Identiv, Inc.

Good afternoon. Welcome to Identiv's presentation of its second quarter 2024 earnings call. My name is Holly, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Stephen Humphreys, CFO, Justin Scarpola, and President, IoT Solutions, Kristin Newquist. Following management's remarks, we will open up 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 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 and quarterly report on Form 10-Q. as well as our second quarter 10Q once filed. Identif assumes no obligation to update these forward-looking statements. I will now turn the call over to CEO Steven Humphreys for his comments. Sir, please proceed.

Thanks, operator, and thank you all for joining us. The second quarter accomplished the three main goals for the business to build our base for the company's long-term future. First, Kirsten Newquist, the president of our IoT business and soon to be CEO of Identiv, made great progress understanding our core IoT business and developing a rigorous plan for future growth. Second, we cleared all but the last one of the process hurdles to close our transaction to divest our security business lines. And third, our combined total company revenues exceeded consensus estimates, delivering the results needed to keep our strategy on track. I'll address the Q2 results in the context of the transaction and support for the business going forward, and then turn the call over to Kirsten. Execution across Identiv continued as projected, despite being in a pre-closing state that could be distracting for any organization. We were able to deliver revenues above consensus estimates through Kirsten's leadership of the IoT team and solid performance of the physical security and identity reader teams. As we progressed through the preparations for the closing of the strategic transaction, VitaProtect's been a supportive partner, enabling management to focus on executing our growth plan to deliver this revenue. Just as important, we're managing cash tightly to be sure our businesses are healthy during the transition. As a result, we finished in a better cash position than our internal forecasts. Operationally, we had some gross margin pressure due to mix in the security business and temporarily lower overhead absorption as we accelerate our move to Thailand, partly offset by the phase out of some lower margin business. Regarding the transaction process, we've executed each step on track. We've cleared antitrust and UK regulatory approval, and for our shareholder approval, we received a 96% positive vote among our voting shareholders in favor of the strategic transaction. Our only remaining regulatory step is US government CFIUS approval. This is going well, and we expect a decision within the Q3 timeframe we've communicated before. We're confident we're on track to close the transaction as planned. Upon closure, we expect to add about $130 million in net cash after taxes, bankers' fees, and one-time costs. One other clarification I'd like to make about our reported financials. In today's earnings release, in accordance with GAAP, our financials are now being reported as continuing operations, our IoT business, and discontinued operations are physical security and reader businesses. Now, Justin will cover these in further detail in the financial discussion, but before that, I'd like to turn the call over to Kirsten for her update on the current IoT business. Kirsten, over to you.

Thank you, Steve, and good afternoon, everyone. I'm glad to be with you all today to provide an update on the IoT business and the progress we've made on our strategic growth and go-to-market plans since we last spoke in May. I've been at Identiv for nearly four months, and I've spent much of that time diving deep into the details of our IoT business and preparing for the anticipated close of the asset sale transaction, which will provide significant capital to fund the future growth of the company. I have visited our offices in Germany, Thailand, and Singapore to meet with our teams, learn about our sales and R&D processes, and listen to their feedback. We have some of the most talented people in the RFID industry working at Identiv, and their passion for our technology and customers is energizing. I've also had the opportunity to meet with some of our customers and suppliers, allowing me to hear directly from them about the areas where we excel and where we can improve. I've received particularly positive feedback on our ability to quickly develop technical solutions and produce prototypes for testing. As I've gotten to know the business, some of my initial impressions were confirmed, while others have evolved as I've learned more. I'll start today's discussion with an update on our core IoT business. With a deeper understanding of our customers, products, and capabilities, it is clear to me that the opportunity space for Identif's specialty IoT solutions is strong. Going forward, we need to focus the organization on the highest potential and most sustainable opportunities. Our core business is primarily focused on selling and marketing through the RFID channel, which allows us to serve many industries and segments and complements our own sales and marketing efforts with those of our partners. We are strengthening our relationships with our channel customers, shifting from a traditional supplier approach to a more collaborative partnership model. We have many promising customer-driven new product development opportunities in progress, such as an HF authentication solution for surgical consumables, NFC-enabled smart labels for auto-injectors, and NFC-enabled smart labels for top-shelf liquor brands to enhance consumer engagement. However, we need a more disciplined approach to evaluating these opportunities from the start and throughout the product development process to ensure we focus on those that we expect will have a sustainable competitive advantage and strong ROI for the business. To address this, we are implementing a stage-gate process to actively manage the projects, assess viability and ROI at each stage, and maintain continuous customer engagement. We are developing clear criteria for accepting new opportunities, as well as for entering each stage of the development process. New projects must meet these acceptance criteria before we begin design work, and we will be diligent in reassessing at each stage gate. When I visited Thailand, I was very impressed with our new state-of-the-art production facility with its competitive cost structure and led by our highly experienced RFID operations leader and his skilled team. As we mentioned on our last earnings call, the transition of our RFID production from Singapore to Thailand is a key near-term priority, and we are progressing it with the highest sense of urgency. We made significant progress in quarter two toward that objective, including receiving our ISO 9001 and ISO 14001 quality certifications for the Thailand facility, and we will continue to move machines and add headcounts in Thailand throughout the second half of this year. We are on track to complete the majority of the transition, with the exception of three customers by quarter one, 2025. Due to qualification and regulatory requirements, we will continue to support these three customers in Singapore into 2025. We are continuing to phase out our very low margin business and anticipate discontinuing another 10% of this year's volume in line with completing the transition. Once we shift all production to Thailand and the team achieves full productivity, we expect the non-GAAP growth margin of our core business to almost double, reaching 26 to 28%. By focusing our growth efforts on higher margin segments, those with over 35% gross margin, we believe we can ultimately achieve a 30% plus non-GAAP gross margin for the business. Nonetheless, there remains much to do for the IoT business to fully capitalize on its potential, and achieve the scale necessary to become a self-sustaining standalone company. Separating the IoT business from the physical security business will require focus, resources, and collaboration with the physical security team during the 12-month transition period. We have engaged an external advisor to assess our current business processes and identify key priority areas. We are building the plan to address these areas to ensure we have a strong foundation on which to scale the business. Although we see a path to achieving a 30% non-GAAP growth margin, we will need to scale the current size of our IoT business. With our OPEX profile, including the costs associated with being publicly listed, we believe we should be able to achieve EBITDA break-even at $60 to $70 million in annual sales. This leads to my second key priority, which is to complete our strategy and growth plan so we have a clear path to reach this annual run rate as quickly as possible. While we expect that much of the strategy will be organic, we are also exploring other strategic options such as mergers, partnerships, and acquisitions. As we consider these options, we intend to focus on those that not only bring scale, but also offer complementary products, strong synergies, talent, and are highly accretive financially. But before I get into the details of our strategy efforts, I would like to hand off the call to Justin so he can provide the financial update on quarter two, the cash requirements for the next 12 months, and the quarter three guidance for our continuing operations, as well as the combined business.