Steven Humphreys - CEO Sandra Wallach - CFO.

Mike Latimore - Northland Capital Markets.

Welcome to the Q2 2017 Identiv Earnings Call. My name is Ally and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. On the call with me today are Steven Humphreys, CEO of Identiv and Sandra Wallach, CFO.

In a moment, you will hear remarks from both of them and then we will take questions from the sell-side analysts. Before we begin, please note that during this call, we will be making references to non-GAAP measures 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 documents filed from time to time with the SEC including the annual report on Form 10-K for fiscal year 2016. Identiv assumes no obligation to update these forward-looking statements which speak as of today. I will now turn the call over to Steven Humphreys for his comments.

Steven?.

All right. Thanks, Ally and thank you all for joining us. As we highlighted in our earnings announcement this afternoon, we continue to see organic year-over-year growth across all three of our business segments as well as strong 11% sequential growth in the business overall.

And we previously talked about the importance of balanced growth in all of our segments to provide stability, especially for a small public company.

Last quarter was the first quarter in several years when we had growth in all of our three core segments and that trend has now continued into this quarter, led by 39% year-over-year growth in our identity reader segment, 2% in Credentials overall, but solid 10% growth in our RFID products, which are in the credential segment and 5% in our physical access segment.

As you might recall, last quarter, our growth was led by RFID business at 40% year-over-year growth. And now looking ahead, with the current quarter being the fiscal year end of the federal government's budget year, we expect physical access products to be one of the fastest growing segments for us for this quarter.

So as you can see, having growth in every segment continuously with varying segments leading with the strongest growth in different periods gives us great balance. Now conversely, it does expose us to margin shifts as different parts of the business drive growth in different periods.

We expect this variability to continue and we have to keep our expense controls tight and manage gross margins extremely carefully to deliver consistent predictable results. We didn't manage this as well as we would have liked in the second quarter and on our scale, a few transactions can change outcomes.

So we always need to have more than enough safety factor to offset them all. The timing of a few events created pressure even as we were delivering the strong growth I’ve mentioned. So we've taken steps to keep us in an even safer financial position.

Ultimately, building our business to greater scale will be the best way to sustain enough resilience in the overall business model to balance varying seasonality and growth rates in our segments.

Even at our current scale, we continued to closely manage our operational expenditures and therefore delivered positive adjusted EBITDA for the fourth consecutive quarter, which we certainly expect to sustain for the foreseeable future.

Later, we’ll give more detailed insights into our path to scale, but as a snapshot, we already see that in addition to the third quarter’s federal government growth driver, the business levels building in the fourth quarter show to be shaping up to be one of those balance we've had in years with solid growth across all segments.

As I mentioned earlier, this quarter, we've had strong growth in our identity segment, growing at 49% over the comparable quarter last year. Credentials growth was 2%, which includes our access card products, but more importantly, it was anchored by RFID growth of over 10%, which brings our first half transponder year-over-year growth to 24%.

Our physical access segment grew at 5%, reflecting a very strong year prior comparable, but more significantly, it reflects our highest quarter yet through the Cisco channel. Our revenues through Cisco channels and partners grew a couple of hundred percent in fact, albeit from a small base, since it was just beginning a year ago.

Nevertheless, it's now over 10% of our physical security revenues and we expect it to continue to expand as a contributor to our year-over-year growth.

Our overall physical access systems and reader sales remain strong, positioning us to once again realize accelerated Hirsch growth from the federal government's annual fiscal year end purchase cycle, which is the current quarter. So turning now to specific growth drivers within our segments.

In physical access, we had a range of product launches and events in the first quarter, including bringing Hirsch Mx panel support into the Cisco related ICPAM platform. As a result, in the second quarter, we saw demand for these products through the Cisco channel driving rapidly growing volumes of our MX-4 and MX-8 controllers.

As I mentioned, for the first time, the Cisco channel in aggregate represented more than 10% of our physical access sales.

This was partly due to the Mx volumes, but also included wins in key segments, such as a multisite educational deployment, reflecting the accelerating adoption of physical security among educational institutions nationwide and the long standing strength of Cisco in the education market.

Regarding our Hirsch velocity offering, we had challenging comparables due to very strong Q2 last year and as I mentioned, we're already seeing the seasonal strength we expect as we enter the fiscal federal year end, made even stronger by our core Hirsch strength in the federal government, but also the advantages we've discussed before in our FICAM solutions.

Now beyond products and market spaces, one of the most significant sales milestones in our physical access business is that we were fortunate to bring on Ed MacBeth, a world class sales leader whose impact was felt at the end of the last quarter and is accelerating into the current quarter.

Ed brings a background that includes EMC, Oracle, Symantec, Tivo and in fact he was with Identiv’s predecessor company SCM Microsystems during our highest growth period back when we broke through the $100 million revenue level for the first time.

Particularly with our federal government opportunities, Ed’s driven yet disciplined approach to complex system sales will make our sales and marketing outreach in this area more efficient, more scalable and ultimately reaching higher penetration than we've ever had in this key segment. Now, let's turn back to our identity segment.

As you know, this segment is primarily our smart card reader products, encompassing desktop readers, modules, components and tokens. In fact, our smart card reader products, specifically grew even faster than identity overall, growing at a 41% year-over-year clip.

This growth includes a smart card reader deployment for an overseas government where our readers are used to authenticate military personnel and other applications including payments, US government authentication, mobile e-mail and other smart card enabled applications.

We have a long track record of successful support of highly demanding solutions, such as credit card payments, government security and healthcare.

In addition, we've seen continued high demand for our reader components in the quarter, where we deliver chipsets to longstanding OEM customers who incorporate our smart card technology into their products.

I could go on at length, but as I mentioned earlier, the clearest indicator of our strong position here is the demand growth and this has even exceeded our bandwidth to deliver everything being requested of us.

This only strengthens our business model however since we're able to add very cost effective technical talent in our engineering center in Chennai, India. The result is faster growth and deeper market penetration with virtually no change in our operating base.

Now, on the Credentials side, the design in strategy that drives our transponder solutions is demonstrated by the project conversion we've seen also in this quarter.

We've identified brand authenticity and customer experience as drivers of this business in the past and now we're seeing our category leading customers going from early volumes in to mass production.

For example, we're now shipping to several contract manufacturers in Central America for one of our customers and as we track these volumes, we get visibility into the product success and the business prospects overall.

We're certainly encouraged by what we're seeing so far and this is only one example of RFID customers who are at this stage going into production with solutions we've developed with them in prior quarters.

Now what's really underpinning the success we're having in RFID and transponders is our focus on customers that have innovative, value delivering solutions for their industry that we can tailor to them and then scale up.

This is the stage we're entering with several of our leading RFID customers in our current quarter and going into the third and fourth quarter. So when you add up all these details within our segments, the result is growth that's leveraging the overall strength of our business model.

While driving growth, we've held stable operating expense levels, resulting in consistently positive adjusted EBITDA consecutive quarter, even with low average gross margins and we expect margins to move back up into our target range as the mix moved towards a higher contribution from physical access in the second half of the year.

This will also drive a EBITDA percentage relative to sales. And we continue to be confident that we can leverage our business model and expand our growth rates. This was also supported by the equity offering we completed during the quarter, resulting in a healthy cash position of $18 million at the end of the quarter.

This provides strength to our balance sheet and confidence in the company industrywide. Looking back 12 months, the company came from an operating loss position and a debt overhang out of 2016. This position has completely changed now with the debt refinancing in Q1 and the solidifying of the balance sheet in Q2.

We believe the current balance sheet and operating strength provide a strong base to continue organic execution and growth as well as the flexibility to execute inorganic and other opportunities. So putting this altogether, for the first time in a couple of years, there are no non-operating, legal, financial or any other distractions of the business.

So our entire focus is on driving this growth to maximize the market opportunity we've got in front of us, which would be the focus of the rest of the business discussion today following the financials. So with that, I'll turn it over to Sandra for our financial results and some analysis.

Sandra?.

Thank you, Steve for providing the context for our financial results for the second quarter of financial year 2017. Revenue in the second quarter was 14.8 million, and 11% sequential increase compared with 13.4 million in quarter one of 2017, and a 10% increase compared with 13.5 million in the comparable quarter of 2016.

In fact, if we remove the all other segment, which are discontinued businesses today, our current quarter is also 11% sequential growth over the comparable quarter of 2016.

Our physical access control segment generated $5.8 million of revenue in the second quarter of 2017, up 9% sequentially from the 5.4 million in the first quarter and up 5% from the 5.5 million recorded in the comparable quarter of 2016.

The increase sequentially and comparably is the result of higher sales of physical access control solutions attributable to higher demand from our federal government customers and higher sales through our channel partners.

Revenue from our identity products, primarily smart card readers, reader modules and chipsets was 4.1 million in the second quarter.

This represents a sequential increase of 31% from the 3.1 million of revenue in the first quarter of 2017, reflecting higher sales primarily in the Europe and the Middle East and APAC markets, and an increase of 39% over the 2.9 million recorded in quarter two of 2016.

Approximately 33% of our second quarter revenue or $5 million was derived from sales in our Credentials segment, which comprises both Access Control credentials and our broader Internet of Things transponder products.

This revenue performance in the second quarter of 2017 was 5.0 million was comparable to the results achieved in both the first quarter of 2017 and the second quarter of 2016 at 4.9 million. As previously anticipated and disclosed, we have virtually no revenue in our all other segment in the second quarter of 2017.

This change is primarily due to the phasing out of our digital media product lines and the discontinuation of our chipdrive product line. Now, focusing on gross margins, our GAAP gross profit margin was 38% in the second quarter of 2017, 43% in the first quarter and 39% in the second quarter of 2016.

On a non-GAAP basis, excluding certain noncash items, our non-GAAP gross profit margin was 40% in the second quarter of 2017, 45% in the first quarter of 2017 and 42% in the comparable second quarter of 2016.

The sequential quarter-over-quarter decrease in both GAAP and non-GAAP margins was attributable to product mix with channel partners within our PACS segment and lower margins on a large order of readers for an international government project in our identity segment.

Moving now to our operating expenses, which is the next graphic on the webcast presentation. GAAP operating expenses totaled 6.9 million in the second quarter of 2017 compared to 6.6 million in the first quarter of 2017 and 7.9 million in the comparable quarter of 2016.

Adjusted on a consistent basis to exclude restructuring and severance and certain non-cash charges normally excluded from our non-GAAP results such as stock-based compensation and depreciation and amortization, our non-GAAP operating expenses in the second quarter of 2017 were 5.8 million as compared with 5.7 million in the prior quarter and 6.8 million in the second quarter of 2016.

The comparative decrease is primarily due to the positive impact of the restructuring activities undertaken in the first quarter of 2016 and the continuing cost focus across the business to keep our operating expenses sub $6 million.

Our R&D expenses of 1.3 million in the first and second quarter of 2017 represent 10% and 9% of total revenue respectively. These results were comparable to 1.3 million or 10% of revenues incurred in the second quarter of 2016. Sales and marketing expenses remained consistent at 2.9 million in the first and second quarter of 2017.

Again, these results are comparable to expenses incurred in the second quarter of 2016.

G&A expenses in the second quarter of 2017 were 1.6 million compared to 1.4 million in the first quarter and 2.6 million in the second quarter of 2016 with the decrease in the comparable quarter reflecting the reduction of non-core legal expenses in addition to the benefits of the restructuring completed in quarter one of 2016.

We now look at our total full income statement of the earnings release. Our GAAP net loss for the second quarter was 1.9 million compared to a loss of 0.7 million in the first quarter 2017 and a loss of 3.0 million in the second quarter of 2016.

On a non-GAAP adjusted EBITDA basis, our second quarter EBITDA gain was approximately 0.2 million in the second quarter compared to 0.3 million gain for Q1 of 2017 and a 1.2 million non-GAAP adjusted EBITDA loss in the second quarter of 2016.

The results this quarter represent the fourth quarter in a row of positive non-GAAP adjusted EBITDA, as we exit Q2 with our seasonally lowest quarter historically behind us. We have one significant item to disclose.

On August 7, we received final notification that our insurance provider agreed to reimburse us for certain legal fees incurred in connections with the matters related to the class and derivative litigation and related investigations. We now expect to recognize a credit to operating expenses of 0.4 million in our third quarter of 2017.

On the next page, we’ve provided a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. There are a few items worth noting at this point. Interest expense was approximately 0.7 million in the first quarter and second quarter of 2017 and 0.5 million in the second quarter of 2016.

Non-cash stock based compensation was 0.7 million in the second quarter of 2017, 0.6 million in the first quarter of 2017 compared to 0.4 million in the second quarter of 2016.

There were no restructuring charges recorded in the first or second quarter of 2017 and we do not expect to incur further charges in connection with the implementation of the quarter 1 restructuring plan from 2016. Now, if I could turn to the balance sheet, I'll be comparing our position at June 2017 to our position at March 2017.

Cash at June 2017 was $18 million compared to 7.9 million at March 2017.

The 10.1 million net increase in the quarter is comprised of a decrease of 0.1 million net loss excluding noncash items, a reduction of 1.8 million net change in operating assets and liabilities, offset by a net increase of 2.3 million from financing activities, which contains the 2.6 million of proceeds from the common stock sale, less 0.3 million of changes in existing debt from the prior quarters.

The last page is a full balance sheet as per the table in the earnings release. We define working capital simply as accounts receivable plus inventory less accounts payable. This was 14.7 million at June 2017 as compared to 13.9 million in March of ’17.

The net increase was driven by an increase in accounts receivable of 1.8 million, offset by an increase in accounts payable of 1.0 million.

With respect to accounts receivable, our average days sales outstanding increased to 55 days in the second quarter from 49 days at the end of the first quarter, driven by higher quarterly volume billed in the last month of the quarter.

Inventories, net of reserves, remained consistent at 12.5 million at June 2017 compared to 12.6 million at March 2017. Our adjusted inventory turnover was approximately 4 for the second quarter compared to 3.5 for the first quarter of 2017.

Accounts payable increased by 1.1 million from 7.4 million at March 2017 due to an increase of approximately 1 million in the 1 280 day payable. A couple of other noteworthy items in the balance sheet.

Accrued expenses and liabilities are comprised of employee compensation, legal and professional fees and other items amounting to a total of 4.8 million as of June 2017 and 5.8 million as of March 2017. The decrease of 1 million was primarily driven by reductions of 0.6 million in accrued professional fees and 0.3 million in accrued compensation.

In addition, our long term payment obligation decreased from 3.8 million at March of 2017 to 3.5 million at June of 2017, reflecting the continuing quarterly payments made and partially offset by the accretion of interest.

Our long-term financial liabilities decreased from 7.6 million at March 2017 to 7 million at June 2017 as a result of more of our long-term debt reclassified to current.

On the next page, if we put the second quarter performance in the context of our guidance and our mid-term target business model, based on our combined Q1 and Q2 results, we believe that we are on the right trajectory and we are confirming the previously announced guidance for the fiscal year 2017 of revenue between 64 million and 68 million and positive non-GAAP adjusted EBITDA between 4 million and 7 million.

With that, I will conclude the financial discussion and pass it back to Steve..

Tenth Anniversary Edition and its accompanying iOS 11 coming out either in September or October. Now the relevance for us is that Apple's use of NFC for the first time is extending beyond the closed use case for Apple Pay. Now they’re likely to only enable limited RFID reading, but even this will change the entire NFC enabled market.

This is the one topic today that's not an immediate revenue driver for us, but it will likely happen before our Q3 earnings discussion, so we wanted to address it.

You'd expect us to be very close to this, we are and we think will be positioned to benefit as the industry realizes what Apple is doing and as it ripples through the end of this year and especially going into 2018.

So turning back to our smart card readers, which were the initial product line of Identiv’s original company by the way, we experienced wider and deeper demand than we've seen in years. Both from a competitive perspective and a project perspective, we're taking more share faster.

As a result as I mentioned earlier, we've actually been adding technical resources very carefully in our lower cost engineering center in Chennai, India because demand is actually exceeded our capability to quickly fulfill the solutions requested by our customers.

The 41% year-over-year smart card reader growth in the second quarter actually reflects the resource constrained situation. We're now catching up and to be clear we haven't lost any business as a result.

But we need to continue to be very responsive to under capacity in engineering to avoid opportunities for competitors to make inroads into this market in which we have clear leadership. Now while we're driving growth, we also have to continue to drive the entire business platform.

We know that any of our segments can experience rapid growth acceleration as happened with RFID in the first quarter, smart card readers in the second quarter, and that we anticipate in Physical Access for the third quarter.

We need to operate with enough business model headroom to throw topline revenues growth to the bottom line regardless of which segment it comes from. And related to this, one of our challenge is, is our scale.

As Sandra mentioned, due to the timing of one subsequent event we disclosed in our earnings release, we have about $400,000 of contribution that fell a few days outside the quarter. We need to quickly get beyond the scale at which our results can be affected by a few events.

We're doing this primarily through organic growth, tight expense control and margin tracking because those are the things we can control directly. However, an additional path to growth and profitable scale is through our inorganic strategy. So I’d like to focus on that for just a minute.

With our solid operating organization, we're well positioned to add accretive directly related acquisitions. We actually had hoped we’d have one completed by now, but we've set a rigorous bar for the profiles we'll evaluate and execute. They have to be directly aligned with our markets, clearly accretive, the right scale and at a good price.

Although we'd like to have a completed transaction by now, our discipline related to these criteria hasn't gotten one through to completion so far. We have active discussions with prospects that fit all of these criteria, but will always remain disciplined. So having something close within a specific period is impossible to commit.

However there's definitely a range of candidates we’re actively working and we're well positioned to the consolidation leader. So in some periods they'll be none, but in some there may be one or even more than one. This strategy is core to our drive to achieve scale though.

So not having closed in inorganic growth transaction means we're not moving as fast frankly as we expect of ourselves. The last growth factor is the one that's most core to us which is people.

I've mentioned our physical access sales leader, Ed Macbeth, you'll hear much more about his initiatives over time, but as you've already heard, he's hit the ground very fast. I’d also like to comment on our RFID and smart card reader sales teams while we are on this subject.

While they're not new, we have the industry's best sales teams in both of these areas and you're seeing it reflected in the numbers. In transponders, nothing short of the best could be landing the wide and deep relationships with the leading global companies embedding our RFID products deep within their products and solutions.

You can also see this clearly on our gross margins in this segment, which can run more than 50% higher than the industry average. Similarly, our smart card reader sales team is also the best in the world.

And in fact we're looking to strengthen our European sales team with an addition in the next quarter that we're confident will lead our European sales back to the leadership in that truly key market for smart card readers. Now in prior quarterly updates, we’ve spent a lot of the time updating products, technologies and vision.

All of the efforts of course continue, but we thought a focus on sales, customers and inorganic growth would be appropriate as we continue to deliver sustained EBITDA positive predictable growth. We know we need to build a greater scale and we're certain we're on that path and on a stronger and faster path overall than we've been on in years.

Nonetheless, we're going to remain disciplined and methodical, building for the long run and always through steps that build rather than dilute. This sometimes can take more time than just getting something done to fit into a period.

But we're certain that it will keep driving as quickly towards our vision for our business’ potential and to creating much greater shareholder value. We’ll encounter challenges with margin shifts, personnel changes, demand spikes, and others, but it will adjust rapidly and build an even stronger business every time.

Most importantly, we've established growth engines across all of our businesses which now been demonstrated in each of the last few quarters. There's no mystery about where our growth is coming from and how close in it happening.

Similarly, we've shown leverage from our operating base delivering positive EBITDA in our seasonally toughest half of the year, positioning to accelerate into the second half and throwing most of that progress to the bottom line moving from our mid-term business model towards our long-term goals.

So on the last slide here, as we always do, we reaffirm our commitment to keep you updated as we move forward. In fact, we have the busiest investor communication calendar we've had for a few years including the Gateway Conference in San Francisco and the Rodman & Renshaw and Imperial Capital conferences in New York.

We’ll keep our investor communications bounded to ensure our primary focus remains building the business, but it will keep any interested investors informed of Identiv’s growth and the exciting opportunities we've got in the marketplace. Thanks for your attention and now we'd like to open the discussion for questions..

[Operator Instructions] Our first question comes from Mike Latimore. Please go ahead..

Just on the federal government strengths, I guess, can you talk just - you gave very good detail, but I guess, is most of the strength coming from current customers that are upgrading or some of these new agencies you've won starting to pick up steam in this quarter.

I guess maybe can you talk a little about sort of current versus new customer demand?.

Sure. In terms of numbers of course, current customers are always going to be the bigger number because it's so easy for an agency CIO to, you know, knowing us knowing our products to make year-end buys. So that's very straightforward and we've got a number of activities going in that front.

But what we're finding is especially out in the regions, over half of federal government purchasing occurs outside of Washington DC.

Getting to people we hadn't been touching before out of the VA hospitals, out on the bases, other things and demonstrating how we can get them along the along the FICAM path with infrastructure that they can already deploy and works with their systems, but then is FICAM-ready and really will make them look like heroes.

That's an area where we're seeing a lot of activity, it won't be as big numbers, but it will drive a lot of growth.

Even in Europe, we had a big open house just a few weeks ago and we had a bunch of army bases there, some other government facilities and customers we had not been closely enough engaged with saying, this is a great use of our funds right now. So there's a bit of both..

I believe you won a couple new agencies earlier this year, have they started to purchase products yet..

A couple of them have. One of them is still doing their PSG analysis, their infrastructure analysis and then there's a couple others that are coming in even as we speak. So the expansion across the federal government is working pretty well..

And then on – as it relates to Cisco, sounds like it was a strong quarter, I guess how was the momentum there, what does the pipeline look like and then maybe a little more color on, is it international versus domestic, yeah, just a little more color on Cisco a bit..

The National versus domestic is a good one, it's a remarkably global pipeline that they've got. And it is starting to appear more in verticals. I mentioned education, there's a lot going on in the, - what they call SLED, the state and local education vertical for them. And they also spill over into some federal government agencies as well.

So we're seeing across the board adoption. It's always exciting working with a company as large as Cisco. Sometimes we get lost in the noise, but we're so small that even a little extra noise pick up from them is substantial for our numbers. So it’s feeling very positive..

And then, you talked about a kind of balanced demand for the fourth quarter, but did you say that you thought there is a chance that the PACS revenue segment might be up in the fourth quarter versus the third or did I miss to hear that?.

No, you’re right and that would be the first time in a while. So we're going to watch it carefully. But as I said with the broadening visibility for the Hirsch FICAM solution, we think that will be purchases that go even outside of the fiscal year end with new accounts in particular.

And then Cisco is not as seasonally driven as Hirsch without the government concentration. So if you put those both together, we definitely have a short at it..

And then just last, you mentioned the Apple iOS, I guess if that benefits your credentials business, is that more of a 2018 revenue lift or would you have some benefit in the fourth quarter potentially?.

No, that would be 2018 in terms of anything specific and it drives our RFID business. Now, where it can go you know into ’18 and beyond is our early adopter users of RFID technology have some of these very nascent applications, as the iOS platform becomes a user of NFC-based applications, it really just opens up the whole marketplace.

And we've got some interesting developer’s kits and other things we're putting out there to have us be kind of the reference supplier in this space as Apple moves into it. And like I say, I was hesitant even putting that into the conversation because today's been so tactical and that really is an ‘18 and beyond thing.

Where it might show up earlier is if customers for transponders also believe that Apple is going to go in this direction and therefore they might start projects earlier and a little bit more aggressively..

[Operator Instructions] And it looks like we have [indiscernible] on with a question. Please go ahead..

I have a couple questions, I was wondering on a clarification, so beginning of the year when you put out the guidance and you put out the $64 million to $68 million in revenues, which is a nice increase. I don't recall any kind of breakdown between organic and inorganic and my assumption was that that was all organic.

Now you're talking about some inorganic growth potentially, although you haven't done a deal yet.

But can you just clarify that number is that an organic growth number?.

Yeah, fair question, that's an organic growth number, yes. And I didn't mean to confuse anybody with that..

And then, so the second thing is, your growth, while you've had growth in the first half of the year, it's obviously lower then on a pro rata basis kind of that year-end number. I recognize you're talking about some or expecting some nice lift here in the second half.

So you would be talking about I mean real numbers here of something like 36 to 40 million bucks in the back half of the year to make those numbers. And I guess you've got - I'm just trying to understand the visibility into those numbers at this point.

I mean is that pretty visible, I mean you don't talk about bookings and things, but you guys are pretty comfortable that you're going to land in that number - in that range..

Yeah that's why I tried to go into a fair bit of detail in terms of the federal government buying motivation in terms of the projects and programs we've got going on at the local and European even for federal government level.

The fact that we're seeing production volumes for our transponder customers that give us insight into what their reorders are going to be as they go into the holiday season. So I tried to build that up as well as you could, but you're right, we don't go putting backlog numbers and other things out there..

And then another one if I may, regarding margin. If I remember correctly, I mean it sounds like you had a really strong business on the reader side. Correct me if I'm wrong, but going from memory that that might be the lower end of your margin spectrum. You're also talking about continued strength into the back half of the year in that area.

But I guess where I’m really going with this is, so that range of revenues is not from the low end or the top end for the entire year is not really that big its $4 million difference, when you get to EBITDA, you've got a what four to seven that's $3 million range.

So I guess your range on the EBITDA side, I don’t know if you can talk a little bit more of your expectations on margins, but is that really going to be dependent on kind of the mix of the credential versus say the access control business? I mean, I’m sorry, not credential but the readers versus the access control..

You mean, is hitting EBITDA going to be dependent on mix?.

Yeah, I mean, how dependent on mix and kind of your visibility in that at this point?.

I mean the mix of course affects aggregate EBITDA, although the EBITDA is fairly solid in all of our segments. But I’ve tried to give some insight into, you know, third quarter is always skewed towards to Physical Access System, which is our highest gross margin segment.

And fourth quarter as I answered Mike's question a little earlier, we still expect to have a good mix of Physical Access even though in the fourth quarter, we often see some more transponder and smart card reader business.

So does that get at what you're asking?.

It does I guess, [indiscernible] [00:45:31] try one last one, as we go into next year, over the next few years, can you comment at all on what you see as far as you get these three verticals, any one that will take over more than another as far as again influencing your margin as you grow your business going forward? Also when you look at inorganic growth, are you focused on one area over the other? I'm just, you know, six months ago or maybe a year ago now, you had a slide in one presentation that had kind of your I think you called it a mid-term target range as far as trying to get your EBITDA up to I think it was a 10% kind of number.

And I'm just - now that we're six or nine months beyond that, how you kind of triangulating that going forward?.

Yeah, well I think as you saw even in the last half of last year and under most modeling scenarios you could look at this year even if you were flat, you'd have something in the range of that model for the second half of this year and going out of the year. So we're certainly comfortable with those models.

Back to your earlier question of, is there any particular segment, from an organic growth perspective, I think they'll all be growing at healthy clips, I don't think there's going to be a substantial mix shift.

From an inorganic perspective, we are certainly more heavily leaning towards higher gross margin acquisitions in all the areas, Physical Access is where you'll find more higher scale acquisitions just because it's a bigger industry overall.

So from a mix perspective, you’d probably expect to see more mix shifting topline towards the Physical Access business..

And we have Mike Latimore back on with a question. Please go ahead..

Steve, you talked about some accelerated sales efforts, but what does that mean generally for just kind of sales and marketing spend let’s say..

Good question, yeah well hopefully you know us long enough that that means no increase in spend. It means we have three - really four categories of customer facing activity, we have our sales engineers, we have our direct sales people, we have our inside sales and we have our professional services group, which is paid for basically.

So you'll see us doing more in professional sales - professional services because when we add a person, we actually get 1.5 to 2 times their all in cost in revenues. And you'll see us shifting more towards highly leveraged inside sales lead gen that makes our sales guys more productive, sales guys and girls.

But not an aggregate increase, you know, not a dollar increase and certainly not a percentage increase..

And then on the just channels and partner front, did you added any new channel partners in the quarter or sort of develop additional partnerships that sort of can help with the channel and then how does that look for the second half of the year..

From a channel perspective, yes, although we don't call them out. We haven't - needed to be clear, we haven't added a Northrop Grumman scale system integrator or a Cisco scale partner. But we've added a number of regional dealers and super regional dealers as our channel builds out..

And then on the government strength that you're seeing, does that flow through to the identity segment as well or do you see it more on the access?.

Mike, you cut out, I'm not sure you're….

Right.

Is this better?.

Oh yeah, I heard you say, then on the gov and then lost you..

The strength of the government you're seeing does that also flow through to the identity segment income?.

Yes, good point because the smart card reader is a portion of that volume especially the desktop readers for smart card readers are driven by network log in for the DOD as well as our OtterBox project when that comes online that will be for mobile email access also for DOD and government security applications..

And just last one on the Physical Access Security, you mentioned FICAM a few times, I guess just you know can you compare the FICAM initiatives that you're seeing in the second half or is there a pick-up in FICAM activity or is it more really tied to just kind of more kind of second half government spending..

No, there is a pick-up in FICAM activity actually. Partly - you might remember we went on the approved product list in, is either January or the first week in February this year. And so the message is just really vetting in now. We've repeated a couple of times when people are coming to seminars. And so it's picking up..

And we have no further questions at this time..

All right, well, thank you and thank you all for joining us today. We look forward to keeping you updated on our progress as the business goes forward, particularly at any of our investor conferences and our third quarter earnings call when that comes around, but thank you again for your time and have a good afternoon and evening..

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