Identiv, Inc.

Good afternoon. Welcome to Addentiv's presentation of its fourth quarter and fiscal year 2021 earnings call. My name is John, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steve Humphries, and CFO, Justin Scarpulla. Following management's remarks, we will open the call for questions. Before we begin, please note that during this call, management may be making references to non-GAAP measures or guidance, including adjusted EBITDA and free cash flow. 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 future financial results, future business and market conditions, and future plans and prospects, 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. Identif assumes no obligation to update these forward-looking statements, which speak as of today. I will now turn the call over to CEO Steve Humphries for his comments. Sir, please proceed.

Thanks, Operator, and thank you all for joining us today. During 2021, the advanced RFID applications market started to take off, and we put in place the technology, capacity, team, and key customer design-ins to lead in the market. We've clearly established leadership as we start the pivotal year of 2022. This is the year that launches the next stage of IoT devices as RFID and NFC become embedded in almost everything we touch. Already this year, we've launched several initiatives for advanced RFID technologies. In January, we announced our partnership with Williott for Bluetooth low-energy-enabled RFID devices, launched our industrial-grade on-metal RFID devices, focused on high-value use cases in medical and industrial products, and announced our industrial-grade NFC programmers. In February, we announced our partnership with NXP for their 22X chips that enable batteryless condition sensing, making fill-level and wet-or-dry sensing easily embeddable into any product. Now, there are two themes here. First, we've become the partner that industry-leading companies in advanced RFID and NFC are turning to for advanced solutions. Second, all of these are focused on advanced applications that incorporate secure data, sensing, tamper, authenticity, and enable truly unique product experiences. We're in this position as we start 2022 because throughout 2021, we've built our leadership in the industry and put in place everything we need to support it. We finalized our major hiring and system capabilities, shipped record levels of RFID units, and completed our technology and project management platform. The fourth quarter also showed us two areas we needed to strengthen to really be ready for 2022. We've now done that, which I'll describe in a few minutes. But first, here's some metrics from 2021 and our fourth quarter reflecting the momentum that we built. For 2021 overall, our total revenues were up more than 19%, to a record 103.8 million. Our unit shipments in RFID were up 36 percent for the year at 185 million units, showing both growth and our ability to scale. We exited 2021 shipping over 65 million units in the fourth quarter, an annual rate of 260 million units. Now, this is a key metric, our ability to scale past the quarter billion annual unit level. The second half of 2020 already had major volume growth in RFID. To meet demand in 2022 and beyond, we had to prove that we can scale to the next level. We went from shipping 136 million units in 2020 to a run rate almost double that going out of 2021. Now, while driving this unit volume step up, we also kept leverage in our business, with operating expenses up 3% while we grew revenues 19%. The RFID unit growth and overall operating expense leverage are our key metrics, which drove 23% year-over-year revenue growth in our identity business. Our premises business also delivered strong results. It grew 14% in 2021, more than double the industry rate. Our key premises growth metrics are even stronger. Our core federal government security revenues grew 21% year-over-year, and overall our growth in premises accelerated from about 13% in the first half to more than 15% in the second half of 2021. As we add commercial strength through new products and channel expansion, plus pent-up demand from lockdowns and increased government spending, we're confident that 2021 has positioned us very well for 20 to 25% growth in-premises in 2022. On the RFID side, in late 2021, we more than doubled our sales force and project management team to support design wins. The key metric indicating how we're positioned going into 2022 is backlog. Our total backlog at the end of 2021 was up 45% over our total backlog at the end of 2020 at over $30 million. Now, this is a strong indicator that our expected 25% to 30% growth for 2022 for the company overall is on track. Now looking at Q4, I mentioned that RFID units were up 36% for the full year. And in Q4, RFID unit shipments grew even more, up 49% over Q4 2020. Now remember, the Q4 2020 was the second quarter of a step-up in unit shipped, particularly to a major mobile device manufacturer. So the comparable is a pretty high bar that that 49% grew off of. Growing in 2020 to the production levels needed then was a challenge. and it was critical that we demonstrated our ability to scale up another step function in Q4 2021. We made the shipment step up, but I also mentioned there are two things we learned in Q4 that we needed to get ahead of, and this showed us one of them. RFID is a project-based industry. Each use case has its own unit prices and margins, and they even can vary over the lifecycle of a project. The result is margins and unit prices can fluctuate with project growth cycles. At our scale, this can change our overall margins in a specific quarter, even as the long-term trend of expanding margins continues. In the fourth quarter, this brought our margins down, even as our units grew very fast. We managed the production and shipping, met all the demand, and took market share. We scaled fast, but we didn't balance this with enough offsetting higher margin ASP devices in our sales in the quarter. As a result, our overall gross margins declined by about three margin points. At the same time, we were determined to keep our track record of fulfilling every major customer shipment request to our premises customers. In the last couple of weeks of the quarter, a vendor tried to decommit supply. We successfully worked with them to deliver, but then had one-time extra inbound freight costs, and this cost us almost three more percentage points on gross margin. Now, this premises event in particular, we're confident, is a one-time event that we will not let happen again. So we've applied these tough lessons from Q4. In RFID, we've taken actions to keep a more balanced progression on margins. We've put in place real-time systems and people with focused ownership, so even when we have an RFID volume step-up of almost 50% in a single quarter, we can manage the blended margin impact from a financial and production perspective. With these controls in place, we expect to make progress towards our gross margin goals regardless of unit prices of individual devices. As unit prices increase over the long term, that'll drive sustained gross margin expansion. To be clear, in a fast-growth, project-based business like ours, quarter-to-quarter margins can fluctuate, but with an upwards long-term trend. Going forward, we have to be able to manage volume step-ups like this, because we're building a pipeline of business that we expect to drive step-ups in future. Now, one of the main drivers of step-up growth applications and of margin expansion is our expanding pipeline of customers that have contracted with us for paid non-recurring engineering development. Non-recurring engineering, or NRE, is contracted when a customer has specific technical and functional needs. Engaging in an NRE contract has lots of benefits. It validates their commitments to the project, builds a contractual relationship, builds project success between our technical teams, and usually results in a custom solution that we're in a unique position to fulfill. It also builds trust doing joint development, so customers are ready to do design refinements and feature expansion. This supports expanded margins and reduces competitive risk. So we don't do NRE for the money. We do it for all of these business benefits. Now, new NRE-paying contracts include Ricca for smart packaging for castor oil, Fanatics for collectibles, Promate for a range of medical devices, Cellar for wine authenticity, a surgical devices company, and a dozen others. These and the other design wins from 2021 are the broad base of design win growth drivers that are at the core of our expected 40 to 50% RFID growth. In addition to this broad base of growth drivers, our major transformational opportunities made progress in Q4 and early this year. Our auto injector project has progressed on several fronts. We're entering into an NRE development agreement with them, and we're meeting almost weekly on both the product and the production process. so the core auto-injector project continues to be on track. Now, a completely new project with the same company on a different medical device has come together fast and has already started a 20,000-unit pilot run and could result in an initial million-unit order as early as this quarter. These units are in the $0.20 range rather than the much higher ASPs for the auto-injector, but they have healthy margins. Most importantly, they got us shipping volumes for the customer, integrating us into their supply chain. And it's a category that by itself could move to tens of millions of units and potentially over 100 million units annually. Continuing with the NRE theme, in the cannabis market, we've signed an NRE development agreement with the leading company for the Canadian cannabis market. We designed a customized combination UHF and NFC device. As a result, we got an initial 1.4 million unit order. We're now building the first 50,000 units to run a pilot and systems test. I'll go into more details in our 2022 outlook. But so far, this is a faster start than we expected. This lays the groundwork for the multi-million unit orders we expect later in 2022. Also in the 2022 discussion, we'll update our relationship with TruGreen in the U.S., where we already have a 20 million unit frame order for an even more ambitious device that combines digital signatures, UHF tracking, content authentication, tamper production, and enables personalized customer engagement. Now we'll go into more details in the 2022 discussion, but the net is that for cannabis applications, both the Canadian and US market leaders are moving forward and we're working closely with them both. So with these specific customers and projects making progress, we expect RFID to continue to be our core growth driver. The base customers were established by the end of 2021 and our transformational projects are on track. We also kept our track record of 100% customer retention in RFID So as our customers' use cases grow, we believe we'll grow with them. Now RFID is our main growth driver, but in Q4 we also had strong growth metrics in premises and our overall business. First, premises usually is down sequentially in Q4 following the government year end that drives growth in Q3. In Q4 and 21, our premises business was up 6% sequentially versus Q3 rather than being seasonally lower. Another important metric, software and services revenue, was up 20% in Q4 versus Q4 2020. Finally, our revenue per employee for all of 2021 was $315,000 per employee, up from about $267,000 per employee in 2020. Now, the final area we had to address in Q4 to put us in position for a strong 2022 focused entirely on driving growth and business model leverage were vestiges from the peak of COVID. In late 2020, the public transit industry was hit hard. A few long-term customers struggled to pay their bills. Consistent with our conservative accounting policies and to remove distractions from executing our growth plans, we've charged off all of these outstanding receivables. They're mostly from 2020 and mostly in public transportation. It's a one-time non-cash expense, but it skews our Q4 results. We believe we'll still collect some of these receivables and we'll fight for every penny because whatever we collect is cash, but we need to comply with our policies on overdue accounts receivables. Going forward, our transit customers are either on prepayment terms or are now part of much larger diversified public companies. The business message is that it happened in industries that had a clear one-time impact from COVID shutdowns. We're confident it won't recur, both because the industries have stabilized and we've taken a conservative payment policy to companies in these industries. Now, our new CFO, Justin Scarpola, who will be on the call in a minute, will go into more details. It's painful for our Q4 gap results, though. I mentioned our 2021 operating expenses were about 3% over our 2020 operating expenses. This includes the cost to expense these receivables. Without those charges, our leverage would have been even more, with expenses basically flat, while revenues grew 19%. GAP includes them, though, and we own our own decisions, so that's how we're reporting them. For our ongoing business model for 2022 and thereafter, though, we do not expect to see this again. So in summary, 2021 laid all the groundwork for a strong 2022 as we built our teams, retained and expanded our customers, grew design wins in NRE, and managed another volume step-up to meet customer demand. Our major transformational projects each made progress, with most now having designs done or well underway, and preliminary orders placed for some. Our RFID business is clearly positioned going into 2022 to lead in the huge NFC and advanced RFID market that's taking off now. Our premises business is also on a strong growth cycle to support our overall growth and business model leverage. Now, we faced some issues in Q4 and fixed them. We put in place systems to control financials when we have step-ups in RFID unit growth and eliminated the last carryover effects of shutdowns, especially in the transit industry. We think this puts us in position both operationally and from a balance sheet perspective for strong, consistent leverage growth in 2022. So with that, I'll turn the call over to Justin to go through our financial results in more detail. Then we'll look at 2022 and beyond.

Thanks, Steve. As Steve mentioned, our financial results reflect our continued strength exiting 2021 with the delivery of year-over-year growth in revenues and future backlog. We believe these results, paired with our continued investments in the RFID organization and its capabilities, position the company to achieve its growth and profitability potential in 2022 and beyond. We close the fourth quarter of 2021 with $28.5 million in revenue, up 15% compared to the fourth quarter of 2020 and in line with our normal seasonality exiting 2021. Our full year 2021 revenue was $103.8 million, up 19% compared to the full year of 2020 and near the midpoint of our guidance. For the fourth quarter of 2021, our GAAP and non-GAAP adjusted gross profit margins were 33% and 34%, respectively, compared to 35 and 36% in the fourth quarter of 2020. For the full year 2021, our GAAP and non-GAAP adjusted gross profit margins were 36 and 37% respectively, compared to 39 and 40% in 2020. Gross profit margin changes resulted primarily from our product mix, increased freight and logistics costs, and the continued investment in technology and manufacturing processes and systems to meet the near and long-term project profiles of our customers. Specifically, in the second half of 2021, we ramped up projects with RFID customers and made investments in technologies to drive new processes, increase automation, and boost manufacturing speeds to support an annual run rate of 260 million units. These investments have been fruitful and will continue to contribute to the company's growth in the current year and the years ahead due to the competitive advantages created as a result. We remain committed to a long-term gross margin target of 40 to 45%. GAAP operating expenses, including research and development, sales and marketing, and general and administrative costs were $11.3 million in the fourth quarter of 2021 compared to $8.9 million in the fourth quarter of 2020. As Steve mentioned, GAAP operating expenses in the fourth quarter of 2021 included a one-time expense totaling $2.3 million for the expensing of aged accounts receivable from our balance sheet. Without this one-time expense, our operating expenses were $9.0 million nearly flat compared to Q4 2020. We have tightened enforcement of our accounts receivable policies and procedures, including weekly reviews of outstanding balances, credit limits, prepayment arrangements, and moving to credit holds quickly and timely. In a high growth environment like ours, implementing and maintaining strict financial controls, systems, and policy discipline are my top priority as CFO. I am confident we have taken the necessary steps and we will continue ensuring rigorous controls as we scale. Our full year gap operating expenses increased 3% and demonstrate our continued efforts to drive business model leverage. Our Q4 gap net loss was $1.9 million or a loss of $0.10 per share. This compares with a loss of $0.7 million or a loss of $0.05 per share in Q4 2020. Excluding the $2.3 million expense of aged accounts receivable, net income would have been $0.4 million. Our full year gap net income was $1.6 million or $0.02 per share compared with a loss of $5.1 million or $0.34 per share in 2020. 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 $17.5 million or 61% of our total revenue in Q4 2021. our identity segment generated 62% of our full-year 2021 revenue, or $64.7 million, a 23% increase from 2020. The year-over-year increase in identity revenues was primarily driven by higher sales of RFID transponder products. These increases were driven by current customer expansion, new customer wins, and our ability to deliver versus competitors' constrained supply chains. The sequential change in revenue was due to normal seasonality. Our Q4 2021 identity segment gap margins were 20%, driven primarily by product mix and the rapid production step-up in transponders. Our full year 2021 identity segment gap margins were 24% compared to 28% in 2020. As previously mentioned, our decision to opportunistically grab market share resulted in very rapid growth from customers in the early stages of their RFID deployment strategies, consequently resulting in a higher proportion of lower ASP RFID units sold. Quarter-to-quarter margins can fluctuate, but we expect long-term margins to trend upwards from current levels as we expand and deepen our existing customer and technology partnerships. We believe our increasing NRE business as we move to more complex devices and relationships will only further strengthen our margin profile. We have implemented a vigorous review process for all new opportunities to ensure that our higher margin goals are being met. Any temporary exemption must be signed off by top management should we deem a relationship to be strategic to the future success of identity. We remain committed to a long-term gross margin target of 35 to 40% in our identity business. Now turning to the premises segment, This segment accounted for $11 million, or 39% of our total revenue in Q4, representing an increase of 22% from Q4 2020. For 2021, our premises segment generated 38% of our full-year revenue, or $39 million, an increase of 14% from 2020. The year-over-year increase in premises segment revenues reflected the continued strength of our federal business and select recovery in other verticals. Gap gross margins for premises in the fourth quarter were 53%, compared to 56% in Q4 2020, primarily due to the mix of products within the segment and short-term expedited freight fees. Within premises, we have taken steps to ensure that any increase in freight and logistics will be passed through to our customers. Going forward, we have systems in place to proactively adjust these costs and prices. We remain committed to a long-term gross margin target of 55% to 60% in our premises business. For the full year 2021, premises gap margins of 55% were comparable to 2020. Moving now to our operating expense management. Our gap operating expenses for the fourth quarter of 2021, which included the one-time write-off of age receivables, totaled $11.3 million compared with $8.9 million in Q4 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 $10.5 million in the fourth quarter of 2021 or 37% of revenue. This compares to $7.5 million or 30% of revenue in Q4 2020. For the full year 2021, Our total gap operating expenses were $38.4 million, an increase of $1.3 million from 2020. Our non-gap operating expenses for the full year were $34.2 million, or 33% of revenue, compared with $30.7 million, or 35% of total revenue in 2020. In summary, we continue to demonstrate operating leverage in our business model in 2021 by increasing our top-line revenues while successfully reinvesting for growth within our current cost envelope. Now turning to the balance sheet, we exited Q4 2021 with $28.6 million in cash, a $17.1 million increase from Q4 2020. We remained debt-free and we maintained our strong working capital position. In our 10-K filings, will be providing a full reconciliation of the year-to-date cash flows for completeness we have included the full balance sheet in the earnings release in the appendix momentum exiting the fourth quarter of 2021 combined with a strong backlog give management confidence in the company's growth expectations for 2022 and 2023 sharing some metrics as we move into the first quarter exiting q4 2021 Our total backlog for all future shipments was 30.2 million, up 45% versus Q4 2020. And total new orders booked through the first month of Q1 2022 was 12 million, up 43% over the same prior year period. These trends provide visibility into the current business momentum going into 2022. As a result, we are reaffirming our full year 2022 guidance today with expected revenues between $130 and $135 million, reflecting year-over-year growth of approximately 25 to 30%. Management also is reaffirming its guidance for 30 to 35% year-over-year revenue growth in fiscal 2023. Normal seasonality is expected to continue. With that, I will conclude the financial discussion and pass the call back to Steve.