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.
spk10: Good afternoon. Welcome to Addentiv's presentation of its fourth quarter and fiscal year 2021 earnings call. My name is John, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steve Humphries, and CFO, Justin Scarpulla. Following management's remarks, we will open the call for questions. Before we begin, please note that during this call, management may be making references to non-GAAP measures or guidance, including adjusted EBITDA and free cash flow. In addition, during the call, management will be making forward-looking statements. Any statement that refers to expectations, projections, or other characteristics of future events, including future financial results, future business and market conditions, and future plans and prospects, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company's latest annual report on Form 10-K. Identif assumes no obligation to update these forward-looking statements, which speak as of today. I will now turn the call over to CEO Steve Humphries for his comments. Sir, please proceed.
spk03: Thanks, Operator, and thank you all for joining us today. During 2021, the advanced RFID applications market started to take off, and we put in place the technology, capacity, team, and key customer design-ins to lead in the market. We've clearly established leadership as we start the pivotal year of 2022. This is the year that launches the next stage of IoT devices as RFID and NFC become embedded in almost everything we touch. Already this year, we've launched several initiatives for advanced RFID technologies. In January, we announced our partnership with Williott for Bluetooth low-energy-enabled RFID devices, launched our industrial-grade on-metal RFID devices, focused on high-value use cases in medical and industrial products, and announced our industrial-grade NFC programmers. In February, we announced our partnership with NXP for their 22X chips that enable batteryless condition sensing, making fill-level and wet-or-dry sensing easily embeddable into any product. Now, there are two themes here. First, we've become the partner that industry-leading companies in advanced RFID and NFC are turning to for advanced solutions. Second, all of these are focused on advanced applications that incorporate secure data, sensing, tamper, authenticity, and enable truly unique product experiences. We're in this position as we start 2022 because throughout 2021, we've built our leadership in the industry and put in place everything we need to support it. We finalized our major hiring and system capabilities, shipped record levels of RFID units, and completed our technology and project management platform. The fourth quarter also showed us two areas we needed to strengthen to really be ready for 2022. We've now done that, which I'll describe in a few minutes. But first, here's some metrics from 2021 and our fourth quarter reflecting the momentum that we built. For 2021 overall, our total revenues were up more than 19%, to a record 103.8 million. Our unit shipments in RFID were up 36 percent for the year at 185 million units, showing both growth and our ability to scale. We exited 2021 shipping over 65 million units in the fourth quarter, an annual rate of 260 million units. Now, this is a key metric, our ability to scale past the quarter billion annual unit level. The second half of 2020 already had major volume growth in RFID. To meet demand in 2022 and beyond, we had to prove that we can scale to the next level. We went from shipping 136 million units in 2020 to a run rate almost double that going out of 2021. Now, while driving this unit volume step up, we also kept leverage in our business, with operating expenses up 3% while we grew revenues 19%. The RFID unit growth and overall operating expense leverage are our key metrics, which drove 23% year-over-year revenue growth in our identity business. Our premises business also delivered strong results. It grew 14% in 2021, more than double the industry rate. Our key premises growth metrics are even stronger. Our core federal government security revenues grew 21% year-over-year, and overall our growth in premises accelerated from about 13% in the first half to more than 15% in the second half of 2021. As we add commercial strength through new products and channel expansion, plus pent-up demand from lockdowns and increased government spending, we're confident that 2021 has positioned us very well for 20 to 25% growth in-premises in 2022. On the RFID side, in late 2021, we more than doubled our sales force and project management team to support design wins. The key metric indicating how we're positioned going into 2022 is backlog. Our total backlog at the end of 2021 was up 45% over our total backlog at the end of 2020 at over $30 million. Now, this is a strong indicator that our expected 25% to 30% growth for 2022 for the company overall is on track. Now looking at Q4, I mentioned that RFID units were up 36% for the full year. And in Q4, RFID unit shipments grew even more, up 49% over Q4 2020. Now remember, the Q4 2020 was the second quarter of a step-up in unit shipped, particularly to a major mobile device manufacturer. So the comparable is a pretty high bar that that 49% grew off of. Growing in 2020 to the production levels needed then was a challenge. and it was critical that we demonstrated our ability to scale up another step function in Q4 2021. We made the shipment step up, but I also mentioned there are two things we learned in Q4 that we needed to get ahead of, and this showed us one of them. RFID is a project-based industry. Each use case has its own unit prices and margins, and they even can vary over the lifecycle of a project. The result is margins and unit prices can fluctuate with project growth cycles. At our scale, this can change our overall margins in a specific quarter, even as the long-term trend of expanding margins continues. In the fourth quarter, this brought our margins down, even as our units grew very fast. We managed the production and shipping, met all the demand, and took market share. We scaled fast, but we didn't balance this with enough offsetting higher margin ASP devices in our sales in the quarter. As a result, our overall gross margins declined by about three margin points. At the same time, we were determined to keep our track record of fulfilling every major customer shipment request to our premises customers. In the last couple of weeks of the quarter, a vendor tried to decommit supply. We successfully worked with them to deliver, but then had one-time extra inbound freight costs, and this cost us almost three more percentage points on gross margin. Now, this premises event in particular, we're confident, is a one-time event that we will not let happen again. So we've applied these tough lessons from Q4. In RFID, we've taken actions to keep a more balanced progression on margins. We've put in place real-time systems and people with focused ownership, so even when we have an RFID volume step-up of almost 50% in a single quarter, we can manage the blended margin impact from a financial and production perspective. With these controls in place, we expect to make progress towards our gross margin goals regardless of unit prices of individual devices. As unit prices increase over the long term, that'll drive sustained gross margin expansion. To be clear, in a fast-growth, project-based business like ours, quarter-to-quarter margins can fluctuate, but with an upwards long-term trend. Going forward, we have to be able to manage volume step-ups like this, because we're building a pipeline of business that we expect to drive step-ups in future. Now, one of the main drivers of step-up growth applications and of margin expansion is our expanding pipeline of customers that have contracted with us for paid non-recurring engineering development. Non-recurring engineering, or NRE, is contracted when a customer has specific technical and functional needs. Engaging in an NRE contract has lots of benefits. It validates their commitments to the project, builds a contractual relationship, builds project success between our technical teams, and usually results in a custom solution that we're in a unique position to fulfill. It also builds trust doing joint development, so customers are ready to do design refinements and feature expansion. This supports expanded margins and reduces competitive risk. So we don't do NRE for the money. We do it for all of these business benefits. Now, new NRE-paying contracts include Ricca for smart packaging for castor oil, Fanatics for collectibles, Promate for a range of medical devices, Cellar for wine authenticity, a surgical devices company, and a dozen others. These and the other design wins from 2021 are the broad base of design win growth drivers that are at the core of our expected 40 to 50% RFID growth. In addition to this broad base of growth drivers, our major transformational opportunities made progress in Q4 and early this year. Our auto injector project has progressed on several fronts. We're entering into an NRE development agreement with them, and we're meeting almost weekly on both the product and the production process. so the core auto-injector project continues to be on track. Now, a completely new project with the same company on a different medical device has come together fast and has already started a 20,000-unit pilot run and could result in an initial million-unit order as early as this quarter. These units are in the $0.20 range rather than the much higher ASPs for the auto-injector, but they have healthy margins. Most importantly, they got us shipping volumes for the customer, integrating us into their supply chain. And it's a category that by itself could move to tens of millions of units and potentially over 100 million units annually. Continuing with the NRE theme, in the cannabis market, we've signed an NRE development agreement with the leading company for the Canadian cannabis market. We designed a customized combination UHF and NFC device. As a result, we got an initial 1.4 million unit order. We're now building the first 50,000 units to run a pilot and systems test. I'll go into more details in our 2022 outlook. But so far, this is a faster start than we expected. This lays the groundwork for the multi-million unit orders we expect later in 2022. Also in the 2022 discussion, we'll update our relationship with TruGreen in the U.S., where we already have a 20 million unit frame order for an even more ambitious device that combines digital signatures, UHF tracking, content authentication, tamper production, and enables personalized customer engagement. Now we'll go into more details in the 2022 discussion, but the net is that for cannabis applications, both the Canadian and US market leaders are moving forward and we're working closely with them both. So with these specific customers and projects making progress, we expect RFID to continue to be our core growth driver. The base customers were established by the end of 2021 and our transformational projects are on track. We also kept our track record of 100% customer retention in RFID So as our customers' use cases grow, we believe we'll grow with them. Now RFID is our main growth driver, but in Q4 we also had strong growth metrics in premises and our overall business. First, premises usually is down sequentially in Q4 following the government year end that drives growth in Q3. In Q4 and 21, our premises business was up 6% sequentially versus Q3 rather than being seasonally lower. Another important metric, software and services revenue, was up 20% in Q4 versus Q4 2020. Finally, our revenue per employee for all of 2021 was $315,000 per employee, up from about $267,000 per employee in 2020. Now, the final area we had to address in Q4 to put us in position for a strong 2022 focused entirely on driving growth and business model leverage were vestiges from the peak of COVID. In late 2020, the public transit industry was hit hard. A few long-term customers struggled to pay their bills. Consistent with our conservative accounting policies and to remove distractions from executing our growth plans, we've charged off all of these outstanding receivables. They're mostly from 2020 and mostly in public transportation. It's a one-time non-cash expense, but it skews our Q4 results. We believe we'll still collect some of these receivables and we'll fight for every penny because whatever we collect is cash, but we need to comply with our policies on overdue accounts receivables. Going forward, our transit customers are either on prepayment terms or are now part of much larger diversified public companies. The business message is that it happened in industries that had a clear one-time impact from COVID shutdowns. We're confident it won't recur, both because the industries have stabilized and we've taken a conservative payment policy to companies in these industries. Now, our new CFO, Justin Scarpola, who will be on the call in a minute, will go into more details. It's painful for our Q4 gap results, though. I mentioned our 2021 operating expenses were about 3% over our 2020 operating expenses. This includes the cost to expense these receivables. Without those charges, our leverage would have been even more, with expenses basically flat, while revenues grew 19%. GAP includes them, though, and we own our own decisions, so that's how we're reporting them. For our ongoing business model for 2022 and thereafter, though, we do not expect to see this again. So in summary, 2021 laid all the groundwork for a strong 2022 as we built our teams, retained and expanded our customers, grew design wins in NRE, and managed another volume step-up to meet customer demand. Our major transformational projects each made progress, with most now having designs done or well underway, and preliminary orders placed for some. Our RFID business is clearly positioned going into 2022 to lead in the huge NFC and advanced RFID market that's taking off now. Our premises business is also on a strong growth cycle to support our overall growth and business model leverage. Now, we faced some issues in Q4 and fixed them. We put in place systems to control financials when we have step-ups in RFID unit growth and eliminated the last carryover effects of shutdowns, especially in the transit industry. We think this puts us in position both operationally and from a balance sheet perspective for strong, consistent leverage growth in 2022. So with that, I'll turn the call over to Justin to go through our financial results in more detail. Then we'll look at 2022 and beyond.
spk01: Thanks, Steve. As Steve mentioned, our financial results reflect our continued strength exiting 2021 with the delivery of year-over-year growth in revenues and future backlog. We believe these results, paired with our continued investments in the RFID organization and its capabilities, position the company to achieve its growth and profitability potential in 2022 and beyond. We close the fourth quarter of 2021 with $28.5 million in revenue, up 15% compared to the fourth quarter of 2020 and in line with our normal seasonality exiting 2021. Our full year 2021 revenue was $103.8 million, up 19% compared to the full year of 2020 and near the midpoint of our guidance. For the fourth quarter of 2021, our GAAP and non-GAAP adjusted gross profit margins were 33% and 34%, respectively, compared to 35 and 36% in the fourth quarter of 2020. For the full year 2021, our GAAP and non-GAAP adjusted gross profit margins were 36 and 37% respectively, compared to 39 and 40% in 2020. Gross profit margin changes resulted primarily from our product mix, increased freight and logistics costs, and the continued investment in technology and manufacturing processes and systems to meet the near and long-term project profiles of our customers. Specifically, in the second half of 2021, we ramped up projects with RFID customers and made investments in technologies to drive new processes, increase automation, and boost manufacturing speeds to support an annual run rate of 260 million units. These investments have been fruitful and will continue to contribute to the company's growth in the current year and the years ahead due to the competitive advantages created as a result. We remain committed to a long-term gross margin target of 40 to 45%. GAAP operating expenses, including research and development, sales and marketing, and general and administrative costs were $11.3 million in the fourth quarter of 2021 compared to $8.9 million in the fourth quarter of 2020. As Steve mentioned, GAAP operating expenses in the fourth quarter of 2021 included a one-time expense totaling $2.3 million for the expensing of aged accounts receivable from our balance sheet. Without this one-time expense, our operating expenses were $9.0 million nearly flat compared to Q4 2020. We have tightened enforcement of our accounts receivable policies and procedures, including weekly reviews of outstanding balances, credit limits, prepayment arrangements, and moving to credit holds quickly and timely. In a high growth environment like ours, implementing and maintaining strict financial controls, systems, and policy discipline are my top priority as CFO. I am confident we have taken the necessary steps and we will continue ensuring rigorous controls as we scale. Our full year gap operating expenses increased 3% and demonstrate our continued efforts to drive business model leverage. Our Q4 gap net loss was $1.9 million or a loss of $0.10 per share. This compares with a loss of $0.7 million or a loss of $0.05 per share in Q4 2020. Excluding the $2.3 million expense of aged accounts receivable, net income would have been $0.4 million. Our full year gap net income was $1.6 million or $0.02 per share compared with a loss of $5.1 million or $0.34 per share in 2020. 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 $17.5 million or 61% of our total revenue in Q4 2021. our identity segment generated 62% of our full-year 2021 revenue, or $64.7 million, a 23% increase from 2020. The year-over-year increase in identity revenues was primarily driven by higher sales of RFID transponder products. These increases were driven by current customer expansion, new customer wins, and our ability to deliver versus competitors' constrained supply chains. The sequential change in revenue was due to normal seasonality. Our Q4 2021 identity segment gap margins were 20%, driven primarily by product mix and the rapid production step-up in transponders. Our full year 2021 identity segment gap margins were 24% compared to 28% in 2020. As previously mentioned, our decision to opportunistically grab market share resulted in very rapid growth from customers in the early stages of their RFID deployment strategies, consequently resulting in a higher proportion of lower ASP RFID units sold. Quarter-to-quarter margins can fluctuate, but we expect long-term margins to trend upwards from current levels as we expand and deepen our existing customer and technology partnerships. We believe our increasing NRE business as we move to more complex devices and relationships will only further strengthen our margin profile. We have implemented a vigorous review process for all new opportunities to ensure that our higher margin goals are being met. Any temporary exemption must be signed off by top management should we deem a relationship to be strategic to the future success of identity. We remain committed to a long-term gross margin target of 35 to 40% in our identity business. Now turning to the premises segment, This segment accounted for $11 million, or 39% of our total revenue in Q4, representing an increase of 22% from Q4 2020. For 2021, our premises segment generated 38% of our full-year revenue, or $39 million, an increase of 14% from 2020. The year-over-year increase in premises segment revenues reflected the continued strength of our federal business and select recovery in other verticals. Gap gross margins for premises in the fourth quarter were 53%, compared to 56% in Q4 2020, primarily due to the mix of products within the segment and short-term expedited freight fees. Within premises, we have taken steps to ensure that any increase in freight and logistics will be passed through to our customers. Going forward, we have systems in place to proactively adjust these costs and prices. We remain committed to a long-term gross margin target of 55% to 60% in our premises business. For the full year 2021, premises gap margins of 55% were comparable to 2020. Moving now to our operating expense management. Our gap operating expenses for the fourth quarter of 2021, which included the one-time write-off of age receivables, totaled $11.3 million compared with $8.9 million in Q4 2020. Our non-GAAP operating expenses adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization totaled $10.5 million in the fourth quarter of 2021 or 37% of revenue. This compares to $7.5 million or 30% of revenue in Q4 2020. For the full year 2021, Our total gap operating expenses were $38.4 million, an increase of $1.3 million from 2020. Our non-gap operating expenses for the full year were $34.2 million, or 33% of revenue, compared with $30.7 million, or 35% of total revenue in 2020. In summary, we continue to demonstrate operating leverage in our business model in 2021 by increasing our top-line revenues while successfully reinvesting for growth within our current cost envelope. Now turning to the balance sheet, we exited Q4 2021 with $28.6 million in cash, a $17.1 million increase from Q4 2020. We remained debt-free and we maintained our strong working capital position. In our 10-K filings, will be providing a full reconciliation of the year-to-date cash flows for completeness we have included the full balance sheet in the earnings release in the appendix momentum exiting the fourth quarter of 2021 combined with a strong backlog give management confidence in the company's growth expectations for 2022 and 2023 sharing some metrics as we move into the first quarter exiting q4 2021 Our total backlog for all future shipments was 30.2 million, up 45% versus Q4 2020. And total new orders booked through the first month of Q1 2022 was 12 million, up 43% over the same prior year period. These trends provide visibility into the current business momentum going into 2022. As a result, we are reaffirming our full year 2022 guidance today with expected revenues between $130 and $135 million, reflecting year-over-year growth of approximately 25 to 30%. Management also is reaffirming its guidance for 30 to 35% year-over-year revenue growth in fiscal 2023. Normal seasonality is expected to continue. With that, I will conclude the financial discussion and pass the call back to Steve.
spk03: Thanks, Justin. Our 2021 results and the activities behind the numbers have us positioned for expanded growth in 2022. With the strength in the advanced application RFID and NFC market and the team and customers we've established, we're confident in 25% to 30% growth for the entire company, led by 40% to 50% growth in RFID. The transformational projects are moving forward with our position more entrenched in each. Our design wins expanded fast with more NRE engagements than we've ever had. Our existing customers are all staying with us and are growing strongly. We've established ourselves in leadership roles in nearly all of the relevant trade and industry groups, which further drive sales opportunities, as we're better known as the go-to for advanced NFC applications. We've established solid partnerships with the technology leaders in advanced RFID, including NXP, Williott, CollectID, BlueByte, and others. We've augmented these partnerships with our own technology initiatives across tag-on-metal, authentication servers, application developer kits, and more. We took actions to make sure sudden volume growth in RFID is managed financially as well as operationally, made sure there aren't balance sheet exposures, kept our track record of delivering on every customer request regardless of today's unreliable supply chains, and held our cash steady while expanding our team. Now, our strategic priorities for 2022 remain the same. First is our top priority, RFID growth driven by design wins, current customer growth, technology partnerships, and industry leadership. Our second strategic priority is our federal government growth, and our third strategic priority is expanded software services and recurring revenues. With our teams, financial resources, and tight financial controls in place, and with our pipeline growing, 2022 is all about execution on these priorities. Our first design win focus is our transformational projects. In the opening, I mentioned the NRE commitments from our auto injector and cannabis customers. I should add that our largest already deploying customers, including one major mobile device customer and our prescription customer, also engaged in NRE contracts with us early on. I also gave some updates earlier about both cannabis and the auto injector and related projects. The measurable point to highlight in both is the design progress and initial orders already in place earlier than we'd expected. Now, for the cannabis market in Canada, the dual technology UHF and NFC device we designed for our customer is an ideal solution. This design, plus the pilot run order for over a million units that I mentioned, has us on track for production volumes ramping in Q3 or Q4. These initial production volumes will cover the base demand we're expecting in our 2022 plans. Beyond this, additional volume would be upside. The customer continues to project a market opportunity of over a billion units, but we're not projecting higher revenues into our 2022 or 2023 expectations until we can confirm timing of the larger ramp-up. Also in cannabis, I went into some detail earlier about our progress with TruGreen, mostly for the U.S. market. The product we developed together is exactly aligned with our advanced RFID strategy and our recently launched authentication server, and we already have a frame order for 20 million units in place from TruGreen. The auto-injector project also continues to make progress. In addition to design refinements, we're developing an IP agreement together, another clear sign of their commitment to our technology. In addition to this flagship project, I mentioned earlier the third use case for the same company. We did a fast design turnaround, our design outperformed our competitors, and as a result, we're already working on a 20,000-unit pilot run. Now, I won't repeat the details, but the point is we're on track with this customer for our 2022 plan, with some areas moving faster than we'd planned. Another transformational project is RFID tagging for prescription pharmaceuticals. The initial CVS use case for the visually impaired is continuing to grow well. Now, they won't let us disclose unit volumes, but one metric we can share is on the programmer side. We've deployed RFID programmers to nearly all their pharmacies. Now, either this quarter or next, we're deploying about 3,000 more programmers for them. They won't do that or wouldn't do that unless they needed their pharmacists to be able to issue more RFID-enabled prescriptions than they can do already. So deploying additional readers certainly is an indicator that the demand is moving above where they initially deployed for. So our transformational customers are already establishing their baseline demand to support our 2022 outlook. If they continue to bring their plans forward, that'd be upside. But the key goal to get them on the deployment path is happening. Beyond that, it should be a matter of time until full opportunities reached in each case. So these and other very large opportunities are key for our company to get much larger than we are today. Now, in fact, most of the core growth that drives our expectations for 2022 are among existing customers and some of the smaller new ones that are near term with faster ramp cycles. These have progressed well and can deliver some upsides of their own, but the main implication is that they set the base growth for our business. Among these design wins that are moving into production are a COVID test kit manufacturer who's issued a $4.5 million PO for supply across 2022 and into 2023. A robotic cleaner manufacturer has issued a 2 million unit order for a new design. Collect ID is expanding their sporting brand lines into major global soccer clubs. Four new designs have been completed for another consumer brand company. One European customer in the medical industry was about $2 million in 2021, and already for 2022, we have orders in hand for revenues of about $2.9 million from this customer. Now, there's, of course, some upside, but 45% growth is a good start to having backlog already from one customer. Now, there are a couple of dozen companies in this category, customers at meaningful scale and growing fast. It's the core reason that our backlog coming into 2022 was up 45% versus a year ago. Our orders for the first month of this year also are up 43% over an already strong order period last year, showing continued growth momentum. The result is that we have over 60% of our 2022 RFID plan already covered with billings, backlog, and run rate business. Also among our current customers, our mobile device customer is continuing to grow and to support NFC as core to their technology platform strategy. In our baseline scenario, we expect them to grow around 10% this year. If they expand into other use cases and drive their platform more aggressively, that creates upside. Now, I could go through lots more, companies like Angel, Graphio, Coach, Procure, and Johnson Controls, but you get the sense. Now, another thing you'll notice is that these are almost all new names. The ones we've mentioned before are still with us, contributing to our growth as they grow. They also don't have to be huge already to contribute a lot to our growth. For example, another medical device company is coming from a sub-$100,000 base in 2021. They're expecting to triple this year and then grow next year to be more than $2 million a year. Now, let me give you one specific example of the sort of company in this last category, smaller companies with use cases that could expand massively. A company called Graphial is a graphene-based biosensor device in France. Their biosensors have a lot of uses, all enabled by RFID devices. On their website, they have a great demo video showing use cases like smart wound bandages that can track if a wound is oozing fluids or healing well without taking off the dressing to check every time. They have lots of other use cases from rapid biotests to smart dressings. And you can decide for yourselves how big the market will be, but in their video, you can see how central our RFID devices are to their solution. Now, with multiple medical use cases like Graphio, we know that some of them will take off. They have unit volume potentials in the hundreds of millions or billions of units, and our RFID devices are core to their delivered value. Now, that's just one example of a design win that could scale meaningfully. Our partnerships are our third strategic growth driver. The partnership we announced with Williott has opened a range of projects. They have a few dozen prospects in their pipeline, and as these move into production, we'll be in position to supply and then to ramp the use cases across each industry. The partnership with NXP around their very low-cost sensor-enabled 22X DNA RFID chips is just as unique. The built-in capacitance sensor is perfect for fill level and dampness sensing. Think of everything from diapers that tell you when they need to be changed to lotion bottles that tell you when they're getting low and need to be reordered and hundreds of applications in between. Fill level and refill insights for both consumer and industrial uses is another category that clearly can be billions of units. Now our focus on RFID reflects the massive scale potential of that market. For 2022, our premises business is contributing strongly also. The market itself is growing as the technology refresh cycle kicks in, combined with deferred demand from lockdowns and an emphasis on physical security combined with digital systems. We expect our growth to be above even this positive market growth cycle because government demand is very strong. Our integrated physical security platform is the most complete in the industry, and fast-growing sectors like prop tech, federal and local governments, education, infrastructure, and others have the most critical need for complete solutions. This is happening as lots of competitors have hollowed out their solutions, outsourcing their firmware, hardware, and other components right when customers want confidence that overall security systems are seamless, secure, and easy to manage. Because of our depth as a complete technology provider and our strength in some of the highest growth segments, we think we're in a solid position to deliver 20 to 25% revenue growth in premises with some upsides, especially in the federal government and our integrated video intelligence and access solutions. So as we came into 2022 with strong growth, you can hear from these details that we now have visibility to our growth expectations for this year and beyond. We have a strong growth engine, but we also learn things we absolutely have to manage across our business model when we have to deliver sudden growth step-ups. We're confident that we now have them all in place, positioning us for accelerated growth, consistently improving margins, and expense leverage. Now to be clear, our top priority is growth. In an emerging market like this, keeping leadership and expanding market share is critical to building value as the market reaches scale. We've got potentially revenue-multiplying projects on track in 2022 that we have to keep focus on and a growing base of design wins that we have to keep supporting and driving. That's how we're building a business that's uniquely valuable in this nearly unlimited market. So with this focus from account-specific progress to partnerships and industry-wide leadership, you can see why we think we're set to lead the advanced RFID and NFC industry to grow fast and ultimately to much bigger scale. We have the backlog and pipeline in place to deliver on our 2022 plans and the industry reach and team already built to expand our leadership across the market. That's why I opened my comments that 2022 is now all about execution. We have the business elements in place and the market itself is clearly taking off with use cases that are transformational. So with that, we'll open the call to questions. And I also want to mention that we also have on the line Dr. Manfred Mueller and Amir Khoshniadi, who are the real architects and the drivers behind our RFID business. So if you have questions about that part of the business, we can get it directly from the people who are driving it forward. So, operator, please open the line for questions.
spk10: Thank you. We will now take questions. If you have any questions or comments, please indicate so by pressing star 1. Pressing star 2 will remove you from the queue should your question be answered. Lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.
spk07: Once again, that's star one if you have a question or a comment. Okay, our first question is coming from
spk10: Brian Rutenberg from Imperial Capital. Your line is live.
spk06: Yes, thank you very much. And thanks for all the color. So the first question is on the recovery of gross margins in 2022. And I feel very confident, as do you, about revenue growth. But how quick are we going to see the recovery from fourth quarter to first quarter? It sounds like half of the recovery pretty much comes automatically from freight. And then maybe you can talk a little bit about, you know, where we should see kind of sequential growth in terms of gross margins. And should we be getting back to kind of 2020 levels or something like that?
spk03: Yeah, Brian, I'm glad you brought that up as the first question, because that, of course, is our absolute focus. You know, Amir and Manfred are driving the business so effectively today. We've got to be controlling the internals and the mix so that's reflected as we go forward. And I'll turn it over to Justin to address as well because he, as you can imagine, has been immersed in this. But we do expect it to be progressing regularly, sequentially. You can't in one quarter bounce all the way back. It's going to be over the course of the year that we're expanding margins as we go forward. But we certainly expect, as you say, progression right as we get into the first quarter. And the main thing is we need to make sure that we have consistent progression going forward. It is a balance because you have big opportunities that come in, and we've got to satisfy them. And we can balance them only as much. And that's the only aspect of the caution you're hearing in me, as you know. We want to be cautious on these things and not over commit on anything. There will be an immediate improvement. There will be sequential progression towards our target gross margins. There will certainly be some fluctuations along the way as we go, but we'll make sure they're going in the right direction. Let me let Justin add some color to that specifically.
spk01: Sure. As Steve mentioned, I think that we, We do have a path for Q1. A few of the items that we said were very specific, they were dropships and stuff that we could make sure we eliminate going forward. And as we go throughout 2022, I believe and I strongly feel that each quarter margins will continue to recover.
spk06: Great. Thank you very much. Thanks, Brad.
spk10: The next question is coming from Mike Lattimore from Northland Capital Markets. Mike, your line's live.
spk05: All right, great. Thank you. Yeah, I guess just on that topic a little more. So are there areas where customers where, you know, once they get to a certain volume, they automatically get a price discount? Or is this truly a situation where, you know, you have a new customer coming online to get the share, to get that market? or the customer, you need to give them a certain price. Can you just elaborate a little more on that?
spk03: Yeah, good question. Because some customers do want the step downs as you go further. But as we've talked about in the past, even with our big mobile customer, who of course has that normally built in, we've been very effective at new designs that take them off of that price down step. So for us, in fact, the tightest margin is early in a project when sometimes there's new technology we've got to put in and we're amortizing that earlier on over lower volumes. The margins tend to expand over time with projects for us. First off because of volume learning curve and second off because we get them to upscale their design and make it more complicated in that respect. So that's the profile that we typically see. Since we've got Manfred on and he, of course, is immersed in this and in the market, let me turn it over to Manfred as well to comment on the gross margin profile kind of over the life of a customer, Manfred.
spk08: Yeah, I think it's absolutely right the way you just have described it, Steve. On the other hand, of course, we did address the topic of a mix having some impact on the margin here and there. you also have heard about the, let's say the volume shipment. So with some substantial growth in terms of like, like the overall output there we, we also addressed various markets that were like in the, in the lower ASP area. And that, that was also basically one of the drivers there on top of some of the seasonal Q4 OCOX topics that basically dropped down the margin, whether it's shipment, or whether it was purchase price variations here and there. So from that point of view, that's basically what we have seen. We are addressing things also with regards to price increases. So it's not just that in days like this prices drop down because not only we are passing on some of the component increases that we have seen, we also try to basically use that type of, let's say, opportunity to adjust the pricing out there. in particularly wherever the market is allowing us to do so.
spk05: Okay, thanks. In terms of – I'm sorry. Sorry, go ahead, Mike. Yeah, just I guess the other one would be how influential are these transformational deals on the backlog growth you just reported? Are they kicking in in a material way yet, or is that to come?
spk03: Yeah, good question. That backlog is, I mean, some of it, of course, CVS is already in there and our bulk customer is already in there. I mentioned 1.4 million unit order on the medical company, but most of it is not. So that's 60% of our business that's in billing backlog and run rate doesn't include them, that that will be added in on top.
spk05: Okay.
spk10: Thank you. Once again, if there are any remaining questions or comments, please indicate so by pressing star 1 on your touchtone phone. Once again, that's star 1 if you have a question or a comment. The next question is coming from Jay Chong. He is a private investor. One moment. Jay, your line is live.
spk09: Great. Thank you. First, on the RFID capacity, I know the run rate was – Oops.
spk07: Hello? Hello?
spk10: It looks like Jay's line has dropped. Let me see if I can get him back in the queue. One moment.
spk03: Okay. If there's someone else in the queue, you can certainly let him in in the meantime. But, yeah, I just wanted to make sure it wasn't us.
spk10: Okay. I'll place, let's see here. We've got Michael Manny from B Riley securities. Michael, your line's live.
spk04: Hi. Yep. I'm here. This is Michael Manny on for Craig Ellis. Uh, thank you for all the color and the prepared remarks and also for letting us ask a couple of questions. Um, so my first question is on the company's ability to execute, um, given that it's done a great job in executing versus some of the supply constrained peers, especially with its quick project turnaround. That's led to a lot of share gains, as you mentioned. So to what extent is that embedded in the full year 2022 guide or to what extent could that drive upside to it? You mean the rapid responsiveness on design specifically? That and your ability to deliver as well while other peers cannot.
spk03: Yes, good point on both. First off, yes, the design side is a huge advantage. There's actually another company that I didn't mention because their name is too sensitive. But we did a quick design for them, had basically double the read range and some other performance, you know, superior results to what they had before. and did it in literally a week and a half. And that is really core to our differentiation. And I'm going to let Amir comment on that a little bit, too, because Manfred and he have built that team that does that quick part. And then I'll come back to follow up on the second part of your question. Amir, would you mind commenting on the design and development cycles?
spk00: Yeah, sure, Stephen. Hi, Mike. What we're really focusing on right now is as the team is growing, their targets are really on high-margin business. And this high-margin business, basically the underlying factors are that it's specialty applications that we need to take in and be really rapid and agile in the designing of the requirements. And we've built a very nice foundation through Q4 of our highest quarter of design wins all in one. Now, many of them are picking up, but we're keeping a really keen eye of what the forecast would look like and working very close with the suppliers to ensure that we can react and respond as these ramp up. Now, a couple of them are picking up and we're seeing good traction and the indicator is not just the success of the first NRE, but the second one actually coming in for a similar product that they might run in tandem with what we have in the queue. We're responding really quick to the requirements, and that's really a testament to our engineering excellence. But the second component to this is we're keeping an eye on what the visibility and the forecast needs to be so we can ensure that we can ramp up as quickly as they want to in the coming year. And these plans have been extended now into 2024. So we have almost two and a half year right now run rate of where we want the sales folks to grow within their region and what targets they should be focusing on. So everything really coincides together.
spk03: And then, Michael, to the second part of your question about, you know, in the supply-constrained environment, is it an opportunity for us because we are able to fulfill better than some? The answer is really yes. And we had an on-deal roadshow discussion, as you recall, not long ago. And we talked specifically, Manfred did talk specifically about The fact that we've got about 100 million units, you know, ordered and, you know, in supply, already allocated the backlog, but 130 million more coming in on order that we've ordered ahead for that puts us in a really advantaged supply position. And then the third part is I don't want to overly, you know, name names or, you know, over a certain, certainly don't want to get one of our vendors in trouble, but NXP has been a very supportive partner to us. And there is quite a crunch going on. They're juggling a lot of things. But when we have had upside requirements, they've been very supportive of those upside requirements. So we're actually able to fulfill some things even beyond what we've pre-ordered and what we've got, you know, on hand because we have some pretty good relationships there. So I hope that, does that answer your two questions?
spk04: Yeah, that's a fantastic color. Thank you. Thank you very much. If I could just squeeze one more about concerning premises. So we've seen a number of good signs of an enterprise recovery is underway. It seems like a lot of verticals are undergoing tech upgrade cycles that you alluded to in your comments. So how do you when you look out at the course of the year, how do you think that the pace of the enterprise recovery will play out maybe in the first half of the year versus the second half?
spk03: It's already on a good pace on the premises side as well. The second half of the year, of course, always is stronger. The third quarter is always very strong because of the government year end. And we certainly see government spending only going in one direction. And, you know, we also find you never want to profit from things like this. But when there's, you know, conflicts and other concerns in the world, security spending, and especially physical security spending, tends to go up. People are more sensitive to it, and when people propose programs, they're generally pushed right through. So we're seeing a lot of activity. I mentioned PropTech, airports, education institutions, critical infrastructure, ports, transportation, all those areas, as you would expect, that you want to make sure are secure and operating well, even in an uncertain environment. We're seeing lots of RFP activity as well as programs we already had underway that are coming through and getting deployed. And we're seeing very little remaining friction in going out to sites and getting installed. There's virtually none of that anymore. Everybody is open and deploying at this point. Great. Thank you very much.
spk04: Sure. Thanks, Mike.
spk10: Okay. Up next, we have Jay Chung, private investor. Jay, your line is live.
spk09: Hi, can you hear me now?
spk03: Yes, we can.
spk09: Okay, perfect. So first on the RFID capacity, I know the run rate was 260 million units, but where is the capacity now and where will it be by the end of the year?
spk03: Manfred, would you like to take that on directly? Okay.
spk08: Yeah, I can comment on that. So it was 185 that we delivered last year. The capacity right now is roughly at 220. The outgoing capacity by the end of the year entering 2023 is 350 million. If we don't pull in additional equipment, which is an order already. So I was, for example, with a machine and a manufacturer in Germany this week, we are basically releasing and doing the site approval for the the next piece of equipment which is going to be arriving singapore uh in about two or three weeks and the next machine is already ordered for like july arrival and another one is uh is sitting in early 2023 again with the possibility of being pulled in so there is oh go ahead all the equip say again oh sorry go ahead please Yeah, so all the necessary capacity is going to be lined up, so capacity is not going to be the issue right now.
spk09: I see. Okay. And then your supply chain team has done a great job in making sure your customers' orders were all filled, especially when your competitors were unable to do so. I believe this was the case in both segments. As vendors see this and they see how well you accommodate your customers, do you see your allocations from your vendors increasing significantly this year?
spk03: Yeah, actually, that's a good behind-the-scenes reality, and the answer is yes. I mentioned NXP, and again, they're balancing lots of demands, but they've been very supportive, and we expect that to continue. They really like the nature of the projects and use cases that we've got going, and they want to be behind them and very supportive of them, so I expect that to continue. And that's the same for several of our vendors. And the same on the on the premises side that by virtue of being a credible supplier, we're filling in more of our products for, you know, for more customers, and therefore, people are selling through us and vendors to us know that we're growing our market share, and we're the ones they want to support as you know, it then starts to become a, you know, a self fulfilling prophecy. Interestingly, the other thing we're doing, which also helps on gross margins, and this is now openly communicated, is effective March 1st across the board for our premises business, we implemented a 10% price increase. And it was perfectly well received because we've been very supportive with our customers. They know it. Everybody reads the papers about how hard it is. And when you put through a price increase, they appreciate that we've worked with them up to now and they understand that it needs to be done so our business can stay healthy. So yes, I think we're in a decent position from a supply perspective, better than our competitors and our vendors are working with us on it. And that therefore also allows us to start expanding our gross margins in the most straightforward way, which is by raising price.
spk09: That's great. And then I assume this enabled you to take new customers from your competitors Um, one, how meaningful of an impact were these new customers? And then two, do you see those customers now going back to their old suppliers or are they staying with you and reordering from you?
spk03: You know, when, when you, when you work with a customer in hard times, uh, they, they tend to stick with you because everybody needs reliability. Uh, and, uh, and even if they need to pay a little bit more for it, uh, it, uh, it, you know, it, it, it hurts more. You know, I think, um, Financial optimization sometimes looks like algorithms and that works when everything is on a consistent environment and everything's stable. Everybody knows that we are not in stable times and who knows when we'll get back to stable times. And so being willing to put value on reliability and relationships and commitments as well as great technology and great solutions. I think everyone from CFOs on down are accommodating that kind of situation so no the customers that we won back uh that we won um i think are going to stay with us we're already in there of course and talking about other products that we can do with them they're starting to look at expansion of capabilities uh and then that allows us to look at higher gross margin products okay great and then um
spk09: On the Plan 2 guidance, I noticed you were maintaining it from last quarter, but whether it's new projects, new customers, bookings, higher allocations from excess suppliers, it seems that momentum is only accelerating from four months ago. So, why wouldn't guidance improve as well?
spk03: And it's purely as, you know, we've talked about before. we really need to see it in our hands before we're going to raise expectations. Timing with some of these projects can move around and something moves by one month and it moves out of one quarter into another. We think we've got it well covered. Certainly we've got it well covered for 2022 in our opinion, but we don't want to raise that until we have a raised number really well covered. So hopefully they can appreciate that.
spk09: Yeah, okay. And then on the call, Justin reiterated your overall long-term gross margin target of 40 to 45% for the entire company, and then 35, 40 for the ID side, and then 55, 60% for the premises side. What level of sales would you need to reach those gross margin targets for each segment, and what would be the resulting either dial or operating margins?
spk03: Yeah, good. So, interestingly, it's not so much a level of sales as it is getting to the mix. It's partly scale, but it's largely mixed as we get things like the high-end auto injector and a dozen other projects that, as Amir talked about, our pipeline of NRE projects is bigger than they've ever been. That's where the gross margin is big. And as that becomes a bigger part of our mix, the gross margins expand. So I'm not trying to avoid the question, but, you know, certainly when we're looking at a $200 million revenue range, that mix should be in place. But I think it could be in place earlier than that as we drive the mix properly. And then on the premises side, the 55 to 60%, you know, you don't have to go far back in our – results to see that we've been in the 57 plus percent gross margin range and premises already. So we are at the scale, um, that, uh, that that can be, uh, you know, achieved. It's, uh, again, it's a matter of mix, uh, and, uh, uh, you know, the, the margin on the mix there, but mix becomes more stable and more consistent as you gain scale. But all of those numbers are numbers that, uh, are, you know, are touchable from where we are right now, frankly.
spk09: Okay. And actually, just to squeeze one more in, I know we're out of time, but you reiterated guidance for 2023 of 30 to 35% revenue growth. How much visibility do you have that you feel confident that you can reach these, what seemingly is an aspirational goal?
spk03: No, well, we have visibility to that. And in fact, with the pace at which some of these bigger deals are moving through, if anything, the 23 number, we're feeling more confident about, you know, just wouldn't make sense to be moving 23 and not moving 22. But if you look at all these we have, and then when you look at that pipeline, again, that I can't throw out all the names that are there, but you can hear from when Manfred and Amir are talking about the pipeline we're building and the project we've got underway, that isn't aspirational at all. That's as much line of sight as you can have. And all we're talking about at this point is 10 months out to nine months out. So it's something that we have... decent visibility too. Things can always change, but certainly we're as confident about that as ever. And you're right, we have run over, so I'm getting the waves that we have to wrap it up.
spk09: Great.
spk10: Thank you so much. At this time, this concludes the company's question and answer session. If your question was not taken, you may contact the Identives Investor Relations team at INVE at gatewayir.com. I'd now like to turn the call back over to Mr. Humphreys for his closing remarks.
spk03: All right. Thank you. And thank you all for joining us. I know we've run over and, uh, and it's very busy time for everybody, but, um, uh, we really appreciate, uh, the support for the company and we're certainly going to continue to drive it forward and continue to communicate out. Uh, we have some other, uh, investor events coming up and, uh, we'll keep communicating, uh, as transparently as we can as the company moves forward. But, uh, we're certainly excited from a business perspective and, uh, committed to keep making progress on the overall business model. Thank you again for joining us.
spk10: Thank you for joining us today. You may now disconnect.
Disclaimer