Steve Humphreys - CEO Brian Nelson - CFO Jason Hart - President.

Saliq Khan - Imperial Capital Mike Latimore - Northland Capital.

Welcome to the Q3 2015 Identiv Earnings Call. My name is Ethan and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

With me on the call today are Steve Humphreys, CEO of Identiv, Brian Nelson, CFO and Jason Hart, President. In a moment, you will hear remarks from both of them and then we will take questions from sell-side analysts and registered investors.

Before we begin, please note that during this call, we will also be making references to non-GAAP results or projections, including non-GAAP gross margins, operating expenses, and adjusted EBITDA.

A complete reconciliation between each of these non-GAAP measures and the most directly comparable financial measures can be found in today's press release, which is available on identiv.com. In addition, during our call today, we will be making forward-looking statements.

Any statement that refers to expectations, projections, or other characteristics of future events, including financial projections and future market conditions 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 the documents filed from time-to-time with the SEC, including the Annual Report on Form 10-K for fiscal year 2014. Identiv assumes no obligation to update these forward-looking statements, which speaks as of today. I'll now turn the call over to Steve Humphreys for his comments.

Steven?.

Thanks, Ethan, and thank you all for joining. This is my first earnings call for Identiv in quite a while. As some of you know, I was the CEO when we brought the company public. So it’s a pleasure to be back here with the company I care for deeply working with Brian, Jason and the whole Identiv team.

Now, one of the questions a new CEO is always asked is what changes are coming down. Now, in fact successful management transitions almost always are characterized by focusing on existing customers and building on the company's core strengths. It's not about new visions or wholesale changes in strategy, team or anything else.

It is about focusing and serving customers. To the extent change is implemented, it’s to increase service to customers and to strengthen the channel and dedication to partners. That’s what we're doing and that’s what I'm committed to. It’s demonstrated in our third quarter results and will be in the quarters going forward.

Now, last quarter's business discussion began with an emphasis on focus, partnering and growth. Our third quarter was built on strengthening exactly those priorities. Our business model is well underway with the transition from a direct sales, major customer approach to a leveraged partner and channel model.

Now, the flagship partnership of this strategy is of course Cisco. Our Cisco partnership in physical access launched in earnest last quarter with joint events, the largest of which was at the ASIS Security Conference last month.

We had a joint Identiv-Cisco booth, which was busy the entire show as we’re the joint partner in customer events we held in the evenings. Actual shipments of the ICPAM product, which is our platform for the Cisco channel began just last week.

In just this first week, we processed orders in the low-100s of ICPAM bundles, but over a $1,000 each and we processed - and the partnership's sales pipeline already is over $10 million, now that's leverage. Additionally, we've established OEM and co-sales relationships with the global technology practice of Tyco, our long-time government partner.

We've also established reseller and OEM relationships with three of the Top 10 physical access system providers and last week signed an OEM partnership with the leading cloud-based premises access provider to the US government.

No we're empowering our partners with an open access strategy and premises breaking some of the traditional monopolies that have existed. We’re excited to be joining this mission by major partners like Dimension Data, a $6 billion global security solutions provider.

Our partnerships are enabling customers to embrace physical access as a component of their IoT strategy. We've also seen existing relationships gaining traction, especially with Johnson Controls and new partners like Zones, another $1 billion plus IoT solutions provider.

These partnerships are built on our commitment to open architectures, our low-cost discipline and our ability to bring next-generation technology into traditional physical access environments. This is perhaps best embodied in our Touch Secure Reader line, where results are reflected in sales results.

In the second quarter, we shipped under 1,000 Touch Secure Readers and in the third quarter that number was around 3,000. We expect Touch Secure to continue to grow strongly as our partner sales and Cisco attach rates grow. Also in the premises space, we've been investing in our channel.

Our dealers are eagerly adopting our access credential, reader and platform solutions for premises. In access credentials, our production lines are running double shift at times, supporting a 30% volume growth year-over-year.

The air carrier customer we mentioned last quarter now has received tens of thousands of our identity cards representing several hundred thousand dollars in revenues in the current quarter.

As you can tell from these business results and from our underlying business focus, the premises business and all the related products and services is a clear focus for us. This is the key area, which we're emphasizing to drive profitable growth.

What we're doing this because physical premises also is the fulcrum for several higher growth areas as premises moves from perimeter doors and access control to pervasive doors and access enablement. The revenue opportunity expands by an order of magnitude.

Identiv’s access technology incorporates bluetooth and other ubiquitous longer-range standards-based protocols mobile devices will further reduce friction, enhance adoption of access platforms. Fundamentally the Internet of Things is about physical objects.

Our beachhead in physical premises is our base to win as IoT develops from point solutions to ubiquitous aspect of our physical activities and environment. Our strategy is to grow profitably with a wide channel and standards-based products into the traditional base of the access business.

We’ll then tactically bring in game changing products to our existing customers and partners just when they're ready to deploy budget allocations and adopt new advances. Without having to invest in channel development and market experimentation, we’ll be there to leverage our technology investments more efficiently than anyone in the marketplace.

Since our vision and the capabilities of our products extend beyond perimeter premises access control, we’ll continue to leverage our platforms to provide expanding capabilities and business benefits to this customer base. Now, so far I’ve focused largely on our commercial premises activities.

Our position is even stronger in the federal government where all of these trends are active with additional impetus for near-term platform enhancement to comply with the Federal, Identity Credential and Access Management mandate known as FICAM.

Our government customers drive much of our premises business and over 90% of our identity segment made up mostly of our smart card readers, chipsets and modules. So our second major focus, really core to the first is our government customers, partners and channel.

This is another area where investments in technologies such as spycam channel with an expanded DC office and partnerships with Tyco, Brivo, Cisco and others increasingly will pay off going into 2016. Our only other area of focus is our transponder business within the credential segment.

Here, we’ve had a small number of large customers who have driven results. Diversification of customers and applications to drive consistent growth is the mission here and is paying off. We launched an initiative to penetrate the library market resulting in wins in over 40 libraries in a 90-day period.

Similarly a strong presence at the IoT show in Singapore deepened our strength in transit, pharma and other verticals leveraging our strong base in Southeast Asia, our reference customers, engineering and of course our Singapore production base. Now, these are just some of the customer diversification programs, but here are the results.

In the first quarter of this year, our non-top customers represented about 35% of our transponder sales. By third quarter, they represented over 44%. For the first nine months of last year, they represented 35% also, which has grown to 43% in the first nine months of this year. We're determined to drive this diversification in our transponder revenues.

So in sum, our third quarter reflected well our business direction from a revenue and gross margin perspective. The same underlying RF and security technology is core to our access readers, access cards and transponders. Our commitment to open platforms enables robust partner relationships.

It also enables rapid adoption of market expanding shifts such as pervasive door access enablement, mobile enabled access, converged access and IoT. So with our revenue focus sharpened relative to channel partners, products and segments, we're also taking steps to drive the business model and profitability.

Early in the fourth quarter we pivoted in Europe moving to a completely partner and distribution model. We thoroughly implemented the channel focus including transferring our legacy web sales business to a third-party.

Although this will eliminate around $0.5 million in quarterly sales, it didn't align with our core business direction and added to the infrastructure load in Europe. We think this is the optimal structure going forward, leveraging partners and channels rigorously.

This provides leverage not just in sales but in trade shows, industry events, marketing, implementation support and even G&A. This both improves profitability and minimizes partner and channel concerns over account conflicts.

So stronger financials, clear channel roles, improved business focus and low risk paths to new product and market segments are the ingredients for sustained growth and delivering ROE to our investors. So with that in mind, it is probably very appropriate point to turn the discussion over to our CFO, Brian Nelson..

Thank you, Steve. I will now turn to our financial results for the third quarter. Revenues in the third quarter were $17.2 million as compared with $15.6 million in the prior quarter, an approximate 10% sequential increase and compares to revenues of $22.7 million in the comparable quarter of 2014, a decrease of 24%.

Our premises segment provided $6 million in revenue in the third quarter of 2015, which is up 31% sequentially from $4.6 million in the second quarter of 2015 and an increase of 21% from the $4.9 million in the comparable quarter in 2014.

The growth sequentially and year-over-year is primarily a result of the company's continued efforts in the US federal government sector and as Steve mentioned earlier, our dealers’ adoption of our access credential, reader and platform solutions for premises.

Revenue from our identity products which includes smart card readers, reader modules and tokens was $3.1 million in the third quarter of 2015, which is a sequential decrease of 5% from the second quarter and a decrease of 18% over the third quarter of 2014 revenues of $3.8 million.

These changes reflect the weaker demand for these products on our international markets.

Approximately 45% of our third quarter 2015 revenue or $7.8 million was derived from sales in our credential segment, a sequential increase of approximately 6% from the $7.4 million achieved in the second quarter and a 39% decline from the $12.8 million in the third quarter of 2014.

These changes were primarily due to the timing of orders worldwide for products used in electronic game toys, applications and other Internet of secure things applications.

As I will discuss later in my review of the balance sheet, we have built up significant inventories in anticipation of fulfilling backlog going into the fourth quarter and for these future orders.

Revenue in our All Other segment which has historically represented sales of our digital media and chip drive products was $0.3 million, a decrease sequentially from the second quarter revenues of $0.4 million and a decrease of approximately $900,000 from $1.2 million in the comparable quarter of 2014.

These changes are primarily due to the phasing out of our digital media product lines and softness in the demand of our chip drive products. Now turning to our margins, our non-GAAP gross profit margin was 47% in the third quarter of 2015 as compared to 45% in the year-ago quarter and 45% in the second quarter of 2015.

The increase sequentially and comparably is primarily a result of our product mix with the higher revenues realized in our premises segment.

Now turning to our operating expenses, our non-GAAP operating expenses in the third quarter were $11.4 million as compared with $11.2 million in the prior quarter and $9.6 million in the comparable quarter of 2014.

These expenses in the third quarter and the second quarter of this year reflect legal and professional fees related to non-core business activities of $2.7 million and $1.9 million, respectively, for the quarters. Excluding these expenses, our operating expenses would have been down sequentially by approximately 8% and comparably by approximately 7%.

Our R&D expenses were $2 million in the quarter ended September 30, 2015 or 12% of revenue as compared to $2.1 million in the prior quarter, a sequential decrease of $100,000 and an increase of $300,000 as compared to the $1.7 million in the same quarter of 2014. Our fluctuations in R&D continue to be the result of our timing of development projects.

Our sales and marketing expenses were $4.6 million in the quarter or 27% of revenues, a decrease of $250,000 sequentially and a decrease of $50,000 over the comparable quarter in 2014. The changes primarily reflect the timing of certain marketing programs as well as employee related costs with our sales force.

Our G&A expenses, which include the previously mentioned legal and professional fees related to non-core business activities or $4.7 million in the third quarter as compared to $2.9 million in same quarter a year ago and compared to $4.2 million in the prior quarter.

When excluding the non-core spending for Q3 and Q2 of this year, G&A expenses would have been $2.0 million in the current quarter and $2.4 million in the prior quarter or approximately 11.5% and 15% of revenues, respectively.

Our non-GAAP operating expenses in the quarter exclude charges for restructuring activities in addition to other items, normally excluded from our non-GAAP results such as stock based compensation. I will touch on these in a moment.

Our adjusted EBITDA loss was approximately $3.3 million in the third quarter of 2015 as compared to an adjusted EBITDA loss of $4.2 million in the second quarter of 2015 and as compared with positive EBITDA of approximately $1 million in the third quarter of 2014.

Our adjusted EBITDA loss excluding the legal and professional fees related to non-core business activities would have been $600,000 in the third quarter. Now touching on a few other items on the income statement. Our restructuring charges in the third quarter were $0.2 million and relate to severance for terminated employees.

Our interest expense of approximately $478,000 relates to our outstanding debt under the Opus facility, both cash and non-cash amortization of debt issuance cost, as well as interest associated with our other long-term financial liabilities.

Our non-cash stock-based compensation was $1.2 million in the quarter as compared to approximately $600,000 in the comparable quarter of 2014 and $1.3 million in the prior quarter. The increase year-over-year is a function of our broad move for employees from cash-based to equity-based incentives.

Now turning to the balance sheet, I will be comparing our position at September 30, 2015 to that as of June 30, 2015. Our reported cash was $21.4 million at September 30 as compared to $30.8 million at June 30, a decrease of approximately $9.4 million.

Major uses of cash in the quarter include the pay down of approximately $3.2 million in accounts payable, an increase in our inventory of $2.8 million and the approximate $500,000 in interest payments associated with our debt and other financial liabilities.

Under our working capital, we define this as our accounts receivable, plus inventory less our accounts payable. It was $20.1 million at September 30, as compared to $17.2 million at June 30, an increase of $2.9 million.

This is due to the aforementioned $3.2 million decrease in accounts payable, the $2.8 million increase in inventories, partially offset by $3 million decrease in accounts receivable. A couple of notable balance sheet asset metrics.

With respect to our accounts receivable, our days sales outstanding improved to 55 days in the third quarter from the adjusted 56 days in Q2 based on improved collection efforts in the quarter. Our inventories as noted previously increased by $2.8 million to $15.2 million at September 30, from $12.4 million at June 30.

Our turnover was approximately 2.5 for the quarter as compared to 2.9 for the preceding quarter. As I previously mentioned, we have built up inventory related to our credential segment to satisfy both the backlog entering Q4 and in anticipation of certain customer orders. Some of the other noteworthy line items in the balance sheet.

As noted in my discussion of working capital, accounts payable decreased by $3.2 million to $5.5 million at September 30, as compared to $8.7 million at June 30 and this was partially based on the timing of periodic payments as well as our inventory purchases.

Accrued compensation increased by $300,000 from $2.1 million to $2.4 million, primarily reflecting period variable compensation accruals. Our other accrued expenses and liabilities increased slightly to $4.8 million at September 30, as compared to $4.7 million at June 30, primarily related to the accrual of legal and professional fees.

Our long-term payment obligation decreased from $5.9 million to $5.7 million, which reflects the periodic payment made during the quarter, partially offset by the accretion of interest. Our long-term financial liabilities reminded at $18 million and reflects the amounts outstanding under the combined $40 million facility with Opus Bank.

The $10 million term loan matures March 2017 and amounts under the revolving credit line mature in November 2017. Onto our revenue guidance. The company is providing guidance for fiscal 2015, of revenue between $62 million and $64 million. That concludes our financial discussion and I'll pass the call back to Steve..

Alright, thanks Brian. Before we go into the Q&A. I just like to briefly summarize some of the growth drivers for the business. Also, some of the metrics we’re tracking internally, so you have an insight into what we’re focusing on and the levers we’re really keeping our hands on.

And then, as well as some of our investor communication plans I’d like to touch on. When you think of our growth drivers, the Touch Secure reader sales really are very good surrogate for our overall strategy. They tie directly to partner enablement, channel sales and open standards. Another growth driver is clearly government sales.

They represent a broad cross section of our products and partners, so it's really something that we’ll be tracking and reporting on very carefully. Third one that I touched on in my comments is the transponder verticals, where we are going after new customer segments, and new customers to broaden our base of revenue and our growth.

And then fourthly certainly platform adoption by Cisco, our channels and other partners. So, those are the large growth drivers that we should keep in mind for our business.

Additionally, those of you who’ve worked with me before know I'm very metrics driven, so there is a set of metrics that we've implemented and we’re going to be working with and testing, and probably adapting as we go forward, just thought was worth sharing with you.

One of course is the probability weighted sales pipeline that's pretty straightforward. We are going to focus specifically also on partner sales and partner sales growth Also our identity credentials to reader attach rate ratio.

This is where when we sell a reader how many credentials do we expect to sell into that customer and right now, we've got a target of about 40 to one that's what we've experienced so far and what the industry experiences, we obviously want to track that very closely. Also, our reader to platform ratio.

So, when we sell particularly through a channel partner and we sell a system or a platform, how many readers go on versus centralized controllers. Near-term, due to the architecture, it's probably around 4 to 1 ratio.

As you go to more IP and cloud-based installations, we expect to drive that up closer to high teens or 20, so we want to track that progress as we go. We also obviously will be tracking our Touch Secure reader unit sales very closely. Our new customer numbers as well as percentages, our sales person productivity and our channel productivity.

And then also perhaps of less interest to investors but something that’s very important internally and to the productivity and efficiency of an organization like ours, our developer day variances. This is an agile development methodology. I've used before for calibrating developer effectiveness.

You basically look at your total developer days applied to a project and how many days over or under do you come in terms of the delivery dates and how reliable are you and how efficient are you. So just wanted to share some of those metrics as we refine them will determine which ones make sense to update externally on an ongoing basis.

And this is really because we’re very much committed to business predictability and investor transparency and we want to start delivering metrics that can give a better understanding of where the business is going and what the underlining dynamics are in it. So along those lines, I just like to mention a few upcoming investor events.

In less than a month, we’ll be at the Imperial Capital Conference on December 10, and the very next day, on December 11, we’re going to hold a dedicated Investor Day and webcast where hopefully a number of you can attend either in person in New York or virtually through the webcast and have a good solid discussion about the business, fully disclosed equal information going out to everybody and get into some of these dynamics and trends and metrics of the company.

Additionally, of course, we’ll have the 2015 earnings call in early March and investor conferences throughout 2016. We are expecting to be present at least at America's Growth Capital, B. Riley, Ross, Northland and then steadily throughout the year.

Over the course, we’re going to be balancing our commitment to investor understanding with our primary obligation, which is running the business and creating shareholder value by profitably delivering the industry's best service and value to our customers. So, with that I’ll turn it over to Ethan for questions..

[Operator Instructions] And our first question comes from Saliq Khan from Imperial Capital. Saliq please go ahead..

Giving the announcement of the different partnerships that we've seen with the likes of Cisco and Tyco, when do you anticipate that these engagements will turn into realized revenue?.

So as we mentioned, we've already started shipping products and its early implementation and pilots, but we think it will be materially affecting our numbers certainly in the second half of 2016, and if it merges as we expect, we'll certainly see trends that are showing right in the first quarter and second quarter.

And if the pipeline develops as it looks like it may, it could be fairly material, even as early as second quarter..

Do you find that for the stability of deployment by the partners could be a challenge as well going forward, and how do you anticipate this and what can you do in your end to bring about a lot more visibility within this?.

Yes. The reason that we've highlighted big partners is because the key to predictability is substantial pipelines and so without going into specifics that would disclose activities of individual partners, I mentioned the Cisco pipeline is already built to over $10 million.

That's going to be the core for getting some predictability into it, as we start to get understanding of what the conversion rate is, the sell-through and upgrade is.

Also part of the partnership in both cases with Tyco and Cisco is existing installed base and so we’re going to be selling - upselling into that installed base and getting repeat business and on Tyco’s side, a lot of the partnership is related to the government. So the FICAM upgrades that we mentioned are already underway and part of the roadmap.

So there is current customers, current partners, there is new customers, current partners, and then ultimately there is going to be new customers and new partnerships such as Dimension Data.

They start to grow and we’ll do our best to update you on development of conversion rates and pipeline in all those areas because I know you're trying to get your handle on it..

Got it. As I look at the geography right across Americas, Europe and Asia-Pacific, I know there has been a lot of focus around trying to make sure that more of the revenue comes from the Americas region.

But within the near term, could the efforts in North America be offset to a certain degree by the international headwinds and how do we think about this and what can you do on your end to once again mitigate the risk?.

Yeah. Good question. Actually, with some of these partnerships, that could bring some results in the international markets that are beyond what we might be expecting. So we had a Cisco sponsored event in the Middle East less than a month ago that was very well attended and has brought out some of the pipeline.

So that Cisco pipeline, when I talk about it, is very much worldwide. Dimension data, if you know these guys, very global footprint as well. So it’s certainly accurate that we are making our infrastructure more efficient and a lot of that efficiency is coming out of our international operations.

On the other hand, our partners are helping us internationally. I mentioned Abu Dhabi will also have a pretty substantial event with Cisco in Berlin in January. And as you know, Berlin is a real technology epicenter right now. So we expect some pretty good things out of that too.

But we will try and deliver to you metrics and conversion rates as soon as they start to appear. And frankly, we tried to start indicating that already with volumes of the bundles, pipeline numbers, et cetera that are very tangible..

One last question guys and then I'll hop back in the queue.

Within the other category, the other product category that you have, what level of competition are you seeing particularly from the Chinese market who tend to sell cheaper solutions that are just good enough?.

And Saliq, when you mention the other category, you're talking about all other segment, which is the typical digital media and chipdrive?.

Exactly, and those relatively small comparisons to the rest of the product category, but from the conversations that I've had previously, it seems to me that it was a faster growing category as well?.

Yeah. As I mentioned earlier in my discussion, the digital media has all but languished, just based on like you said, commodity product.

We chose not to invest in that area since we didn't see growth in it and the chipdrive product as well, it’s a product line that has been diminishing over time, and our goal and our focus as Steve mentioned throughout his comments is really building up our premises, core business and expanding other aspects of our business by that leverage..

Thank you, guys. I appreciate it..

And our next question comes from Mike Latimore from Northland Capital. Mike, please go ahead..

Great. Thanks a lot.

So on the inventory increase, is that related to current customers or is it more related to new customers there?.

Yeah. Good question. Thanks, Mike. It's predominantly related to customers in our installed base and anticipation of their current backlog and fulfilling future orders..

Okay.

And then within current strategy here, how important is the on-demand service, part of the mix, is that core, non-core, how do you view that?.

It's really our core platform for issuance of the identities, the access cards, the credentials. So it's still very core to the business.

In terms of emphasizing marketing that as an end-use product for identities to be issued on-demand, it's going to be less core, but the platform itself is fundamental to what we are delivering throughout our services..

And then on the, you had the non-core expenses, legal accounting, this quarter.

What might it be like next quarter?.

Can you repeat the question Mike?.

Sure.

You had the extra legal and accounting expenses this quarter, what might that amount be next quarter, the December quarter?.

I can’t give you an estimate, but we’re looking at it declining as we continue through the various processes that those relate to..

Got it. And then I guess beyond that, I think you mentioned partner distribution to Europe.

I guess is there a quarterly OpEx number you want to get down to and what might that be?.

Yes. And we certainly are looking through as we do our 2016 planning, targeting the top line as well as what we might need from an operating base to be profitable. It's not anything that we're providing guidance on at this moment..

Okay. Got it. And then I guess just lastly, I think there was just prioritizing to some of your government and premise, but it seems to me like 20,000 channels that could get upgraded.

Maybe, can you talk a little bit about the status of that, and the opportunity, timing of opportunity there?.

Yes. You bet. That is indeed core to a lot of the upgrade cycle we were talking about in the government, largely through that Tyco relationship, the FICAM technology mandate, which I mentioned in my comments and that you’ve heard before is really what's driving it a lot.

Underpinning it all is IPv6, which as you know is coming as a mandate for all information infrastructure and yes, that's driving our sales and upgrade strategy at across IRS, US Marshals, FBI, some of the others you’ve heard..

Okay. That's it. Thank you..

Thanks, Mike..

Thanks, Mike..

And it appears we have no further questions at this time. I would like to turn the call back over to Steve..

All right. Thank you, Ethan and thank you all for joining us. We look forward to seeing some of you at our upcoming investor conferences and especially in a few weeks in person or via webcast at our Investor Day on the 11th. So thank you, all and have a good evening..

Thank you, all..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..