INVE - NASDAQ

Good afternoon. Welcome to Identiv’s presentation of its First Quarter Fiscal 2023 Earnings Call. My name is Holly, and I’ll be your operator this afternoon. Joining us for today’s presentation are the company’s CEO, Steve Humphreys; and CFO, Justin Scarpulla. Following management’s remarks, we will open up the call for questions. Before we begin, please note that during this call, management may be making references to non-GAAP financial measures or guidance, including adjusted EBITDA, non-GAAP gross margin and non-GAAP operating expenses. In addition, during the call, management will be making forward-looking statements. Any statement that refers to expectations, projections, or other characteristics of future events, including future financial results, future business and market conditions, and future plans and prospects is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company’s latest Annual Report on Form 10-K and quarterly report on Form 10-Q. Identiv assumes no obligation to update these forward-looking statements, which speak as of today. I will now turn the call over to CEO, Steve Humphreys, for his comments. Sir, please proceed.

Thanks, operator, and thank you all for joining us. Our first quarter set a solid start to the year with record revenues for the first quarter and strategic progress in both our RFID-enabled IoT business and our physical security business. Our focus for 2023 is delivering disciplined growth, while strengthening our strategic position in both of these businesses and protecting our balance sheet, so we can continue to support our growth. With an improving supply chain and our established reputation as the go-to company for advanced RFID-based IoT applications, especially in medical and specialty packaging, Q1 put us on track for 2023. In our physical security business, our Premises segment, our focus is expanding our share of wallet with our comprehensive security platform across video, access control, analytics credentials and readers. We had wins in Q1 in key verticals across schools, state and local governments, enterprises and airports, as well as in the federal government. In our IoT segment, we shipped nearly 43 million units, and non-recurring engineering projects continued strong at 54% with more than half of these projects in our key medical, health care and pharma vertical. In Q1, we delivered 10 million units of Wiliot IoT Pixels, up from the 1 million we delivered in Q4. We expect to deliver the balance of 14 million units in Q2, and we’ve now received the first follow-on order from Wiliot of a similar magnitude for delivery starting right after the first 25 million unit order is completed. Now, we’ll talk about the implications for 2023. But as you can tell from the sequential progression of one, then 10, then more than 14 million units across Q4, one and two, it’s on track to be an industry-transforming application. We also delivered 4.8 million units to healthcare-related customers, and our five auto-injector projects progressed, including one going into FDA approvals that I’ll describe later. Our viral test kit use cases scaling, orthopedic surgery devices are shipping and the medical use cases we shared last quarter have all continued on track. We continue to maintain 100% customer retention in RFID in Q1, but as we planned, we’ve suspended business with one customer as we rotate out of lower-margin products. That was planned and already built into our projections. On the supply front, chip availability is improving. And in some cases, prices are dropping. At our main supplier, some chip categories were still on allocation in Q1, but we see most becoming broadly available. Supply in other chip categories is loosening up, which has let us negotiate lower prices. We think the RFID-based IoT chip supply is nearly normalized. As usual, with the chip cycle, they’ll continue to improve and prices should continue to drop. We also made inroads in supplier diversification, reducing our dependence on our main chip supplier. We recently announced a new partnership with Procure for high-performance cost-competitive type 2 NFC chips and expanded our relationship with STMicro. Among other things, ST’s chips integrate into our bitse.io platform for seamless tag commissioning and launching engaging brand experiences. Also on the supply side for IoT, our new Thailand production facility project hit its key milestones in Q1, keeping us on track to begin first production runs in July. This will expand capacity while also reducing our production costs. We have efficiency projects underway across our production and supply chain operations to keep improving margins. On the software side of our IoT strategy, in Q1, feedback on our bitse.io SaaS platform has been very positive. We held one event in particular in Q1, where our SaaS platform enabled RFID tags to create a consumer experience for a onetime event. 88 different vendors at the event on the spot created custom mobile menus on bitse, delivering unique customer experiences for each vendor when they tapped on one of our IoT digital triggers. Each customer got unique content buy now options, distribution information and more. Proving this level of ease of use and customization has strengthened our confidence in the ability of our SaaS strategy for IoT management and consumer engagement to deliver value. In our physical security segment in Q1, Premises revenue was up 8% year-over-year in our seasonally slowest quarter. Federal sales were up 16% year-over-year, and our fully integrated solution continued to gain traction. Commercial demand in Q1 results was strong and some late arriving orders from commercial customers gave us a strong physical security backlog going into Q2. We saw particular strength in the schools and education, airports and state and municipal government markets on top of our federal strength. There’s certainly caution about big project commitments these days. So decisions are taking longer, and this drove our sales to be more back-end loaded, but core demand seems to be holding well. Another indicator in Q1 was great foot traffic at the ISC West Trade Show in the last week of Q1. Demand for end-to-end security solutions is strong. This was reflected in a 30% increase in demos and it’s clear that the value proposition of our hyperconverged velocity video, access and analytics platform has broken through with customers. So to summarize, in Q1, both IoT and physical security made solid progress, keeping us on track for 2023. In IoT, our strategic initiatives in healthcare and of Wiliot grew very well, supported by our project management sales and technology strength. Our production expansion in Thailand is on track to begin production in July, supply chains for critical chip categories are normalizing and our product and organization investments are largely done in delivering results. In physical security, our industry-leading converged platform and our ability to deliver it as a SaaS or system solution positions us to keep taking market share. Now, all of these support both our growth and our strategic positioning expectations for 2023, which I’ll discuss after Justin covers our financial results. Justin?

Thanks, Steve. As Steve mentioned, in Q1 2023, we delivered record revenue for our fiscal first quarter, while maintaining year-over-year gross margins. We believe these results, paired with our focus on expanding our share of wallet across both the Premises and Identity businesses, position the company to continue to grow in 2023. First quarter 2023 revenue was $26 million, slightly above consensus estimates and was up 4% versus the comparable prior year period. First quarter 2023 GAAP and non-GAAP adjusted gross profit margin was 35.4% and 37.1% compared to 35.8% and 37.1% in the first quarter 2022. GAAP and non-GAAP adjusted gross profit margin reflects our continued focus on our margin profile in 2023, while continuing to increase our investments in technology and manufacturing processes and equipment, maintaining a non-GAAP adjusted gross profit margin above 37% in the first quarter, which is typically our seasonally lowest quarter is in line with our expectations. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. In the first quarter of 2023, our GAAP operating expenses, including research and development, sales and marketing and general and administrative costs were $11.9 million compared to $10 million in the first quarter of 2022. In the first quarter of 2023, non-GAAP adjusted operating expenses were $10.6 million compared to $9 million in the first quarter of 2022. The increase in operating expenses year-over-year is primarily related to our strategic headcount additions and investments made in 2022. We believe our current quarterly operating expense level of $10.6 million reflects these investments, which will allow us to meet our 2023 goals, and we do not expect the remaining three quarters to vary significantly from this amount. Non-GAAP adjusted EBITDA was a loss of $0.9 million in Q1 2023 as compared to EBITDA of $0.2 million in Q1 2022. The decrease reflects the increase in operating expenses as noted. Our Q1 GAAP net loss was $2.7 million or $0.13 per share. This compared to a net loss of $1 million or a loss of $0.06 per share in Q1 2022. We have provided in the appendix today a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. Our next slide further analyzes trends by segment. Beginning with Identity, revenue from our Identity products totaled $14.7 million or 56% of our total revenue in Q1 2023 as compared to $14.6 million in Q1 2022. This reflects an increase in IoT product sales, offset in part by a decrease in our legacy smart card reader sales. Our Q1 2023 Identity segment non-GAAP adjusted gross margin was 23% flat year-over-year. Quarter-to-quarter margins can fluctuate, but we expect long-term margins to trend upwards from current levels as we expand and deepen our existing customer and technology partnerships, including our expansion into Thailand that we expect to lower manufacturing costs. We remain committed to a long-term gross margin target of 35% to 40% in our Identity business. Now turning to the Premises segment. This segment accounted for $11.3 million or 44% of our total revenue in Q1 compared to $10.5 million in Q1 2022. The year-over-year increase in Premises segment revenue was across both federal and commercial businesses. We continue to expand our market share and offer a comprehensive end-to-end platform solution. Non-GAAP adjusted gross margins for Premises in the first quarter of 2023 were 55% compared to 57% in Q1 2022. The year-over-year changes were primarily due to product mix. We remain committed to a long-term gross margin target of 55% to 60% in our Premises business. Moving now to our operating expense management. Our non-GAAP operating expenses in the first quarter of 2023, adjusted to exclude restructuring and severance costs and certain non-cash charges, consisting of stock-based compensation and depreciation and amortization was 41% of revenue compared to 36% in Q1 2022. As noted previously, we expect quarterly operating expenses as a percentage of net revenue to significantly decrease in the remainder of 2023. Now turning to the balance sheet. We exited Q1 2023 with $21.2 million in cash, cash equivalents and restricted cash, which included a $10 million draw on our revolver with East West Bank. In Q1, we used $4.7 million in cash from operating activities, primarily from changes in working capital and $1.2 million in capital expenditures. Our working capital exiting Q1 was $49.4 million. As Steve noted, our supply chain outlook is improving, and we expect to work through our inventory over the course of 2023. In addition, capital expenditures required for our Thailand expansion are expected to be largely complete exiting Q2. As a result, we expect to rebalance our working capital through the sale of our inventory and pay off our revolver in its entirety in the second half of 2023. In our 10-Q filing, we will be providing a full reconciliation of the year-to-date cash flows. For completeness, we have included the full balance sheet in the appendix of this earnings release. In summary, with our Q1 net revenue in line with expectations, we are reconfirming our 2023 outlook with expected revenues in the range of $125 million to $130 million. Normal seasonality is expected to continue. This concludes the financial discussion. I’ll now pass the call back to Steve.

Thanks, Justin. In 2023, we’re getting the benefits from the work we put in internally during 2022. Despite customer delays, supply shortages, tight capacity and economic worries in 2022, we kept building the foundation of our businesses to win strategically. In IoT, we built out our technical sales, project engineering and production infrastructure. In Q1, that groundwork continued to pay off. Our IoT business delivered on our operational plan so we could focus on building the pipeline for the next four quarters. We kept serving our core mobility, medical and specialty retail customers and expanded our strategic relationship with Wiliot. We deployed our Bitse.io SaaS platform and built out our full range of standardized NFC and ruggedized UHF products. We now have the foundation built, and we’ve established our reputation as the go-to company for specialty applications. In physical security, our complete platform is showing its competitive advantage. Through 2022, we kept building out product engineering, sales and sales engineering, tech support, training, systems and more. It’s everything that we needed to be the best-in-class enterprise scale physical security company that we believe we are now. For 2023, our focus continues to be expanding our competitive advantage in our businesses. Both IoT and physical security are universal and widespread markets, critical solutions for our customers and with the potential to grow substantially. We have to do this within our resources, protecting our balance sheet and working capital while driving growth to take advantage of our market opportunities. We’re working down the strategic inventory position we built last year to manage supply shortages. We’re streamlining product lines and tightening expenses, which will build our cash and working capital strength over the next few quarters. We’re being careful to support every aspect of our competitive strength, while managing our working capital health. For example, we’ve kept payables low to keep good vendor relationships and confidence in the industry. We’re focusing on inventory turn improvements, collections and other healthy approaches to protect working capital using revolver debt only as incrementally needed. We expect revolver debt to be completely unnecessary within the next three quarters, and we don’t think we’re overly constrained in our core strategic growth as we manage working capital. So, across 2022, we built the capabilities we need in IoT and physical security. In Q1, we showed strength in our key growth drivers, supply and production constraints are almost all behind us, and we have the capital we need to grow our business. For 2023, we continue to have four IoT growth drivers. The first is the medical and health care vertical. We already have several medical customers who each are forecasted to be over $1 million in annual revenues this year and a couple of dozen NRE projects or customer samples and pilots in medical use cases with the potential of multimillion dollar recurring revenue levels. We’re clearly the go-to company for advanced medical applications. We think we’ll expand this position, which is critical given that we’ve seen that medical applications take a long time to take off. One recent example is an auto-injector project that’s gone to FDA approval for our solution. This means it’s going to take at least six months longer to get to market, but the upside is that will be designed in. So switching costs will be very high. It’s a great market with good margins and strong customer loyalty. And you can see the range of applications on the slide, reflecting how broadly we’ve developed a pipeline of health care use cases. The second IoT growth driver is Wiliot and related use cases. I described the volumes growth rates earlier. Wiliot’s IoT pixels opened use cases across warehousing and logistics, supply chains, consumer experience, RTLS enabled retail, product environment and handling and an almost unlimited range of applications. In addition to Wiliot themselves who are winning projects with some of the world’s largest companies, we’re engaging with Wiliot-based solution providers going into even more use cases. Wiliot’s already driving growth and has placed its first follow-on order and these third-parties multiply the volume and margin opportunities. The third growth driver is our in-place customer base growing. Our mobility customers, specialty packaging customers, including cannabis and others all drive our growth as they grow, where adoption has been slow, we’re still the leading provider. In cannabis, for example, we’ve got strong relations with the MSOs. In pharmacies, between direct sales and through Envision America and other partners, we’re in most of the top 10 pharmacy chains. In smart packaging, we’re working closely with collectID and other leaders. We’ve kept our leadership and relationships, and we haven’t lost a single customer or opportunity as far as we know. So as these markets grow, we have the same opportunity we’ve always had to grow with them. Our fourth growth driver is our SaaS platform, Bitse.io. Now it will take years to grow to a material revenue source, but it’s very strategic. It’s core to our vision of billions of connected IoT devices and the opportunity to leverage their data. It’s also the basis for higher margins, deep remotes, switching costs and recurring revenues. I described earlier the event where we supported 88 vendors on a tight time frame and the Bitse experience was a huge hit. We bring very easy tight commissioning, consumer experience and data analytics to our customers this way. The platform is easy to manage and experiences are simple to set up even on the spot and events with multiple vendors. It will develop over time, but the platform is in place and now proven. With these IoT growth drivers in place, we think we’re in a good position to deliver as planned in 2023, and we think it will put us in a strong position for faster growth as the use cases and new technologies like Wiliot’s IoT pixels expand. Turning to our physical security business. We spent 2022 building out our next-generation product range and the best in industry teams I described earlier. Our Velocity ecosystem, which includes Velocity access control, Velocity Vision, Vision AI, Hyperconverged Velocity and Velocity Cloud, combined with our Touch Secure readers and TS cards, we think is the most complete integrated security platform in the industry. Customers need integrated systems to get the most benefit from each security touch point and to make the system easy for systems managers and security teams to manage. Security systems are higher performance, lower cost and more secure when they’re integrated across hardware, firmware, software and cloud, as well as across different security actions like access control, video and credentials. As a result, we think our platform offers customers the most complete security system from a single vendor. With our integrated system, adoption already is strong in schools, state and local government, airports and federal agencies. We’re now seeing interest across large enterprises, small businesses, hospitals, banks, first responders, transit and other verticals with security needs but always constrained budgets for security personnel and systems. Especially in a cost-conscious customer environment, our ability to deploy only the needed parts use existing infrastructure to keep costs low and then expand over time is winning share. There’s also a technology refresh cycle that will drive growth over the next few years as server-based systems go cloud, separate access, video and identity systems converge and is in place hardware running Windows 7 and other legacy systems need to be replaced. Our system can leverage in-place cameras and infrastructure while enabling the technology and cybersecurity upgrades they need and creating a single pane of glass security system. We think there’s an opportunity for a new generation of market leaders to own enterprise scale, highly secure systems. The leading enterprise security competitors are either up for sale, recently sold or rumored to be for sale. Competitors trying to build high security enterprise scale systems by coming up from consumer scale systems like [indiscernible] are challenged both technically and from a go-to-market perspective. We believe our faster-than-market growth in 2022 was partly due to this trend, and everything we see so far in 2023 shows the trends continuing in our favor. We’re also planning several product launches, pushing the edge of multi-capability, very high-performance hardware, supporting cloud-enabled systems and features, including biometrics, wireless infrastructures and mobile apps. These include our EG2 Edge Gateway, our new Primis SMB access system and our multifactor authentication reader coming out at the end of this year. With product and technology strength, we’re also OEMing our technology to leverage our engineering investment and to expand the reach of our technology platform. With our OEM program, we’re now selling our access readers through two of the top three physical security system vendors, creating an efficient channel to market. So with this tight focus on business model efficiency and the solid Q1 progress in both our IoT and physical security businesses, we have clear execution plans. We know our immediate growth drivers as well as the strategic advantages we’re building. This focus gives us confidence in our ability to manage working capital reliably to be efficient and expensive while building our long-term competitive moats. So we continue to lead as these markets take off. Now, Justin already confirmed our confidence in our 2023 revenue outlook with the solid gross margins and cash flow from our physical security business and known uses for working capital and for our Thailand expansion, we have the resources to make it all happen. Now we have two strong businesses with strategic positions for the next growth stage of two very large markets. And now, as you’d expect with two strong businesses like these within a small company, we are doing a strategic review to maximize the positions we’ve built and to realize the full business potential in these critical markets. With our progress in IoT across medical applications, Wiliot and our long tail of specialty applications and with progress in physical security expanding both key verticals and share of wallet with our complete platform, there are several opportunities for upside. For now, we’re maintaining guidance. If these trends continue, we’re positioned to accelerate growth and EBITDA margins. We’ll certainly keep you all updated as business wins come in to drive upside. So with that, I’ll now ask the operator to open the lines for questions. Operator?

Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is coming from Craig Ellis at B. Riley Securities.

This is Ethan Widell calling in for Craig Ellis. Thanks for taking my question. And I only have one. Regarding your reiterated fiscal 2023 guidance, I was wondering if there were any meaningful changes to the macro environment that you’re seeing that add colors to that picture and specifically what you’re seeing in supply conditions?

Sure. I think we all know the ups and downs going on in the economy, but we actually are seeing very solid demand, particularly in our physical security side. And because of the long lead times in RFID and the use cases that don’t tend to be swung by economic trends, we’re seeing stability on all sides. So, some of our competitors are exposed to the retail market, for example, which has some headwinds going in, that’s not a strong market segment for us on purpose strategically. So we don’t see exposure to that. So we’re feeling pretty comfortable about the macroeconomic environment. And can you remind me of the second part of your question?

Yes. Second part was regarding supply conditions.

Yes, which we tried to address on the call. It’s actually improved quite a bit and, frankly, faster than we expected, both in terms of supply. And as you often see in the semiconductor patch, it goes from famine to feast. So, prices are dropping as well as supply being freed up. There’s still a couple of sectors, a couple of categories of chips affecting maybe 10% of our revenues that are still having some tightness to it. But even those, we think, over the course of in this quarter should be fully cleared up and flipping already the other way to be advantageous in terms of price and availability.

Got it. Thank you.

Thank you.

[Operator Instructions] Your next question for today is coming from Brian Ruttenbur at Imperial Capital.

Yes. Thank you very much. Looking forward to the next quarter, maybe we can talk a little bit about Premises. You saw 8% growth in the first quarter year-over-year, I believe. Do you expect to see similar kind of quarterly growth on a year-over-year basis? Will it go back into the teens? Can you give us any kind of color for the next quarter?

Right. And I’m sure Justin will remind me, we don’t do quarterly guidance, so I’ll be a little careful about that. But just for the year overall, we did – I just said a few minutes ago that first quarter is always our seasonally lowest one. And so, we do expect sequential strengthening over the course of the year. And second quarter is generally progressed over the first. Third is always strong because of the federal government, I shouldn’t say always, but it historically has been strong because of the federal government, and we think that’s going to continue, plus the penetration we’re having with that full solution ecosystem I talked about. And that’s just building over the course of the quarter since we launched it. So I think that there’s going to be sequential growth both in an absolute sense and on a year-over-year sense as we go through the year.

Okay. And then in terms of your debt, can you – was it just a line of credit that you took out? Can you talk a little bit about that? I believe that happened in the first quarter?

Yes. It’s a revolver. So we only need to use it as that’s something we’ll take up and down as needed for working capital.

Okay. And do you anticipate having to take that up in the second quarter or just keeping where it is?

We’re anticipating – I mean, we don’t give quarterly again, but I would say, we would definitely not be above that $10 million we took out in Q1, would probably be lower than that exit in Q2.

Great. Thank you very much.

Of course.

[Operator Instructions] We have reached the end of the question-and-answer session, and I will now turn the call over to Steve Humphreys for closing remarks.

Okay. Thanks, operator, and thank you all again for joining us today. As you can tell from the comments here, we’re very excited about the markets we’re helping to build and especially the outlook for 2023, we really are focusing on driving our business forward and making sure that all parts of the business have the resources they need. I mentioned the strategic review that we’re doing on the business overall that our Board has initiated to make sure that we are creating all the value we can in the businesses that we’re driving forward. For any of you that are looking for more insights into our IoT business, we’ll be pretty prominent at the RFID Journal LIVE in Orlando next week. And for investor-specific events, we’ll be holding a virtual fireside chat session with Lake Street on May 18. We’ll be at B. Riley conference in LA on May 24, the Craig-Hallum Conference in Minneapolis on May 31. And we’re setting up a couple of other virtual and in-person investor sessions over the next several weeks. So we certainly look forward to keeping you all updated as we build our business and go forward through 2023 and beyond. Thanks, again, and have a very good evening.