Identiv, Inc.

Good afternoon. Welcome to Identiv's presentation of its first quarter 2024 earnings call. My name is Matthew, and I'll be your operator this afternoon. Joining us for today's presentation are the company's CEO, Stephen Humphries, CFO, Justin Scarpullo, and President, IOT Solutions, Kirsten Newquist. Following the 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, 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 the pending asset sale transaction, future business and market conditions and opportunities, and future plans and prospects, including with respect to the transaction and identities post-closing business, is a forward-looking statement. Actual results may differ materially from those expressed in the 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 and quarterly report on Form 10-Q. In addition, risks related to the asset sale are included in the preliminary proxy statement filed with the SEC April 30, 2024, and our first quarter 10-Q once filed, and will be included in the definitive proxy statement once filed. Identiv 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. The first quarter of 2024 was one of the most important in our company's history. We completed an extensive, year-long strategic review and took actions that we think will serve all of our stakeholders very well. We're divesting assets relating to our security and logical reader products for a cash price of $145 million, generating capital to invest in our IoT business. We also completed a thorough search for a new leader for our IoT business who will take over as CEO of the remaining Identiv business when the transaction closes. We believe we put Identiv on a path to realize its opportunity to create major value by investing in the growth of a key business that's increasingly central to the digital transformation of some of the world's largest industries. Now, that's a big statement, but we believe it's accurate for three reasons. The scope of the market opportunity, our competitive advantages, and soon our access to the capital and the focus and leadership to deliver on the opportunity. We'll go into details throughout the call, but first let me outline specifically what steps culminated in and around Q1. We undertook a strategic review of our business starting early last year. We looked at every combination of our business assets, including market opportunities and our competitive positioning, with one criterion. What is the highest expected value creation opportunity available to us to deliver to our investors? We looked at divesting each part of our business, including divesting all of the business. We looked at each path for capital formation, value creation, and ROI. We went in-market to assess current values and competitive dynamics. We evaluated competitive companies both to assess their strategic directions and the effect on our value creation opportunity and to assess our opportunity to realize near-term value for our assets. In consultation with our largest investor and with our financial advisor, Imperial Capital, we ultimately focused on the actions we announced last month. raise the maximum capital possible to invest in and focus on our specialty IoT business, ensure a strong balance sheet for that business, and bring on highly experienced leadership to direct this investment and navigate the company's future growth trajectory. We believe this transaction positions us to build an enduring, leading IoT company that's core to enabling the digital transformation taking place in particular across healthcare, pharmaceuticals, and medical devices, but also a critical enabler in other industries' digital transformations. In order to secure the investment for the IoT business, one of the requirements was that I join the buyer. So last year, we launched an executive search process to find a world-class leader for our specialty IoT business to take over as CEO when the transaction closes. We needed the best possible leader to take advantage of our unique opportunity to be a linchpin technology provider in the digital transformation we're targeting. We found that leader in Kirsten Newquist. Kirsten is the ideal profile to lead the business to maximize our value creation opportunity. She spent 17 years at Avery Dennison leading their medical business as well as in their SmartTrack RFID business, one of the strongest companies in the space. She deeply understands the key customers and influencers across the digital transformation of healthcare while also knowing intimately the operations of RFID businesses. She's a pragmatic and disciplined business person who also sees strategic opportunities to transform industries. She has the rare ability to define a vision and then to build and execute plans to make the vision happen. We're convinced she's the right leader for the business and to realize Identiv's market opportunity. So Kirsten will be speaking more about her background and why she chose to join Identiv after the financial review. Now, in the interest of time, we won't go through the details of our strategic assessments, executive recruiting, and everything else. So for more details, please review the preliminary proxy statement we filed last week. We've put a lot of information into it, including a thorough description of the IoT business going forward, as well as the timeline and alternatives we assessed and the basis for the board's decision to proceed on this path to maximize shareholder value. Today, we'll focus on Q1 and subsequent events as they relate to our business' future. Investors need clear visibility on the likelihood to close of the transaction and of the post-close business going forward, so we'll focus on those topics. I'll go through relevant business results in Q1 and the status and outlook for the transaction, and then after Justin's comments, I'll turn the call over to Kirsten to discuss the IoT business, her near-term priorities, and long-term vision for the business. So for Q1, our business continued on a solid footing, but there was some effect due to the ramp in activity on the transaction and recruiting our future CEO. We managed both activities, which involved key management and diligence meetings, as well as in CEO interviews and onboarding. And we couldn't disclose it at the time, but of course this was going on in Q4 as well as in Q1. So our overall business performance was consistent despite these distractions, with total revenues within our guidance range at $22.5 million, and solid gross margins. Our GAAP gross margin was 37% and non-GAAP gross margin was 40%, our highest non-GAAP gross margin since Q3 2020, reflecting margin strength in our premises segment as well as within identity readers. In premises, we also had to contend with the federal government's continuing resolution budgetary uncertainty. We've been pleased with the premises' business strength, which we think puts us in a good position to continue strongly into Q2 and for the rest of 2024. Now, notably, software services and recurring revenues grew to 27% of premises revenues in the first quarter. This reflects three other trends we saw in Q1. Strong interest in our Primus product line, cloud as an interest area in nearly all of our new business opportunities, and high interest levels in video in the federal space as we deployed demo platforms of Velocity Vision across three more federal agencies. We also continue to see growth from our newest integrators, from our smaller geographic regions, and in particular across K-12 schools, utilities, and transportation, especially in airports. Now, our identity business, which includes our access card and identity readers in addition to IoT, continue to perform consistently overall, even with the internal demands of recruiting a new leader. Our IoT team continue to build our position as a specialty IoT leader with another successful presence at RFID Journal. We also joined the Axia Institute in Michigan State, and we continued our webinar series with sessions shared with STMicro and another with NXP and Axia Institute next week. We secured a new two-year customer contract for a smart home application, and we also shipped another 5 million units to Williott in Q1. Now, as we said on our Q4 earnings call, we expect these to be the last Williott units for at least a few quarters as they work on producing their Gen 3 chip. This last batch for Williott was produced in our new Thailand facility. It demonstrated our ability to rapidly ramp up even very complicated products in Thailand to take advantage of our lower costs there for nearly all of our production over time. Now competitively, as we've expected due to the large capacity buildups by some companies that we described on prior calls, we've seen a couple of companies become aggressive on pricing. Now this capacity was added mostly for UHF products, but some of it can be applied to HF applications. This affects some of our standard lower margin products, but doesn't affect our more complex specialty IoT devices. Then lastly, our logical access readers within our identity segment performed very well. Our FIDO dual factor security keys expanded sales and pipeline opportunities, especially in Europe. In the Americas, our contactless readers are our main growth drivers, including our deployment company-wide across one of the world's largest online retailers in Q1 and Q2, and this could continue into 2024 with further follow-on orders. So, returning to our strategic transaction, in terms of timeline to close, we believe we're moving the process on the shortest possible timeline, given the statutory requirements for a shareholder vote and other regulatory processes. In terms of certainty to close, clearance of these approvals and, of course, the stockholder vote are the only major terms needed to proceed. We believe we're on a good path both in terms of timing and certainty. We're on track for the Q3 close estimate we provided, and should things progress smoothly, we have a decent shot at an early Q3 close date. That forms the foundation for our IoT business going forward. So after Justin's comments on our financial results, I'll turn the call over to Kirsten so you can hear directly from her the path and opportunity we'll be focused on. Justin, over to you.

Thanks, Steve. As Steve mentioned, in the first quarter of 2024, we were able to deliver revenue in line with our guidance range, increased company margins, and continued control over our operating expenses. We achieved these results while focusing on both our identity and premises businesses, including our cutting-edge premises products, as well as our continued build-out of our operational Thailand facility. First quarter 2024 revenue was $22.5 million, a decrease of $3.5 million versus Q1 2023. $1.7 million of this decrease was from our premises segment and was primarily related to the federal government continuing resolution that wasn't resolved until March. The remaining $1.8 million decrease in our identity segment was related to our RFID-enabled IoT products, primarily from Williott, offset in part by an increase in our identity breeder product. First quarter 2024 gap and non-gap adjusted gross margins were 37 and 40%, respectively, as compared to 35 and 37%, respectively, in Q1 2023, which included increases in both our premises and identity segment margins. Our Q1 2024 gap and non-gap adjusted gross margins reflect our continued focus on our margin profile. while continuing to increase our investments in technology and manufacturing processes and equipment. GAAP and non-GAAP adjusted operating expenses for the first quarter 2024, which include research and development, sales and marketing, and general and administrative costs total $12.6 million and $10.4 million, respectively, as compared to $11.9 million and $10.6 million in Q1 2023. First quarter 2024 GAAP operating expenses also included 1 million in strategic review related costs. First quarter 2024 GAAP net loss attributable to common shareholders was 4.8 million or 21 cents per share compared to GAAP net loss of 3 million in Q1 2023. Non-GAAP adjusted EBITDA for Q1 2024 was negative 1.4 million compared to negative 0.9 million in the prior year period. This change in non-GAAP adjusted EBITDA is primarily a result of our lower year-over-year identity revenues, which impacted the utilization of our Singapore and 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 Q1 2024, revenue from our identity products totaled $12.8 million, or 57% of companies' net revenue, compared to $14.7 million, or 56% of net revenue in Q1 2023. Identity segment gap and non-gap adjusted gross margins for Q1 2024 were 22% and 26%, respectively, as compared to 21 and 23%, respectively, in Q1 2023. The year-over-year increase in gross margin was primarily attributable to an increase in identity, reader, revenues, and margin, offset in part by increased overhead expenses from our Thailand operations that came online in Q3 2023. Now, turning to the premises segment. In Q1 2024, revenue from our premises products and services accounted for 9.7 million or 43% of companies net revenues compared to 11.3 million or 44% of net revenue in Q1 2023. Premises segment gap gross margin for Q1 2024 was 58%, an increase of 4% compared to Q1 2023. Premises segment non-gap adjusted gross margin for Q1 2024 was 59%, compared to 55% in Q1 2023. The increase in our premises segment related to decreases in inventory, freight, and logistics costs. Moving now to our operating expense management. Our GAAP operating expenses in the first quarter of 2024 as a percentage of revenue was 56%, compared to 46% in Q1 2023. The increase in GAAP operating expenses as a percentage of revenue is primarily related to our strategic review costs. Non-GAAP operating expenses in the first quarter of 2024 adjusted to exclude restructuring, strategic review, and severance costs, and certain non-cash charges consisting of stock-based compensation and depreciation and amortization was 46% of revenue, compared to 41% in Q1 2023. The increase in non-GAAP operating expenses as a percentage of revenue is primarily related to the year-over-year decrease in revenue, as operating expenses were relatively flat. Now, turning to the balance sheet, we exited Q1 2024 with $22.4 million in cash, cash equivalents, and restricted cash, a decrease of $2 million from Q4 2023. In Q4, the decrease in cash was a result of $1.4 million from operating activities $0.2 million from investing activities and $0.4 million from financing activities. Our working capital exiting Q1 was $45.6 million, a decrease of $3.1 million from Q4 2023. As noted previously, our cumulative strategic review costs are $1.4 million exiting Q1 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. This leads us to an expected Q2 revenue range of $23 to $25 million. This concludes the financial discussion. I'll now pass the call back to Steve.