Identiv, Inc.

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.

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.

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.