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spk08: 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.
spk04: 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.
spk01: 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.
spk04: Thanks, Justin. As we go into the second half of 2023, we're continuing to build on the work we put in during the first half of the year, as well as taking advantage of the industry position we built, as some of our less well-positioned competitors face some headwinds. In IoT, we accomplished this in several ways. First, by winning NRE projects for strategic, technically complicated applications. Second, building our industry leadership in key verticals as the go-to solutions provider. Third, increasing awareness of our solutions through customer-facing initiatives like our new IoT product finder and IoT webinar series. And fourth, expanding into Thailand for cost competitiveness and capacity expansion to meet growing demand for IoT solutions while simultaneously reducing our production input costs. In physical security, our complete platform is showing its competitive advantage. Through the first half of 2023, we've kept building out product, engineering, sales, and sales engineering, tech support, training, and systems. We've launched a range of new and refreshed products, and our focus now is on leveraging our channels to bring our complete product range into all of our target market segments. For the second half of 2023 and into 2024, our focus continues to be expanding our competitive advantage in our businesses while strengthening our balance sheet. To drive cash flow, we'll keep working down the strategic inventory position we built when we had to manage supply shortages. We're optimizing expenses, as you can see in our reduced gap expense levels quarter over quarter. This aligns with our financial plan to build our cash and working capital strength over the next few quarters. We're fully supporting our competitive strength while managing our working capital health. We're focusing on inventory turn improvements, AR collections, and other healthy approaches to protect working capital, using revolver debt only as incrementally needed. As we said last quarter, we expect revolver debt to be repaid within the next three quarters, and we don't think we're overly constrained in our core strategic growth as we manage working capital. Looking at our specific business lines, in Q2, our IoT business delivered on its revenue plan, so we could focus on building pipeline for the next quarters, which we've largely done for 2023. For the second half of 2023 and into 2024, we've got four advantages supporting our growth in IoT. I'll assess how each advantage is developing halfway through the year. Our first advantage is our strength in the broader medical and healthcare vertical. We already have several medical customers, each forecast to be over $1 million in annual revenues this year, and a couple dozen NRE projects or customer samples and pilots in medical use cases with the potential for multimillion-dollar recurring revenue levels. We think we'll expand our position for advanced medical applications, which is critical given that we've seen that medical applications take a long time to take off. We're expanding our healthcare presence continuously with activities like the session at HIMSS we participated in, our webinar on healthcare applications for IOT, strategies guided by our board members from healthcare industry leaders, and other healthcare initiatives. Our second advantage is our clear lead with BLE-enabled RFID providers and integrators. I described the growth rate of production volumes earlier. IoT Pixels open use cases across multiple verticals, warehousing and logistics, supply chains, consumer experience, RTLS-enabled retail, product environment handling, and an almost unlimited range of applications. In addition to Williott themselves, who are winning projects with some of the world's largest companies, we're engaging with BLE-based solution providers going into even more use cases. These third parties multiply the volume and margin opportunities. We're seeing signs that the BLE-enabled RFID category may create a whole class of new RFID applications. UHF RFID, which is not our core focus, has always been limited by its expensive, dedicated readers and the limited bandwidth and sensor capabilities of UHF chips and devices. NFC has excellent technology features and the ability to support a wide range of sensors, but is limited by its read range of a couple of centimeters. BLE solves both problems. Not only is every phone equipped as a Bluetooth reader, much like NFC, but there are far more Bluetooth readers in the IoT, including Bluetooth beacons, laptops and tablets, smart watches and fitness trackers, health monitoring devices, smart home devices, and more. So passive BLE technology is the best of both worlds, long-range, like UHF RFID, with the ubiquitous readers and wide range of data and sensor capabilities like NFC. We're staying focused on current customers, but we're determined to keep in front of the broader BLE RFID category as it develops. So our third advantage, our specialty devices are used in sectors like healthcare, luxury brand engagement, supply chains, mobile devices, and others, not low-end retail, loss prevention, or similar use cases. Some of our competitors and even suppliers are exposed to the cyclicality and variability of the commodity retail market. Some have missed targets in Q2, and others have dropped their outlook. We have no significant exposure to the low-end retail or pure UHF-based loss prevention markets. As a result of the combination of our diverse use cases and not having that cyclical downside low-end retail, plus the tendency of our use cases to have consistent ongoing demand, we expect to continue on the business trajectory we projected at the beginning of the year. The fourth advantage is our in-place customer base, which grows our volume as their use cases grow. A good example of this is a specialty consumer household product that we just started producing last year and is now at a $2 million annual run rate. Customers like this and other specialty packaging and consumer engagement customers all drive our growth as they grow. In smart packaging, we're working closely with CollectID and other leaders. We've kept our leadership in the relationships. 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. So with these competitive advantages of our IoT business, we think we're in a good position to deliver as planned in 2023, and we think it'll position us for growth going into 2024 as use cases and new technologies like BLE expand. To build customer awareness for our technical excellence and innovative IoT solutions, we recently launched our IoT webinar series and the new IoT product advisor tool, which covers our entire IoT product portfolio. The feedback so far has been positive, and we now have webinars confirmed with CollectID and NXP for later in Q3. Turning to our physical security business, we spent the first half of 2023 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-Converged Velocity, and Velocity Cloud, combined with our touch-secure readers and TS cards, we think is the most complete security platform in the industry. This complete solution is our core advantage in security, which along with three other advantages we believe positions us to continue to grow faster than our market. So our second of those advantages is that customers need integrated systems to get the most benefit from each security touchpoint and to make this 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 tightly integrated 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. Our third advantage is an opportunity created by industry dynamics that we're positioned to exploit. We think there's an opportunity for a new generation of market leaders to own enterprise-scale, highly secure systems and to extend this strength into the small and medium business market. Some 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 Verkata or Ring are challenged both technically and from a go-to-market perspective. Our advantage is that our solutions are built on very high-security hardware and software, which we then bring to all levels of the commercial and government markets. We believe our faster-than-market growth in the first half of 2023 was partly due to this trend, and everything we see so far shows the trends continuing in our favor. Our fourth advantage in physical security is our technology depth and breadth across hardware, firmware, software, cloud, web, and mobility. This enables us to bring complete, secure products to market fast because we control all aspects. We mentioned last quarter that we're planning product launches, pushing the edge of multi-capability, very high-performance hardware, supporting cloud-enabled systems and features, including biometrics, wireless infrastructure, and mobile apps. We recently announced the launch of our new Primus SMB access system and EG2 edge gateway. Primus is fully cloud-ready as well as being available as an on-prem solution. The EG2 is the first new gateway and controller hardware we've launched in several years. It's completely new from the ground up with a powerful quad-core processor while also being very cost-effective. We've architected it to be able to evolve to support everything the future holds at the edge across readers, access sensors, cameras, biometrics, and intelligence at the edge. We've built it on a Linux core with flexible modular software and responsive user interface that scales across administrative devices. Even with all these capabilities and aggressive pricing, we're sustaining our margins while deploying the technology to support our vision of upselling services and features into the platform over time. Now, consistent with our technology depth, As a lot of the security industry is rushing to figure out AI, we already have an AI solution with our Vision AI product that we launched earlier this year. This brings AI-enabled analytics to integrated video content that can be combined with access control events to create an environment that's dynamically secure even when managing complex threat situations. In the next phase, we expect AI will enable proactive threat response preparation for anticipated events. Our position as the provider of one of the industry's highest security systems gives us access to some of the most sensitive threat environments, which are likely to be the earliest adopters of AI-enabled security, such as federal courthouses, intelligence community facilities, and high-sensitivity locations like the White House. With our proven 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 vendors, creating an efficient channel to market, and this is reflected in OEM reader sales more than doubling year over year in Q2. So with these competitive advantages in place, with tight focus on business model efficiency, solid Q2 progress in both our IoT and physical security businesses, and new product and technology launches, our execution plan is clear. 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, be efficient with our expenses, and build our long-term competitive moats so we continue to lead as these markets take off. Now, Justin's already confirmed our 2023 revenue outlook. With the solid gross margins and cash flow from our business and clearly known uses for working capital to support our growth, we have the resources to make it all happen. Now, as I've discussed before, we have two strong businesses with strategic positions for the next growth stage of two very large markets. Last quarter, we described that with two strong businesses like these inside a small company, as you'd expect, we're doing a strategic review to maximize the positions we've built and to realize the full business potential in these critical markets. So as part of that review, we have engaged a financial advisory firm, and we're working closely with them to take the right steps to maximize value for our shareholders. So in Q2, we showed strength in our key IoT and security growth drivers. Chip supply and production constraints are behind this, and we have the capital we need to grow our business. With our progress in IoT across medical applications, BLE-enabled RFID, and our long-tail specialty applications, and with strategic leadership in physical security expanding in both key verticals, new products, and share of wallet, with our complete platform, there's several opportunities for upside. If these trends continue, we're positioned to accelerate growth and to expand EBITDA margins. We'll certainly keep you all updated as the year unfolds. So with that, I'll now ask the operator to open the lines for questions. Operator?
spk08: Thank you. 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. Once again, please press star 1 if you have a question at this time. One moment while we poll for questions. And the first question today is coming from Craig Ellis from B. Reilly. Craig, your line is live.
spk07: Thank you for taking the question and congratulations on the relative performance to other players in the IRT field, Steve. Clearly doing a nice job with maintaining your financial performance when others are deteriorating mid-year. I want to start just by digging into the Williott commercial opportunity. Nice to see the progress year-to-date and starting on a follow-on order, but can you take a step back and just look out maybe towards next year and provide some broad parameters on what the commercial potential could be for Bluetooth low power and help us understand how that might ramp up and what role Thailand might play in manufacturing?
spk04: Yeah, great question, Craig. And I'll try to keep it tight because we could talk about that almost all day. And thank you for noticing the performance relative to some others. We've, as you know, we started shipping to Williott just in December of last year, and the takeoff has been pretty impressive. And there are also other BLE-enabled RFID companies now coming into play. So we're starting to see it as a category of technology, and as I said in my comments, you get the best of the both worlds that you've got the range of UHF and you've got the data intensity and capability of NFC, you know, but without the range constraints of NFC. So, we're starting to see third party integrators, solution providers coming up with all kinds of new ideas, you know, enabled by passive BLE, which has never been possible before to actually get sufficient power from the RF signal for a full BLE device. And, of course, once Moore's Law starts kicking in, you start to get longer range, lower power requirements, and, of course, more data capabilities. We certainly don't know exactly where it's going to go, but, you know, Williott themselves is on a continuing growth trajectory. I'll let them, you know, comment on their actual numbers, but certainly substantially greater going forward. And then now we're starting to see others coming into the category, and then that really can create an accelerating effect. Now, to be clear, we're not talking about 24 guidance or anything like that, but just in this category, there's a lot going on. and people starting to build applications and solutions around it. And then us coming in from the perspective of technologists, we see that it's solving a couple of things that have been bottlenecks, both in the NFC and in the UHF category. So that's how I would categorize it. I know it's a little bit general, but does that give you a fair picture, or should we go into some more detail?
spk07: That's fair. Just comment on manufacturability, Steve, and what role Thailand could play. I should get to that point.
spk04: Yes, good point, because it is very complicated. I think we mentioned on the prior call that normally an RFID chip has, you know, a few touch points, and these BLE chips tend to have a dozen and a half, so they're very complicated to produce when you're trying to manufacture 1,000 units an hour. But our Thailand facility has all the capabilities that we have in Singapore and a very skilled workforce there that we've been able to hire, frankly, from some competitors and former competitors. So we think Thailand actually faster than we expected will be able to cover most of the technology arc. that are needed in our products. Now, there's some customers who require that you manufacture in certain locations, you know, so you can't move, but Thailand will be able to come online for most of our production capabilities. And, you know, actually, we've got on the line here both Amir Khoshnyadi and Manfred, so let me ask Amir to comment on the BLE and Williatt business, and then I'll ask Manfred to comment on the production.
spk02: Sure. And just building on the DLE aspects and Steve's points, it is the best of all worlds because you are getting the supply chain visibility that you would get with traditional UHF. You're getting the consumer experience that you get with NFC. And you get all the condition monitoring value adds. So from that spectrum, early stage technology on a good ramp. And we've announced in both the press releases that we are on the right trajectory with the current project. expanding to the second site for that large retailer. And so the project is progressing overall very well, very excited about the progress of the technology.
spk04: And Manfred, do you want to comment on Thai production?
spk00: Absolutely, yes. So maybe also on the context of the village deal, We are preparing the site for the next wave of BLE pixels. We've had some great learnings over the first seven months of successful producing that type of new technology. And some of the new equipment we are bringing in is also going to be tailor-made to basically produce that type of application. So from that point of view, we have had a lot of learnings that are transitioned over into the new Thai site, plus new equipment that's coming in there. In general, we are rolling up production in Thailand. The first couple million units are produced. The first ones already in the month of June. So for the opening, we've had that. and we are ramping production, we are ramping people, and we are basically getting ready for additional projects being taken on, and if necessary, transferring more from Singapore over to Thailand in order to take advantage of some of the improved production costs related to labor rates, lower labor rates, lower overall costs in terms of lease rates and such. So from that point of view, we should be seeing that kicking in fairly soon.
spk07: That's great, guys. Thanks for all the color on Bluetooth energy. I wanted to move on and inquire about the comments you made about supply, Steve. You sound more confident in supply than I think anything I've heard in a year or so. Can you comment on how broad-based improved availability is? And then from a cost standpoint, since a lot of component costs rose over the last 18 months throughout the supply chain, I suspect with Identiv, how's the cost trends that you're seeing? And are we seeing decreases versus what you might have in inventory and things that would ultimately help boost gross margins?
spk04: Yes, and you're absolutely right. It's much more positive than we've been for probably 18 months plus. And as usual, it flips faster than you think, and that's happened in this case. So, costs have come down. Our purchase price variance that we were getting hit on a margin with last year has really come down. Freight also has come down substantially, and in some cases, you know, air freight, things like that, can be down by a factor of three or four. Lead times have also reduced, so that means you've got to carry less, you know, you don't have to carry as much inventory. You can be more flexible in real time. And so, all of that has moved in the right direction so that it really feels, frankly, totally normalized now across all those dimensions. And then, as you mentioned, there is still some inventory at some of the lower prices. It takes time to burn it all down. And sometimes you have a tail of open POs at higher prices with providers. And so you have to burn those down, even while you're doing the brass knuckle negotiations necessary to get it down faster. But as that burns down, then, of course, that naturally comes in and gives some margin room because our intention, of course, is the value of our products is the value of our products. And if the cost of input goes down, that should go to our gross margin line for the most part. So, yes, it is a much better position than we've been in from a supply and lead time and COGS perspective than easily the last year and a half.
spk07: That's great. And then lastly for Justin, before I hop back in the queue, Justin, I think I heard you mention that you'd expect OPEX to be flattish through the rest of the year. Can you just talk about what the gifts and takes are for gross margin as we look through the second half? Thanks, guys.
spk01: Sure. On the OpEx front, that's correct. We do anticipate flat OpEx for the rest of the year. We've been pretty consistent. We were consistent last quarter as well that we put quite a bit of investment into OpEx throughout 2022 and the first quarter of 2023. So we feel we have the Workforce and and the objects we need to to meet our goals for the rest of 2023 So we expect some operating leverage there in the back half of 2023 as revenue Resumes its its cyclical nature and q3 being fed to your end and others as far as gross margin with the mix that we have we are You know, we don't give specific gross margin but we do expect gross margin profile to remain consistent with what we saw in Q2.
spk06: Thank you. Thank you.
spk08: And the next question is coming from Anthony Stoss from Craig Holland. Anthony, your line is live.
spk05: Thank you. Hi, guys. Steven, maybe I missed it. Can you update us where you stand with your strategic review that was kicked off during the quarter? Is that still ongoing? And then maybe Amir, if he could, take the mic. I'd love to hear if deals are taking longer, if pricing is holding up. Pretty incredible that half of your NRE designs or engagements are related to medical. I would assume that that's a higher ASP. So anything you could share would be helpful.
spk04: So absolutely. The strategic review I did mention, We normally don't give specifics in terms of the strategic review. There's so much investor interest and it is important. So we did say that we have appointed a financial advisor and we're working with them on the proactive process you'd expect with such an engagement. The board's working very closely with them. And that's in the comments I made. So that's moving forward, I'd say, is the best way to say it. Amir, you want to comment on the business side that Tony was asking?
spk02: Sure. Yeah. So from an NRE perspective, Steve mentioned with 60 NREs, but I think the important thing to note here is our burn rate through those NREs is pretty consistent stream. So as we're finishing out NREs, taking them to the engineering teams of the various customers, they're going into evaluation. The team is doing a really good job with the pipeline and advancing new NRE deals. So we have a very, very good probability of closing. And then also we understand that the sales cycles within health care and pharma and medical devices typically take longer. So we need more in the queue to increase our probability of a lot of these taking off in a shorter time frame. In addition to that, the price points are holding well because these are high value goods. They're justifying the higher price points. And then the chips themselves are higher tier of chips. So they're type twos or type fours with added encryption around authentication rather capacitive sensing. So it justifies the price point and holding the margins for that. So overall, I would summarize that the pipeline looks really good. And our number one focus right now is to continue putting more within that pipeline. So a lot of these evaluations while they're being tested by the engineers and we're getting feedback, we have more in the queue to increase the probability and speed of these projects.
spk05: Thanks for the call, Amir. Best of luck, guys. Thank you. Thanks, Tony.
spk08: Thank you. And the next question is coming from Jason Schmidt from Lake Street. Jason, your line is live.
spk03: Hey, guys, thanks for taking my questions. Just looking at Wiliot, you've obviously started shipping against that follow-on order, but when we think about unit shipments for Q3 and Q4, what sort of trajectory should we think about there?
spk04: I don't think we've broken that out, but I think consistent levels would be that, you know, we mentioned that the follow-on order was of a similar magnitude to the initial order. And so I would be thinking in terms of consistent levels, and when we get more of that upside going into 24 that we were talking about, we'll communicate that. Again, always constrained by Williott themselves. There's some limitations to what they'll let us talk about, and we fully respect that as a customer.
spk03: Okay, got it. And then just as a follow up, you called out some commercial wins in the premises business. When you look at the commercial opportunity within that segment, is it becoming a growing proportion of that business? Or how should we think about that opportunity longer term?
spk04: Yes, the commercial part of the business is growing. I mean, quarter by quarter, it varies. This is federal year-end, so federal will probably have some seasonal strength to it. But we put a real effort into expanding commercial business, and it's expanded as a proportion of the business there. We put in more regional sales managers, and we've done some product launches. And then this This product launch that I mentioned on the call, Primus, that in particular is focused at commercial and in particular small and medium business in commercial. So I would expect that that commercial portion will continue to grow.
spk06: Okay, perfect. Thanks a lot, guys. Thanks, Jason. Thank you.
spk08: There were... There were no other questions. We would now like to move to closing remarks with Steve Humphreys. Steve?
spk04: Okay. Thanks, Operator. And thank you all for joining us today. As always, of course, we'll keep you all updated as our business progresses. And in Q3, we'll also be at the Rosenblatt Tech Conference in late August and the Lake Street Best Ideas Growth Conference in New York in mid-September. We also have a couple more IoT webinars coming up, one with CollectID and another healthcare IoT webinar, this time together with NXP. So any of those that you'd like to access, please just contact IR, and we can connect you into those. So with that, thank you all again for your time and support, and have a good evening.
spk08: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
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