, under which Renesas intends to commence a tender offer to acquire all outstanding ordinary shares of Sequans, including American Depositary Shares of Sequans for $3.03 per ADS in cash. The transaction values Sequans at approximately $249 million, including net debt.
After completion of the required consultation with the French employee works council and our Board has formally recommended the offer, Renesas will launch the tender offer. The target is for the transaction to close by the first quarter of 2024, subject to confirmation of tax treatment from relevant authorities, regulatory approvals and other customary closing conditions. This is a significant development for our company, and we are extremely excited to join forces with Renesas, who has been a valued strategic partner for several years.
Combining with Renesas will allow us to leverage their worldwide sales and support organization to further boost design wins. And with the Sequans products under the Renesas umbrella, we will be better equipped to compete and grow our sales in massive IoT and broadband IoT markets. Renesas is present in applications and regions that we have not been able to address. Combining with Renesas will expand our cellular IoT addressable market and revenue potential.
Through closer collaboration and integration of our IoT 5G/4G solutions with Renesas' extensive LAN wireless offering, we can provide a truly comprehensive wireless connectivity portfolio. This, combined with Renesas' rich MCU/MPU product family, will empower us to offer all the essential technologies needed for any IoT device and application.
Furthermore, integration with Renesas' operations will provide us with production scale and access to unique wireless expertise, resulting in lower costs, improved operational margins and fostering further innovation. For all these reasons, we believe that joining forces with Renesas will provide a richer offering to our customers and create synergies that lead to a faster and higher potential revenue ramp than Sequans could achieve on its own.
Sequans is experiencing strong momentum in design wins, expanding our partnerships, and diversifying our product offerings, positioning our business for long-term growth and success in the evolving market landscape. Recently, in the second quarter, we have gained four more projects in the metering segment, including two major ones. We continue to believe that we are heading to secure a strong presence in this space.
Also, we strengthened our position in tracking device applications, specifically since the introduction of our Cat 1 Calliope 2 platform. We are projecting to have significant shipments of Calliope 2 next year as many design win projects are expected to ramp at the beginning of 2024. This is expected to add to our Cat M Monarch 2 design win projects moving to production this year, resulting in a significant year-over-year growth.
With our 5G Taurus chip tape-out, we are on track to begin sampling the solution in Q4. We have witnessed considerable engagement with prominent OEMs and ODMs and are currently finalizing our first alpha engagements. These developments demonstrate our commitment to delivering cutting-edge technology and fostering strong relationships with key industry players.
Our 5G strategic licensing partnership continues to develop well and expand. We continue to believe that this partnership will lead in the future to a royalty stream that can reach $10 million annually, as our partner has a strong presence in a few applications requiring 5G NR technology. However, as rewarding and impressive as our accomplishments have been, the timeline to move design wins into production has been longer than we initially forecast, and additional investment is still required to fully bring the Taurus product to market.
After extensive consideration and a comprehensive evaluation of all available financing options to remain an independent company, we concluded that entering into this MoU with Renesas is in the best interests of our shareholders. Renesas provides valuable resources that can empower us to consistently deliver cutting-edge technology to the market over the long term. We firmly believe that this acquisition represents an outstanding outcome for our customers, partners, employees, and ultimately, our shareholders.
The $249 million value takes into consideration the acquisition of all outstanding ADS and in-the-money warrants, along with the repayment of approximately $60 million of our debt. This represents more than a 4x multiple of our trailing 12-month sales. This transaction is expected to close by the first quarter of 2024, depending on the timing of confirmation of tax treatment from relevant authorities, regulatory approvals and other customary closing conditions.
Completion of the tender will be subject to tenders of 90% of the outstanding share capital of Sequans on a fully diluted basis. We will provide additional information to our shareholders as the process evolves to ensure a transparent and informed decision-making process. The next step is the French requirement to consult with our employee works council. The works council has up to a month to provide their opinion, which will be considered by the Board but is not binding on the Board. The Board will then decide whether to recommend that the offer be accepted; once the Board has so voted, the tender offer process can begin.
The final step assuming tender by at least 90% of the shares will be a shareholder vote on a series of transactions that would result in Sequans structurally, but not operationally, redomiciling in Germany. Following the closing of the tender offer and completion of such transactions, any ordinary shares or ADS not tendered would be ultimately transferred to Renesas under German squeeze-out rules for statutory compensation. In connection with these transactions, Sequans’ existing French activities, including assets, liabilities and employees, would be first transferred to a new wholly-owned French subsidiary of Sequans.
In conclusion, the decision to enter into an agreement with Renesas was carefully considered. Given the long-term prospect for the business, we believe this acquisition will unlock the company’s full potential and is the best course of action for all stakeholders. I want to thank each of you for your continued support and dedication to Sequans. We will keep you updated on any significant developments throughout this process.
I will now open the floor for any questions. Ross, we are now ready to open the call.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question comes from Craig Ellis from B. Riley Securities. Please go ahead, Craig.
Craig Ellis
Thank you for taking the question, Georges, Deborah. Congratulations on the deal with someone that’s been just a real strong partner over the last couple of years. Georges, I was hoping that you could provide a little bit more color on which countries specifically will be needed for regulatory approval. I imagine EU, U.S., Japan, but China, anybody else need it?
Georges Karam
Hi, Craig. Yes. Obviously, all this is filed with the MoU. So you have all the details. But essentially, what you named there is no China. It's really, obviously, France, UK, some countries in Europe, and Japan, obviously, and Taiwan as well on the naming in addition obviously to the U.S.
Craig Ellis
Got it. That makes sense. And then I was wondering if you could also speak to the current business environment and specifically, the activity that you saw with pipeline growth. If we look back to the first quarter, very nice demand for long-term engagement, I think the pipeline rose about 7%, 50 million. Is the magnitude of interest that you're seeing in 2Q in that same ballpark? And if you can provide any color beyond that, which you mentioned earlier, would appreciate it? Thank you.
Georges Karam
Sure, Craig. In fact, really the quarter, the activity we didn't stop. And I tend to say, it's more than ever, continue growing and being in good shape. Specifically to give you a view on the three product line, obviously, Cat M, which is the [indiscernible] Monarch 2, the mature technology, we continue having design win. And I mentioned, we added a few more projects in many spaces this quarter, but also in the metering again, and again, we are really getting good position there. We won as well in the Cat 1 platform, another big metering project, but also Calliope 2, which is the new product that we launched. We have now really approaching the readiness of this product for mass production, and talking about the product with all the software and the certification because the chip is in good shape so far, but it's more about the solution.
And we have design win all lined up to be ready for shipment in Q4, start initial deployment to some customer for mass production beginning of next year. And we have really nice projects with nice volume for next year. So this is really developing well. Massive IoT again continue to be moving into the right direction. We had -- as we said, the challenge in this business was so far the ramp of the projects taking longer in general, mainly for the inventory situation, because many of our customers, they have inventory, not from Sequans, by the way, from their first generation product before they switched to Sequans. And obviously they are waiting to consume all this before they start buying new product from Sequans and move the next generation to production.
The other good news I have there is really the 5G platform. We announced the 5G chip because now we will be sampling this and start showing end-to-end solution working in Q4. And with this, obviously, you engaged aggressively with all the potential partners and customers. And we have many customers. Really the product is extremely well positioned, very appreciated in the market and many potential customers in our pipeline today. So if I look to the pipeline by counting the 5G, we have really very, very nice growth coming from there. Obviously, we're still in the first phase of this. So waiting more to move to what I call a design win phase, but many customers in the pipeline now engaging with us and we should line up a couple of alpha partners towards the end of this quarter, beginning of next quarter on the 5G platform. So all-in-all, it's a very good business. Again, the same image, momentum developed as we are moving forward on the three platforms.
Craig Ellis
Very helpful color. Thanks, Georges. And I'll hop back in the queue.
Georges Karam
Thanks, Craig.
Operator
Our next question comes from Scott Searle from ROTH MKM. Please go ahead, Scott.
Scott Searle
Hi. Good morning. Good afternoon, Georges. Congrats on the deal. Nice to see Renesas as the partner. Just given where we are in the process that it is expected to move from a MoU to a formal tender, I guess is there a formal go-shop period or a breakup fee that would be associated with it? And then, on the other potential opportunities to bolster the balance sheet a little bit, there has been some talk about grants from the French government in the Europe chipset. I was wondering if you could give us a quick update on that part.
Deborah Choate
On the formal go shop, there's not a breakup fee. And that's all documented in the MoU. On the financing, we had expected -- we hope to hear from the French government at the end of June and they pushed back decisions on all of the pending grants to the end of September. So no bad news on that, but they just pushed off the date. And we continue to move forward with the European Investment Bank, but also the same thing. They have moved into August, and they've pushed off any kind of formal feedback until the end of September.
Scott Searle
Thank you. And Georges, maybe just to follow up quickly on Craig's question. It sounds like there's a tremendous amount of design activity that continues, particularly it sounds like on the Cat 1 front and now starting to move into the 5G front. But what does the channel inventory situation look like at the current time? I know a lot of customers are elsewhere throughout the supply chain, have talked about modules, et cetera, kind of backing up. I'm wondering what you're seeing kind of into the back half of this year and 2024? Thanks.
Georges Karam
Scott, essentially, we were facing two things for that. We have some existing customers that they bought last year. They are moving a little bit more to a just-in-time consuming that inventory. For example, we have one major model partner that I mentioned in the beginning of the year, they had enough inventory that we need to let them go before they start buying again. I was expecting this will finish like midyear. Honestly, it's taking a quarter more on our side. On the rest of the business, which is we are impacted from the inventories not really direct inventory related to Sequans.
We have a lot of situations where the customers, they selected Sequans for the second generation platform, and they had their old last year. And for all the good reason, they bought a lot of inventory for the first platform. And even if the second platform is ready to go, they're a little bit holding this little bit until they finish their inventory and they can optimize that, obviously the financial impact for that. But all this seems to be going to the right direction. We don't see a major problem other than just only be patient through this. And we start seeing some nice sign for the second half of the year. So I remain optimistic, if you want, where we exit the year with all this behind us somehow.
Scott Searle
Thanks, guys. I'll get back in the queue and congratulations again.
Georges Karam
Thanks, Scott.
Operator
[Operator Instructions]. Our next question comes from Quinn Bolton from Needham & Company. Please go ahead, Quinn.
Quinn Bolton
Hi, Georges and Deborah. Can you hear me?
Georges Karam
Yes, sure, Quinn.
Quinn Bolton
Georges, you mentioned in the script the WiFi portfolio at Renesas is being one of the things that you think helps the go-to-market strategy. Just wondering if you could elaborate on some of the segments? Is this more in that higher speed broadband modems? Is this 5G? Or are you seeing applications with Calliope 2, Cat M and Cat 1 as well in terms of that WiFi, the benefits of bringing the WiFi and the cellular together?
Georges Karam
Sure. Quinn, obviously, in the script I was giving the example, not to be restrictive on WiFi. But Renesas has done, if you are following them, in the last couple of years is a series of transaction where they acquired a lot of technology. But very honestly, when you look to their portfolio today, they have all what's needed for any IoT device, whatever you look then, IoT device they have it. And obviously, we'll be joining this group and there will be some integration and so on to optimize the global offering. But as an expert, if I look myself just only with my background in this space, I believe the group has everything now with cellular to go to any market. And obviously that by the way to talk about WiFi, but also don't forget the Bluetooth, [indiscernible] for the mesh technology.
If we go to the metering space, we need mesh and cellular, we need microcontroller and processor, they have it all. If you go to the broadband, you need WiFi and you need 5G broadband. So they have it -- and obviously MCU, microprocessor MPU. So they have it all. So the IP is there to attack any market. And this is what I wanted to mention. So definitely we will -- once part of the group, obviously all this is under the condition that this standard will be concluding positively, we'll be able to have a strategy where end-to-end we have it in-house to deliver the best offer to the customers. And obviously, WiFi is part of it.
Quinn Bolton
Understood. It sounds like there are a number of potential revenue synergies by combining with Renesas. I guess my other question was, do you see any revenue dis-synergies? Are there any customers today or partnerships with other microcontroller vendors that might be threatened as Sequans joins Renesas?
Georges Karam
No. To be honest, on the first look, I see all more positive synergy than negative synergy. The microcontroller in general, sometimes the customer, they make their call. I can talk about it even before the acquisition will be closing. Today, Renesas is a partner of Sequans and we are with them in many deals. Sometimes the customer, they use their microcontroller. And they use Sequans on the cellular. Sometimes by the way they use -- they have some other processor they are using and it doesn't prevent the customer to use the cellular of Sequans.
So I don't see why this will be different, right? At the end, it's not to lock the customer. It is to give the customer more options to make the best choice on their side. And obviously, they could have the chance to get more from one-stop shop, but also diversify if some of the technology they would like to keep it from other partners. So we don't see this really impacting any negative. To the contrary, it will be more positive because we'll be able I will say to do a better job together being part of one group.
Quinn Bolton
Understood. Thank you, Georges.
Operator
And at this time, there are no further questions. I’d like to turn the call back over to Dr. Karam to close out the call.
Georges Karam
Thank you, Ross. Thank you again for joining the call, all of you. I know that it was fast notice and I appreciate that you managed to have your time to come on the call. Following this call, Deborah and I have scheduled follow-on calls with our analysts. Afterward, for the remainder of the day, we are tied up with internal communications, as you can imagine, and we are making ourselves available for discussions with customers and suppliers. However, tomorrow we can speak with investors, if needed, and you can contact Kim Rogers, our IR consultant to schedule a call on Tuesday. With this, again, I would like to say thank you all. And Ross, you can close this call. Thank you.
Operator
This concludes today's conference call. Thank you for attending. You may now disconnect.
For further details see:
Sequans Communications S.A. (SQNS) Renesas Tender Offer Transaction Conference Call (Transcript)