This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: In Q1, we used $4.7 million in cash from operating activities, primarily from changes in working capital, and $1.2 million in capital expenditures. Our working capital exiting Q1 was $49.4 million. As Steve noted, our supply chain outlook is improving, and we expect to work through our inventory over the course of 2023. In addition, capital expenditures required for our Thailand expansion are expected to be largely complete exiting Q2. As a result, we expect to rebalance our working capital through the sale of our inventory and pay off our revolver in its entirety in the second half of 2023. In our 10Q filing, 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. In summary, with our Q1 net revenue in line with expectations, we are reconfirming our 2023 outlook with expected revenues in the range of $125 to $130 million. Normal seasonality is expected to continue. This concludes the financial discussion. I'll now pass the call back to Steve.
spk02: Thanks, Justin. In 2023, we're getting the benefits from the work we put in internally during 2022. Despite customer delays, supply shortages, tight capacity, and economic worries in 2022, we kept building the foundation of our businesses to win strategically. In IoT, we built out our technical sales, project engineering, and production infrastructure. In Q1, that groundwork continued to pay off. Our IoT business delivered on our operational plan so we could focus on building the pipeline for the next four quarters. We kept serving our core mobility, medical, and specialty retail customers and expanded our strategic relationship with Williott. We deployed our BitCIO SaaS platform and built out our full range of standardized NFC and ruggedized UHF products. We now have the foundation built, and we've established our reputation as the go-to company for specialty applications. In physical security, our complete platform is showing its competitive advantage. Through 2022, we kept building out product engineering, sales and sales engineering, tech support, training systems, and more. It's everything that we needed to be the best-in-class, enterprise-scale physical security company that we believe we are now. For 2023, our focus continues to be expanding our competitive advantage in our businesses. Both IoT and physical security are universal and widespread markets, critical solutions for our customers, and with the potential to grow substantially. We have to do this within our resources, protecting our balance sheet and working capital while driving growth to take advantage of our market opportunities. We're working down the strategic inventory position we built last year to manage supply shortages. We're streamlining product lines and tightening expenses, which will build our cash and working capital strength over the next few quarters. We're being careful to support every aspect of our competitive strength while managing our working capital health. For example, we've kept payables low to keep good vendor relationships and confidence in the industry. We're focusing on inventory turn improvements, collections, and other healthy approaches to protect working capital using revolver debt only as incrementally needed. We expect revolver debt to be completely unnecessary within the next three quarters, and we don't think we're overly constrained in our core strategic growth as we manage working capital. So across 2022, we built the capabilities we need in IoT and physical security. In Q1, we showed strength in our key growth drivers. Supply and production constraints are almost all behind us, and we have the capital we need to grow our business. For 2023, we continue to have four IoT growth drivers. The first is the medical and healthcare vertical. We already have several medical customers who each are forecasted to be over a million dollars in annual revenues this year, and a couple dozen NRE projects or customer samples and pilots in medical use cases with the potential of multimillion-dollar recurring revenue levels. We're clearly the go-to company for advanced medical applications. We think we'll expand this position, which is critical given that we've seen that medical applications take a long time to take off. One recent example is an auto-injector project that's gone to FDA approval for our solution. This means it's going to take at least six months longer to get to market. But the upside is that we'll be designed in, so switching costs will be very high. It's a great market with good margins and strong customer loyalty. And you can see the range of applications on the slide, reflecting how broadly we've developed the pipeline of healthcare use cases. The second IoT growth driver is Williott and related use cases. I described the volumes and growth rates earlier. Wiliot's IoT pixels open use cases across warehousing and logistics, supply chains, consumer experience, RTLS-enabled retail, product environment and handling, and an almost unlimited range of applications. In addition to Wiliot themselves, who are winning projects with some of the world's largest companies, we're engaging with Wiliot-based solution providers going into even more use cases. Williott's already driving growth and has placed its first follow-on order, and these third parties multiply the volume and margin opportunities. The third growth driver is our in-place customer base growing. Our mobility customers, specialty packaging customers, including cannabis, and others all drive our growth as they grow. Where adoption's been slow, we're still the leading provider. In cannabis, for example, we've got strong relations with the MSOs. In pharmacies, between direct sales and through Envision America and other partners, We're in most of the top 10 pharmacy chains. In smart packaging, we're working closely with CollectID and other leaders. We've kept our leadership and relationships, and we haven't lost a single customer or opportunity as far as we know. So as these markets grow, we have the same opportunity we've always had to grow with them. Our fourth growth driver is our SaaS platform, BitCIO. Now, it'll take years to grow to a material revenue source, but it's very strategic. It's core to our vision of billions of connected IoT devices and the opportunity to leverage their data. It's also the basis for higher margins, deep remotes, switching costs, and recurring revenues. I described earlier the event where we supported 88 vendors on a tight timeframe, and the Bitsy experience was a huge hit. We bring very easy tag commissioning, consumer experience, and data analytics to our customers this way. The platform's easy to manage and experiences are simple to set up, even on the spot at events with multiple vendors. It'll develop over time, but the platform's in place and now proven. With these IoT growth drivers in place, we think we're in a good position to deliver as planned in 2023, and we think it'll put us in a strong position for faster growth as the use cases and new technologies like Williott IoT Pixels expand. Turning to our physical security business, we spent 2022 building out our next generation product range and the best in industry teams I described earlier. Our Velocity ecosystem, which includes Velocity Access Control, Velocity Vision, Vision AI, Hyper Converge Velocity, and Velocity Cloud, combined with our touch secure readers and TS cards, we think is the most complete integrated security platform in the industry. Customers need integrated systems to get the most benefit from each security touchpoint and to make the system easy for systems managers and security teams to manage. Security systems are higher performance, lower cost, and more secure when they're integrated across hardware, firmware, software, and cloud, as well as across different security actions like access control, video, and credentials. As a result, we think our platform offers customers the most complete security system from a single vendor. With our integrated system, adoption already is strong in schools, state and local government, airports, and federal agencies. We're now seeing interest across large enterprises, small businesses, hospitals, banks, first responders, transit, and other verticals with security needs but always constrained budgets for security personnel and systems. Especially in a cost-conscious customer environment, our ability to deploy only the needed parts, use existing infrastructure to keep costs low, and then expand over time is winning share. There's also a technology refresh cycle that will drive growth over the next few years as server-based systems go cloud, separate access video and identity systems converge, and as in-place hardware running Windows 7 and other legacy systems need to be replaced. Our system can leverage in-place cameras and infrastructure while enabling the technology and cybersecurity upgrades they need and creating a single pane of glass security system. We think there's an opportunity for a new generation of market leaders to own enterprise-scale, highly secure systems. The leading enterprise security competitors are either up for sale, recently sold, or rumored to be for sale. Competitors trying to build high-security, enterprise-scale systems by coming up from consumer-scale systems, like Verkada or Ring, are challenged both technically and from a go-to-market perspective. We believe our faster-than-market growth in 2022 was partly due to this trend, and everything we see so far in 2023 shows the trends continuing in our favor. We're also planning several product launches, pushing the edge of multi-capability, very high-performance hardware, supporting cloud-enabled systems and features including biometrics, wireless infrastructures, and mobile apps. These include our EG2 Edge Gateway, our new Primus SMB access system, and our multi-factor authentication reader coming out the end of this year. With product and technology strength, we're also OEMing our technology to leverage our engineering investment and to expand the reach of our technology platform. With our OEM program, we're now selling our access readers through two of the top three physical security system ventures, creating an efficient channel to market. So with this tight focus on business model efficiency and the solid Q1 progress in both our IoT and physical security businesses, we have clear execution plans. We know our immediate growth drivers as well as the strategic advantages we're building. This focus gives us confidence in our ability to manage working capital reliably, to be efficient in expenses while building our long-term competitive moats. So we continue to lead as these markets take off. Now, Justin already confirmed our confidence in our 2023 revenue outlook. With the solid gross margins and cash flow from our physical security business and known uses for working capital and for our Thailand expansion, we have the resources to make it all happen. Now, we have two strong businesses with strategic positions for the next growth stage of two very large markets. And now, as you'd expect with two strong businesses like these within a small company, we are doing a strategic review to maximize the positions we've built and to realize the full business potential in these critical markets. With our progress in IoT across medical applications, Williott, and our long tail of specialty applications, and with progress in physical security expanding both key verticals and share of wallet with our complete platform, there's several opportunities for upside. For now, we're maintaining guidance. If these trends continue, we're positioned to accelerate growth and EBITDA margins. We'll certainly keep you all updated as business winds come in to drive upside. So with that, I'll now ask the operator to open the lines for questions. Operator?
spk00: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Your first question for today is coming from Craig Ellis at B Reilly Securities.
spk04: Hi, this is Ethan Wydell calling in for Craig Ellis. Thanks for taking my question and I only have one. Regarding your reiterated fiscal 23 guidance, I was wondering if there were any meaningful changes to the macro environment that you're seeing that add color to that picture, and specifically what you're seeing in supply conditions. Thanks.
spk02: Sure. I think we all know the ups and downs going on in the economy, but we actually are seeing – very solid demand, particularly in our physical security side, and because of the long lead times in RFID and the use cases that don't tend to be swung by economic trends, we're seeing stability on all sides. So some of our competitors are exposed to the retail market, for example, which has some headwinds going in. That's not a strong market segment for us on purpose strategically so we don't see exposure to that so we're feeling pretty comfortable about the macroeconomic environment and can you remind me of the second part of your question yeah second part was regarding supply conditions what yes which we tried to address on the call it's actually improved quite a bit and frankly faster than we expected Both in terms of supply, and as you often see in the semiconductor patch, it goes from from famine to feast. So, prices are dropping as well as supply being freed up. There's still a couple of sectors, a couple of categories of chips affecting, maybe ten percent of our revenues. that are still having some tightness to it. But even those we think over the course of this quarter should be fully cleared up and flipping already the other way to be advantageous in terms of price and availability.
spk03: Got it. Thank you. Thank you.
spk00: Once again, if there are any questions or comments, please press star one on your touchtone phone. Your next question for today is coming from Brian Ruttenberg. at Imperial Capital.
spk03: Yes, thank you very much. Looking forward to the next quarter, maybe we can talk a little bit about premises. You saw 8% growth in the first quarter year over year, I believe. Do you expect to see similar kind of quarterly growth on a year over year basis? Will it go back into the teams? Can you give us any kind of color for the next quarter?
spk02: Right. And I'm sure Justin will remind me we don't do quarterly guidance, so I'll be a little careful about that. But just for the year overall, we did, you know, I just said a few minutes ago that first quarter is always our seasonally lowest one. And so we do expect sequential strengthening over the course of the year. And second quarter is generally progress over the first Third is always strong because the federal government, I shouldn't say always, but historically has been strong because the federal government, we think that's going to continue, plus the penetration we're having with that full solution ecosystem I talked about. And that's just building over the course of the quarter since we launched it. So I think that there's going to be sequential growth, both in an absolute sense and in a year-over-year sense as we go through the year.
spk03: Okay, and then in terms of your debt, can you, was it just a line of credit that you took out? Can you talk a little bit about that? I believe that happened in the first quarter.
spk01: Yeah, it's a revolver, so we only need to use it as needed. It's something we'll take up and down as needed for working capital.
spk03: Okay, and do you anticipate having to take that up in the second quarter or just keeping where it is?
spk01: We're anticipating, I mean, we don't give quarterly again, but I would say we would definitely not be above the 10 million we took out in Q1. We'd probably be lower than that exiting Q2.
spk03: Great. Thank you very much. Of course.
spk00: Once again, if there are any questions or comments, please press star 1 on your touchtone phone at this time. We have reached the end of the question and answer session, and I will now turn the call over to Steve Humphreys for closing remarks.
spk02: Okay, thanks, Operator, and thank you all again for joining us today. As you can tell from the comments here, we're very excited about the markets we're helping to build and especially the outlook for 2023. We really are focusing on driving our business forward and making sure that all parts of the business have the resources they need. I mentioned the strategic review that we're doing on the business overall that our board has initiated to make sure that we are creating all the value we can in the businesses that we're driving forward. For any of you that are looking for more insights into our IoT business, We'll be pretty prominent at the RFID Journal Live in Orlando next week. And for investor-specific events, we'll be holding a virtual fireside chat session with Lake Street on May 18th. We'll be at the B. Reilly Conference in L.A. on May 24th, the Craig Hallam Conference in Minneapolis on May 31st. And we're setting up a couple of other virtual and in-person investor sessions over the next several weeks. So we certainly look forward to keeping you all updated as we build our business and go forward through 23 and beyond. Thanks again and have a very good evening.
spk00: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
Disclaimer