Identiv, Inc. (NASDAQ:INVE) Q4 2023 Earnings Call Transcript

Identiv, Inc. (NASDAQ:INVE) Q4 2023 Earnings Call Transcript March 12, 2024

Identiv, Inc. misses on earnings expectations. Reported EPS is $-0.08 EPS, expectations were $-0.033. Identiv, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Welcome to Identiv'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, Steven Humphreys; and CFO, Justin Scarpulla. Following management's remarks, we will open the call for questions. Before we begin, please note that during this call, management may be making references to non-GAAP financial measures or guidance, including non-GAAP adjusted EBITDA, non-GAAP gross margin 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. Identiv assumes no obligation to update these forward-looking statements, which speak as of today. I will now turn the call over to CEO, Steven Humphreys for his comments. Sir, please proceed.

Steven Humphreys: 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.

That was 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 disciplined 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 view our financial 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 bulid on our early leadership in SCRI. While are still in 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, Shriners 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 Energous and Wiliot.

This solution is great for cold chain monitoring in warehouses and refrigerated trucks. We announced one of the first adopters, the logistics 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 Wiliot 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 Wiliot in Q4. As I mentioned before, demand can fluctuate quarter-to-quarter in early stage applications like this. And our understanding is that, Wiliot is undergoing a technology transition, so we expect to pause in shipments for the next two to four quarters.

Fiscal year 2023 revenue from Wiliot 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 Wiliot 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, NexSight is also a partner with a focus on connected retail products and we expect volumes from NexSight, Energous 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 Bitse.io IoT cloud platform.

Last week we announced the release of Bitse 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 Bitse related initiative is with Mazars, a leading international audit, tax and advisory firm on a new AI enabled retail operation solution. This combines Mazars ERP systems expertise with our Bitse.io platform, NFC tags and Microsoft Dynamics 365. We work directly with the Microsoft R&D team to integrate Microsoft AI Assistant Co-pilot with the data analytics enabled with Bitse. At the recent National Retail Federation Annual Show in January, the Mazars's team demoed their new total experience offering for retailers in the Microsoft booth.

We're also co-hosting a virtual panel with Mazars's and NFC Forum on March 28 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 margin 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 the quarter, we saw normal seasonality. Our core packs 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 platform.

Now product releases late in 2023 included the full launch of our cloud first small to medium business product Primis, along with a totally new edge controller, our EG2 and our Primis 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 ScrambleFactor, our new multi factor intelligent reader. This is more than a product. It's the next generation of our iconic ScramblePad 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 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 Bitse.io 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?

Justin Scarpulla: 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 the 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 $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 $41.3 million, respectively, as compared to $41.3 million $37.1 million in 2022. Q4 GAAP net loss attributable to common shareholders was $1.9 million or $0.08 per share, compared to GAAP net income of $0.03 million in Q4 2022. Fiscal year 2023 GAAP net loss was $6.8 million or $0.29 per share compared to GAAP net loss of $1.6 million in fiscal year 2022 or $0.07 per share. Non-GAAP 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 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 dollars 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 GAAP and non-GAAP adjusted gross margins for Q4 2023 were 22% and 24%, respectively, flat compared to Q4 2022. For the full year, Identity segment GAAP and non-GAAP 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 GAAP 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 Q4 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 was 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 million to $24 million dollars. This concludes the financial discussion. I'll now pass the call back to Steve.

Steven Humphreys: Thanks, Justin. Across 2024, we expect use cases in SCRI to continue to grow and expand to new customers. In Premises, we're positioned with the strongest refreshed product lineup to support growing 2024 revenues of our end-to-end platform with continuing margin strength and expanded recurring revenue software and services. As we develop our competitive value in both of our growth businesses, we'll keep both our balance sheet and working capital strong. Let me start by addressing the Identity business, particularly focusing on the RFID segment. In RFID applications for IoT, we build value three ways. First, by supporting pilots for technically complex SCRI applications, particularly in the healthcare and consumer engagement verticals.

Healthcare and medical devices are the most strategically important market for our RFID IoT solutions. Our focus is on delivering solutions that meet the challenging technical requirements of our SCRI customers, which positions us to lead entirely new categories. Now healthcare projects move slowly. There's progress quarter-over-quarter, but large scale ramps are hard to forecast. The NRE and pilot pipeline is healthy and we've been devoting more resources to the best near term production rollout revenue generating opportunities. Now this is a key category for increased investment. We're balancing relatively near term use cases like auto injectors with the long term transformational market for medication compliance. Now this compliance category is possibly the healthcare industry's biggest opportunity to generate economic benefits.

As an indication of the scale of the opportunity, nearly a quarter of all first time prescriptions aren't filled and of these, almost half aren't taken according to their administration protocol. We believe RFID provides a unique platform to address this multi $100 billion issue for the healthcare industry. We'll focus more on this when we complete our strategic activities since this will take time, focus and capital to realize the full potential of the opportunity. But the scale of the opportunity and our unique positioning to address it makes it well worth the time and effort. We also continue to support five different auto injector projects across four different companies with various ASPs ranging to over $1, depending on the complexity of the solution.

In one case the second phase of application testing for a project that received FDA approval is underway. In another, our largest auto injector customer has deployed about 10,000 auto injectors in a controlled pilot with select physicians and patients evaluating usability and effectiveness. This remains an exceptional category of opportunity that's continuing to progress. We'll keep sharing milestones since medical device timelines can be long. Anyone who's following the exploding use cases for auto injectors is aware of the extremely large volumes that pharmaceutical companies are projecting in what's becoming one of the largest and fastest growing categories in medication administration. In consumer engagement, we're seeing expanding use cases including a unique smart home electronics application, which doubled sales quarter-over-quarter.

We're continuing to see high end garment use cases including our life of garment applications, the Mazars application for retail users and many others. The second way we build value in IoT is by solidifying our reputation as a specialty applications provider and reinforcing our industry leadership as evidenced by our joint marketing and product initiatives. These include partners like NXP, collectID, Wiliot, Mazars and Energous and deep engagement with institutions including the Axia Institute at Michigan State and the NFC Forum which are active in setting the standards for advanced RFID applications. This is a particularly active growth driver with pervasive use cases emerging such as the digital product passport which was introduced by the European Commission within the Circular Economy Action Plan.

And third, by expanding our lower cost, high quality and technically advanced production in Thailand. Our initial CapEx in Thailand is essentially complete. We expect the advantages of producing IoT devices in Thailand, lower production costs for rent and labor, shorter supply chains and access to highly skilled technical and production people. So these are our value creation drivers in IoT for 2024. Our business issue -- one business issue from prior years that we don't expect to be a factor in 2024 is supply chain. Now let me address our Premises business. In physical security, we accomplished our industry leadership goals in four ways. First by offering a tightly integrated end-to-end physical security solution, including our recently announced ScrambleFactor as well as our Vision AI and Velocity plus Velocity Vision, single pane of glass security management platform.

Here is the value proposition of our tightly integrated end-to-end system has clearly resonated with commercial customers. End users appreciate our complete solution and integrators are an even more effective leverage point. It's more profitable for integrators to implement systems from fewer partners, reduces their training costs, consolidates purchase order complexity, allows for faster more efficient installations and makes ongoing system maintenance easier and more profitable. Now this is one strategic category where Identity and Premises segments overlap. The physical security industry is embracing the convergence of Identity management for logical as well as physical security. A Gartner study in 2022 found that 41% of enterprises plan to converge parts of their cyber and physical security operations by 2025, up from 10% in 2020.

Our identity readers provide logical access as well as being used as enrollment and issuance systems to provision access control identities. And we have deep technical roots in secure authentication as well as a wide market presence. Our leadership in this market was demonstrated again earlier this year with a $2 million order in January for Identity readers to deploy company-wide across one of the world's largest online retailers. Now our second security leadership driver is by growing our leading federal position in physical security solutions, including on premises and cloud based services. Across our federal customers, we focused on expanding the agencies we sell into, as well as maximizing share of wallet. Both of these initiatives are reflected by our continued growth in federal, up 9% in 2023.

We expect federal to continue to be a growth driver in 2024. Our third industry leadership driver is bringing high security to the SMB market, leveraging enterprise scale high security through our new Primis Cloud EG2 controller and encryption bridge platform. This solution can also be used for customers with many locations as a cost effective option for uniform access control across distributed organizations. Already in 2024 we're seeing demand for EG2s ahead of our initial projections. Fourth, expanding our enterprise software services and recurring revenues by driving sales of Cirrus cloud across our existing enterprise install base as well as new customers. Software and recurring revenues exited 2023 well over 20% of our Premises revenues and we expect this trend to continue in 2024.

Driving recurring revenues is one of our most important initiatives for 2024. In addition to our Cirrus enterprise cloud platform with Primis cloud we're piloting pricing models that we believe will accelerate ease of adoption for the channel enhancing recurring revenue growth. To continue to drive this growth, we're committed to a strong balance sheet with healthy working capital to fund our strategic growth initiatives. We continue to tightly manage our expenses reflected in the sequential reduction in expenses, but still prioritizing investments in key growth initiatives. So as you can hear from our comments, we're very positive about the value creation and the industry leadership progress we think we're making in both of our businesses.

From a business planning perspective, we expanded our next generation products, technologies and production capacity. Both of our businesses and markets are well positioned for strong 2024 following our investments in 2023. Our product launches, Thailand production and other investments consumed capital and pressured our operating results, but they positioned us well for 2024 and going forward. For Q1 we're anticipating revenues in $22 million to $24 million range with continued strong contribution from our Premises security and Identity reader businesses. We expect our strategic efforts may have some effect on near term business as we focus on taking the right strategic steps to support long term value creation. The next major step for our business course is the culmination of our strategic process.

Our commitment is to maximize shareholder value by substantially investing in our growth opportunities and our strategic verticals and strengthening our leadership teams to execute our strategic plans. As I mentioned earlier, in the near term we expect to take strategic steps in these areas, consistent with the plan we communicated at end of last year. So with that, I'll now ask the operator to open the lines for questions. Operator?

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