Saturday, July 28, 2012

Sequans Communications Is Giving Mixed Signals

Many stocks are dangerous investments. Some more than others. Although I'm long Sequans Communications (SQNS), I consider this a most dangerous investment for a variety of reasons. First, it sells for under two dollars which is always a red flag. Secondly, they're not making any money. Thirdly, their calling card is being the self described technology leader in LTE semiconductors, and the majority of their LTE chips won't come to market for another few quarters.

The big question is, can Sequans remain solvent before they make their mark on the investing community? I'm betting they will, but there is no guarantee. I'm not necessarily using a go for broke strategy with this up and comer in the semiconductor space. I'll sell in an instant if they don't get things going in the next quarter, and from reading the Q2 conference call transcript, my impression is that Q3 is do-or-die for them; no matter how up-tempo the CEO Georges Karam, or, CFO Deborah Choate is.

I prefer to get the bad news out of the way first, so I'll defer to CFO Choate. In the prepared statement section of the conference call, she mentioned that they have trimmed back 10% of the work force. She also stated they had just filed a shelf registration statement with the SEC, but had no immediate need for capital. The filing gives them the flexibility to, "...tap the equity markets if required when we believe the timing is right, consistent with our long term strategy to expand and diversify our product portfolio.". Shelf registration is where you sell more of your shares to the public without a separate prospectus. That would dilute your holdings if you are an investor.

In the Q&A session, the CFO goes on to say: "I think you will notice in Q1, Q2, our cash burn stands pretty closely to our operating loss, and we don’t expect that trend to change. As I have already mentioned, the headcount reductions we did, we expect to have cost savings of about $500,000 a quarter, so that factors into of course the expected operating results, and therefore, the cash burn. And I think in terms of looking out beyond Q3, we really can’t give guidance beyond one quarter out.". They're really on thin ice if they can't give guidance past the next quarter.

Analyst Stephane Houri from Natixis in Paris inquired about if Sequans would make a nice target for a larger organization. CEO Georges Karam responded with: "...I know that any company is always a target for M&A, and merger and restructuring, and any management team should do the best for their shareholders, and we will do so as well.". He went on to say that he preferred to continue the journey as long as he could as a stand alone company.

From looking at the company from 30,000 feet up, it would appear that they may indeed need to be absorbed by a larger entity in the semiconductor space if orders don't begin to pick up. Although their current income stream is from WiMAX, they're betting the farm on LTE, and that is carrier dependent. Globally, many LTE networks won't be built out until the end of 2013, but they are coming. It's a question of when, not if for Sequans. Time is running out.

I believe many organizations would welcome the technology of a company like Sequans to buttress their LTE product portfolio. Here is why (as paraphrased from CEO Karam in the conference call):

  • At the end of June, Sequans began volume shipments of all three chips belonging to their second generation LTE platform.
  • They are actively engaged with Verizon (VZ) and Sprint (S) to collaborate on innovations for future development. Verizon is expected to achieve LTE coverage parity with their CDMA network by the end of 2013. This creates a need for single mode LTE devices in the future; something that Sequans excels in, at least in trial runs.
  • Sequans is primarily a RIC (Russia, India, China) organization, although they are in Malaysia and Australia, too. Purchasing their assets would give larger companies focusing on North America and Europe increased international exposure.
  • They have established business relationships in China, particularly China Mobile (CHL) and Nationz. Sequans has been working with China Mobile since 2009 where they delivered their first generation TD-LTE chip.
  • They now have more than a dozen manufacturers as customers. Each customer is planning to introduce multiple devices which means at least thirty data devices with their second generation LTE devices should be coming to market.
  • They have the most advanced LTE semiconductors on the market.
Bellwether semiconductor companies don't live in vacuums. Their executive teams are well aware of upstarts like Sequans, and the potential opportunities they would present for them in LTE. Although the conference call went public only a few days ago, they can probably already smell blood in the water. However, as an investor on a shoestring budget, you may think this could be a blue-light special if you are out to make a fast buck. Doesn't always work out that way, especially since the stock is in no man's land.

Investing in a security like Sequans means you have to take a leap of faith. Not only in the company, but in their industry which is 4G wireless communications. I'm a real believer in the wireless broadband industry, and taking a flier in a company that's transitioning from WiMAX to LTE chips, could put me in fat city. After all, that's where the technology is going. However, if I'm not careful, I could lose a lot, too. Buyer beware.

If you need to crunch the numbers in more detail, check out the Sequans Communications' quarterly release of financials.