Identiv, Inc.

Good afternoon. Welcome to Identiv's presentation of its second quarter fiscal 2023 earnings call. My name is Paul and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO Stephen 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 financial measures or guidance, including non-GAAP adjusted EBITDA, non-GAAP gross margin, non-GAAP operating expenses, and non-GAAP free cash flow. In addition, during the call management, we'll 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 form on Report 10-K and quarterly report on Form 10-Q. Identif assumes no obligation to update these forward-looking statements, which speaks as of today. I will now turn the call over to CEO Stephen Humphries for his comments. Sir, please proceed.

Thanks, Operator, and thank you all for joining us. Our second quarter continued our strong progress for the year, with record revenues for Q2, gross margin expansion, and positive free cash flow. We continue to deliver disciplined growth while strengthening our strategic position in both our RFID-enabled IoT and physical security businesses and positioning our balance sheet to support our growth. Reflecting our commitment to balance sheet strengthening growth, in Q2 we delivered positive free cash flow and positive net operating cash, a positive swing in this last metric of over $5 million from last quarter. Justin will comment on the details, but since these results reflect our focus on discipline growth and working capital strength, it's worth noting in the business overview. With a fully normalized supply chain and our position as the go-to company for advanced RFID-based IoT applications, especially in medical and specialty packaging, Q2 has kept us on track for 2023. Because we focus on specialty applications with nearly zero exposure to commodity UHF-based retail tags, we've also outperformed some competitors who've struggled recently, and our outlook seems to be in a better position, even than some industry bellwethers in the RFID chip category. In our security business, our premises segment, where our focus has been on expanding our share of wallet with our comprehensive security platform across video, access control, analytic credentials, and readers, Q2 revenue was up 8% year over year. Now, behind this aggregate growth, Our core Hirsch Velocity platform grew 23% year-over-year, with controllers up 33% and access security readers up 37%. Looking more closely at our business unit performance, in our RFID-enabled IoT business, in the second quarter we shipped over 44 million units. Our non-recurring engineering roster remains strong at nearly 60 projects, with more than half of these projects in our key medical, healthcare, and pharma verticals. and our average unit prices were up about 17% sequentially. We also delivered 5 million units to healthcare-related customers. Our five auto-injector projects progressed, including the one going through FDA approvals, where we expect approval the end of this year or early next. CVS and Envision America continue to support our prescription application for the visually impaired, orthopedic surgery devices are shipping, and the medical use cases we shared last quarter have all continued on track. Our webinar on RFID solutions for healthcare was very well received. If you have any interest in the healthcare use cases for RFID, I'd really urge you to check it out. In Q2, we delivered 14 million units of Williott IoT Pixels, up from the 10 million units we delivered in Q1. And we started production of our second large BLE RFID order. As you can tell from the sequential progression of 1, then 10, then 14 million units across Q4, Q1, and Q2, BLE-enabled RFID is on track to be an industry-transforming application. We'll talk later about our expectations for the BLE-enabled RFID category, which we're increasingly convinced will become a pervasive platform for high-value RFID applications. Another metric we track in Q2, we continue to maintain 100% customer retention in RFID, except for low margin customers that we're choosing to move away from. This continues to be on plan and already factored into our projections. On the supply front, chip availability is normalized, and as higher price components are consumed, we'll start deploying lower price components, which should create margin expansion opportunities. Despite this supply normalization, we're continuing with our supplier diversification. We've added a sign for sensor-based ruggedized specialty UHF applications and are expanding our partnership with Procure and STMicro for direct integration with our BitCIO SaaS platform for seamless tag commissioning. Also on the supply side for IoT, our new Thailand facility is now fully operational and producing at a rate of 5 million units a month. Exiting 2023, we expect to have a primary production capacity of about 200 million units a year in Thailand. This will expand capacity while also reducing our production costs. In addition to the structural cost advantages in Thailand, we also have efficiency projects underway across our production and supply chain operations to keep improving margins. Turning to our security business, our complete integrated video and access strategy encompassing cloud, on-prem, hardware, and all the related components needed for a security system is clearly getting traction from the product growth rates I covered earlier. That growth was partly offset by a decline in one video product line as we're de-emphasizing our 3VR video product in favor of our integrated Velocity Vision platform. As vision sales accelerate, we expect aggregate growth to reflect this higher growth in the overall platform. Commercial demand was also strong. In Q2, we saw particular strength in healthcare, K-12 schools and higher education, and airports on top of our core federal strength. Supporting continued federal growth, in Q2, we received FedRAMP listing, which is required by most federal customers to deliver cloud services, making us one of only four physical security companies with this capability and the only major federal access control provider with it. Going into Q3, which is also the federal fiscal year-end, we think we're in a good position for recurring revenue opportunities for our FedRAMP solution. So to summarize, in Q2, both IoT and physical security made solid progress, keeping us on track for 2023. In IoT, our strategic initiatives in healthcare and with Williott grew very well, supported by our project management, sales, and technology strength. Our production in Thailand is fully up and running. Supply chains for critical chip categories have normalized, and our product and organization investments are largely done and delivering results. In physical security, our industry-leading Converge platform and our ability to deliver it as a SaaS or system solution positions us to keep taking market share. We're executing our strategy while also managing cash flows, margins, and inventories to strengthen both our business and our balance sheet. All of these support both our growth and our strategic positioning expectations for 2023, which I'll discuss after Justin covers our financial results. So, Justin, over to you.

Thanks, Steve. As Steve mentioned, in Q2 2023, we delivered record revenue for a fiscal second quarter while improving year-over-year gross margins and a return to positive free cash flow. We believe these results, paired with our focus on driving disciplined growth in our IoT and physical security businesses, position the company to continue its growth momentum in the second half of 2023. Second quarter 2023 revenue was $29.6 billion, in line with consensus estimates, up 6% versus the comparable prior year period and up 14% versus Q1 2023. Second quarter 2023 gap and non-gap adjusted gross margin was 37% and 38% above consensus estimates. GAAP and non-GAAP adjusted gross margin reflects our continued focus on maintaining our margin profile in 2023. In addition, we added $1 million in cash and cash equivalents to our balance sheet, while continuing to increase our investment 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 second quarter of 2023, our GAAP and non-GAAP adjusted operating expenses, including research and development, sales and marketing, and general and administrative costs, were $11.9 million and $10.6 million, respectively. This was consistent with Q1 2023 levels. As discussed in Q1, we were able to deliver on our plan to expand revenues quarter over quarter while maintaining our operating expense levels. We continue to believe our current quarterly operating expense levels will enable us to meet our 2023 goals, and we do not expect our remaining two quarters to vary significantly from this amount. Non-GAAP adjusted EBITDA was $0.7 million in Q2 2023, an increase of $1.6 million versus Q1 2023. As we are able to increase revenue, expand our GAAP and non-GAAP adjusted gross margins, while maintaining our operating expense profile. This was concurrent with our continued strategic investments in machinery and equipment. Our Q2 GAAP net loss was $1.1 million, or six cents per share, which was in line with consensus estimates. In the appendix of today's presentation, we have provided a full reconciliation of GAAP to non-GAAP financial information, which is also included in our earnings release. Our next slide further analyzes trends by segment. Beginning with identity, revenues from our identity products totaled $17.7 million, or 60% of our total revenue in Q2 2023, as compared to $16.9 million in Q2 2022, an increase of 5%. This reflects an increase in our IoT and legacy smart card reader sales, offset in part by a decline in our access card sales. Our Q2 2023 identity segment gap and non-gap adjusted gross margin was 23 and 25%, consistent with Q2 2022. These reflect an increase of two percentage points as compared to Q1 2023. 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 and increased production at our Thailand facility, which has lower manufacturing costs. We remain committed to a long-term gross margin target range of 35% to 40% in our identity business. Now turning to the premises segment, this segment accounted for 11.9, or 40%, of our total revenue in Q2, compared to 10.9 in Q2 2022, an increase of 8%. The year-over-year increase in premises segment revenue was across both federal and commercial businesses, across many of the verticals Steve mentioned above. Increases in access control sales were partially offset by decreases in our video products as we transitioned from 3VR video product to our integrated velocity vision platform. We continue to execute on our go-to-market strategy to offer a comprehensive end-to-end platform solution. Gap and non-gap adjusted gross margins for premises in the second quarter of 2023 were 57% and 58%, respectively, which is consistent with Q2 2022 and demonstrates our ability to maintain our margin profile. 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 2023 adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization was 36% of revenue compared to 41% of revenue in Q1 2023. As noted previously, we expect quarterly operating expenses as a percentage of net revenue to decrease in the remainder of 2023. Now turning to the balance sheet. We exited Q2 2023 with $22.2 million in cash, cash equivalents, and restricted cash. This was an increase of $1 million from Q1 2023. In Q2, we generated $1.4 million in cash from operating activities, $0.9 million from financing activities, offset in part by $1.2 million in investing activities related to our capital expenditures. Our working capital exiting Q2 was $49.2 million. As Steve noted, our supply chain outlook is improving and we expect to work through our inventory over the course of 2023. As a result, we expect to rebalance our working capital and repay our revolver balance 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, our overall Q2 results were in line with expectations, and 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.