Identiv, Inc.

Good afternoon. Welcome to Identiv's presentation of its second quarter 2022 earnings call. My name is Matthew, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steve Humphries, and CFO, Justin Scarpola. Following management's remarks, we will open the call for questions. Before we begin, please note that during this call, management will 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 statements that refer 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. 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 second quarter, Identiv continued to make progress, securing our leading position in the expanding RFID-enabled Internet of Things sector. We had two primary goals in Q2 – Growth in RFID of over 40%, validating our long-range plan, and gross margins holding at the 37% or above range we guided for the year. We beat both goals. RFID growth was 41%, and non-GAAP gross margins expanded to 38%, showing margin expansion even while driving RFID growth. Two other key goals in Q2 were growth in our premises business and expanding EBITDA. Our premises business grew 19%, another quarter of growth that's three times the industry's growth rate, and bringing our half-year growth rate to 21%. We think this level of growth is sustainable throughout this year and next. EBITDA of $1.4 million was above our projections. As we go into choppy economic times, growth has to happen with strong positive EBITDA so we can self-fund our growth regardless of the macroeconomic environment, and we demonstrated this in Q2. Now, we see a clear path to continue and to expand these growth and profitability ranges. Our core markets, medical devices in RFID and security in premises, are both reliably stable and grow even in recessions. And we've shown their strength in inflationary times with our ability to raise prices to hold and expand gross margins. As a debt-free company, we're also not exposed to interest rate rises. These all give us confidence that our long-term strategy is paying off in growth and EBITDA results. and that the nature of our business and balance sheet have us in a good position to execute our strategy regardless of macroeconomic issues. In Q2, we kept disciplined in our business execution to drive these strategic priorities. Now, that led us to decide not to pay premiums for components for our legacy business. As a result, we didn't ship almost $2 million in legacy smart card readers and access hardware, choosing not to pay expedite fees and inflated component prices. These would have compressed gross margins in non-strategic categories. Now, we overperformed in RFID to offset most of this and delivered above-plan gross margin dollars as a result, which drove our above-plan EBITDA results. Now, we'll continue this discipline, prioritizing strategic growth in RFID and premises and gross margin strength over shipments of legacy products if they create margin pressure. Another characteristic we're driving into our business model is recurring revenues. As a result of this effort, deferred revenues on our balance sheet are up 37% versus last quarter. Over a million dollars of bookings in Q2 were recurring, meaning they weren't recognized as revenues in Q2, even though they were booked orders. And they'll be recognized as recurring revenue over the next 12 months. So putting this together, this is the momentum we need to drive sustained 40% plus RFID growth with steady margins that's the core of our strategy. In fact, we expect RFID growth in the current quarter to be over 50%. Also, as we go into uncertain economic times, we're well-positioned to keep growing with our expanding EBITDA, strong balance sheet with no debt, and our focus on recession-resistant medical device solutions and RFID and federal government security solutions and premises. From a market perspective, we're enabling the IoT, where we continue to differentiate our business model and technology. Now, this goes beyond our foundational strength in identification and tracking. RFID-based IoT devices require complex, highly integrated designs, and we are the industry leaders in deep technology specialty RFID applications. We're powering use cases with multi-technologies and flexible designs for our IoT partners. Our new BLE RFID device with Williott is a prototypical example. We also have the IoT software stack in place with companies like BlueByte, TapWow, and CollectID. We're an enabler for all those platforms. Without our design and encoding capabilities, they wouldn't be able to deliver the product engagement and experience that their customers demand. So we're creating solutions that are driving the future of the IoT. So with that overall growth context, here's some details. Our high margin specialty applications continued to expand with 38 different NRE projects underway in Q2. Now we'll go into more details in our forward discussion later, but we really expanded our NRE activities and as a result, our reputation as the leader for advanced RFID applications. Now, a couple of NRE projects with major volume potential that we launched in Q2 were for a major athletic footwear company, another for a golf ball project, a third that uses accelerometers to track shock and vibration, and five different projects that are medical device related. So with this progress in Q2, RFID is positioned to grow even faster with upside volumes from specific projects that can transform our business and NRE initiatives that are creating even more transformational use cases. Now, as I mentioned, our premises business is growing at 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. Our drive to expand our commercial premises business has made progress, now representing over half our premises sales. Sales to federal government also continue to grow, as well as airports, schools, and other public sector markets that are security sensitive. With this broad market, product, and services strength established, we expect to continue to grow at a multiple of the industry's rate as the seasonally strong federal cycle in the third calendar quarter drives 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. And hitting well in this range in the first half clearly has us on track for the year. Overall, gross margins continue to strengthen as we focused on them. In Q1, you might remember our non-GAAP gross margins rebounded over 300 basis points. And in Q2, gross margins expanded another 97 basis points. Our systems implemented in Q1 are working. We're staying committed to our prioritization of gross margins, even over legacy growth, as long as we're supporting all the growth opportunities in RFID and premises. The continuing progress on gross margins is important, of course, for the strength of our business model, and also because it validates that because higher margin specialty RFID devices are the fastest growing segment, we can drive growth as well as margin expansion. So overall revenues grew to $27.9 million, up 16% versus Q2 of 21. This, of course, was without the almost $2 million of legacy products we didn't ship and excluding the deferred revenue component of another million dollars. Consistent with this, our forward indicators grew with total backlog of $34.2 million, up 23% year over year. In addition to these growth metrics, our business model progressed. While increasing gross margins, we tightly controlled operating expenses, resulting in EBITDA ahead of plan. Behind the financial and operational aspects of our second quarter results, we continued our track record of 100% customer retention in RFID. Our other growth drivers made strong progress across existing customer launches and expansion, new design wins, and technology launches. As expected in Q2, growth was driven by our wide base of existing customers. This shows the sustainable growth in our core RFID business, which is the basis for our projections. On top of this core predictable growth are transformational projects, which are of major scale, but whose full-scale production timing is less predictable, each made progress. Our auto-injector category built more momentum. We have two new designs in progress as separate NREs, one for a faster-track near-term product. Our chip allocation and commitment from the suppliers for this project has been confirmed for the ramp. To be clear, these are for a basic capability device with a price point in the 35 cent range. We're also expanding our activities in this category. We're now in discussions with the largest provider of auto injectors worldwide and a third smaller but very proactive auto injector company. Last but possibly most strategically important, we've now completed and signed the intellectual property and development agreement with our anchor customer for the technology we jointly develop for our high-end auto injector project. This agreement includes NRE in both 2022 and 2023. Both of our cannabis initiatives also made progress. The retail pilot we've been tracking is launching in August rather than July, but it's broader, covering almost 100 dispensaries, each deploying about 500 units. On the design side, we now have three designs in place, two for the U.S. market and one for Canada. As described last quarter, we still expect around 2.5 million units in the second half of 2022 across the U.S. and Canada. Progress in Q2 also included an LOI for 80 to 100 million units for 2023. Now, the market potential is much more, but getting tangible projections this early in the cycle is a key step. As described before, the dual frequency design and services, including conversion and encoding support, strong margins. Now, the cannabis program in Canada also is progressing, with about 2,000 of our test units delivered in-test. Production programmer tuning and converting, which includes a hologram and the finished product, is going well. We can go into more details in the Q&A, but this billion-plus unit program is moving as we expected. Turning to our RFID-enabled prescriptions, we continue to win awards and get industry recognition for our accessibility solution. Replenishment volumes at CVS are continuing, and four other pharmacy chains are in various stages of pilots and deployments. giving the solution more visibility and putting more pressure on other pharmacies to adopt our solution. Our largest mobile device customer ramped the new design we mentioned last quarter. We're now shipping this design in multi-million unit quarterly volumes and expect to continue into Q3 as they build for fall launches and the holiday season. Most of their prior designs are continuing, resulting in more total demand than we had projected. Our RFID business is on track with our transformational projects moving forward and volume outlooks getting clearer as the programs progress. Demand is growing fastest for our specialty RFID devices, strengthening margins and unit prices. Design wins are growing with our expanded technical sales and engineering team, and our marketing investments are driving more opportunities that our expanded sales team is converting. Our production capacity continues to expand to meet this 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. In premises, we continue to take market share aggressively, growing, as I mentioned, at a rapid 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 cycles ramp up. Our premises growth was also well balanced across software services, products, and recurring revenues. 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 second quarter. Justin, over to you.

Thanks, Steve. As Steve mentioned, our financial results reflect our continued strength exiting the second quarter of 2022. With the delivery of sequential and year-over-year growth in revenue, sequential increases in GAAP and non-GAAP gross margin, and a positive non-GAAP adjusted EBITDA. Both non-GAAP gross margin and adjusted EBITDA were above consensus estimates. In addition, total future backlog increased 23% year over year. We believe these results demonstrate our continued commitment to protecting our margin and maintaining tight control over our operating expenses, reflecting strong operating leverage. We closed the second quarter of 2022 at $27.9 million in revenue, up 16% compared to the second quarter of 2021, and up 11% compared to the first quarter of 2022. Our revenue in the second quarter of 2022 was slightly below consensus estimates, primarily due to supply chain issues in our legacy smart card reader business. The trailing 12-month revenue was $110.5 million, up 15% versus a comparable prior year period. The sequential and year-over-year change in revenue was across both our premises and identity segments. Second quarter 2022 GAAP gross profit margin was 37%. an increase compared to 36% in the first quarter of 2022, and comparable to 37% in the second quarter of 2021. For the second quarter of 2022, non-GAAP adjusted gross profit margin was 38%, which was above consensus estimates, and an increase compared to 37% in the first quarter of 2022, and comparable to 38% in the second quarter of 2021. Non-GAAP adjusted gross profit margin changes resulted primarily from our product mix as well as our continued margin products. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. In the second quarter of 2022, our GAAP and non-GAAP adjusted operating expenses, including research and development, sales and marketing, and general administrative costs, were $10.5 million and $9.2 million, respectively, compared to $10.0 million and $9.0 million in the first quarter of 2022 and $9.1 million and $8 million in the second quarter of 2021. Our non-GAAP adjusted EBITDA was $1.4 million or 5% of EBITDA margin in Q2 2022 as compared to $0.2 million in Q1 2022. This was above consensus estimates and we are continuing to deliver leverage in our operating model. we also remain committed to a long-term non-GAAP adjusted EBITDA margin of 15 to 20%. Our Q2 GAAP net loss was $0.3 million, or a loss of $0.02 per share, which was in line with consensus estimates. This compared to a loss of $1 million, or a loss of $0.06 per share in Q1 2022, and net income of $2.5 million, or income of $0.09 per share in Q2 2021, which did include a $2.9 million one-time gain on the extinguishment of our debt. 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 $16.9 million, or 61% of our total revenue in Q2 2022. This was a 16% increase from Q1 2022 and a 14% increase from Q2 2021. The sequential and year-over-year increase in identity revenue was primarily driven by higher sales of RFID transponder products, which were driven by current customer expansion, new customer wins, and our ability to deliver product versus competitors constrained supply chains. The increase in our RFID products was partially offset by a decrease in our legacy smart card reader revenues due to increasing component costs, which we elected not to purchase as we were unable to pass this increase on to select customers. Our Q2 2022 identity segment non-GAAP adjusted gross margin increased to 25% compared to 23% in Q1 2022 and was comparable to Q2 2021. The sequential increase in margins were due to a greater proportion of higher margin specialty RFID products sold in Q2 versus Q1. We continue to actively monitor our component cost increase to pass these through to our customers. 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 our focus on more complex devices and strategic NRE relationships with our customers will only further strengthen our margin profile. We remain commercial's margin target of 35 to 40% in our identity business. Now turning to the premises segment. This segment accounted for 10.9 million or 39% of our total revenue in Q2. representing an increase of 4% from $10.5 million in Q1 2022 and a 19% increase compared to Q2 2021. The sequential and year-over-year increases in premises segment revenue was primarily in our commercial business as well as our video product offerings, which have been a key focus area for us to expand on our market share and offer a total platform solution. Non-GAAP adjusted gross margin for premises in the second quarter of 2022 was 58% compared to 57% in Q1 2022 and 59% in Q2 2021. The sequential and year-over-year changes were primarily due to product mix. 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 second quarter of 2022 adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization was 33% of revenue compared to 36% in Q1 2022 and 33% in Q2 2021. This resulted in a return to positive non-gap adjusted EBITDA for two consecutive quarters in 2022. In summary, We continue to demonstrate a strong gross margin profile and operating leverage in our business while successfully reinvesting for growth within our current cost structure. Now turning to the balance sheet, we exited Q2 2022 with $25.9 million in cash and cash equivalents and restricted cash. We spent $1.8 million in strategic inventory purchases and $1.1 million in capital expenditures. We remain debt-free. and we have maintained our strong working capital position. In our 10Q filings, we will be providing a full reconciliation of the year-to-date cash flows. For completeness, we have included... As we move to the third quarter, our total backlog for all future shipments was $34.2 million exiting Q2 2022, up 23% versus Q2 2021. This provides visibility into the current business momentum we anticipate continuing through 2022. Momentum exiting the second quarter of 2022, combined with this strong backlog, gives management confidence that the business is on the right track to meet the company's growth expectations in our key strategic RFID and premises businesses for 2022 and 2023. With our continued focus on gross margin, In the event that current supply chain and macroeconomic issues would result in margin compression, we may elect to forego revenues in our legacy businesses as long as our strategic growth targets are maintained. As a result, we are expanding our full-year 2022 guidance range today with expected revenue between $125 and $135 million. We are also reaffirming our guidance for 30% to 35% year-over-year revenue growth in fiscal 2023. Normal seasonality is expected to continue. And with that, I will conclude the financial discussion and pass the call back to Steve.