Identiv, Inc.

Good afternoon. Welcome to IDENTA's presentation of its fourth quarter and fiscal year 2023 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, Stephen Humphreys, and CFO, Justin Scarpola. 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 included non-GAAP adjusted EBITDA, non-GAAP gross margin, and non-GAAP operating expenses. In addition, during the call, management will be making forward-looking statements. Any statement that refers to expectations, projections, or other characteristics of future events including future financial results, future business and market conditions, strategic review, 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 the documents filed from time to time with the SEC, including the company's latest annual report on Form 10-K and quarterly report on Form 10-Q. Identif assumes no obligation to update these forward-looking statements, which speak as of today. I will now turn the call over to CEO Stephen Humphreys for his comments. Sir, please proceed.

Thanks, operator, and thank you all for joining us. Before we get into our business and financial comments, I need to acknowledge a mistake we just made in our processes. We mistakenly put our earnings results up on our website shortly before the market closed. We pulled it down when we became aware of it and immediately contacted NASDAQ. This has never happened before, and we've already put in place very tight cross-check processes to make sure it never happens again. We pride ourselves on careful and complete disclosures and communications with our investors. Investors depend on our communications being available as expected and only then. I personally apologize for this and we will not let it happen again. Now it's doubly unfortunate because it's a negative way to open comments about our business where we're making some very good progress. So we'll address any questions you've got about this or anything else in the Q&A section as always. But let me first get into our business update. 2023 finished with a fourth quarter that reflected our priorities of discipline growth and balance sheet strengthening to position us for investment to accelerate our strategic position in both our RFID-enabled IoT and physical security businesses. Consistent with that strategy, in Q4, we kept our focus on high margin revenue that supports our balance sheet and margins. Q4 net revenue was $29 million while we drove balance sheet and working capital strength by reducing non-GAAP operating expenses below $10 million. Our cash position was improved by $3.6 million in free cash flow in Q4, the highest free cash flow quarter since Q4 2020, reflecting a sequential $4.7 million swing from Q3 2023. In addition to driving revenue in the fourth quarter, we put in substantial efforts towards the future direction of the business. As discussed on recent earnings calls, our board initiated a strategic review to assess and execute the best strategy to maximize value creation opportunities of our two growth businesses, IoT and physical security. Both require dedicated management focus and execution and have different capital needs to drive growth. As you'll note in our financial results, there's substantial expenses below the operating expense line. some of which are associated with activities related to making progress towards a strategic action to generate capital and focus. We certainly wouldn't be expending this cash unless we're making tangible progress. We're of course continuing this activity in Q1 and continue to expect completion in early 2024, as we said the end of last year. In the near term, we expect to announce specific actions to create substantial investor value in three ways. First, by investing in our transformational growth opportunities. Second, by strengthening our position in the verticals we've been strategically targeting, particularly healthcare and medical applications, but also across the category of specialty complex RF-enabled IoT solutions, which we call SCRI. And third, by bringing in world-class leadership to drive our strategy and execution to lead in this major market opportunity. Now, before turning the call over to Justin to review our financial results, I'll review our business and operational updates for the fourth quarter, which we believe position us very well to leverage our next strategic steps, starting with the IoT segment of our identity business. In Q4, we focused on the strategic IoT verticals of healthcare, smart packaging, and logistics, with margins remaining a key priority. Volume-wise, we shipped nearly 200 million units in 2023. we continue to build on our early leadership in SCRI. Though still in an early stage, this category is our strategic focus. Because of the leadership we've established, we're consistently getting R&D inquiries to develop solutions for new potentially high-volume use cases. Our most important vertical for SCRI, healthcare, accounts for more than half of our NFC-based revenues. This reflects our drive over the past two years to focus on healthcare applications. Even at their current early stage volumes, some of these healthcare applications carry gross margins in the 40% range, with more margin opportunity over time. In the healthcare vertical, we have ongoing pilot projects with Arthrex, Schreiner, and over two dozen other healthcare companies. More broadly, we continue to focus on pilot programs, deploying innovative SCRI products. Based on the current TAMs in each of these specialized verticals of the healthcare market, we believe some of these applications could scale to $20 million annually or higher. Consistent with this focus, in a recent article in the RFID Journal, we announced 15 pilot programs in Europe for a Bluetooth-based solution we developed in collaboration with Energis and Williott. This solution is great for cold chain monitoring in warehouses and refrigerated trucks. We announced one of the first adopters, the logistic company RPL Group. The initial feedback has been positive, and we expect to see further pilots deployed through 2024 with actual deployments ramping up later this year. Relatedly, our relationship with Williott remains strong. Our battery-assisted tag is a finalist for Best New Product at next month's RFID Journal Awards, and we delivered nearly 14 million units to Williott in Q4. As I mentioned before, demand can fluctuate quarter to quarter in early-stage applications like this, and our understanding is that Williott is undergoing a technology transition, so we expect a pause in shipments for the next two to four quarters. Fiscal year 23 revenue from Williott was substantial, so we'll be working to fill the temporary gap with alternative demand. Because of the multiple pilots and our close relationship with Williott and other leaders in the category of BLE-enabled RFID, we believe we're in a good position to offset some of this pause and to continue to lead the category. Another BLE company, Nexite, is also a partner with a focus on connected retail products, and we expect volumes from Nexite, Energis, and others to grow throughout 2024. Our technology, production, and process expertise also has encouraged two of the largest enterprise customers deploying BLE-enabled RFID to work directly with us for their next stage of technology deployment. In the consumer engagement part of our strategy, we've seen strong momentum for our Bitsy.io IoT cloud platform. Last week, we announced the release of Bitsy 3.0 with real-time visibility and traceability, making it an ideal solution for healthcare, pharma, medical devices, smart packaging, specialty retail, and industrial applications. A new Bitsy-related initiative is with Mazars, a leading international audit, tax, and advisory firm on a new AI-enabled retail operations solution. This combines Mazda's ERP systems expertise with our Bitsy IO platform, NFC tags, and Microsoft Dynamics 365. We work directly with the Microsoft R&D team to integrate Microsoft AI Assistant Copilot with the data analytics enabled with Bitsy. At the recent National Retail Federation annual show in January, the Mazda's team demoed their new total experience offering for retailers in the Microsoft booth. We're also co-hosting a virtual panel with Mazars and NFC Forum on March 28th on the store of the future. Now, opening our Thailand production was another important step in 2023. As expected, our Thailand capacity for primary processes is 200 million units exiting 2023. Early production results from this facility suggest the potential for even higher production margins gains than we originally expected. We've now also leased the adjacent building, securing our ability to expand efficiently. So let me now talk about our premises security segment. After a very strong Q3, where we set a new record for segment revenues in a quarter, we saw normal seasonality. Our core PAX business was up 9% for 2023, with underlying faster growth partly offset as we transition our legacy video products into sales of our new Velocity Vision and Vision AI platforms. Now, product releases late in 2023 included the full launch of our cloud-first small to medium business product, Primus, along with a totally new edge controller, our EG2, and our Primus mobile app, setting the standard for high-security cloud offering in the SMB space. We also launched Vision AI, our video intelligence solution that's now a standard feature in all of our video offerings, and Scramble Factor, our new multi-factor intelligent reader. This is more than a product. It's the next generation of our iconic scramble pad with biometrics and a state-of-the-art LCD touchscreen keypad, creating a flexible access point with multiple authentication methods. We've designed it to easily expand to mobile and frictionless access, video, audio, and other entry point capabilities to support the next generation of infrastructure-light, cloud-based access control platforms. Now, as you can tell from these major product launches across access, video and intelligent reader infrastructure, from a product perspective, we came out of 2023 in a stronger position than we've ever been. Another metric of our progress is our high margin software services and recurring revenues, which increased to over 20% of premises revenues. There's still a portion of revenues that are perpetual license, which we expect to convert to subscriptions. Now, this is a relatively near-term recurring revenue growth opportunity, because it's grounded in our own customer base. Supporting our federal strength, the U.S. General Services Administration approved Identiv's Velocity 385 software, Hirsch hardware, and UTrust readers for listing on the GSA-approved products list following a rigorous testing led by the GSA APL FIPS 201 evaluation program. Our fourth quarter also reflected progress in key strategic directions, including our OEM and federal sales, hospital and healthcare systems, and velocity vision pilots. So in summary, our premises business strengthened industry-wide, with software services and recurring revenues reaching well over 20% of premises revenues as we exited 2023, and positioned strongly with the product releases I described earlier across cloud, AI analytics, SMB, and next-generation sensors and biometrics. We focused our RFID business on SCRI applications, particularly in healthcare and consumer engagement, supported by continued progress developing our BitCIO data analytics platform. And from an investor perspective, in Q4, we strengthened nearly all aspects of the strategic foundation of our businesses. We continue to believe we're on track to complete our strategic review and actions early in 2024. So with that, I'll pass the call over to Justin to review our fourth quarter financial results in more detail. Justin?

Thanks, Steve. As Steve mentioned, in 2023, we were able to deliver revenue growth, consistent margins, controlled operating expenses, and generate positive cash flow from operations. This enabled us to maintain a strong working capital position. We achieved these results while focusing on driving disciplined growth in both our identity and premises businesses, including our new cutting-edge premises products, our focus on SCRI, and the continued build out of our operational Thailand facility, which positions the company to continue its growth momentum in 2024. Fourth quarter 2023 revenue was $29 million in line with our previously announced guidance range and flat versus a comparable prior year period. Fiscal year 2023 was $116.4 million, a 3% increase compared to fiscal year 2022. Fourth quarter 2023 GAAP and non-GAAP adjusted gross margins were 35% and 37% respectively, as compared to 36% and 38% in 2022. The year-over-year decline in margins versus the prior year period is attributable to the product mix between premises and identity segment sales. Fiscal year 2023 GAAP and non-GAAP adjusted gross margins were 36% and 38%, respectively, which is consistent with 2022. GAAP and non-GAAP adjusted gross margin reflect our continued focus on maintaining our margin profile in 2023, despite the rising cost of materials, while continuing to increase our investments in technology and manufacturing processes and equipment. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. GAAP and non-GAAP adjusted operating expenses for the fourth quarter 2023, which include research and development, sales and marketing, and general and administrative costs, totaled $11.8 million and $9.8 million, respectively, as compared to $10.2 million and $9.3 million in 2022. Fourth quarter 2023 GAAP operating expenses include $0.4 million in strategic review related costs. GAAP and non-GAAP adjusted operating expenses for fiscal 2023 totaled $47.2 million and $41.3 million respectively as compared to $41.3 million and $37.1 million in 2022. Q4 GAAP net loss attributable to common shareholders was $1.9 million or $0.08 per share, compared to gap net income of $0.03 million in Q4 2022. Fiscal year 2023 gap net loss was $6.8 million, or $0.29 per share, compared to gap net loss of $1.6 million in fiscal year 2022, or $0.07 per share. Non-gap adjusted EBITDA for Q4 2023 was $0.9 million, compared to $1.7 million in the prior year period. For fiscal year 2023, non-GAAP adjusted EBITDA was $2.8 million compared to $5.4 million in fiscal year 2022. This change in non-GAAP adjusted EBITDA reflects our continued strategic investments in R&D, as evidenced by our new product launches, sales activities, and our expanding Thailand operations. 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, in Q4 2023, revenue from our identity products totaled $17.5 million, or 60% of the company's net revenue, compared to $18.3 million, or 57% of net revenue in Q3 2023, and $16.8 million, or 58% of net revenue in Q4 2022. For fiscal year 2023, identity revenue was 68.1 million versus 67.4 million in fiscal 2022. The year-over-year increase was primarily driven by our RF-enabled IoT products, which more than offset the decline in our legacy access cards. Identity segment gap and non-gap adjusted gross margins for Q4 2023 were 22% and 24%, respectively, flat compared to Q4 2022. For the full year, identity segment gap and non-gap adjusted gross margins were 22% and 24%, respectively, also flat compared to fiscal year 2022. While quarter-to-quarter margins can fluctuate, we expect long-term margins to trend upwards from current levels as we expand and deepen our existing customer and technology partnerships and increase production at our Thailand facility, which has lower manufacturing costs than our Singapore operations. We believe our focus on high-value specialty IoT solutions and strategic relationships with industry partners and suppliers could further strengthen our margin profile. We remain committed to a long-term gross margin target of 35 to 40% in our identity business. Now, turning to the premises segment, in Q4 2023, revenue from our premises products and services accounted for $11.5 million, or 40% of the company's net revenue, compared to $13.6 million, or 43% of net revenue in Q3 2023, and $12.2 million, or 42% of net revenue in Q4 2022. The sequential decrease in premises revenue was in line with our normal seasonality, as Q3 coincides with the government's fiscal year end. For fiscal 2023, premises revenue was $48.3 million versus $45.5 million in fiscal 2022. The year-over-year increase was primarily driven by our physical access control systems, offset in part by decreases in video products. We continue to execute our go-to-market strategy by offering a comprehensive end-to-end security platform solution. Premises segment gap gross margin for Q4 2023 was 55%, a decrease of 1% compared to Q4 2022, primarily due to product mix. Premises segment non-GAAP adjusted gross margin for Q4 2023 was 57%, flat compared to Q4 2022. For full year, premises GAAP and non-GAAP adjusted gross margins were 57% and 58%, respectively, flat compared to fiscal year 2022. We remain committed to a long-term gross margin target of 55% to 60% in our premises business. Now, moving to our operating expense management. Our non-GAAP operating expenses in the fourth quarter of 2023 adjusted to exclude restructuring, strategic review, and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization with 34% of revenue compared to 32% in Q4 2022 and 32% in Q3 2023. Non-GAAP operating expenses for fiscal year 2023 was 35% of revenue compared to 33% in fiscal year 2022. Now, turning to the balance sheet. We exited Q4 2023 with $24.4 million in cash, cash equivalents, and restricted cash. an increase of $3.5 million from Q3 2023. In Q4, the increase in cash was a result of $4.8 million in cash from operating activities, while we used $1.1 million in investing activities, primarily related to capital expenditures, and $0.4 million from financing activities. Our working capital exiting Q4 was $48.7 million, a decrease of $1.1 million from Q3 2023. Inventory decreased $0.7 million in Q4 as we continue to work through our inventory balances. As a result, we expect to continue rebalancing our working capital and anticipate repaying our revolver balance in 2024. In our 10-K 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 today's earnings release. As Steve mentioned, with the anticipated technology transition from one of our key RFID customers, leads us to an expected Q1 revenue range of $22 to $24 million. This concludes the financial discussion. I'll now pass the call back to Steve.