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spk01: Good afternoon. Welcome to Identiv's presentation of its third quarter 2021 earnings call. My name is Katherine, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steve Humphries, and interim CFO, Ed Kierenbauer. Following management's remarks, we will open the call for questions. Before we begin, please note that during the call, management may be making references to non-GAAP measures or projections including adjusted EBITDA and free cash flow. In addition, during this 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 last 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. Sir, please proceed.
spk05: Thanks, operator, and thank you all for joining us. In the third quarter, we had record revenues of $29.1 million, led by sequential growth in our identity business of 27 percent and overall sequential growth of 21 percent. We also generated $2.9 million in cash flow from operations and $2.5 million in GAAP net income, or nine cents a share, EPS. In Q3, we also retired all of our debt, giving us a strong balance sheet with $29.2 million in cash and no debt. We think this gives us the capital strength to drive for industry leadership as our markets take off. On the growth side, stepping up more than 20% quarter on quarter, especially with the supply chain stresses and other challenges around us, shows the underlying demand strength in our markets. This is why we're confident in our outlook for the rest of the year and for strong growth into 2022 and beyond. Now, I'll go through our key growth metrics first, which made progress across growth, backlog, cash flow, and profitability. In Q3, though, we also made progress that's even more relevant than these numbers in a couple of our major RFID opportunities and in developing our RFID team to drive growth in 2022. So after the metrics, I'll update you on those steps and the opportunity for next year. For our core metrics, in addition to the sequential growth I mentioned, we grew 17% year-over-year overall and 21% year-over-year in our identity business. This is especially meaningful since in Q3 of 2020, we had over 100% growth in our RFID business, making for a high comparable bar. Even with that high bar, our RFID units grew 19% year-over-year for a year-to-date total of nearly 120 million units. As expected, our premises business also grew solidly, up 13% sequentially and up 10% year-over-year. Our federal government sales led the growth pace up 16% sequentially on top of the 34% growth last quarter. Our other key metrics show the progress in our business model. As I mentioned, positive cash flow in Q3 was $2.9 million, a sequential swing of $5.3 million versus last quarter's use of cash for $2.5 million and a cash flow improvement of $3.9 over even the seasonally strong Q3 of 2020. Now, cash flow is probably the clearest indicator of a business's strength. So reaching almost 10% free cash flow while also driving growth and managing supply chain stresses shows the base strength in our business model. This was supported by a sequential growth in non-GAAP gross margins from 38% in Q2 to 39% in Q3. So in Q3, our core business strengthened across revenues, gross margins, cash flow, and profitability. But even with these strong metrics, our biggest progress in Q3 wasn't in the numbers. Our RFID team made very fast progress expanding and strengthening our already world-class team to drive our 2022 growth and industry leadership. In just the last couple of months, we're on track to more than double our RFID sales team. Some are already on board and some are signed up, joining over the next few months. We think we're building the best technical sales team in the industry, including hires from SmartTrack, OmniID, which is part of HID, CCRR, which is one of the most aggressive competitors in RFID, Honeywell, Storer Enso, and others. Attracting the best talent from our toughest competitors is probably the strongest endorsement of our competitive position you can get because salespeople only go where they'll make more money by selling more. Now, Manfred Mueller and Amir Khoshnyadi have both led this team building, and they're on the call if we want to go into more detail later. Also during Q3 and in the first few weeks of Q4, we've had a busy in-person trade show schedule, including RFID Journal Live, IoT World, MJBiz, IFSEC, ISC West, and GSX. We had a central presence, especially at RFID Live, which you can see in the picture here. Our marketing and sales teams managed all of these in a tight timeframe while still controlling expenses in the quarter. Let me turn now to progress in the third quarter in our core growth strategies of new design wins, moving customers through the production cycle, and expanding new and more complicated designs. These all made progress in the third quarter. So starting with customer launches, expansions, and ramp-up. Our major mobile device customer increased their marketing emphasis on NFC and on their NFC-enabled platform for accessories. We're confident they'll keep growing NFC use cases in 2022 and beyond, the result of which will be added opportunities for us across eco tags, metal attached tags, and our cloud-based authentication platform. Most relevant for 2022, we also had one of our cannabis-related customers place first meaningful orders. As we said might be the case, the first movers are coming from the States. Even though Canada's cannabis industry started out working on NFC RFID solutions, and we think they'll be the biggest single market, one of the leading suppliers to the U.S. cannabis market is placing an initial purchase order for 1.9 million units and a frame order for 20 million units. Now, this is just a beginning, but it shows that the market adoption is starting. We'll share more information about this in the next couple of weeks, but it's relevant because we've seen this before. A first mover then drives others to speed up. Now, to keep you updated on the other major cannabis program, it's also making progress. We can't disclose customer details, but it's important for investors to track progress, so here's the latest. Because we program RFID inlays for our mobile device customers, this customer has asked us to apply our production-scale programming technology to their products, thereby expanding the relationship and integrating us further into their solution. This could mean more revenues from the opportunity and a stronger differentiation for us, which is even more important. We don't think this changes the timing, especially with others already getting rolling, but I wanted to give insight into the process of projects like this. It's why we're confident in the market and our revenue opportunity. Similarly, our auto injector syringe customer is making meaningful progress. Our customer recently conducted a board demonstration and review and received board level approval to go forward with the program, which gives you a sense for the strategic relevance of this product. We think we're still on track for the introduction mid-next year, and volumes are still projected to reach over 100 million units on an annual basis. As we've been able to establish ourselves as a key central technology partner to this customer, we've been asked to and are now working on another RFID application of similar size for this customer. Now, as we did last time, here are some new and expanding customers. We don't want to go into all the use cases, but you can see adoption is happening fastest in our main focus area of health care and medical devices, followed by consumer use cases. So in medical devices and health care, new customers include Minifab, Siemens, Rangers Pharma, and Rookling Medical. And as always, there are others we can't name. Now, among those new customers we can't name are several that are actually using Fujitsu's radiation-hardened FRAM chip technology, which it turns out is ideal for medical devices that use radiation exposure for sterilization. Now, in addition to these new customers, we also had follow-on sales into CareStream, ChemFlow, Schreiner Group, CollectID, BullionWorks, TapOnline, and a couple of dozen others. Now these and the many others I went through last quarter and our 150 plus other RFID customers are the wide base of adopters that'll drive our base 40 to 50% RFID growth with the game-changing projects then adding further to that total. Lastly, an even more broad market initiative is our NFC RFID Software Developers Kit, known as our SDK, which we did launch in Q3. We've had several thousand inquiries for developers kits that were being selective to whom we send the actual kits because we can only support a limited number of developers at a time. We think this captures the vast majority of the market because we know most of the serious use cases. So this should give you a sense for the accelerating RFID momentum underneath the numbers in Q3 and the beginning of Q4. That's now in place to drive our 2022 growth. In addition to our high growth RFID segment, in Q3 our premises segment showed the strength we expected and we expect will expand into 2022. This isn't a backlog driven business normally, but we exited Q3 with a near record total premises backlog of 2.6 million in premises. This is a strong signal of the premises business momentum that we see growing into 2022. Our third strategic focus is on revenue repeatability and predictability. In RFID, predictability is driven by customer attention and a focus on consumable products. In Q3, we kept our track record of 100% customer attention in RFID. In premises, predictability is driven by software services and recurring revenues, which remain strong at over 22% of our premises revenues. So before I wrap up, let me mention something I haven't discussed as a factor in Q3, which is supply chain. Now, we're affected by supply and logistics like any hardware and systems business, but we manage to fulfill every customer demand. We have one of the best supply chain teams in the industry. We got ahead of some of the bottlenecks early on, and we always have some safety room in our planning. Now, we're not immune, but our team's doing a great job. We weren't materially impacted in Q3, and we expect to keep that track record in Q4. Now, to be clear, from a macro perspective, we think the world's supply problems will get even tougher in Q4 as the holiday shipment surge competes with all the other demands. But we expect to deliver to our customers' needs and to take some market share as our competitors aren't able to. So in Q3 and the beginning of Q4, our growth, profitability, and cash flow showed strength. Beyond the metrics, we made major steps in our RFID organization to drive growth in 2022 and landed an initial cannabis frame order for 20 million units, signaling the launch in that category. We made progress in our major opportunities, as well as expanding our broad base of customers and use cases in our key segment of medical devices and healthcare. Launched our NFC SDK with huge interest and delivered strong software services and recurring revenues in our premises business. These all made great progress in Q3, supporting a strong finish to 2021 and an even stronger 2022. So before getting into the next quarter and our outlook for 2022, let me turn the call over to Ed to hit the financial highlights for the third quarter. Ed, over to you.
spk08: Thanks, Steve. As Steve mentioned, our financial results reflect our continued strength exiting the third quarter with a delivery of sequential and comparable growth in revenues, future backlog, cash flows from operations, and overall profitability. These results, paired with the investments in RFID capacity, expansion of the RFID organization and capabilities, and our supply chain, we believe position the company to achieve its growth and profitability potential. We closed out the third quarter of 2021 with $29.1 million in revenue, up 21% on a sequential basis, and up 17% year-over-year. Our reoccurring revenue was stable at 5% of our third quarter revenue and 5% of total trailing 12-month revenue. For the third quarter of 2021, our gap and non-gap adjusted gross profit margins were 38% and 39% respectively, compared to 37% and 38% in the second quarter of 2021 and 40 and 41 percent in the third quarter of 2020. For the trailing 12-month period, our GAAP and non-GAAP adjusted gross profit margins were 36 and 37 percent, respectively. Gross profit margin changes resulted primarily from the mix across and within our segments. Our non-GAAP-adjusted EBITDA margin was 11 percent, or 3.2 million, compared with 11 percent in the third quarter of 2020 and 5 percent in Q2 2021. For the trailing 12-month period, our non-GAAP-adjusted EBITDA margin was 6 percent. Our Q3 GAAP net income attributable to common stockholders was 2.3 million, or 9 cents per share. This compares with income of $0.1 million or $0.01 per share in Q3 2020 and income of $2.2 million or $0.09 per share in Q2 2021, which included a one-time gain on the forgiveness of our PPP loan. We have provided in the appendix today a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. Our next slide further analyzes trends by segment, beginning with identity. Revenue from our identity products totaled $18.7 million, or 64% of our total revenue in Q3 2021, a 21% increase from Q3 2020, and a 27% increase compared to Q2 2021. The sequential and year-to-year increases were driven by growth across all identity with additional customer expansion due to our ability to deliver versus competitors' constrained supply chains. Our Q3 2021 identity segment gap margins were 28% compared to 24% in Q2 2021 and 30% in Q3 2020. The sequential increase in margins were due to a greater proportion of higher margin products in Q3 versus Q2. The decrease in year-over-year margins were due to product mix with a higher proportion of lower margin RFID transponder product sales due to the faster growth rates of this category. Turning to the premises segment, this segment accounted for 10.4 million or 36 percent of our total revenue in Q3, representing an increase of 10 percent from Q3 2020 and an increase of 13 percent compared to Q2 2021. The sequential change in revenue was due to the continued recovery in select commercial verticals like banking and retail, along with normal seasonality. The year-over-year increase in revenues from the premises segment reflects a growth in sales to the federal government, the rebound in sales of Hearst Velocity software products to commercial consumers, and higher sales of video technology and analytics software products. Gap margins for premises in the third quarter of 57% were comparable to Q2 2021 and higher compared to 55% in Q3 2020, primarily due to the mix of products within the segment. Moving now to our operating expense management. Our gap operating expenses for the third quarter of 2021 totaled $9.1 million, which were consistent with both Q2 2021 and the third quarter of 2020. Our non-GAAP operating expenses adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization totaled $8.2 million in the third quarter of 2021 or 28% of revenue. This compares to $8 million or 33% of revenue in Q2 2021. and $7.5 million, or 30% of revenue, in Q3 2020. Our non-GAAP adjusted EBITDA was $3.2 million in the third quarter of 2021, a $0.5 million increase compared to Q3 2020, and a $2.1 million increase compared to Q2 2021. Turning to the balance sheet, We exited Q3 with $29.2 million in cash, a net decrease of $7.2 million from Q2 2021 and a $16.9 million increase from Q3 2020. The key drivers of our cash activity for the quarter were $2.9 million generated from operating activities, $0.4 million provided by investing activities, driven by $0.6 million of proceeds received from the sale of an investment, offset by $0.3 million in capital expenditures related to our continued investment in our R&D facility in Germany and our Singapore manufacturing plant. These sources of cash for the quarter were offset by cash used in financing activities of $10.3 million, driven primarily by the repayment of all principal amounts outstanding under our EWB revolver of $10 million, leaving us free of debt as we exit Q3. In our 10-Q filing, we will be providing a full reconciliation of our year-to-date cash flows. For completeness, we've included the full balance sheet in the earnings release in the appendix. As we continue to progress through the remainder of the year, we are refining our full year 2021 guidance today with a revenue between 103 and 105 million. Sharing some metrics as we move into the fourth quarter. Exiting Q3, our Q4 backlog was 11.7 million, up 18% versus Q3 2020. Our total backlog for all future shipments was also up 51% versus Q3 2020. And total new orders booked through the first three weeks of the fourth quarter were 7.5 million, up 46% over the same period of the prior year. These trends provide visibility into the business momentum through the balance of 2021 and going into 2022. As a result, today we are providing initial revenue guidance for the full year 2022, building on the strong base of growth that we have delivered to this point. Our full-year 2022 initial guidance is for revenue between $130 and $135 million, reflecting growth of approximately 25% to 30% year-over-year. We will be refining that initial guidance when we report our Q4 and 2021 full-year earnings in March 2022. With that, I will conclude the financial discussion and pass the call back to Steve.
spk05: Thanks, Ed. As our results and our initial guidance for 2022 show, our growth is expanding. We expect overall growth of 25% to 30% for 2022, driven by 40% to 50% growth in our RFID business, with the possibility that our major programs could drive RFID growth much higher. In premises, we're expecting 20% to 25% growth, with strong margins and increasing software services and recurring revenues. Beyond 2022, we see overall growth increasing in 2023 at a minimum in the 30% to 35% range, again, driven by higher RFID growth rates. Let me go into the basis for our growth projections and how we're thinking about our base growth that's predictable both in timing and scale and how we're projecting transformational opportunities. At the core is the 40% to 50% RFID growth. This assumes base growth of our core markets and the wide base of customers. It assumes a measured takeoff of a couple of our transformational opportunities, but it doesn't depend on any of the opportunities becoming in 2022 the over $10 million revenue drivers that each can easily reach. The reason is timing. In this industry, we've seen projects move around by six months or more. I'll talk later about how we're mitigating this. We think we've got some different leverage points than the industry has had in the past, so we should be able to project and manage revenue paths better. Right now, though, we need to project what we can see. Forty to 50% growth shows a very strong market that we have line of sight to. Our leadership in the market means we'll also most likely be the winner when each use case hits an inflection point. Now I'll go into details of how we're driving our core RFID growth. We're already far along building the industry-leading organization in NFC-based RFID. We're developing early adopter customers and use cases faster than anyone else, and we also have a great competitive environment just as end users are adopting. Our strong financial position, now debt-free with a strong cash and working capital balance sheet, lets us focus purely on execution and driving our unique and massive market opportunity. I'll focus the rest of my comments on our execution plans for 2022 that drive our base growth and that expand the range of transformational use cases beyond this base growth, especially in healthcare and medical devices. Our expectations for 2023 growth are based on our base 2022 growth continuing, plus confidence that some of the transformational applications will be underway in 2022 and contributing substantially in 2023. In fact, if these transformational applications contribute for the full year 2023, growth rates could be substantially higher than 35%. So the structure of our 2022 strategy is the same we've applied for the past two years. Design wins, current customer volume growth, and the technologies, programs, and partnerships to drive growth. Design wins is our focus. Our organization is built to drive design wins with early adopters in key use cases. We do this through four strategies, chip partnerships, technical sales strength, engineering and technology depth, and industry design and production leadership. We've talked before about our deep chip partnerships and our engineering leadership. In technical sales, I said earlier, we're on track to double our direct sales reach with industry experienced salespeople from the best companies in the industry. Now experienced salespeople bring with them visibility into almost every design opportunity in the industry. With the team Amir and Manfred have built, we think we're now in this position. Combining that visibility with our full scope design through production expertise we're able to win designs and then help customers get past the friction that early adopters run into. The biggest problem in our industry has been customers not having experience, running into a roadblock, and then sidelining the project despite the business benefits. Our technical expertise and experience scaling projects lets us get customers past all these roadblocks. It's basic early adopter customer success focus, which the semiconductor industry has been very effective focusing on in early stage categories. Intel did it early with CPUs, NVIDIA did it early with their GPUs, and we think we're the only company applying it to advanced RFID devices as this market takes off. So with this best in the industry platform, continuing design wins in Q3, more in the pipeline for Q4 and 2022, and with 100% of our current customers staying with us and some expanding designs and volumes, we've got solid visibility into 2022, both from a backlog and pipeline perspective. We're also continuing to expand our technology offerings. There are a dozen technology programs we've talked about before, so I'll just highlight one new one, our partnership with Williott, an Israeli-based company that's recently gotten a $200 million investment from SoftBank. This is the passive Bluetooth RF device company that could be an industry game changer. Our partnership includes both devices and applications, as well as the software platform for product engagement. Also on the technology front, I mentioned earlier we're extending our SDK to include a cloud-based authentication server to validate, personalize, and then enable customer engagement with any RFID-enabled device we've deployed. To make our technology range really accessible to product engineers, we're also setting up innovation labs and customer experience and success centers. Now, our engineering center in Germany has proven to be a competitive advantage with great people, equipment, and exciting projects that all draw great talent. We're planning similar capabilities, first in our Southern California headquarters and eventually in Singapore, so we'll have all major geographies covered. Now, only Germany is our core engineering center, but our customer success centers will be meeting at workplaces to find use case opportunities, develop project ROIs, and break any bottlenecks that come up in the design, pilot, ramp up, redesign process. With the design wins, the team, customer success focus, the technology platform, and our partnerships around chips, technologies, and channels in place, the final part of our strategy is focus. Our clear focus is in healthcare and medical devices. Our customer-specific projects around the auto-injector syringe, blood test assays, operating room tools, and consumables are the highest margin opportunities, while our standard medical RFID products can scale across customers. These include our U-Trust Syringe Check for single-use syringes, U-Trust Blister Check for prescription pill protocol compliance and authenticity, U-Trust TempSense for in-hospital temperature checking, and our prescription spoken content RFID devices for CVS, spoken RX, and others. We now have medical applications that span syringes, test assays and equipment, at-home tests, operating tools and devices, prescription pharmaceuticals, high-end blister pack pharmaceuticals, in-hospital disposables like thermometers, and others. We built a portfolio giving us solutions for almost every aspect of healthcare from hospital to clinic to home. Business development and sales now is the focus to leverage our solutions into every medical early adopter opportunity. Now, we're of course going after high-end NFC-based RFID applications in consumer experience, packaging, libraries, cold chain logistics, and industrial use cases to build our scale and cover emerging markets. but you can see where the long-term focus is with our medical initiatives. Now, I focused on RFID because that's our core growth driver. The premises part of our business is also lined up for strong growth. In particular, federal, state, and local government sales look strong, as do our software and recurring revenue products. With a focus on physical security in both the federal government and the state and local level, we're seeing great demand strength. Combine the need for improved physical security, expanding federal spending, fiscal health at the state level, and infrastructure investments, and we see lots of drivers for growth and increasing market share. Now before wrapping up, one other topic I'd like to touch on is our CFO search. After screening several dozen candidates, we have a terrific CFO we're preparing to move forward with. Now transitions of financial executives are always sensitive, so we're being respectful of his current company's processes. We're not able to name someone today, but we expect to within the next couple of weeks. We'll go into details then, but I'm sure the industry and our investors will be impressed by his ability to lead all financial aspects of our business. As just a couple of background points, this is a finance leader that's been with a public semiconductor company through the growth phase from $70 million to $400 million in revenues over just a few years, which is exactly the growth path we're driving towards. He's deeply experienced in systems as well as semiconductor businesses, which are the best comparables to our RFID business, and has operated in $100 million up to several billion-dollar businesses. He's also built world-class teams and implemented critical financial systems in very intense public and private company environments. He started his career at a Big Four accountancy, so he's deep on the accounting side as well as financial planning and operational rigor. I wish I could say more right now, but this is important enough that I wanted to give a very clear update on exactly where we are in the process. So to wrap up, Here are some growth indicators from just the last few weeks. As Ed mentioned, we have over 7.5 million in new orders booked in just the first three weeks of the fourth quarter, up 46% versus the same time last year. As we look into 2022, our total backlog for all future shipments at the beginning of the fourth quarter is up 51% versus the same time last year. We've gotten our first purchase order of almost 2 million units for a major cannabis program, part of a 20 million unit frame order. Our auto syringe customer got board-level approval to go forward with the program, and our mobile device customer is increasing their focus on NFC as part of their accessory platform. Our medical device and healthcare focus is getting more traction, both with a growing range of customers and now a full suite of standard medical RFID devices across syringes, pills, temperature, prescription apps, and others. To leverage this technology and customer progress, we've aggressively expanded our RFID customer-facing team, bringing in some of the best talent in the industry. Federal security spending is on a long-term growth path, and our revenue predictability for the company as a whole is strengthening from the growing range of consumable use cases, returning customers, and recurring revenues. So we see the rest of 2021 and 2022 continuing these trends. In 2022, we expect some of these major programs to accelerate our growth even further as some of the revenue-multiplying projects fully ramp later in 2022 and into 2023. We're also confident we'll find more opportunities like these, with our strengthened team, our technology leadership, our developers' kits, and other aspects of the leadership we're building in the advanced application RFID industry as it takes off. With that, I'll open to questions and discussion. And as I mentioned before, we have Manfred and Amir on the line also. So if there are RFID-related questions, we can cover them in whatever depth we need. So operator, please open the lines for the discussion.
spk01: Thank you. We will now take questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Again, if you have any questions or comments, please press star 1 on your phone now. Please hold a moment while we poll for questions. Your first question is coming from Craig Ellis with B Reilly. Your line is live.
spk07: Thanks for taking the question and team congratulations on the financial performance and the progress in the business. Steve, I wanted to start just by seeing if we could dig in a little bit more to the frame order that you talked about in cannabis. So exciting development and certainly high volume. Since I'm not familiar with that type of order, What are some of the milestones that investors should be thinking about with that type of an agreement?
spk05: So, it'll be the usual, you know, finalization of design process and launch plan that they'll have to go through for the product itself. And then, of course, you know, finalization of the prototypes, the pilots, and the production ramp-up process. And, you know, it is actually just a beginning order. It's relatively, there's volumes that should be substantially larger than that as we go forward with it. But it's that first step that should start to break some of the logjam.
spk07: Great. Nice to see. The second question, I think I got most of the points around calendar 22's outlook. Nice to see significant growth at 130 to 135 million. I think you went on to make some comments on calendar 23, which I missed. So could you just recap what you said about 23's potential growth?
spk05: Yes, absolutely. We think that that growth base that we go out of 2022 into will be the platform for growing off into 2023. So we expect 23 to be in the 30 to 35% growth range. and that again as I said in 2022 we have the base growth and then we have some of the transformational projects that we think will be coming in but not you know really driving you know 10 million plus in the year they really should be developing the 23 time frame and so that's why we expect to see accelerated growth on the back of that and then the growth rates in premises we expect to continue as well underpinning the overall business model does that fill in the gaps Yep, that does.
spk07: And then if I could flip it over to Manfred and Amir. Guys, the question I had for you is regarding the sales team. So Steve mentioned that there have been a number of direct salespeople added from competitors. The question is, when you're bringing folks in from a competitor, how long does it take for them to become very productive with the different solutions that that Identiv has and the capabilities that Identiv has from engagement all the way through manufacturing and fulfillment. And so what should we expect in terms of the timing to their potential contribution to revenues?
spk02: Yeah, great question, Craig. So in general, all the folks that we are bringing on board are, let's say, industry veterans that have like 10 plus, 15 plus years of industry relevant experience, which means that There is zero ramp-up curve when it comes to basically make them familiar with the product portfolio there. So all of them are HF as well as UHF specialists. So from that point of view, we really expect them to hit the road very, very fast. Maybe a general comment, we have really accelerated to bring in all these people into 2021, most of them, because we really wanted to be sure that they are hitting the road hard right from the beginning of 1-1-22. bunch of them are starting basically this week we have some more following in the month of December with a very very sophisticated training and and and and and other sessions to basically ramp them up. And all of them, of course, know a ton of business. But on the other hand, we also are respectful of respective technologies and other things and IP issues and related things. So from that point of view, I really expect them to basically contribute fast. Amir, any more comments from your end?
spk00: Yeah, I would just add that they do have rigorous 30, 60, 90 day ramp up plans for them to get on board. And then in addition to that, a lot of them have that deep channel expertise. So they are familiar with competing with products that are very similar. And the nice thing is they can step really well into the relationships that they have and then ramp up from there. So from that standpoint, we're very, very excited. And to add, as we grow into 2023, this layer that we've built It's also a really good foundational layer for any new talent we bring in. Because of their senior level experience, they can mentor the new groups that come in and also get them up and running.
spk07: And is there a particular geographic profile to the folks that you've added? Yes.
spk02: Craig, I just was about to comment on that. Absolutely, yes. So we are filling some of the gaps here in Northern America where we see some, let's say, immediate needs for, let's say, more coverage. Latin America is another area where we are adding. There's two folks in the EMEA region, and we are bringing a couple of people on board in AsiaPAC between Japan on the one hand and then Southeast Asia on the other hand. And they basically blend perfectly fine into the remainder of the team that is on board already. So we're truly doubling the force through the end of the year.
spk07: Very good. Thanks for the help, guys. I'll hop back into the queue.
spk05: Hey, Craig, let me just add to that, just to put a little more color on it, because as you can hear how fast Manfred and Amir have moved, we actually accelerated the hiring process. You know, our board supported making some additional investment faster. And these guys have really brought in some of the industry's best and worldwide, you know, in the last couple of months. So it really is encouraging. And as you can hear from Amir, you know, with 30, 60, 90-day plans in place for each of them, execution that's going to be very aggressive because we wanted to front end load right now, even though they're all industry experts, make sure that they understand our processes, get the lay to land, know the products, and then by the time we're going into 2022, that we really have them all hitting the ground running. And that's what gives us some confidence in the growth. is, you know, having a substantially larger team with the expertise that we've got. We think it'll really position us for 2022. And that really is enabled by, you know, the confidence we have from the investors, the strong balance sheet, and the board backing we have that said, yeah, you've got the right leadership. Now go ahead and invest and build the team fast. So I just want to add that context. But thanks for the question, Craig. Yep, very helpful. Thank you.
spk01: As a reminder, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Your next question is coming from Mike Latimer. Your line is live.
spk03: Hi, this is Aditya on behalf of Mike Latimer. Could you give some color on how the demand has been for video analytics
spk05: Sure, absolutely. The premises part of the business has really, in terms of percentage growth rate, video is probably the area that is growing at the fastest percentage rate. We launched a product called Velocity Vision, which is tightly integrated with our Velocity physical security platform. And from a standing start in May, I think, when we launched it, We've got something north of a $9 million pipeline on velocity vision. It could be 8 or 9 million, but it's of that order of magnitude. So it is being very broadly embraced, partly for the analytics, but also heavily for the integrated access and video, which is the differentiation of our platform. And that's really moving nicely. We think it will be a driver both of growth and of gross margin expansion in 2022.
spk03: All right. All right. And could you also tell me how much did your largest customer contribute as a percentage of revenue?
spk05: Largest customer. I'd have to turn to Ed for our top 10. I know we didn't have any 10% customers. We didn't have any 10% customer concentration. So it was probably of the order of 8-ish percent, but I can get to that in detail.
spk08: Yeah. No one customer exceeded 10% of
spk06: uh total revenue or revenue all right all right fine fine thank you of course thank you your next question is coming from jason schmidt with lake street your line is live hey guys thanks for taking my questions steve i know you highlighted the healthcare sector a lot but just curious if you can provide some more detail on how The ramp at CVS is going as well as that second customer. And then if you've seen any sort of increasing inbound interest from other pharmacies.
spk05: Yes, so the ramp at CVS is going nicely. We expect, and it's up to them, of course, any day, week now, that they will do a press release themselves and some notification on where they're going with it. So I don't want to speak for them, but they should be speaking for themselves pretty proactively before long. They are a very methodical, let's say, pharmacy and insurance company as CVS and Aetna are combined. But the use case itself and the business is going well, and we're looking forward to when they actually turn up the marketing juice on it to really drive it. And then in terms of other interests, we talked about another top five pharmacy chain that is in pilots, and they're deploying readers as well as tags. And because it's such a small industry, I don't want to give too many profiles of others that we're in discussions with. But as you'd expect, most of the major players in the sector are looking at bringing that capability to market now.
spk06: Okay. No, that's helpful. And then one of the big themes this year in the RFID business has been your guys' ability to continue to see ASP expansion. I'm not sure if you want to give specifics, but when we look at your guidance for 2022, does that assume continued ASP growth in the RFID business?
spk05: Good question. The short answer is not necessarily. ASPs will oscillate around and especially with the expanded sales force, we're going to be getting a range of applications. And as long as the margins are where we need them, they can be at 80 cents or at 25 cents. So I want to be careful about setting, you know, two granular expectations and then things are a little bit different. I think they're actually going to going to move around times and they can be driven so heavily by one big project or another. But that can skew it also. Now, on the long timeline, ASPs are certainly moving up. And as you see, have things like the auto syringe and some of the other use cases, those are substantially higher ASPs. And so over the course of a year plus, I'm certain ASPs will be moving up. But on a quarter-by-quarter basis and even, you know, first half of the year versus second half of the year, I can't be certain what the trend line will be. I'm sorry that's a little bit wishy-washy, but I'm trying to be as responsive as possible. Does that fill it in?
spk06: It does, and that makes sense. And just the last question from me, and I'll jump back into Q. Looking at the 2022 guidance, I know you indicated that it doesn't assume sort of a significant ramp in some of these transformational opportunities, but if some of these opportunities take off faster than you had anticipated, could you at the very least meet it from a supply standpoint?
spk05: I want to answer it but also not create any concern. We've got plenty of forward visibility and we've got plenty of very good relationships, but I also don't want to be glib about it. There's always possibilities that if suddenly someone needs 20 million units of a particularly high-end multi-sensor capability, It's possible that we'll have trouble ramping up that aggressively. We're buying in advance of everything we can think of and we think we'll be in good shape, certainly for the plan as we've got here and for some of the upside. But, you know, as we said when we were guiding this year, we don't want to have unlimited upside as if there's unlimited supply because that's just not the case. But there's plenty of room in supply and in our ability to work supply chain so we can deliver a lot of that upside. So we certainly don't think we'll be constraining any of our customers' abilities to ramp at an accelerated rate.
spk06: Okay. Appreciate the color. Thanks a lot, guys.
spk09: Thanks, Jason.
spk01: Your next question is coming from Brian Ruttenberg with Imperial Capital. Your line is live.
spk04: Thank you very much. So, just trying to understand a little bit on 2022 and 2023 as you're doing this ramp on the operating expenses side. Can you give us some kind of grounding on either as a percentage of revenue or something or how fast you're going to be increasing those operating expenses?
spk05: Yes, and we've been consistent, and our board's been consistent. We're excited about the growth opportunity, but you can only absorb so much investment at any given time, and we're on a great growth path. So the framework we're applying is about half of incremental gross margin dollars we want to throw to the bottom line, and about half of incremental gross margin dollars we'll invest in the business. And, of course, if we gap up on some of these projects, more of that will fall to the bottom line. But in general, if you think of gross margin growth and about half of it flows to the bottom line and half of it is driving the growth, that's probably a pretty good framework. Okay.
spk04: And then another question on cannabis. Assuming that $1.9 million order with another 20 behind it, hopefully – What percentage of your business in 22 is going to be cannabis related?
spk05: So just one clarification there. The 1.9 million is units, not dollars. Right, units. And be thinking in terms of, you know, sub-20 cent units for these things. So just to characterize a little bit.
spk04: So what was your question about the trajectory there? You just answered it by giving me the ASPs on the units for the cannabis. Are all those 1.9 million units going to be shipped by the end of 2022? By the end of 2022, certainly.
spk05: I believe that in both that customer and that category, it'll be a multiple of that number in terms of units as it starts to take off. And I want to be very careful. That's a belief from talking to customers, seeing what's going on in the industry. That's not a forecast that if it varies, I want to... be overly worried about. But the trajectory would be for, you know, if you ask Amir and his team from the sales discussions they've been in, you know, and one of the events I mentioned was MJBiz, which was, you know, marijuana business trade show, that there's a lot of activity going there, and I think there would be a multiple of 20 million units total associated with cannabis in 22. Great. Thank you.
spk01: Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Your next question is coming from . Your line is live.
spk09: Great. Again, great quarter, guys, and very nice guidance. Can you give your latest update on your capacity and where you're expected to be by the end of the year next year for the RFID side?
spk05: Yeah, absolutely. Since we've got Manfred on the line, we might as well go straight to the source there. Can you hear me? Now we can, yes. Go for it.
spk02: Can you hear me now?
spk05: Now we got you, yep.
spk02: Okay, very good. Sorry, my line just dropped and I had to dial in again. So capacity wise, we are heading towards about 180 million this year. We are at about 120 million units as of Q3 and have a capacity of just shy above 200, 220 million units as we speak. Plus, we always have the option with some outsourcing partners to basically cover peak demand. For 2022, we are planning on 285 million units. In order to do so, we have a bunch of equipment en route already. So there is another flip chip machine basically signed off at the manufacturer close by here in Bavaria and then shipping in the month of December. And we already have requested quotes for the next two on top of that. So from that point of view, in terms of capacity, we are really planning full steam in order to basically to cover the growth scenarios for the coming year.
spk09: Great. Thank you. And then for others, Steve or Manfred, to the extent you are allowed to discuss, how many other transformational opportunities are there that has a hundred million revenue potential? I think you mentioned earlier that the company you're working with on the auto injector has another project that might be comparable to that, but are there a few more like that? And to the extent you can, can you discuss them?
spk02: There is, there is, and there are in various verticals. So health, there is certainly more than a handful of, But I also have projects that we're working on in the smart packaging area where you have tens of millions to start with and then hundreds of millions thereafter. So there's certainly a couple of whale projects in terms of the projections for us. We are, let's say, I try to be conservative and just hit one or the other. because those alone would already basically meet the necessary volume requirements for 2022 and then beyond. But please rest assured, the pipeline is about 5 to 7x of the revenue that we need to be delivering in the transponder business.
spk09: Oh, that's awesome. And then maybe just more immediate term, I noticed that the growth margin on the ID saving side moved from 24% to almost 28%, if I'm doing my math right, this past quarter in Q3. First, can you talk about what drove that, and then two, whether it's sustainable or even if it should grow going forward? I wasn't sure I caught all of that, Jay. You were breaking up just a bit. I'm sorry. I'll repeat it. If I'm doing my math right, it looks like the ID side of the business did almost 28% growth margins this Q3, and that's a pretty nice improvement from what it was in Q2. I was wondering what drove that and if that 28% level or so, if that is sustainable or could actually be improved upon.
spk05: So it's mixed as always, almost always in that case. And so we had some higher margin products in there and in identity overall. It's going to generally trend upwards, as we've talked about, but it is going to fluctuate, again, depending on mix. When Manfred talks about some of these whale projects, You know, as those kick in, if they're higher gross margin, they'll gap it up. If they're lower gross margin, they'll move it closer to that. So, you will see us continuing to move around in the upper 20% gross margin. And then as you go towards the end of next year, and we have some of these larger and much higher gross margin projects going, then I think you'll see it breaking through 30% sustainably and going into the mid-30s.
spk09: Okay, great. And then, obviously, you laid out the opportunities in RFID. You've hired a lot of people from the industry. How are your competitors like HID or SmartTrack, how are they responding?
spk05: I'll defer that to Amir and Manfred as well. They're dealing with it right on the street.
spk02: So first SmartTrack is not responding anymore because they were acquired by Avery to be very precise here. And in general, we are very, very respectful when there is non-compete clauses. So we try to, not just we try to, we will not be, let's say, breaking the law in any of these regards. Many of the former SmartTrack people, for example, they have been with other players in the meantime. So from that point of view, as you can imagine, whenever there is acquisitions going on, even very good people have to leave an organization or the very, very good people leave voluntarily and go for other endeavors. And that's basically where we pick them up. And indeed, HID is another example. They're also heavily acquiring, same thing there, they have a lot of talent out there, which is both employed with them and which was employed with them. So from that point of view, I wouldn't say it's easy to find the right people, but the sheer speed we basically put to the table in order to fill all our openings should be giving you an idea on how successful we were in that regard.
spk09: Okay, great. And then just on the physical side or the... You mentioned that growth for 2023 is going to be around 30% or so, but that's for the whole company. Do you see the sustained growth for the physical for a 20% plus for the foreseeable future, or is it something where you see a big bump up now and then it'll kind of tear out to, you know, high sort of digits?
spk05: Yeah, good question. And Jay, in the spirit of also respecting everybody's time, if we can make this the last question.
spk09: Yeah, it will be.
spk05: Thank you. Great, great. But actually, no, we expect it to sustain. That 20 to 25% growth we see is certainly a several-year secular growth pattern. You know, our illustrious federal government is not going to stop spending, especially for security applications, which are uncontroversial. And, you know, security has just become very fundamental, physical as well as cyber, in every business walk. And we have a really good total solution. Everybody's trying to consolidate vendors these days as well. So we think we're pretty well in the sweet spot. So we expect to be growing above market for the next, you know, few to several years.
spk09: Great. Thank you so much.
spk05: All right. Thanks, Jake.
spk01: Thank you. This concludes the company's question and answer session. If your question was not taken, you may contact Identive's investor relations team at INVE at gatewayir.com. I would now like to turn the call back to Mr. Humphreys for his closing remarks.
spk05: All right. Thanks again, and thank you all for joining us this evening. As you can tell, things are developing very quickly in our industry and certainly our company itself, and we're very excited about the path ahead of us. We will try to make sure we're continuing to communicate with the investor community as all of these opportunities develop. And in doing that, we'll be at the Stifel Conference next week, virtual, of course, Lattenberg the following week. Also, we have our Washington, D.C. open house on December 9th, which investors are welcome to come to and talk to some of our customers as well as some of our engineers. And then we'll be at the Imperial Capital Conference in New York in mid-December and possibly a couple of others. So we're going to try and keep the direct communication flowing as we primarily focus on driving the business forward, but also keep everybody aligned as we're going forward. So thank you again, and thanks for joining us, and have a very good evening.
spk01: Thank you for joining us today you may now disconnect.
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