Steve Humphreys – Chief Executive Officer Sandra Wallach – Chief Financial Officer Manfred Mueller – Chief Operating Officer & General Manager.

Jack Vander Aarde – Maxim Group Jaeson Schmidt – Lake Street Capital Markets William Gibson – Roth Capital Partners.

Good afternoon. Welcome to Identiv’s Q3 2018 Earnings Call. My name is Steve, and I will be your operator this afternoon. Following – joining us for today’s presentation are the company’s CEO, Steve Humphreys; and CFO, Sandra Wallach. Following management’s remarks, we will open the call for questions.

Before we begin, please note that during this call, management may be making references to non-GAAP measures or projections, including adjusted EBITDA. 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 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 company’s latest annual report on Form 10-K. Identiv assumes no obligation to update these forward-looking statements, which speaks 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. In the third quarter, we took more major steps towards our vision of delivering a platform to make the physical world as secure and convenient as the digital world, and we also made substantial progress, building a strong business to deliver that vision profitably.

We also executed a subsequent event, the merger with Thursby Software Systems, that’s a further big step in both the vision and building our businesses’ strength, which we’ll talk about in a lot more detail later today. But first a few highlights from our third quarter. We continue to have strong revenue growth and to take market share.

We grew 30% year-over-year, and year-to-date, we grew 30% as well.

Now this is really the most important data point because growth can always hit in a single quarter or there can be a comparable quarter that’s more or less favorable but to have 30% growth throughout the year compared to nine months of last year, which shows the sustainability of our strategy, our execution and of our markets.

And once again, more than half of our growth came organically also during both the quarter and year-to-date. So all of this shows that our strategy is really working. We’re clearly growing faster than our competition, faster than the market and building our strategic position.

Now in addition to the sustained growth, the growth has been broad-based across our business. Our Premises segment grew 58% year-over-year. Now certainly, our 3VR acquisition contributed and we’re very happy with the progress we’re making there, but just as important, our physical security products drove well over half of this growth organically.

In fact, we had record physical access panel sales and access reader sales. And as an aside, we did this while also having some quality and delivery problems from one of our vendors, HID. Their problems held back over $300,000 of physical security orders we had ready to go.

Now fortunately, our business is so strong and diverse, we absorbed it without affecting our overall business and we’ve now cleared all that backlog in the current quarter. In addition to the strength in physical security, our Identity business grew 12% year-over-year, bouncing back to double-digit growth.

And we expect this segment to accelerate with the addition of Thursby, which brings more of the mobile software and security value-add that we wanted to add in this segment. Again, I’ll talk about that in a bit more detail later. Our Credentials segment also grew 12% year-over-year.

So you can see we’ve got growth coming across the board and sustainably. Now this strength on the top line has been complemented by our continued operating discipline.

One of the most important indicators of the healthy nature of the growth we’re driving is that gross margin is up on a GAAP and non-GAAP basis over three percentage points versus third quarter last year. Operating expenses continue to be well under control, even decreasing sequentially as expected.

So as a result, our positive adjusted EBITDA of $1.7 million reflects over two years of consistent positive EBITDA now. So looking at the business progress in a bit more detail. As I mentioned, Premises has been particularly strong, especially our Hirsch Velocity and Cisco ICPAM access control products.

Just as important though, our TS Readers are among the most advanced in the market, another platform that we’re adding a range of sensors and RF capabilities into, creating that always on, always aware platform that we envision for the physical world. Our TS Readers within the segment grew 30% sequentially and over 90% year-over-year.

Now this is a great indicator for the product but also for our overall strategy. Now of course, our readers are particularly well-suited for federal government FICAM installations and the continuing progress that FICAM helped, but the TS Readers growth clearly showed strength in commercial as well as federal.

Now in addition to this product progress, our services business, Identiv Global Services, is kicking in. We’re taking more of the total solution revenue associated with selling our platform, driving software and services revenues up 15% sequentially.

And some of these contracts will continue to add revenues recognized in Q4 and carrying throughout 2019. On the federal government side, these IGS contracts are growing. FICAM and FICAM-ready continue to be growth drivers.

We’re expanding our presence with marketing activities, such as the picture on the right, which is from the Government Matters news program, and we’re also hosting an open house next month for our new office in Arlington just outside DC.

This office has a full lab, training, meeting and demo center, and it’s across all of our product lines that we have demo setup for, showing them individually and integrated, including 3VR video, Hirsch and ICPAM access controls, TS Readers, our smart card readers, soon our Thursby product line and, of course, our RFID products.

And since I just mentioned 3VR in my federal government comment, it’s worth focusing there for a moment. Here, we’re getting leverage across the board. I had mentioned before in a prior call the shopping mall example. These malls are now expanding and going into later pilot phases in production.

But what’s more important is with 3VR, we’re seeing the leverage we hope to see in any inorganic combination. There now are several dozen video opportunities being tracked through our core regional sales teams, and these are in addition to the business that 3VR brought in at the time in the merger.

So you’re really seeing leverage out of the organic and inorganic strength that we have in the video space in particular. Turning to Identity and Credentials. I mentioned earlier the 12% year-over-year growth, but there was also a 20% sequential growth.

This was driven by a strong fiscal year and government quarter reader chipset sales and e-voting project in Asia, reader modules for payment applications and more. And really, this shows the diversity of applications of our Identity technology, which really continues to deliver as one of our core strengths.

In Credentials, we saw healthy growth in both revenues and gross margins. As many of you know, this a great segment with explosive growth potential, but the challenge is always delivering value-added solutions with stronger gross margins.

So the segment increase of four margin percentage points is one of the best indicators we hope we can have in this segment. We’re also positioned for stronger growth in Credentials as our new UHF capacity and technology capabilities come online, which is happening as we speak in this quarter, as we’ve discussed before.

And last but not least, on November 1, we completed our merger with Thursby Software Systems. Now I’ll go into the implications of this very positive combination for our Identity segment as well as for our business and strategy overall in just a minute. But first, I’d like to turn the call over to Sandra to review our full financials.

And after that, we will discuss Thursby and our outlook for the balance of the year and into 2019.

Sandra?.

grow and achieve non-GAAP adjusted EBITDA profitability for nine quarters in a row, significantly closing the gap to get to net income profitability. Today, we are tightening the range of our previously announced 2018 guidance for the consolidated results of the company.

We expect 2018 revenues to be in the range of $76 million to $78 million with a non-GAAP adjusted EBITDA range of $4.5 million to $5.0 million. In addition, consistent with our past practices, with this earnings release, I will – be providing top line guidance in the form of expected ranges for the financial year 2019.

We believe that our Premises segment will see growth in the mid-teens, and our Identity and Credentials segments will be growing in the mid-to high teens, with the inclusion of our recent acquisition of Thursby Software.

Overall, we believe that we will have combined growth in the mid-to high teens year-over-year with more than 50% of our growth being driven organically, including the full integration of 3VR.

As we believe that we are hitting several of our midterm target model metrics this year with non-GAAP gross margin achieved in Q2 and Q3, non-GAAP operating expense back in the range of our midterm model for Q3 and non-GAAP adjusted EBITDA again achieved in Q3, we believe that we will be able to exhibit many of our long-term target model metrics within the quarters of 2019.

These ranges will be updated as a full set of guidance with our financials in early 2019 for the full year. With that, I will conclude the financial section and pass it back to Steve..

mobile apps, software and systems to enable secure and convenient access across smart cards as well as derived credentials across Apple iOS and Android mobile devices. These are all strengths of Thursby and directions that are core to Identiv’s platform.

So you can hear the touch points that are core to our vision and I just wanted to highlight that upfront, but let me get into Thursby’s core business and core strengths.

As you’ve heard, Thursby’s mobile apps and secure software platform enabled DoD-issued common access cards, federal personal identity verification ID cards, and mobile-based derived credentials to access, sign, encrypt and decrypt information and e-mails from Apple iOS and Android mobile phones or tablets.

Now what all this means is with Thursby’s Sub Rosa software and with our smart card readers, armed services personnel now can use their own iPhone or Android, connect the reader, open the app, slide in their military ID card and access all their military websites, secured content and even send and receive encrypted e-mails, all from within Thursby Sub Rosa or controlled environment that Sub Rosa enables.

In most cases, this has been prohibited for military personnel. They had to use desktops or government-supplied Blackberrys and had no access through their own mobile devices. Now a great anecdote about this was conveyed to me by Louis Modell, who is leading the combined business for us together.

And he was demonstrating at one of the many military bases that we demonstrate our solutions on, and he was demonstrating the combined Thursby and Identiv solution. And a Marine officer slid in her CAC card and saw, with the Thursby Sub Rosa app, the – secure websites come up. And you can see it on the slide here in the middle.

You can see right in the middle of the slide here, one of the mobile phone screens that has – it starts with My Navy Portal and goes down. And she was able to open and access her own U.S. Marine, in this case, site, all the secure content she needed, all the things she needed now to be effective mobile-y.

And all she had to do was slide her card here and access the app. And she said, "This changes my life." And when you can have one of armed service personnel interact with a mobile device that way and immediately see the value, that’s when you know you’ve got a killer app.

And one of the things that Thursby really did thoughtfully here is in addition to all the security – and it is very secure. I’ll take you to one of these other screenshots in a moment. But in addition to security, they put in this enablement, pre-enrolled all of the secure sites that Navy, Marines, Air Force, Army might want to see.

So when you bring up your CAC card, it’s not just, "Okay, you’re secured, now download a bunch of sites and figure it all out." They are right there and you can import them within the app and be up and running immediately.

That kind of frictionless-ness, number one, is terrific from a business perspective; and, number two, really aligns with the way we want to go to market. Now there’s another screen I want to bring your eye to here on the board, and this is the last one I’ll do and then we’ll go more into Thursby.

But if you look towards the right there, you see one of the screens that has FIPS 140-2 mode, zero data at rest, enable CAC Dual Persona. So a lot of the promise of these CAC cards has been very secure identities. Zero data at rest means effectively no data is actually coming through the mobile device.

If you pull that card out, none of the e-mails, none of the browsing, none of the content you’ve looked at there has actually been downloaded to the phone. So this type of capability, as you can tell, makes it very secure but also super easy for the service people to access and use.

And so this is just – I wanted to give you a little bit of a – from the experience taste of what Thursby is delivering and why we’re so excited about that. Now this has already been deployed to over 100,000 DoD personnel, starting with the U.S. Navy reserve via the Thursby-developed Ready-2-Serve mobile application.

This allows them to use personal devices to access needed information on the go, all of their deployment orders, other things for reservists, which are particularly challenging environment because they aren’t often in a military facility. They’re often coming from home or somewhere else, and they need to get access to the military content.

And now they can in these ways that I just showed you and that you’ve got on the screen. Now prior to the merger with Identiv, Thursby had already sold more than 1 million software licenses to a broad range of customers and industries.

So we’re talking about the DoD here because that’s the primary thrust right now, but their services and solutions have included government, health care, financial services, energy, education, across the Fortune 500 and also OEM solutions.

So in addition to the Defense secure mobility opportunity, the Thursby team has really demonstrated their ability to deliver high-quality, scalable, secure software across the multiple platforms.

So what does this mean for Identiv and Thursby together? Just to bring it up and back a little bit, the obvious touch points, the federal government and smart card readers, cores for Identiv’s business, core to Thursby business, and together much stronger and able to leverage our capabilities.

Just as relevant, now we have virtually the only platform to enable Credentials for both logical and physical access in the high security environment of the DoD. Identiv now does CAC and PIV for FICAM secure access to facilities and uses the same credentials through the Thursby platform for secure mobile log-on and secure session.

In mobile apps, overall, we both delivered mobile apps. We’ve got them for our 3VR video analytics platform as well as our Hirsch access control platform. But now we’ve gotten exposure to truly widely used mobile apps across iPhone and Android, which Thursby has deployed.

This much greater mobility strength is also core to our RFID transponder business. In this segment, our customer use mobile devices and apps to interact with our NFC-enabled RFID devices, which represent tens of millions of the transponder units that we ship every year.

So the core of the market excitement here is that we’re expanding our opportunity size from a number of buildings and doors, which our physical business is typically related to, to the number of people or employees we can serve.

The DoD is a great example, and we can go into more detail around the metrics and the total business opportunity in the Q&A if there is interest, but here’s a quick thumbnail. Thursby’s gross margins run well above 70%, and the unit prices for the full solution is in excess of $100.

In the DoD alone, there are about 1.3 million active service people, over 700,000 civilian DoD employees, and over 800,000 National Guard and reservists.

So when you think about both the unit prices and gross margins and an immediate target market of nearly four million DoD personnel, plus the strategic leverage points we have together, you can see we’re excited about – why we’re excited about our combined opportunity.

Now I know I’ve spent a fair amount of time on Thursby here and I’ll get to the rest of the business, the outlook now. To be clear, they’re a small company, but this is a great example of how we’re driving growth both organically and inorganically, doing accretive transactions that can contribute to our business in multiple dimensions.

We don’t want to buy just revenues. We expect to add capabilities we can leverage and then grow organically and strategically. And we truly believe our combination with Thursby will accomplish exactly that. So on that basis, let’s look at our outlook for our business and then we’ll open to discussion for questions.

So as you can see on these takeaways from – for 2018, we’ve got a strong base and a growing momentum across our business. We expect our growth to continue across all of our business areas, including services, software, federal government, video and analytics, smart card readers and Thursby software and RFID transponders.

Now one area where we do expect revenues to fluctuate is in access cards as those products always have been opportunistic, but we expect this to be more than offset by our strong transponder business, resulting, again, in a double-digit growth for our overall Identity and Credentials segment, as Sandra mentioned in her guidance.

Our RFID pipeline continues to grow and will be anchored by major corporate customers deploying mission-critical applications, which become stronger as we integrate more and more of our security platform especially for mobile users, and will cover the entire RFID spectrum as we bring online our enhanced UHF capacity and capabilities, which is happening within the next month, as I mentioned earlier.

Now all this increasingly strong core business, driving organic growth is now being augmented with inorganic growth, as demonstrated by our second acquisition in a nine-month period. I think I’ve spoken enough about Thursby, but we can go into more detail in the Q&A if there’s interest.

So with our demonstrated EBITDA consistency and expansion, our reduced operating and interest expense base, expanding gross margins and growing revenues from software and recurring revenues, we believe we’re positioned to deliver the next level of our business model.

Even externally, we believe the environment is positive with strong core markets and resilient demand. So as you look at our 2019 and beyond, we believe we are very well positioned both to deliver continually improving financial results and our strategic vision to secure and improve all of our interactions with the physical world.

As we build scale rapidly towards $100 million, we believe our profitability, growth and strategic value is getting stronger than ever. So with that, I appreciate your attention to everything we’re doing in our business, and I’ll open it for questions.

Operator?.

Thank you. [Operator Instructions] The first question is from Mike Latimore with Northland Capital Markets..

Hi Guys. This is Von [ph] on for Mike Latimore. I have two questions. One is like, how much of the growth in Credentials is typically from new customers going live versus current customers expansion – expanding? And I have a follow-up..

Okay. So I’ll repeat it because you were a little bit weak there. The question was how much of the growth in Credentials is typically coming from new customers versus current consumers expanding. And we have our COO, Manfred Mueller, who runs up part of the business that can give a from-the-street answer..

So the Credentials part, which is a combination of both access cards as well as transponders. So on the access card segment, I would say 80% is based on current ones, which are expanding; and 20% is new ones. On the transponder side, in terms of the new business that we are adding, we’re constantly expanding the pipeline.

And I believe we have talked about this in prior quarters as well. I would say a solid 25% to 30% number in terms of new customers being added over – every quarter is probably a good assessment.

Certainly, new customers don’t contribute immediately in terms of high revenue, but it’s just going to be giving us more breadth in terms of, like, pipeline and giving us the right base for future growth..

And my second question is, what are the top three, four applications showing most growth for Credentials?.

So the question, I think, was the top three or four applications for the – driving the most growth for Credentials. Again, I’ll turn it over to Manfred..

All right. So I can comment on that. I would say there is a couple of major trends out there. One, certainly, is anything related to NFC applications, which are adopted throughout multiple verticals out there.

So most of our top growth projects right now and also most of the – some of the most attractive ones out there are related to various verticals, like in the apparel industry, in the toy industry. There is sports companies out there.

We have companies in the pharmaceutical and in the health area out there that are adding NFC RFID technology to any of their products out there. And it’s either a combination – it’s basically a combination of both consumer experience so that there’s an enhanced use case out there or its brand authenticity in that area.

So the lion’s share of all these, let’s say, new application basically fall into that camp. And you might remember about one year, 1.5 years ago, when Apple finally had adopted NFC technology to their iPhone, it was basically the first boost.

And then there’s a new one very recently because the new iPhones have, like, the RFID polling, always on, which means it makes them an even more attractive, let’s say, end point device out there. So that will be triggering some more demand going forward.

And another area out there – and that’s also one of the areas where we are really expanding out there in terms of, like, growth.

And that’s also related to some of the extended production capacity that we just have added in our Singapore plan is related to UHF, and most of the use cases in that area and the implications are in very classic asset tracking and inventory management areas..

Okay, thanks..

The next question is from Jack Vander Aarde with Maxim Group. Please go ahead..

Hi Guys. So I was just curious to know in terms of the FY 2018 guidance, I see that the revenue range has tightened to $76 million to $78 million. And then I just had a question about the EBITDA range tightening. The prior guide reference was to a $4 million to $5 million EBITDA. I recall it was $4 million to $6 million.

Was that restated at one point?.

No, the guidance that we came into the year and shared was $4 million to $6 million, and we’ve tightened it now to $4.5 million to $5 million..

Okay.

And then, I guess, I missed the GM breakup by segment? Could you just quickly provide that again?.

Absolutely. So Premises, on a GAAP to gross margin basis was 57% for the quarter, 56% year-to-date. Identity was 35% for Q3 and 35% year-to-date. And Credentials was 26% for the quarter and 25% year-to-date..

Got it. That’s helpful. Thank you. And then with the FY 2019 initial outlook, I think you said mid- to high teens is the initial outlook, with at least 50% of the growth driven by organic.

Can you talk about how you think of Thursby contributing to that mid-to high teen growth?.

Yes. So right now, we are projecting that Thursby is going to add $5 million, $5.5 million of top line to our guidance for next year and that we’ll sit on top of our organic growth..

Okay, great. Thank you guys and great quarter and that’s all for me..

Thanks Jack..

The next question is from Jaeson Schmidt with Lake Street Capital Markets. Please proceed..

Hi guys, thanks for taking my question.

I apologize if I missed it, but could you comment on if you’re seeing anything out of the ordinary from a pricing standpoint across any of the three segments?.

Yes, a good question. We don’t talk a lot about pricing because we’re fortunate to not have substantial pricing pressure anywhere in our business model, and you can see with the expanding gross margins that we’re not having prices driven down. And in fact, we’re driving down COGS.

So Premises, in particular, has always been resistant on a price perspective. So we really see very little price pressure there; Identity as well, smart card readers and the solutions there, very little.

Sometimes, on the Credentials side and, in particular, on the transporter as well as access cards, on a deal-by-deal basis, it can be competitive and price-competitive, I mean. But our positioning, especially in that category, is very much around higher-end, value-added applications.

And that’s where some of the larger corporates turn to us and that, therefore, gives us something of an umbrella related to price. So I’d want to give you some color and I didn’t want to be so glib, but price really has not been creating pressure by average unit prices on a year-over-year basis..

No, that’s very helpful. And then looking at the Premises segment, I don’t know – you mentioned seeing strength from both commercial and federal in the TS Readers. Do you expect both of those markets to continue to show momentum? Or was this commercial strength more of a – I don’t want to say one-time phenomenon but kind of more of a near-term event..

Yes, a really good question. We actually think it is a secular event. It’s an ongoing event for three reasons, both kind of near, medium term and vision-wise.

Near and medium term, we’ve got some very nice – speaking of price positioning, price competitive positioning on our products, we’ve got some OEM solutions whereby we’re taking our technology and putting it in readers of even some Silicon Valley start-ups and others that are in the physical security space.

And we’re then leveraging their volumes as they grow. And then thirdly, as I mentioned, TS Readers, the readers at the door, are really a strategic initiative for us. We see that as the fundamental sensor to this situationally aware physical environment, where we’re going to be putting more and more in there, certainly first the RFID.

You should have audio, you should have video, you probably should have infrared, and you probably should have Bluetooth and WiFi radios all in there. And we’ll be adding more and more value into our readers. And so – but we’re doing it carefully.

The market can only absorb it at certain rates, but that’s the category that we really expect to be, long term, strategically growing for us. And I think we’re starting to see that just now..

Okay. And the last one from me and I’ll jump back into queue.

Can you remind us how we should think about your quarterly breakeven revenue run rate and with the Thursby acquisition if that changes anything?.

You mean about the seasonality?.

More so just with the Thursby contribution, if that changes the breakeven revenue run rate..

Oh, fair point on the breakeven revenue run rate. I don’t – Sandra and I are looking at each other across the table. I don’t think it changes dramatically the breakeven revenue run rate. It is true Thursby gross margins are in that 70% plus that you would expect with the software business.

But from the numbers, as Sandra indicated, it’s starting out of the small portion of the business. So it’s not going to fundamentally change it, but it definitely strengthens the business.

And there’s an indication of our intention of driving more software content and higher gross margin content, but that’s going to be over the next several quarters and couple of years..

Okay, thanks for your guidance..

Thank you Jaeson..

[Operator Instructions] The next question is from William Gibson with Roth Capital Partners. Please proceed..

Hi Steve. You’ve already owned Thursby for a week and you talked about wanting to buy capabilities that you can leverage, but what’s the environment like out there in being able to do that on an accretive basis? I would think pricing is a real problem..

You have a very good question. And I think that’s why you see our transactions involve a substantial portion of equity because I think they see the opportunity in our business together. And I’ve talked about Thursby being relatively small at this point, but you can hear all the leverage points.

So I think the ability to drive our overall value that they can participate in is an opportunity that we have that someone like a Cisco or a major, Fortune 100 acquirer can’t offer, you better get it in your upfront consideration or you’re pretty much done. So that’s certainly part of where we commence the value.

And then the rest is along things like culture alignment. We have been working with Thursby, for example, for seven-plus years. And the companies that we tend to bring in on an inorganic basis are accretive partly because of the relationships we’ve already got and the strategic complementarity..

Thanks Steve..

Thanks William..

[Operator Instructions] At this time, this concludes the company’s question-and-answer session. If your question was not taken, you may contact Identiv’s Investor Relations team at inve@liolios.com. I’d now like to turn the call back over to Mr. Humphreys for his closing remarks..

All right. Thanks, operator, and thank you all for joining us. As you all know, we’re very active in the investor and with our commercial community. And we welcome you to join us at any of our events. Next week, for example, we’ll be at the Roth Tech Day in New York.

Also, on the business side, the Thursby team, next week, will be at TechNet Asia-Pacific, which is sponsored by the Armed Forces Communications and Electronics Association in Honolulu. Also, on the business side, on December 6, we’ll be hosting an opening celebration for our expanded Washington D.C. office.

And then back on the investor side, we’ll be at the Imperial Capital Conference in New York on December 12. So thank you very much for joining us for this discussion today, and we look forward to seeing you at any of these events and we hope you all have a very good evening..

Thank you for joining us today. You may now disconnect..