Good afternoon. Welcome to Identiv's Q3 2019 earnings call. My name is Carl, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steve Humphreys; and CFO, Sandra Wallach. Following managements, 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 speak as of today. I will now turn the call over to CEO, Steve Humphreys, for his comments.

Please go ahead, sir..

Thanks, Operator, and thank you all for joining us. The third quarter continued the growth in profitability trends from the first half of the year, showing that our strategy is getting traction right now. With revenue growth of 38% in the Premises business year-over-year, we're growing much faster than our market, which is growing at around 7%.

Just as important, our progress on profitability took another major step. Last quarter was Identiv's first profitable quarter in a dozen years, and this quarter we grew our EPS to about $0.05 a share, quintupling over the prior quarter. Now it's just the beginning of course, but it shows how clearly we've turned the corner on profitability right now.

We grew our recurring revenues to about 8% of revenues, and our total software and services revenues grew sequentially, from 12% of revenues to about 14%.

So expanding profit and profitability, core business growth at a rate that's a multiple of our market's growth rates, growing recurring revenues and software revenues all show why we think our business is hitting its inflection point right now.

The EPS growth was especially meaningful because it came through while some large deals in our Thursby business pushed out to later periods.

We've already had major wins in the Air Force and Navy Reserves with TSS, and we expect to close another branch of the armed services, but it didn't happen with year-end funds in our third quarter, which was the federal government's fiscal year-end.

As a result, we had a couple of million dollars of high-margin Thursby business that will be coming in a future period instead. To expand our profit as we did based on growth within our core Premises and RFID businesses really shows the strength of the business model we've built.

Now you can imagine with a couple of million more in the top line of our TSS mobile software, which we've shown can come through at that scale in any given quarter, we're already close to our target profit model, which Sandra will talk about in a bit. So looking at the quarter in a bit more detail, Premises continued its strong path.

You might recall we grew there 21% year-over-year last quarter, and this quarter we grew 38% year-over-year. So we're accelerating. Comparing this to some of our comparables, like alarm.com and Napco, which are growing in the low to mid-teens, our strategy clearly places us in the fastest growing part of the market.

We're just at the beginning of the growth curve, because we're currently piloting some of our most exciting Cloud-based services and our next-generation reader and IoT platforms, which will be coming out at the end of this year and early next year.

Also within Premises, as we noted in the earnings release, 2 of our top 10 customers in the quarter and 5 of our top 10 customers on a year-to-date basis were video customers. Now you might recall this was 4 of the top 10 last quarter.

So video continues to grow within Premises, showing the strength of our analytics platform and especially the strength of our total solution strategy. We're already known for our physical access platforms, especially in the federal, state and local government area.

Seeing the strength in video demonstrates the opportunity we have ahead of us as more companies turn to our total solution and more value-added software and services, especially in analytics around the huge data streams our systems generate. Now of course our federal government business continued to be strong.

In public government filings, our systems have been visible solutions for the Secret Service, the FBI, the IRS, the TSA, Customs and Border Protection, the U.S. Marshals Service, military installations worldwide and a range of other department and agencies at the federal as well as state and local levels. Now we highlighted the U.S.

Marshals in an earlier press release because their deployment program across 900 sites is particularly substantial and because the publicly available filings specifying our Hirsch Velocity system are really a good clear proof point to highlight.

Now we don't typically announce these wins because our customers generally prefer to simply continue their good work for our country. But they're also visible on government websites are contracts are issued. So interested parties can usually figure out the strength and breadth of our footprint.

So you can see the depth and breadth of the activity in our Premises business across the federal government.

But our involvement in the federal government space also includes our smart card reader business, which is the dominant solution for the DoD for desktop CAC card secure sign-on, and of course there's our Thursby software, which is a primary secure BYOD mobility solution for the Defense Department.

On the Identity side, RFID grew 11% year-over-year and 6% year-to-date, and during the quarter we had several strategic wins in this sector. We announced our partnership with Les Bouchages Delage, applying our RFID IoT devices to ensure authenticity for high-end brands such as Remy Martin Cognac.

Probably the biggest news for the market over all, though, with its launch of the iPhone 11 and iOS 13, Apple has really fully embraced all aspects of NFC.

Since they're always a bellwether and partly as a result, we're really starting to see the pipeline of NFC-based RFID applications expand more than ever, and I'll talk about that more a little bit later with some specific examples.

So in total, our Identity segment was down year-over-year, but mostly due to 2 factors which are positive for our future business. We're moving our access card mix to higher-margin, more secure identities and away from lower-margin, unsecure HID cards.

This is partly why we're seeing expanded margins and why we're moving fast along our profitability path. Within the secure cards themselves, we're well ahead of plan, even though we had planned a reduction in total revenues to move to higher-margin identities.

Also as I mentioned earlier, Thursby's next major armed services deployment wasn't covered by year-end funds in the government, which reduced our top line in Identity. We still expect that deployment, which puts another chunk of high-margin TSS business ahead of us, rather than behind us.

So with that context of stronger earnings progression, recurring revenues at 8% becoming a material part of our business, software and services growing strongly sequentially, overall growth of 15% year-over-year, about double our market's growth rate, our business strategy really showed its strength in the third quarter.

I'll turn the call over to Sandra now to go through the financials in more detail, and then I'll come back to give some updates on our growth drivers, the defensible advantages we've established and the scale of the market transition that's happening right now. Sandra, over to you..

Thanks, Steve. Before we dive into our Q3 financials, here are a few key metrics that we think are important in analyzing the progress and performance of our business. The first one is growth, as represented by our third quarter 2019 revenue, which is up 15% compared to the third quarter 2018. Both organic and inorganic growth drove the increase.

This brings our third quarter year-to-date growth rate to 14% over Q3 '18 year-to-date and our trailing 12-month growth rate to 17%.

It's also important to note that our standalone software and services business has increasingly become a bigger component of our revenues, enabling us not only to expand our growth but more consistent in our results and drive higher margins, as well.

This part of our business grew to 14% of our total consolidated revenues and 422 basis points over the prior trailing 12-month period. We are starting to report on recurring revenue as a key driver for our business growth.

As a reminder, this is a subset of our standalone software and services metric, reflecting those longer-term, multiple-period commitments for support, services and maintenance. As we bring our solutions as a service from pilot to market we will report those revenues as part of this new metric broken out.

Our GAAP and non-GAAP gross profit margins have steadily increased over comparable periods based on our stronger sales of higher value-add solutions, with our third quarter 2019 and trailing 12-month non-GAAP adjusted gross profit margin steady at 47%, up 460 basis points over the prior trailing 12-month period.

In addition, based on our strong growth profile, shift to higher-margin mix and consistent OpEx management, this will be the 13th straight non-GAAP adjusted quarter in a row. This quarter, our trailing 12-month period non-GAAP adjusted EBITDA margin hit 11%, over double our comparable trailing 12 months.

In addition, we delivered our second consecutive quarter of positive EPS since the fourth quarter of 2007, with the exception of Q4 2012 when the company recorded GAAP net income of $0.2 million as a result of a non-recurring $1.4 million benefit for income taxes, mainly related to impairment charges taken earlier in 2012.

We also track our quarterly and trended year-to-date free cash flow results as we gave back a little of our progress during the third quarter due to the significant back end loading of our quarter due to late federal government buying patterns.

But we are still generating $1.2 million positive free cash flow to allow us optionality to pay down debt and fund investments for the company. We expect that we will exit full year 2019 net positive and accelerating.

On our next slide, our revenue in the third quarter was $23 million, a 15% increase compared to the third quarter of 2018 and a 4% sequential increase compared to the second quarter of 2019.

Our Premises segment generated 56% of our total third quarter revenue, or $12.9 million, an increase of 38% from the third quarter of 2018 and an increase of 22% from the second quarter of 2019.

The comparative quarterly increase was primarily driven by strong organic demand for our sales of our physical access control solution and our video technology and analytics software. In addition, our recent acquisition of Freedom, Liberty and Enterphone MESH products added inorganic growth.

Sequentially, the quarterly increase was driven primarily by higher physical access control solution sales and is our highest seasonal quarter with the federal government year-end.

Revenue from our Identity products, which includes sales of physical access credentials, readers, modules, transponders and mobile security products, was $10.1 million in the third quarter of 2019, or 44% of our total revenue.

This represents a decrease of 5% from the third quarter of 2018 and a decrease of 13% from the $11.6 million in the second quarter of 2019.

The comparative quarterly decrease was primarily driven by the reduction in revenue from our lower-margin access card segment, as discussed in prior calls, partially offset by the return of transponders to double-digit growth this quarter.

The sequential quarterly decrease was primarily due to lower sales of access cards, with some natural unevenness in our transponder products sales quarter-to-quarter but within our year-to-date growth trajectory. Now turning to our GAAP gross profit margin.

GAAP gross profit margin was 46% in the third quarter of 2019, compared with 44% in the second quarter of 2019 and 42% in the third quarter of 2018.

By segment, our GAAP gross profit margins continue to be strong and stable, with our Premises segment at 56% in the third quarter of 2019 and the second quarter of 2019 and 57% comparably in the third quarter of 2018. Our Identity segment was at 33% in the third quarter of 2019, versus 34% sequential and 29% comparable with the third quarter of 2018.

A key note is that even with the 5% decrease in revenue comparable Q3 of 2019 to Q3 of 2018, our refocusing on higher value-add solutions generated more absolute GAAP gross profit dollars, as measured in 33% versus 29% comparable margin rate expansion.

On a non-GAAP basis excluding certain noncash items our gross profit margin was 47% in the third quarter of 2019, 46% in the second quarter of 2019, compared with 44% in the comparable quarter of 2018. The comparable increase in both GAAP and non-GAAP gross profit margins was primarily attributable to favorable product mix.

If we turn to the full income statement per the earnings release, our GAAP net income attributable to the company for the third quarter was $1.1 million, compared with net income of $0.4 million in the second quarter and a net loss of $0.3 million in the third quarter of 2018.

With the dividends on the Series B preferred stock, our net income attributable to common stockholders was $0.8 million, or a positive $0.05 per share, compared with the third quarter 2018 loss of $0.02 per share. We have provided here 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 lower, at approximately $0.2 million, for the second and third quarter, compared with $0.3 million in the third quarter of 2018.

Depreciation and amortization increased to approximately $1 million for the third quarter, compared with $0.9 million for the second quarter of 2019 and $0.8 million for the third quarter of 2018. The increase comparably was related to the amortization of acquired assets intangibles associated with the acquisition of Thursby and Viscount assets.

Now moving to operating expense management, which is included in the next graphic on the webcast presentation. Underlying the continued management of non-GAAP operating expenses as a percent of revenue is a relatively flat expense basis which we have managed through normal seasonality and acquisitions.

For the third quarter of 2019, per our earnings release, our total GAAP operating expenses were $9.3 million, compared with $9.1 million in the second quarter of 2019 and an increase of $0.6 million compared with the third quarter of 2018, which was prior to the acquisition and integration of both Thursby and Viscount.

Our non-GAAP operating expenses adjusted to exclude restructuring and severance costs and certain noncash charges normally excluded from our non-GAAP results, such as stock-based compensation, an increase in fair value of earn-out liability, depreciation and amortization as well as additional non-GAAP items consisting of acquisition-related transaction costs, were $7.9 million in the third quarter of 2019, as compared with $7.8 million in the second quarter of 2019 and $7.2 million in the third quarter of 2018.

The graph continues to show integration and leverage that we are achieving with delivering top line growth and steady operating expenses.

Bringing all the pieces back together and given our strong growth profile and ongoing cost management, our non-GAAP adjusted EBITDA gain was approximately $3 million in the third quarter of 2019, a $0.6 million increase from the second quarter of 2019 on an absolute revenue increase of only $0.8 million, and $1.3 million more than the comparable quarter 2018 non-GAAP adjusted EBITDA.

Now if I could turn to the balance sheet, we will be comparing our position at September 2019 to the position one quarter ago, at June 2019, and the prior year quarter ended September 2018. Cash at September 2019 and June of 2019 was $11.1 million.

The net activity for the quarter was primarily comprised of a source of $2.8 million cash driven by our net income excluding non-cash items; a $3.8 million cash used in operating assets and liabilities. With a deminimis amount of capital expenditures, our non-GAAP free cash flow generated was a negative $1.2 million.

The performance within this quarter was highly influenced by the back end loading of our quarter and is reflected in the accounts receivable increase noted in the table below.

Under financing activities we had $1.4 million net cash generated by $1.6 million net increase in net borrowings under our East West Bank revolver, while retaining excess available on the line of credit of $20 million if needed for sprint capacity, offset by $0.2 million tax payments related to RSU releases.

And lastly, there was a small, $0.3 million, negative impact of foreign currency fluctuation to reconcile to our GAAP cash flow. In our 10-Q filings we will be providing a full reconciliation of the year-to-date cash flows.

For completeness we have included the full reconciliation of non-GAAP adjusted results to GAAP and the full balance sheet per the earnings release in this appendix. In the context of our target business model we continue to deliver what we set out to do grow both revenue and non-GAAP adjusted EBITDA consistently.

We have achieved net income profitability for our stockholders ahead of expectations. As we head into the fourth quarter of 2019 and 2020, we have already exhibited many of our target metrics within select quarters of 2019. Today we are updating our guidance for the consolidated results for the company for full year 2019.

Our revenue will be between $88 million and $90 million, slightly under our original guidance coming in to this year; but projecting non-GAAP adjusted EBITDA at the high end of our original guidance, at $8.5 million to $9.0 million; and net income attributable to Identiv at or over the high end of our original guidance, now projected to be $1.0 million to $1.2 million.

This guidance includes a full year of profitable EPS, which is the first since 1999, 20 years ago, with the exception of 2006, where the positive net income of $1.9 million included a non-operating gain on discontinued operations of $8.7 million.

In addition, today we're providing guidance for the full year 2020, building on the inflection points that we have delivered.

Our full year 2020 guidance for revenue is $100 million to $104 million, which reflects a 14% to 16% growth year-over-year, far exceeding the market growth by a factor of approximately 2x; non-GAAP adjusted EBITDA between $12 million and $14 million; and net income attributable to the company between $4.5 million and $6.5 million.

We expect our normal seasonality. And as we have committed, we will see more quarters in 2020 where we hit our target model metrics on a sustained basis after we consistently break through the $25 million run rate.

Our guidance for full year 2020 EPS is $0.20 to $0.31 per share, reflecting the continued focus on profitable growth, leverage and strategic cost and cash management as we continue to be cumulative cash flow positive. We believe that our business model is positioned to continue to accelerate towards generating positive and profitable growth.

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

customer leverage and technology leverage. As a single customer acquires identity cards, access systems, video analytics and integrates them into their IT systems, we do one sale and manage one account, generating business for a range of products. Our competitors have to generate profits on one or a subset of these.

The cost of sale is about the same if you're selling one product or several products to the customer, obviously. So that's where our leverage comes in. So let me give you an example that shows this leverage and also shows the connectedness of nearly all of our products.

There are two physical security federal government customers that are evaluating TSS Sub Rosa for their mobile security. Now it would have been a year-long sales cycle, or more, to get into these agencies with an independent mobile security product.

With us, the internal decision makers know us, they have the existing need for secure mobility, and they have contract vehicles in place. So they simply add it on as a CLIN, a contract line item number, and they're ready to deploy, with one customer assessing deployment of Sub Rosa-secured iPads across 900 sites.

Another agency is currently a security customer of our Hirsch Velocity and ScramblePad products, and they're also assessing deployment of Sub Rosa for over 20,000 field operatives.

Now previously I've given several examples of access control and video cross-selling, and identity card cross-sales are obvious, but these examples really show how broadly the sales leverage goes across virtually all of our products. So the sales leverage we have is clear.

What would have been more than a year-long sales cycle became a couple of meetings and some technical discussions.

I could give a dozen other examples of cross-selling into customers, establishing beachheads with lower-end products like identities and growing into other systems, all delivering best-in-industry leverage of our sales and channel investment. Now as a bit of further validation, some other very good companies are trying to start a similar approach.

Some of you follow alarm.com and saw their acquisition of a video analytics company last month, similar to what we did more than a year ago with 3VR.

Now we're not so worried about them competitively because they're coming from the consumer side and the SMB part of commercial, but we do see them as a long-term comparable and their moves do corroborate our vision of where the market is going, which we're already ahead of the curve on. The other leverage point in our strategy is technology.

Mobile solutions and Cloud-based recurring revenues are core to our strategy and are core to the transformation happening in the fastest growing parts of the industry. Across Freedom, Velocity, 3VR, TSS and Credentials, we already have nearly a dozen mobile apps deployed, licensed or under development.

Now some of these are customer- or sector-specific and some are pilot stage in terms of deployments, but all are up and running, and some are available through the Apple Store and Google Play now. And we believe mobility is core to everything our customers want to do.

Our advantage is that we take our investment in mobile expertise, mobile security, mobile UI and UX and we leverage it across access, video, CAC and PIV digital signing, CAC and PIV remote login and security, Cloud-based security and identity credentials.

Nobody in our industry can match that range of product leverage across their investment in mobile apps. Similarly, for Cloud infrastructure. We've used our Cloud infrastructure for a long time for issuance of secure identities and certificate issuance for our secure access readers.

Now that core expertise has enabled us to rapidly build Cloud-native access control and video platforms. Now let me focus on this point for a minute, because our Cloud strategy is different from our competitors.

One of the impediments to adoption in Cloud-based security is that access-control-as-a-service and video-surveillance-as-a-service providers have tried to push software-centric, the-vendor-owns-the-customer business models onto the channel. Now as a result, early entrants like Brivo forced the security channel to turn over a customer control to them.

So dealers would install and set up customers, and they then became Brivo customers. As you might imagine, dealers hate this. And as a result, adoption of Cloud-based security services in the commercial and government segments has really been slow and expensive.

Now our strategy is different, and it's really tailored because we know the customers and the channel so well. Our Cloud architecture empowers dealers to operate through our Cloud infrastructure, brand the service as their own and then manage and build customers directly if they want.

However, if they don't want the overhead of managing and billing customers, we can also operate it as an Identiv service, paying the dealer a fee for the customer. A third capability of our architecture allows the end customer to run the system in their own Cloud if that's how they prefer.

And then a fourth implementation, leverage the federal Cloud, a requirement for some of our federal customers. What's important is it's all the same technology and the same underlying architecture. Now, I can't emphasize enough how leveraged and differentiated this Cloud strategy is.

I'll talk about it more in the Q&A if there's interest and probably will focus on it in a subsequent call. The point is that we analyzed the friction points in adoption, and we think we've developed a superior and broadly applicable Cloud architecture.

As I've said, we're still piloting some of this, but we've got a list of dealers lined up who want to set up and get started. The attractiveness of being able to provide the power of brands like Hirsch Velocity and our Freedom solutions and to do it on their own dealer-branded Cloud is really compelling for the channel.

This architecture advantage is another way to leverage our technology and to empower and leverage our channel. So hopefully this makes it clear how leverageable our business is through both sales leverage and technology leverage.

A defensible, leveraged business model is the base we've built and why you're already seeing expanding profitability and why we expect continued multiple-of-market growth rates and further expanding profitability.

Now in addition to the core strengths of our total solution, our federal government advantages, our Cloud and mobility leverage, I'd like touch on just a couple of related growth drivers for us in the fourth quarter. You might have seen our announcement yesterday of our partnership in the consumer space with Kraft-Heinz.

This is obviously one of the leading brand companies worldwide, and it reaffirms the adoption of NFC technology that's going on in the security and consumer engagement spaces. Consumer brand adopters that have been active in the marketplace include Mattel, Nike, Addidas and many more.

Now certainly, Apple's complete adoption of the NFC stack that I mentioned earlier has really signaled to the industry that the time for wide adoption is now. That's why you're seeing mass market deployments that we're a part of, and you'll see more of that. I can also go into more details of the Kraft-Heinz application in Q&A if there's interest.

On the mobility side, we've got a lot coming through from TSS. We're launching a new version of Sub Rosa, Version 5, with great usability and applicability across all the armed services and the wider federal government for secure BYOD devices.

We're especially excited about our new CAC- and PIV-enabled PDF signing application, which lets any federal government employee use their mobile device to digitally sign documents using the certs on their CAC or PIV ID card.

Now that's a lot of jargon, but I think everybody can appreciate how important signing forms in a secured fashion is to our government. And this is a really unique, technically hard, but very widely useful app. And again I can discuss it more in Q&A.

Now I could go into a lot more releases and channel initiatives coming this quarter, but they all align with the sales leverage and technology leverage I talked about earlier. So hopefully this has given you a sense of the internal development we have going on, and we'll just keep updating progress through press announcements and trade events.

So you can see the profitability leverage point we've hit, why we think it will continue to expand in scale and the clear trends and business drivers that give us visibility to our profitability and revenue outlook.

This is the foundation for the 2020 guidance that Sandra described as well as the updated 2019 guidance, both of which I'll expand on from a business perspective. For the balance of this year, with $64.8 million in revenues year-to-date, including $23 million in the third quarter, normally the third quarter is our highest quarter of the year.

This year our growth is strong enough that we expect fourth quarter revenues to be in line or slightly higher than the third quarter, and this takes our revenue guidance for the 2019 year, as Sandra indicated, to the $88 million to $90 million range, which is below our prior guidance primarily as a result of the delays in the Thursby deals we expected with the end of the fiscal year.

We're confident that business will come in, but the government fiscal year-end passed so we can't be confident it will happen before the calendar year-end.

Now for EBITDA and net income, though, as Sandra confirmed guidance at the top of the range or better, where our full year EBITDA guidance was $7 million to $9 million, and we now expect EBITDA at the high end of this range, in the $8.5 million to $9 million range for 2019.

With the strength we're already showing on net income, as you heard, we're expecting full year 2019 results above our guidance range. Our full year 2019 net income expectation was between a $0.5 million loss for the year and positive net income of $1 million. And we now expect net income for the full year at around $1 million to $1.25 million.

Now for 2020 all the trends we've discussed puts us in a stronger growth and profitability position. As a result, the 2020 guidance you heard incorporates higher growth rates and profitability. We had been projecting low-double-digit growth going into 2020.

We now expect growth in 2020 in the mid-teens, leading to revenues in the range that Sandra indicated. We expect to be free cash flow positive. So this will let us reduce our revolver debt, reduce interest income and drive net income to more than triple, to the $4.5 million to $6.5 million range.

So finishing 2019 with 3 profitable quarters and, particularly, a profitability of the core business even with limited contribution from higher-margin TSS revenues, this is our continued growth with expanding profitability.

Solid growth above our best comparables and competitors, expanding recurring revenue, a strong market and competitive position and a long-term trend to software-defined security and [indiscernible] mobile access which is happening right now, this combined with the strong customer and technology trends we're seeing, we expect acceleration in this direction sustained over the next several years.

So with that, I'd like to open the discussion to questions..

[Operator instructions] The first question comes from Mike Latimore, of Northland Capital Markets. Please go ahead. .

This is [Beejay] for Mike Latimore. So could you talk a little bit more about your U.S. Marshals deal in terms of what the size and what the time frame and does it include hardware and software? Any comments on the deal would be very helpful..

Of course we can't disclose what's not already in the public filings there, but it is 900 sites. It will be a 4- to 5-year program across those sites. Each site for us will be $20,000 to $30,000 of revenue. And that will guide you into the scale of the overall business opportunity. It's a mix of services and systems.

And also I would point out it is part of an overall BPA. So those contract line items I indicated in there we can move our entire range of products through. So at the outset it's direct Hirsch, FICAM, readers, IGS services and software to drive it forward. We expect over time that that will expand into other of our products, as well, into Marshals..

Sounds good.

And what are the key verticals that's driving Identity right now? And going forward, in 2020, do you see the same verticals driving revenue and profitability?.

So there's two categories of verticals on the Identity side. On the RFID side you'll typically see consumer goods, retail and hospitals and hospitality, very heavily.

On the Identity, as in smart card reader, Thursby software, it's very aligned with our Premises business in terms of federal government and then security-conscious enterprises, such as banking and healthcare..

Okay. And a quick question on bookings in terms of the mix between new customers and existing customers.

So how do you see that booking mix? And do you see a specific trend in terms of for the next year?.

As we've always talked about, the predominant portion of our revenues come from expanding sales into current customers because we've been in the market so long. But we're actually seeing the proportion of new sales to new customers expanding, as well.

For example, with Thursby software, those are -- even though it's in the federal government, it's different agencies and departments within the federal government and that's often new. Similarly for video. That's going into a number of new customers.

And as we bring in the Cloud-based platforms, we expect that will also open from our mainstream state and local, federal education markets and large enterprises into small and medium businesses. So I think, going forward, you'll see more brand new customers and names, often at smaller scale, but a more diverse customer base..

The next question comes from Reed Motulsky of Imperial Capital. Please go ahead..

As you were talking earlier about the seasonality, it's been a couple of quarters or a couple of years in a row now where the third quarter has been a little lower compared to what the fourth quarter is now expected to be.

Do you see that continuing, going forward into future years, where your earnings continue to grow throughout the year and it's less of a middle year peak?.

Very good point, Reed. I do believe that will be the case. The diversity of customer base that we just added, talked about in the last call, I think that plus the non-federal parts of the business that are growing and typically grow strongly in the fourth quarter of the year. Enterprises are using their year-end budgets up.

Consumers, you have the holiday buying season on some of the products that RFID is associated with. So I think you will see more of a sequential quarter-on-quarter growth throughout the year versus heavily driven in a third quarter spike. That said, we'll always have third quarter federal year-end buying in the third quarter.

So it could push it up higher than fourth in any given year, but there will be more sequential linearity..

And talking about the state and local government education, have you guys seen a significant uptick, especially in the educational market, for any sort of access control? Has there been any sort of pressure there?.

Very good question. So we've been in education for a long time. We do some of the Houston Community College, Santa Monica Community College, a number of the large community colleges.

Local school districts are a little more reticent to allow disclosure of their names because of the sensitivity around security that requires, but we are seeing a lot of growth there.

You may be aware the Department of Justice has a program, about $70 million that they apply as matching funds to local school districts for physical threats, is what they call it, for threat risk. And we have had especially our wireless infrastructure going into school environments. So yes, it's very active..

And in terms of recurring revenue, I know you guys disclosed that's 8% now, which is great.

What is causing the uptick there? And which portions of your revenue do you see contributing to that, going forward?.

So in terms of technology platforms, access control is the furthest along on the recurring revenue platform. But I expect as we do more product launches and get our mobility as well as our Cloud infrastructure in place next year you'll see it in access control, in video and also in identities, as well, with Cloud issuance of identities.

So I think you'll see it across the board, but it will be led I think with access control..

The next question comes from Nehal Chokshi, of Maxim Group. Please go ahead. .

I apologize if my questions have been asked already. The U.S. Marshals win seems really huge, and that's awesome. I was wondering if you could talk about who were your primary competitors in that particular competitive case..

Sure. We did talk about Marshals a little earlier, but didn't talk about the competition. So that's a good one. It was certainly the mainstream, the Lenel's and Software House's of the world, and that really demonstrated the strength of our FICAM solution, which really is the best in the industry for the federal government.

Gallagher is in strongly with GSA. And so they're always somewhere in the hunt, and we beat them out soundly, as well. And there was also an assessment of some of the Cloud platform infrastructure, like the Brivo's of the world, and I think we've got a superior approach there, as well, as I mentioned in the comments.

So as you can imagine with a deal that big, 900 sites, all the federal courthouses nationwide and a number of other security sites, it was, everybody in the industry was competing for it..

And just to give some context in terms of this win relative to the overall [indiscernible] it's huge for Identiv, but just reframe it up again as far as how big is this relative to the 10-year opportunity that you guys have been talking about in the past?.

So it's a substantial portion of it. What I mentioned earlier is across 900 sites, it will be anywhere from $20,000 to $30,000 a site for us. So that gives you a sense of the scale of it for us. So it's very meaningful and -- what context were you trying to put it in? I just want to be answering the right question..

The overall FICAM opportunity as you have guys been talking. As the federal access refreshes to be compliant with FICAM, I believe you guys have talked about it being, I can't remember the number, but I believe it's much, much bigger than this 900-site opportunity here..

Yes, exactly. The federal government is the largest property owner in the country, by far. So yes, this is something in the high-teens to low-20s millions worth for us, and it is less than 1% of the total government opportunity..

Great. Thank you. And then I wanted to talk about the video surveillance space. Recently the United States has placed a couple of key vendors onto their export restriction list; that being Dahua and HIK. I presume that they have -- you have no exposure to them.

And is this actually an opportunity for you guys?.

It is. First, on the first question, no, no exposure. We don't license anything from them. We don't resell anything of theirs, et cetera, unlike many of our competitors who have. And they do -- we of course don't directly compete in cameras, which is their core strength, but they also do have video management platforms and video analytics.

And of course there there's an opportunity to displace them, which we're working hard on.

And then even on the camera side it's just becoming so risky because often even American companies are labeling cameras from these vendors and other Chinese vendors as nominally American, and it's getting hard and tricky for a contract management officer to make sure they're not stepping on a landmine.

So we're evaluating licensing some very clean, completely non-Chinese, including no Huawei chips or anything else, that we can then provide as a trusted technology vendor to our customers..

The next question comes from Jeff Kessler, of Imperial Capital. Please go ahead. .

I'm sorry for overwhelming you with Imperial Capital people here. But the first question I have is recently Apple has allowed, has started to allow the use of NFC around college campuses.

And I'm wondering if as we begin to broaden the amount of credential technologies that can be used for identity, is there a way for you to drive a higher value proposition? Meaning, not so much -- it's more of the identity than it is the actual card itself.

And how do you take advantage of that if there are multiple ways of being able to access or be allowed inside into given places? How do you basically leverage that, the fact that there's now multiple ways of getting involved in checking out who can get in and who can stay in?.

it's great, everybody wants to see it and then they don't take it. So we'll see how that takes off. But we're pretty close with Apple, as you know, on a number of fronts, and we think that will enable a lot of activities.

Since you mentioned Apple, the other thing they have in there enabled that has been much less publicized than NFC is Apple fully enabled ultra-wideband, UWB, in the latest iPhone 11. And that gives you real-time location services with very high granularity in virtually every phone.

So between NFC and UWB there's going to be lots of capabilities that we can bring to market. And I think we have one of the much better technology platforms to leverage those capabilities..

Thank you. And one other question, and that would be I know Reed was asking you about your recurring revenue, the 8% recurring revenue number.

Where are you with regard to the acceptance of your customers and your willingness to provide either video, more or less for you folks access-control-as-a-service, which is beginning to accelerate throughout the entire industry, and also video-, obviously, as-a-service, where you don't have the hardware but you do have the software capabilities of being able to do that? Obviously, it would be beginning of life.

You'd have to convince certain customers to be able to start doing this on a monthly basis instead of paying upfront. And I realize that most, a lot of what you do is gross margin upfront.

Where do you seem to stand on being able to start using or promoting a service-based application?.

Good question. And we are absolutely committed to the services platform. I kind of mentioned this in my comments.

One of the reasons I think it's been slow to take off is some of the Cloud-based access-control-as-a-service and video-surveillance-as-a-service companies have tried to keep control of the customers, which is really counter to the way the channel and the industry has worked.

So our strategy is to empower the dealers in the channel, let them basically make Hirsch and Freedom capabilities available through their own dealer-branded Cloud. And they keep the customer, but we get the recurring revenues as part of the provision of that service.

And I think that will, then you can have hundreds of dealers pushing recurring revenue services to their customers, and you're not sitting here one at a time trying to sell them and ramp them up over time.

And so I think that will really start to break the bottleneck that companies like Brivo and others have created by trying to grab all the customers for themselves. So we're very bullish on the recurring revenue aspect of business.

We think that going to market through the dealer channel is the way to really have thousands of feet on the street in parallel..

Is this something you've begun to do already?.

We have pilots going with several dealers right now, and we expect to turn it live this quarter, yes..

[Operator Instructions] The next question comes from Matthew Galinko, of National Securities. Please go ahead. .

I'm curious how you think about the margin contribution from early Cloud service subscriptions that you might start generating in what sounds like 2020?.

So you mean how we'll calculate the cost of goods that goes into the recurring revenues? I just want to be sure we're answering the right question..

Yes, or maybe in aggregate, how you start hitting operating income.

Are early subscribers going to be kind of lower margin while you scale up the platform? Or are the early ones going to be relatively high margin relative to the current P&L?.

If you talk about it on a variable basis, because most of the cloud platforms are variably priced, yes, there is a little bit of start-up cost, but then it scales with utilization. No, we won't be going under water from a gross margin or profitability perspective on subscription customers.

They'll be nicely, very solid contribution margin from the beginning. Yes, as you get up to scale of course you always get greater contribution margin, but it will be fairly continuous throughout.

Is that what you were trying to get at?.

Got it. It was. Thanks. I appreciate that.

And maybe just, I assume you won't speak too strongly to 2020 and adoption there, but how quickly do you see scaling the subscription business?.

So it's already been growing nicely, certainly. It's really what I just answered to Jeff about the parallelism that we can get by selling through the channel.

If that works the way we hope it will work, because they seem to be very hungry for this capability that they can actually brand and sell themselves, we could see it taking off relatively quickly.

If it turns out that it's more of an enterprise type sale, which is what most of the competitors have done going to market and you've got to sell one individual end customer at a time, it will still be a great SaaS profile takeoff but, as we know, that takes a little bit more time.

But I'm very optimistic that the dealer parallel selling effort will take this off a good deal faster than SaaS businesses typically take off..

That being said, we do have some expansion built into our guidance, which is also what's driving the gross margin and the EBITDA margin expansion. And I think the question is we think we're going to move aggressively and bring customers on, but it is still a smaller part of our total revenue.

And as we've talked about, we don't expect that we're going to have large installed customers rip out and replace stuff. So it's going to continue to grow as a nice addition to our portfolio, and it will drive probably one percent of total GAAP gross profitability upward, giving us some great pressure, but it is baked into our guidance..

The next question comes from Jeff Kessler of Imperial Capital. Please go ahead. .

Sorry.

Can you just give me some update on how you are developing the channel? Are there -- going forward, as you hit this kind of inflection point that you are in your revenues, how are you dealing with partner programs? Are there -- under which circumstances are you going direct? Under which circumstances are you going through various forms of the channel, probably being the integrators? And how are you dealing with them, making sure -- obviously, you've just won a marquee contract.

How do you keep your name in front of those installers and those integrators in order to basically build up confidence of you in the channel? [Technical Difficulty].

Okay. Sorry about that..

All right.

Did you catch the question? Or did you want me to repeat it?.

If you could repeat it, I'd appreciate it..

Okay. I want to know how you're going to market with, how you're developing the channel. Now that you've gotten to a certain level of revenue, obviously you have a chance to go direct a little bit of the time. But generally, it's going to be through the channel.

What are you doing to create partner programs and to create more relevance and more recognition in the channel with the integrators so that they all know who you are and that you can compete more easily for many more, let's call it, singles and doubles types of contracts?.

Great questions. We talk about that a lot. And the answer is twofold. One is on the Cloud side where we are doing these as dealer-branded portals and services, they love that. That gets people's attention immediately. The other one is back on the total solution part that we approach dealers -- as you know, it's a relatively interconnected industry.

So we approach them with different products for different dealers. So if a dealer is just stuck in being a Lenel shop, they all hate HID. So we come in with TS Cards and TS Readers and we say, don't get screwed by buying these HID cards and readers. Here's a perfect solution and alternative. They'll say, great.

I get higher margins on those things and they work better. And then they can swap that out.

And then they say, "Okay, what else have you got? And then the other thing, the third thing we're doing is with the addition of Enterphone and some of the other products, Enterphone and Liberty, we've got distribution products, products that are going through distribution. And a lot of dealers, as you know, buy through distribution.

And so we're also putting our TS Cards and we're putting our readers going through distribution, as well, so they can get recognition and exposure to it. So 3-pronged program. One is land and expand, find out where the entering point is. The other one is distribution so they can get exposure. And the third one is dealer-branded Cloud..

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@gatewayir.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 and especially for hanging with us with a little bit of phone glitches and running a little bit over. But we really do welcome you all at our industry and investor events if you have time to attend them.

We'll be at the ROTH conference in New York next week as well as at Imperial Capital in early December. Also we're going to be opening our federal government Open House to the investor community in the Washington area. So that's on December 5th.

And last year this was a tremendous event, with decision makers from a whole bunch of agencies and departments, a number of our current customers as well as new prospects. We'll also of course have our entire range of products and services, including Cloud and mobile solutions, there. So we'd welcome anybody who can make it down to DC on December 5th.

And of course we'll certainly keep updating throughout with our press releases and other communication methods. So thank you again for joining us all, and have a very good evening..

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