Identiv, Inc.

Good afternoon. Welcome to Identiv's presentation of its fourth quarter and fiscal 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 Skripala. 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 financial measures or guidance, including adjusted EBITDA, non-GAAP gross margin and non-GAAP operating expenses. 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 and quarterly report on Form 10-Q. 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 today. In 2022, we built out our teams and technologies, executed our strategic plan, and made progress towards our target business model. This shows in our 2022 results. We delivered record revenue and adjusted EBITDA while expanding our gross margins. Revenue was $112.9 million, reflecting 9% year-over-year growth, while full-year adjusted EBITDA grew 33% year-over-year to $5.4 million. Gross margins were strong, up 72 basis points over fiscal 2021 to 37.6%. Our IoT security strategy is to focus on high value solutions in verticals that value the technical benefits we bring to their products. We have to be carefully balancing and limiting our participation in more commodity products, but we need some participation in the low end because it drives lower average costs because of volume and scale. But we have to be very selective so that it serves our scale needs but doesn't dilute our margins or our strategic focus. We struck this balance in 2022. It shows in our gross margins and in the nearly 20% revenue growth in our RFID-based IoT business. However, some of our transformational opportunities, the use cases with both strong margins and major growth and scale potential, didn't take off or grow as fast as we wanted. Now, each opportunity is still intact, and we expect them to reach scale. We've built the solutions, the relationships are in place, so we're confident that we'll grow as they deploy and ramp up. In our physical security business, our premises segment, margins are consistently strong without the volume versus margin tradeoff. In this business, we also built out our complete team in 2022. With a strong foundation and a focus on growth, we grew revenues 17% for the year in premises, more than double the industry's growth rate. As we managed these realities in 2022, we focused on growing revenues in higher margin categories, protecting our balance sheet and working capital, and winning strategic applications to drive our long-term business model. Focusing on high-value, higher-margin solutions that protect and expand our margin profile is the top priority in our IoT business. This was reflected in our Q4 results. While revenues came in a bit lighter than consensus, gross margins, EBITDA, and net income were all higher than consensus and higher year over year, establishing our business base for long-term growth and higher margins. So with that context, in Q4, total revenue was $29 million, up 2% over last year, and adjusted EBITDA was $1.7 million, an increase of $2.5 million over last year in EBITDA. Most importantly, adjusted gross margin dollars grew 11% year over year, and our margin percentage grew 370 basis points to 38% from 34% in Q4 2021. By segment, premises grew a solid 11% year over year, and RFID grew 5%, compared to the prior year period when RFID revenues included a greater mix of lower margin orders. Now, both of these growth trends were partly offset by a decline of almost 25% in our non-core smart card reader business. We don't expect further declines in this business, and going forward, we expect it to be essentially flat. As we exit at Q4 with this focused revenue and margin balance, demand is strong. Total company backlog at the end of Q4 was $35 million, up 16% over the same year-ago period, of which backlog for delivery in Q1 was 14.3 million, up 22% year-over-year. Now, beneath the numbers, the fourth quarter of 2022 was important for three reasons. First, it showed the demand strength in both our IoT and premises segments. In IoT, we grew while our largest competitor declined. One of our largest IoT customer categories had declining sales, and our largest chip supplier deprioritized deliveries to our IoT RFID segment. In premises, we again grew much faster than our industry and had major wins in our strategic video and hyper-converged product categories. The second reason Q4 was important is because we grew revenues and expanded gross margins despite the macro environment and tough industry trends in IoT. A year ago, we outperformed the IoT industry average, but at the cost of lower gross margins. A year later, we have the demand strength to outgrow the industry leader with expanding margins. Third, in Q4, we made progress in our strategic medical and healthcare segment and began initial shipments of Williott's combination Bluetooth and RFID device. Now, in absolute terms, growth in our IoT segment was modest, but we outperformed the market. Our closest competitor in IoT, Avery Dennison Solutions Group, declined 11%. And as I mentioned before, our key mobility customers saw its handset sales decline 5%, despite Q4 being their historically strongest season. Our sales pipeline strength supported us in Q4 with enough alternative demand to keep our growth trajectory and expand gross margins, even in the face of demand and supply pressure. In our strategic healthcare segment, we've built a wide pipeline of customers and projects. We now have over three dozen customers in this category in various stages of evaluation and production. Use cases, of course, include the five auto-injector projects, which we'll discuss in detail later on the call. Among the balance of the three dozen healthcare customers, we have eight companies doing various types of medical tests, five companies doing surgical and operating room devices, two companies developing cold chain monitoring applications for blood and other biological samples, two doing dental applications, four drug dispensing use cases, two smart bandage use cases, and a dozen other companies with various use cases. Now, for those of you on the webcast, these use cases are shown on the slide with the customer names kept confidential, of course. And this is the core value segment for our RFID-enabled IoT business, so we wanted to give more insights into the range of applications we have customer activities in. Now, medical products take time to launch, but our strength in the category is growing. We think we're positioned to lead as customers launch their products that incorporate our devices. Now, we're going to be cautious in our near-term outlook since the medical categories of auto-injectors and prescriptions are taking longer to get to market and scale than we expected. Our other key IoT program in Q4 was Williott. Williott's IoT Pixels are very complicated devices. From a standing start in October, without any prior NRE work, we developed the technology and volume production processes, scaled up and shipped our first million units in Q4. This really shows the technical excellence and dedication of our IoT team. Now that we have the processes running, we expect to deliver about 10 million units in Q1, and we're on pace to deliver 14 million units in Q2 with follow-on orders expected for 2023 delivery. Now, it is critical that we demonstrate our capability to deliver high-quality devices at volume. We did this and built an even stronger relationship with Williott in the process, even though we shipped fewer units than we originally planned for in Q4. Now, we also have the first really derived opportunities in the pipeline, and we'll share information as use cases and solution providers come to market. Now, one transformational IoT opportunity that's taken longer than we expected to get traction is cannabis, included in our smart packaging category. We developed great products, but industry deployment of RFID for authenticity and tracking have gone slowly as the cannabis industry has faced its own headwinds. In California, cannabis sales dropped more than 8% in 2022, Colorado similarly. With demand pressures, the industries slowed the deployment of new technology, and even government regulators seem to have deferred some mandates for better product tracking. We're staying engaged with MSOs, but being careful about costs in advance of a sustained market takeoff. Now, smart packaging overall is developing well, and I'll talk about that later. Now, supply chain challenges also continued in the fourth quarter, although we were able to offset most of the impact. NXP recently guided to a decline of 9% in their IoT-related chip sales, but they kept an 11% three-year IoT sales growth rate. Consistent with this expectation, we expect IoT chip supply issues to continue through the first half of fiscal year 2023 before normalizing in the second half. Now, in addition to that, to give our customers options, we recently announced new NFC and HF designs based on chips from STMicro. We also recently announced the strategic supply partnership with TraceID for UHF-based industrial IoT applications. Now, I want to be clear, we're not going after commoditized, high-volume UHF-based business. TraceID is a manufacturer of complex, ruggedized applications of UHF for industrial and specialty environments with products that are consistent with our higher margin profile. Unit price is higher than retail UHF also in the $0.15 range compared to commodity UHF tags that average $0.02. Serving this RFID category through a manufacturing partner rather than direct investment preserves our capital while leveraging our world-class sales and engineering teams to maximize the share of wallet from every account we're in. Lastly, an update on the two other metrics in IoT that we track, customer retention and NREs. We kept our 100% customer retention, although with some of the lower margin products we're exiting, this may change at some point by our own choice. NRE activity also continued to be strong. We have 54 NRE projects underway with four new NRE projects in healthcare. We also have multiple projects in the consumer device category and a fast track project using ST microchips that we expect to ship next quarter. Moving to physical security, our premises segment, the strength I mentioned is clear in both numbers and business progress. In addition to the strong full year in Q4 growth, we also had Q4 revenues comparable to Q3, which is normally our strongest quarter in premises. We've been able to strike this balance because of our drive to strengthen the commercial business alongside our federal business strength that's made great progress. Now, I'll highlight one premises example in Q4 because it shows most of our growth drivers. This is San Diego International Airport, a great example of our strategy to provide the industry's widest range of security products. At SDIA, we're deploying access control, video surveillance, access readers, secure credentials and storage, integrated into our hyper-converged platform, all managed through a single pane of glass. This product portfolio gives us more cross-selling opportunities than anyone in the industry and positions us as the most complete high-security solution right when CSOs and CIOs are consolidating vendors and don't want to take any security risks. Our OEM strategy and premises has also been gaining traction. Our TS readers are now being sold by our two largest access control competitors. By staying focused on our hardware as well as our software strategy, completing our product range to maximize our share of wallet, adding machine learning-based analytics, and driving SaaS as well as system solutions, we're positioned to keep expanding our share and growing above market rates in the physical security market. So in summary, we think the financial and operational milestones we hit in 2022 have solidified our foundation for revenue growth and margin expansion in 2023. Our focus is on disciplined growth with strong execution of our go-to-market strategy. As we drive toward our long-term model, we're positioning to support accelerating growth as our customers launch products in the transformational applications we've developed. So with that, I'll pass the call over to Justin to review our financial results in some more detail. Justin?

Thanks, Steve. As Steve mentioned, in 2022, we delivered record revenue along with expansion in gross margins and adjusted EBITDA. This is in addition to a total future backlog increase of 16% year over year. We protected our margin and maintained tight control over our operating expenses. We believe these results, paired with our continued investments in our IoT business, position the company to continue to grow in 2023. Full year 2022 revenue was $112.9 million, within our guidance range and slightly below consensus estimates. This was up 9% versus a comparable prior year period. Fourth quarter 2022 GAAP gross profit margin was 36.5%, a significant increase compared to 33% in the fourth quarter of 2021. For the full year 2022, our GAAP gross profit margins were 36.3% versus 35.7% in 2021. For the fourth quarter of 2022, non-GAAP adjusted gross profit margin was 37.9%. which was higher than consensus estimates of 37.2% and an increase compared to 34.2% in the fourth quarter of 2021. For the full year of 2022, non-GAAP adjusted gross profit margins were 37.6% versus 36.9% in 2021. GAAP and non-GAAP adjusted gross profit margin changes resulted primarily from our product mix, our continued focus on higher margin customers, and raw material cost reductions through strategic inventory purchases. We were able to increase margins year over year while continuing to increase our investments in technology and manufacturing processes and equipment. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. In the fourth quarter of 2022, our GAAP operating expenses, including research and development, sales and marketing, and general and administrative costs were $10.2 million compared to $11.3 million in the fourth quarter of 2021. For the full year 2022, GAAP operating expenses were $41.3 million as compared to $38.4 million. In the fourth quarter of 2022, non-GAAP adjusted operating expenses were $9.3 million compared to $10.5 million in the fourth quarter of 2021. For the full year 2022, non-GAAP adjusted operating expenses were $37.1 million as compared to $34.2 million, an increase of 8%. Our non-GAAP adjusted EBITDA was $1.7 million, or 6% of EBITDA margin in Q4 2022. Landed above consensus estimates of $1.5 million and was an increase of $2.5 million year over year. For the full year of 2022, our non-GAAP adjusted EBITDA was $5.4 million, an increase of $1.3 million from 2021. Both Q4 and full-year EBITDA numbers, year-over-year growth, reflected our commitment to maintaining our expected margin and operating expense profiles. We remain committed to a long-term non-GAAP adjusted EBITDA margin of 15% to 20%. Our Q4 GAAP net income was $0.3 million, or $0 per share, which was in line with consensus estimates. This compared to a net loss of $1.9 million or a loss of $0.10 per share in Q4 2021. For the full year, GAAP net loss was $0.4 million or a loss of $0.07 per share versus net income of $1.6 million in 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 16.8 million, or 58% of our total revenue in Q4 2022, as compared to 17.5 million in Q4 2021. For the full year 2022, our identity revenue was 67.4 million, or 60% of our total revenue, as compared to 64.7 million in 2021. The Q4 2022 decrease in identity revenue was primarily driven by lower sales of our legacy smart card readers. The full year increase was primarily driven by our RFID IoT products, which more than offset the decline in our legacy smart card readers. Our Q4 2022 identity segment non-GAAP adjusted gross margin was 24%, which compared to 21% in Q4 2021. The year-over-year increase reflects our continued focus on higher margin products. For the full year, the identity segment non-GAAP adjusted gross margin was 24% compared to 25% in 2021, primarily due to product mix. 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, including our planned expansion into Thailand with lower manufacturing costs. We believe our focus on more complex devices and strategic NRE relationships with our customers will only 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 12.2 million or 42% of our total revenue in Q4. representing an increase of 11% compared to Q4 2021. For the full year, revenue was $45.5 million, an increase of 17%. The year-over-year increase in premises segment revenue was across both federal and commercial businesses and reflects increased sales in our expanded product portfolio. We continue to expand our market share and offer a total platform solution. Non-GAAP adjusted gross margins for premises in the fourth quarter of 2022 were 57%, compared to 54% in Q4 2021. For the full year 2022, non-GAAP adjusted gross margins were 58%, compared to 56% in 2021. The year-over-year changes were primarily due to product mix and our continued focus on passing through price increases to our customers and reducing manufacturing and logistics costs. 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 fourth 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 32% of revenue compared to 37% in Q4 2021. For the full year 2022, our non-GAAP operating expenses were 33%, which was consistent with full year 2021. This resulted in our fourth 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 Q4 2022 with $17.1 million in cash, cash equivalents, and restricted cash. In 2022, we spent $9.3 million in strategic inventory purchases and $3.9 million in capital expenditures. This buildup of inventory was to reduce a portion of our supply chain shortages. The capital expenditures were required for upgrades of our existing production facility as well as our planned expansions. We remain debt-free, and we have maintained our strong working capital position. In our 10K 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 first quarter of 2023, our total backlog for all future shipments was 35 million exiting Q4 2022, up 16% versus Q4 2021. As Steve mentioned, some of our transformational opportunities are taking longer to materialize, handset sales at our key mobility customer which affect the entire accessory ecosystem have declined, and supply chain headwinds are expected to continue into at least the first half of 2023. These factors combined with the overall uncertain macroeconomic environment may lessen our growth rate in 2023. That said, We anticipate an increase in total revenue in 2023, and we currently expect revenues to be in the range of $125 to $130 million, while continuing to focus on gross margin and EBITDA expansion. Normal seasonality is expected to continue. With that, I will conclude the financial discussion and pass the call back to Steve.