Identiv, Inc.

Good afternoon. Welcome to Addentive's presentation of its first quarter 2022 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 Humphreys for his comments. Sir, please proceed.

Thanks, Operator, and thank you all for joining us. Our first quarter was a strong start to a pivotal year for our business. We're on track on all of our key metrics, and business activities behind the numbers continue to be ahead of our plans. Our gross margins, in particular, strengthened faster than we projected, up almost 300 basis points over last quarter, with non-GAAP gross margins of 37.1%. This was a key goal that we expected to reach mid-year, and we got there in Q1. The progress on gross margins is important for three reasons. First, it reflects broad customer demand, so we can balance our mix. Second, it reflects the strength of the market itself because higher margin specialty RFID devices are the fastest growing segment, driving growth as well as margin expansion. Third, it reflects the strength of our financial systems. We track gross margins on each customer order. This lets us optimize our business model while also supporting customer account development. We'll go into more details later, but I wanted to focus on gross margin because it reflects key factors, including demand strength, customer diversity, specialty RFID growth, and internal information visibility to manage our business model as we scale. Our other metrics for Q1 were also on or ahead of plan. Revenues in our premises business were up strongly, 23% year over year. We again fulfilled every key customer demand, despite the supply chain pressures we're all dealing with. Our identity segment grew 7%, led by 13% year-over-year growth in RFID, on track over a high growth comparable quarter in Q1 2021 that grew almost 60% year-over-year. Now, more importantly, our backlog at the end of Q1 for shipments in Q2 is up 32% versus the year prior, giving us confidence that we're on target for our 2022 plan. Our unit volumes were 48 million units, up 20% versus Q1 2021, And our average unit prices in RFID expanded up 16% sequentially. Overall revenues grew to $25.1 million, a record for our first quarter and up 13% versus Q1 of 2021. Our forward indicators grew strongly, with total backlog up 24% year-over-year. Now, in addition to these growth metrics, our business model progressed. While increasing gross margins, we held operating expenses tight, resulting in EBITDA and net income ahead of plan and solidly on track for the year. Behind the financial and operational aspects of our first quarter results, we continued our track record of 100% customer retention in RFID, and our other growth drivers made strong progress. These include existing customer launches and expansion, new design wins, often with non-recurring engineering or NRE, and technology launches. Among existing customers, our wide range of customer use cases are growing strongly. These encompass several dozen customers in the $100,000 to $1 million annual revenue range. So I'd like to highlight some of these with an additional perspective of gross margin on these products. In the healthcare and medical device category, Projects for test kits and surgical accessories shipped to six different customers, all with margins of over 55%, and a couple with margins over 70%. Wine bottle, gas bottle, and other intelligent tamper-proof devices sold to five more customers, all with margins ranging from 40% to 60%. High-end authenticated consumables for robotic cleaners, printers, and a couple others with margins in the 40% to 55% range. So our wide base of smaller growing customers continued to expand with margin profiles that support our expanded margin expectations. Turning to our transformational RFID initiatives, each made progress. Both of our cannabis initiatives progressed. As expected, the U.S. is moving faster, and we're now getting a very clear view of volume potential. We're delivering 50,000 units to TruGreen for their retail pilot. The pilot is now formally set for July with all the systems at the MSOs, data flows, infrastructure deployment, and training going on over the next six to eight weeks. Our solutions expanded to include our specialized dual frequency RFID device, and we're also doing all the converting and data encoding. This expands our margin by increasing our value add and obviously expands our moat. Despite the scope expansion, we're on track for a four-week delivery cycle to support the retail pilot schedule. They've also begun rollout projections that give us more specific volume visibility. Now, you might recall that Cresco Labs bought ColumbiaCare, expanding our customers' reach in the cannabis MSO market to 17 states. Discussions for pricing and allocations are in various stages across all 17 states. And specific projected volumes in just the four states of Maryland, Virginia, Delaware, and Pennsylvania are about 150 million units annually. This gives us our first bottoms-up look at potential volumes overall in state-by-state detail. And these states represent about 11% of the populations of the states where marijuana is legal for medicinal or recreational use. So that translates to a total U.S. cannabis market of about 1 to 1.5 billion units for our devices. Our customers cover 17 of the 33 states where cannabis is legal, so our specific opportunity with this customer is around 500 to 750 million units. Now, I know that's a lot of data, but it's the first U.S. volume data we've gotten directly from the companies in the market talking directly to their customers, so we wanted to share it. Now, the cannabis program in Canada also is progressing, with about 2,000 of our test units delivered and in test. Production programmer tuning and converting is going well, including hologram inclusion in the finished product, which is a new Canada-specific requirement we've incorporated. Now, we can go into more details in Q&A, but this billion-plus unit program is moving as we expected. Our auto-injector project is still on track for 2022 ramp-up, with at-scale volume still projected ultimately to be in the 100 million unit range. We're continuing to work intellectual property agreements, which is fundamental for medical device companies. Also, the critical first 25% of the 20,000-unit pilot run have been delivered and signed off, putting us on track for a 100,000 unit production pilot mid-summer. With this deeply engaged process underway, as you can probably tell, our relationship is very strong, creating a solid margin, price, and volume opportunity that's also on track. Turning to our devices for prescriptions for the visually impaired, through our direct sales and partners, we've now got four pharmacy chains in various stages of pilots and deployments. Now, nobody's as far along as CVS, but the broad adoption is underway. As for CVS specifically, they're increasing their marketing push. I mentioned the joint award we've received, and we expect another at RFID Journal Live in a few weeks. This gives the solution more visibility and puts more pressure on more pharmacies to adopt our solution. Lastly, our largest mobile device customer has a new design ramping right now with higher volumes than we originally expected, over 10 million units of that design over the next six months. Most of their prior designs are continuing, resulting in more total demand than we had projected. So in addition to these transformational opportunities, we've got over two dozen non-recurring engineering projects underway and finished about a half dozen in Q1. I won't go into all of them, but one with major volume potential that we completed in Q1 was for the world's largest multinational clothing producer and retailer. We've designed a specialty tag for asset tracking in their stores using our best-in-industry RFID on-metal technology. This is now going into pilot in Austria and Germany. This also got a lot of help from our partnership with NXP. They routed a special wafer to us for development and the pilots, really giving us a boost to hit the customer's goals. With this progress in Q1, RFID is positioned as our main growth driver in 2022 with upside volumes in just a few accounts that can transform our business. Our premises business also had very strong results, growing more than three times the industry's growth rate. So what drove it, and is it sustainable? In physical and converged security, we've always been strong in the federal market. Last year, we launched actions to strengthen our commercial presence, and this really paid off, with Q1 premises growth almost entirely driven by commercial markets. Security has become a priority for every business and institution, and our combination of high security and cost effectiveness and complete solutions from a single vendor delivered growth and market share gains. With this strength in commercial markets established, we're in a solid position to continue to grow at a multiple of the industry's rate as the seasonally strong federal cycle in the second and third calendar quarters drive growth in our federal, state, local, and education markets. This gives us high confidence in our 20 to 25% growth expectations for premises in 2022. Hitting well in this range in the first quarter, which is always the seasonally toughest quarter, clearly has us on track for 2022. If our commercial market strength continues on top of increasing federal budgets for security, we could see premises growth even above our initial expectations for 2022. In addition to technology leadership, our supply chain management became a real competitive advantage in Q1 across both RFID and premises. In premises, we're taking advantage of competitor shortages, especially HID and companies that use mercury hardware. In RFID, our strong supply relationships give us an advantage, like the leading clothing producer that we're in pilot with helped a lot by NXP's supply support. Our engineering expertise also lets us offer alternate solutions to customers, get them accepted, and bring them to market far faster than our competitors. The combination of these supply chain strategies lets us take share in both our segments. Now, one last area we hit hard in Q1 is our technical and thought leadership in our industry. We've kept a fast pace of industry awards, recognition, announcements, and engaging in the main discussion forums in the industry. In Q1, we got awards for our eco tags, our tag on metal devices, and I mentioned the AIM joint award with CBS. We also launched a podcast series called Humans in Tech. We've already got 15 episodes up with titles like Cannabis Quality Control from Farm to Fingertip, IoT Connected Collectibles and Consumables, and Securing Area 51. So you get the idea. They give us a unique social media voice in our pretty technology-centric markets, and this really builds our reputation as the industry thought leader for mass adoption of RFID-based IoT. So our RFID business is on track with our transformational projects moving along, ahead of plan in some cases, and volume outlooks getting clearer as the programs progress. Demand is growing fastest for our specialty RFID devices, driving up margins and unit prices also faster than we expected. Design wins are growing with our increased technical sales and engineering teams, and our marketing investments are driving even more opportunities that our expanded sales team is converting. Our production capacity continues to expand to meet the higher demand, and our systems are in place to manage customer life cycles as more and more customers and projects come into our revenue streams every month. In premises, we proved our ability to take market share aggressively, growing at three times the market rate and winning in the commercial market, just as security is getting more focus and budget allocation than ever, and just as the seasonally strong federal, state, and local government buying cycle ramps up. So before getting into the next quarter and our outlook for 2022 and beyond, I'll turn the call over to Justin to review the financial highlights for the first quarter. Justin?

Thanks, Steve. As Steve mentioned, our financial results reflect our continued strength exiting the first quarter of 2022 with the delivery of year-over-year growth in revenues, sequential and year-over-year increases in gross margins and future backlog, and a sequential return to positive non-GAAP-adjusted EBITDA. 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 the remainder of 2022 and beyond. We closed the first quarter of 2022 with $25.1 million in revenue, which was above consensus estimates and up 13% compared to the first quarter of 2021. The trailing 12 months revenue was $106.7 million, up 17% versus a comparable prior year period. The sequential change in revenue was due to normal seasonality. Recurring revenues came in at 6% of total revenue and an increase of 1% sequentially. First quarter 2022 gap gross profit margin was 36%, an increase compared to 33% in the fourth quarter of 2021 and 35% in the first quarter of 2021. For the first quarter of 2022, non-gap adjusted gross profit was 37%, which was above consensus estimates, and an increase compared to the 34% in the fourth quarter of 2021 and 36% in the first quarter of 2021. Non-GAAP adjusted gross profit margin changes resulted primarily from our product mix, as well as a focus on tracking and prioritization of higher margin products. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. In the first quarter of 2022, our GAAP and non-GAAP adjusted operating expenses, including research and development, sales and marketing, and general and administrative costs, were 10 and 9 million, respectively, compared to 11.3 and 10.5 million in the fourth quarter of 2021, and 8.9 and 7.6 million in the first quarter of 2021. Our non-GAAP-adjusted EBITDA margin increased 4% from Q4 2021 to a positive 1% in the first quarter, which was above consensus estimates, and we are continuing to deliver leverage in our operating model. We remain committed to a long-term non-GAAP-adjusted EBITDA margin of 15 to 20%. Our Q1 GAAP net loss was $1 million, or a loss of $0.06 per share, above consensus estimates of $0.08 per share. This compared to a loss of $1.9 million or a loss of $0.10 per share in Q4 2021 and a loss of $1.5 million or a loss of $0.09 per share in Q1 2021. 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 $14.6 million, or 58%, of our total revenue in Q1 2022, which is a 7% increase from Q1 2021. 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 product versus competitors' constrained supply chains. The sequential decrease in identity revenue was due to normal seasonality. Our Q1 2022 identity segment non-GAAP adjusted gross margin increased to 23% compared to 21% in Q4 2021. The sequential increase in margins were due to a greater proportion of higher margin specialty RFID products sold in Q1 versus Q4. We do believe we have the systems in place to pass through our component costs increases timely, and this combined with our ability to track and focus on higher margin customers should allow us to sustain and expand this margin going forward. 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 the move to more complex devices and relationships with our customers will further strengthen our margin profile for new opportunities. Any temporary exemptions 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 10.5 million or 42% of our total revenue in Q1. representing an increase of 23% from 8.5 in Q1 2021 and a 5% decrease compared to Q4 2021. The year-over-year increase in premises segment revenue was in our commercial business, which has been a key focus area for us to expand our market share. And we did it. The sequential decrease in segment revenue was due to our normal seasonality. Non-GAAP adjusted gross margins for premises in the first quarter of 2022 were 57% compared to 52% in Q1 2021 and 54% in Q4 2021. The sequential and year-over-year increases were primarily due to product mix, price increases, as well as operational efficiencies, which was a key area of focus for us in Q1 and going forward. We remain committed to a long-term gross margin target of 55% to 60% in our premises business. Moving now to our operating expense management, our non-GAAP operating expenses in the first quarter of 2022 adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation amortization was 36% of revenue compared to 37% in Q4 2021. This resulted in a return to positive non-GAAP adjusted EBITDA in the first quarter of 2022. In summary, we continue to demonstrate operating leverage in our business while successfully reinvesting for growth within our current cost envelope. Now turning to the balance sheet, we exited Q1 2022 with $28.7 million in cash and cash equivalents and restricted cash, a $1.1 million decrease from Q4 2021. We remained debt-free, and we maintained our strong working capital position. In our 10Q filings, we were providing a full reconciliation of the year-to-date cash flows. For completeness, we have included the full balance sheet in the appendix of this earnings release. As we move to the second quarter, our total backlog for all future shipments was 32.4 million exiting Q1 2022, up 24% versus Q1 2021. which provides visibility into the current business momentum we anticipate continuing through 2022. Momentum exiting the first quarter combined with this strong backlog give management confidence that the business is on the right track to meet the company's growth expectations for 2022 and 2023. 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%. We are also reaffirming our 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.