Identiv, Inc.

Good afternoon. Welcome to Identiv's presentation of its third 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 files 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. In the third quarter, we had record revenues and took strategic steps forward, but also ran into some serious challenges. We have a scale-up order for delivery in Q4 of up to 25 million units in Bluetooth-enabled IoT for Williott, a transformational category that we believe is now happening, going from just sample units to millions of units. Our premises segment showed increasing strength, delivering another quarter of growth and nearly three times the market rate, and record premises backlog going into Q4. Now, this is especially important because premises generates a great majority of the gross margin dollars that are key to our business's strength. We delivered record quarterly top-line revenue at $31 million, the first time we've been over $30 million and a quarter. Revenue identity was $19.2 million, and premises was $11.8 million. Both new records and revenue for the trailing 12 months was $112.4 million. Non-GAAP gross margin was 37% on our target level, and adjusted EBITDA for Q3 was $2 million. We grew RFID unit shipment 17% year-over-year to 45.4 million units. Now, this would have been higher, but we were limited by component supplies, which I'll talk about later. We also set new records for order backlog. Our total backlog at the end of Q3 was 36.9 million, up 31% year-over-year, and backlog for delivery in Q4 is 16.6 million, up 42% year-over-year and 19% sequentially. So our growth drivers are in place, but I need to start by thoroughly addressing the shortfall in our Q3 top-line revenue relative to our internal expectations and the actions we're taking. Despite the strong business results in absolute levels, they're below where we planned to be. Now, the shortfall was all in our identity segment. Our contingency planning wasn't solid enough to offset what happened, and we totally own that. I'll go into the details, but I'll say right now, our contingency planning failures can never be allowed to happen. It happened, it's unacceptable, and we've taken steps to make sure it never does again. Our identity revenues fell short for three reasons. First, a major customer decommitted almost $1.5 million of orders as they realigned their supply chain from China to India and ran into soft demand for their products. Second, we had component shortages that would have impacted over $4.5 million of revenues across identity and premises. We offset about $1 million of it in premises but couldn't produce in identity about $3.5 million in the quarter as a result. Third, we decided not to fill in the identity revenue gap with lower margin product. We did that in Q4 of 2021, and it hit our gross margins by more than 400 basis points. We committed that we'd never do that again, so we didn't. The result was a revenue shortfall in Q3 of almost $5 million. Now, our contingency planning clearly was poor. We missed by far more than we ever should. Customer demand shift and supply chain were the immediate cause, but we should have had the extra flexibility in demand, supply, and production built in to absorb it. It doesn't matter that we managed the supply chain mess the past two years. That's all undone with a miss like this. We own that, we've made changes, and are taking actions to fix it. It doesn't change the disappointment I personally feel for this impact. So here are the actions we're taking. First, we have new operations and supply chain leadership. Our new global VP of supply chain in our Santa Ana headquarters started last month with experience at Flextronics and other world-class operations. In parallel, our COO, Manfred Mueller, is focused almost exclusively on RFID supply chain and operations. Second, we've sharpened our focus on supply availability and are only planning and forecasting based on reconfirmed chip supply in-house or known to be on the way. For the big program in BLE IoT, we have the chip supply already in-house or committed deliveries for the volumes that we're counting on in Q4, and we've aligned with them on an allocation schedule through 2023. In terms of customer forecasts, we built on the book's orders to offset variations in previously committed customer orders, and we're managing it weekly. Third, we finished redesigns for two of our main products, giving us component interoperability, so the highest volume product in premises and identity readers each have chip alternatives, either in place already or fully online by Q1. Now, there are other actions we've taken to make sure this never happens again. We can go into more details in Q&A, and as we hear later, we're also taking a hard line on base expectation settings. I wanted to take this revenue shortfall head on so it doesn't overshadow our progress right when transformational projects are driving volumes in Q4, our IoT industry leadership is growing, and our premises business is in the best position ever and showing it in its results. Now, both BLE-enabled IoT and cannabis are transformational categories for our business. In the case of Williott, we're going from sample amounts to over 10 million units in a single quarter. With multi-frequency data devices for cannabis MSOs, we're going from a few tens of thousands of units to over a million in the quarters ahead. Similarly, our premises growth and market share gains continued. In a market growing 5% to 6%, we grew 14%. Even with this growth, we went into Q4 with a record premises backlog of over $3 million. That plus our pipeline indicate continued above-market growth in Q4 and 2023. This is key for three reasons. Our premises business contributes disproportionately to our gross margins. Second, our strategy always has incorporated both segments as they connect in the IoT category, so growth in each business reflects health in our strategy. And third, recent valuation proof points, like Verkada's $3 billion valuation in its recent financing, shows the asset value of premises security businesses, contributing meaningful value to our overall company. So in that context, I'll go into other trends and events in Q3 that underlie our results and that are the foundation for our projections. Now, despite the problems I went through earlier, our engineering-driven RFID activities were strong. Our NRE projects grew from 38 projects in Q2 to 56 in Q3. We're continuing to build more tangible opportunities through our engineering excellence. We also continued our track record of 100% customer retention in RFID. In healthcare, we made particular progress. We've added another global injector vendor. So we now have active projects with four of the top five global auto injector companies. The one that's furthest along is placed in order for 500,000 units. And in Q3, we delivered our second and third auto injector NRE projects. This category is part of the medical industry trend towards in-home self-administered care because of the very high ROI versus in-clinic care. In premises, momentum was strong across the board, continuing our growth and market share gains. We grew nearly three times the industry's rate in our premises segment. Now, we manage premises combined with our access card products since it's the same end customers that buy access cards. For our premises and access card revenues combined, which together are managed by our premises business unit team, growth year over year was 22%. Now, the health of this business also shows in the premises segment gross margins which have held solidly despite supply chain challenges. Here's some other premises metrics for Q3. Our commercial business is continuing to strengthen in addition to our federal government business, where we've always been strong. We've completed OEM and reselling agreements for our access card readers with two of the top five access control vendors, building on the market share we're winning from HID. We had supply chain challenges in premises and were able to overcome nearly all of them. Having in-house U.S.-based final production let us adjust right up through the final days of the quarter. Even with shortages of some of our most critical components, we were able to build substitute configurations and work with the supplies we had to fulfill nearly all our demand. Having strong demand and total production flexibility let us meet our goals and puts us in a strong backlog position, with a record premises backlog of $3 million coming into Q4. Now, I don't want to over-focus on our premises business, since the challenges we've got to work on are in identity. But our strategy has always been to have two strong businesses that cross-leverage technology and converge strategically over time. Now, the recent pressures in small-cap growth equities have reached a point that any reasonable value placed on the premises business alone, a business that's growing sustainably at 15% to 20%, with strong gross margins and over 15% recurring revenues, a strong balance sheet and no debt, should support our company's entire current value. Continued growth and profitability in our premises business, plus our RFID-based IoT business, which has shown strong market demand, we believe will drive value creation. Now we need to execute, deliver predictable core results, and build on the progress in our transformational opportunities. Now before Justin goes into the financials, let me give one more view on our overall business. In September alone, we delivered nearly $17 million in revenues in that month. This shows that our business base can generate revenues on an annualized basis of nearly $200 million with healthy margins. So to summarize, the underlying business demand is solid. Our business model is intact and our strategy is hitting milestones. Our focus is on execution and predictability by anticipating problems in our RFID supply chain, supporting the growth and margins in our premises business, keeping our discipline momentum in specialty RFID devices, and planning contingencies and projections so we never again have gaps between expectations and results. So with that, Justin, over to you for the financial updates.

Thanks, Steve. As Steve mentioned, despite significant supply chain issues and customer demand reductions, our financial results reflect our continued strength exiting the third quarter of 2022. With the delivery of sequential and year-over-year growth in revenue, with total future backlog increasing 31% year-over-year. We remain committed to protecting our margin and maintaining tight control over our operating expenses. The trailing 12 months revenue was $112 million, up 12% versus a comparable prior year period. The sequential and year-over-year change in revenue was across both our premises and identity segments. Third quarter 2022 GAAP gross profit margin was 36%. A decrease compared to 37% in the second quarter of 2022 and a decrease compared to 38% in the third quarter of 2021, primarily due to product mix. For the third quarter of 2022, non-GAAP adjusted gross profit margin was 37%, which was consistent and in line with our consensus estimates. A decrease compared to 38% in the second quarter of 2022 and a decrease compared to 39% in the third quarter of 2021. Non-GAAP adjusted gross profit margin changes resulted primarily from our product mix, as well as our continued investments in technology and manufacturing processes and equipment. We remain committed to a long-term non-GAAP adjusted gross profit margin target of 40 to 45%. In the third quarter of 2022, our GAAP and non-GAAP adjusted gross operating expenses, including research and development, sales and marketing, and general administrative costs were $10.6 and $9.5 million, respectively, compared to $10.5 and $9.2 million in the second quarter of 2022 and $9.1 and $8.2 million in the third quarter of 2021. Our non-GAAP adjusted EBITDA was $2 million, or 7% of EBITDA margin, in Q3 2022, as compared to $1.4 million in Q2 2022. Although this was below consensus estimates, We are continuing to maintain our expected margin and operating expense profiles. We remain committed to a long-term non-GAAP adjusted EBITDA margin of 15% to 20%. Our Q3 GAAP net income was $0.5 million, or income of $0.01 per share. 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 $19.2 million, or 62% of total revenue in Q3 2022, which is a 13% increase from Q2 2022 and a 2% increase from Q3 2021. The sequential and year-over-year increase in identity revenue was primarily driven by higher sales of RFID transponder and access card products. The year-over-year increase was partially offset by a continued decrease in our legacy smart card reader revenues. Our Q3 identity segment non-GAAP adjusted gross margin was 24% compared to 25% in Q2 2022 and 29% in Q3 2021. The year-over-year decrease is due to product mix with lower sales of our legacy smart card readers. 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 further strengthen our margin profile. 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 11.8 million or 38% of our total revenue in Q3. representing an increase of 8% from $10.9 million in Q2 2022 and a 14% increase compared to Q3 2021. The sequential and year-over-year increase in premises segment revenue was across both federal and commercial businesses, as well as continued focus on expanding our market share and offering a total platform solution. Non-GAAP adjusted gross margins for premises in the third quarter of 2022 were 59% compared to 58% in Q2 2022 and 58% in Q3 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 third quarter of 2022 adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization with 31% of revenue compared to 33% in Q2 2022 and 28% in Q3 2021. This resulted in our third consecutive quarter of positive non-GAAP adjusted EBITDA. In summary, we continue to deliver a consistent gross margin profile and tight controls over operating expenses in our business while reinvesting for growth within our current cost structure. Now, turning to the balance sheet, we exited Q3 2022 with $21.9 million in cash and cash equivalents and restricted cash. We spent $2.9 million in strategic inventory purchases and $1.4 million in capital expenditures. We remain debt-free, and we have maintained 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 the full balance sheet in the appendix of this earnings release. As we move to the fourth quarter, our total backlog for all future shipments was 36.9 million exiting Q3 2022, up 31% versus Q3 2021, which provides visibility into the current business momentum we anticipate coming through 2022. Even though we delivered record quarterly revenues, built a strong backlog, and reported positive momentum in our transformational categories, the current environment we outlined Delayed customer orders, shifting supply chain availability, and production-related challenges, combined with today's difficult macroeconomic conditions, impacted our results. Therefore, we are updating our full-year 2022 guidance range today with expected revenue between $112 and $118 million. We are updating our 2023 guidance to 20% to 25% year-over-year revenue growth. Normal seasonality is expected to continue. With that, I will conclude the financial discussion and pass the call back to Steve.