Welcome to the Q3 2012 Identive Group Earnings Conference Call. My name is Leslie and I'll be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Ms. Darby Dye. Ms. Dye, you may begin.

Thank you. Hello, everyone and thank you for joining us today. The purpose of today's conference call is to supplement the information provided in our press release issued earlier today announcing the company's financial results for the third quarter ended September 30, 2012. Speaking on today's call are Ayman Ashour, Chairman and CEO; and David Wear, CFO. Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends, and our competitive position, constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. The forward-looking statements we make today speak as of today and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today. Please refer to the press release, our Annual Report on Form 10-K for the year ended December 31, 2011, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. During this conference call, we will also be making reference to non-GAAP results or projections, including non-GAAP gross margin, operating expenses, adjusted EBITDA and earnings per share. Each of these non-GAAP measures exclude some or all of the following: acquisition, transition and integration costs; equity-based compensation expense; adjustments to earn out estimates; impairment charges; and amortization and depreciation. Identive uses these non-GAAP measures internally and believes they provide a meaningful way for investors to evaluate and compare our operating performance from period-to-period, but cautions investors to consider these measures in addition to, not as a substitute for, nor superior to Identive’s consolidated financial results as presented in accordance with GAAP. A complete reconciliation between GAAP and non-GAAP financial measures is included in today’s press release, which is available in the Investor Relations section of Identive’s website. As a reminder, today’s call is also available as a webcast with slides, which can be accessed from the Presentations, Reports and Webcast page within the Investor Relations section of our website at www.identive-group.com. If you are viewing the webcast, you may enlarge the slides of this presentation by clicking on the magnifying lens in the bottom right hand corner of your screen. I would now like to introduce Ayman Ashour.

Good morning. Thank you, Darby, and thanks to all of you for joining us today. Q3 revenues were poorer than we expected. Some of our U.S. government business didn't hit us till late in September -- or actually, early October, but we do have it. Our larger -- our large much delayed order for the Singapore metro started shipping in the -- late in the quarter. Nevertheless, Q3 was a critical quarter for Identive and significant progress was made in many areas. Our base operating expenses decreased by an additional 9% sequentially. Adjusted EBITDA improved substantially. Despite weaker sales levels, we lowered our adjusted breakeven drastically. You will see this in black and white when David Wear compares Q3 of this year to Q3 of last year. We are a lot better on the cash side than the guidance we gave, primarily because of the timing of our payment solution business. So $2 million collected over the weekend before the end of the month and without that -- and without the restricted cash numbers, which David will also go into, we were still ahead of our projection. So in this area, we performed particularly well. More importantly, we believe with the new capital we secured and announced this morning, we will be able to remove the concerns about our liquidity without dilution. This has obviously caused uncertainty. This, coupled with the position of a share overhang caused by the widely expected sale of shares from our second-largest shareholder has also gone. This position is totally now wound out and we believe across the board major progress has been made. Looking at our main business categories. We had record sales of smart card readers to the U.S. government agencies in Q3 supporting cyber-security programs and continued to expand into the Japanese…

Thank you, Ayman. So now I'm moving to Slide 8. I'll take you through our results in a little more detail. At $22.9 million, Q3 revenue was 4% lower than in Q2 and 14% below the revenue reported for the third quarter of 2011, primarily as a result of the order slippage and the delays that's Ayman just discussed. Non-GAAP gross profit margin improved by 0.5% quarter-on-quarter as a result of an improved sales mix and was down slightly year-over-year with 2011 benefiting from stronger cost absorption in our transponder business. At $10.7 million, non-GAAP operating expenses were 10% lower than the previous quarter and down 15% from the same quarter a year ago. The restructuring programming we initiated in June is showing good results and our main focus has been on lowering cost through the rationalization and the streamlining of our organization on a global basis. Much of our work has been in consolidating activities and resources through integration of support functions in our acquired and existing businesses, leading to improvements in efficiency and a reduced cost structure. We are on track to realize savings of between $4 million and $5 million this year compared with the first quarter expense levels and close to $7 million on an annualized basis. Because of the timing of our restructuring activities, we did not record any charges in Q3 but do expect to record between $0.4 million and $0.6 million for restructuring during the fourth quarter. The overall cost of the restructuring activity remains in line with that previously disclosed. Lower operating expenses resulted in a significant reduction in our adjusted EBITDA loss compared with the previous quarter. Even more encouraging is that our breakeven point for adjusted EBITDA is now significantly lower than it was a year ago at between $23…

Thank you, David. I'd like to start out by a slide that reminds you of how we're looking at our investment in our business in 3 broad categories: The hyper growth or mega trend areas, growth in our addressable markets and growth of our existing markets. I'll move on now and just give you an update on how we fared and how we're faring right now in these 3 areas. In NFC, our tags, readers and SDK offerings continued to gain visibility for Identive and to help us educate the market about NFC applications. Presales engagements with our cloud-based NFC marketing platform continues to be robust and our launch of our public -- of our direct-to-consumer Tech Trail platform later this month will make it available for individuals for convenience and fun applications, and for businesses who wish to harness NFC as a marketing strategy for their business. As a reminder, our revenue expectations for NFC software services remain very modest in the near-term as this market is simply too early to have significant scale. However, NFC -- the NFC wave continues to grow and Identive intends to stay on top of it. The investments we're making now strengthen our position in this emerging hyper growth area. Our new tech trail platform will be launched later this month in San Francisco at the arena event. Our engagement with the tech community also results in a number of new NFC readers and SDKs which will be launched and added to our online market in the coming weeks. Some of these products have been debuted with some of our partners with great feedback. Being designed in is a key goal for us in NFC. We have now clearly established Identive as a critical player in the NFC ecosystem as a whole. From…

[Operator Instructions] First question comes from Bryan Prohm with Cowen and Company.

This is Brian, I'm in for Matt. A couple of quick questions here. Ayman, let me start on the outlook. On your prepared remarks, you mentioned the company has significant new wins and there's strong markets develop -- there's a strong market development in NFC. That is broadly in line with your announcement last month of about 15 million new NFC transponder orders. Could you elaborate a little bit more on what generally is driving that growth? It sounds like it's coming primarily from the smartphone market. You specifically mentioned Nokia. Or is it more broad-based?

I think it is actually -- it is very broad-based. Because of reasons of confidentiality, we're unable to disclose the customer. When the customer launches their products, it will become clearer. But at the time, we actually -- we have been working very closely with -- on a number of large NFC applications. This application actually started out at about 10 million pieces. It has grown to 16 million and we expect it to grow again to probably 20 million. And it is not a tag in the box application, it's a different application. But I'm afraid I'm unable to comment on it right now. But all I can tell you is that we're actively building it and expect to be delivering on that this quarter and next quarter. In terms of where the NFC growth is coming from, it is really coming from all over the place right now. And when we -- it is coming from -- in terms of the online market, it is coming from probably any company that you can hear of, it's probably a candidate that's probably doing business with us on the online market buying products in small quantities. Some are buying in bigger quantities and then the design ins for many different applications, be it for tag-in-box or tag-in-box equivalent and various other applications. It's really everywhere. A lot of payment and payment-like applications and advertising-type applications. So it is getting very, very busy right now.

Okay. So quick follow up to that, to your comments just now. Based on your topline guidance for next year, what percent of that would NFC represent? I think...

I think in terms of -- again, if you remember, we always look at NFC in 2 different areas. There is one area which is the infrastructure: the tags, the inlays, the SDKs, the readers. And the other area is the software and the services. In terms of the infrastructure, I would say, probably getting somewhere north of $5 million, could be as much as $10 million, but it is too early to tell right now. In terms of the software services, it will be in the few hundred thousands because it's still in the very early stages of deployment. And in a few weeks, in San Francisco, you will be able to have a lot better color on the software services and the platform that we're launching, keeping in mind that one of the things that we've learned during the last few months is the criticality of being able to make the platform accessible to non-NFC users, so people will be able to access it with a QR code or with a NFC. So that's one of the important modifications we made.

Great. Last question for David. What's the company's current cash position, and does that projected cash position that Ayman stated at the end of the quarter include the $7.5 million you just tapped from the new agreement?

I think -- we're not quite sure we understood your question correctly, Brian. You're asking about the cash position at the end of the quarter of the $7 million to $8 million number that I gave reflecting the new cash, and the answer is yes.

So it's inclusive of the money that's being tapped from the agreement announced today?

Absolutely, yes. Because if you -- just to give you a quick answer on that is, if we look at the effective cash position at about $4.3 million or thereabout which is better than we projected last quarter, we then add to it the new cash minus expenses. And then look at the buildup of receivables during the quarter, you end up with a number in that range. Keeping in mind that we're also paying -- at the same time, we continue to pay down debts every quarter as you can see. David, I don't know if you want to add to that?

No, I mean, I think that's just about right. The other question I think you asked, Brian, was, what's the cash position today? And the position today is over $10 million, including the new facility.

Our next question comes from Ellen Mo with Imperial Capital.

This is Ellen, in for Michael. Just a couple of questions. The first one: Given that the U.S. government business has slippage into Q4 and then the strength in the U.S. government agency orders, what do think would be the potential impact of a change of administration? And number 2, how is your identity as a service progressing? So, what's been the feedback on your pilot and your sense of a timeframe [indiscernible], for closing one of the larger customers?

I'm sorry, I only got the first question. The second question, the sound was not very clear. So...

Okay. So the second question was just the identity of the service and how is that progressing and what's been the feedback on your pilot? And if you have a sense of the timeframe for closing one of the larger customers?

Very good, I got it. Okay, in terms of the government programs that we're working on, a lot of it was initiated during the Bush administration and I'm sure you guys at Imperial would be familiar with HSPD-12, et cetera. And they were strengthened during the Obama administration with support from both sides. So we don't really -- we're not really -- we're not working in anything where 1 party supporting and the other is opposing. So security, cyber security and sort of IT security identity, all of that are areas that both the Republicans and the Democrats in Congress agree on and has not really been affected by the politics. The effect that we've seen when things have slowed down is budget freezes and the budget uncertainty cause confusion. So we don't really expect to see a change, except for short-term hiccups in the overall demand requirements and direction. So that's on the first question. On the second question, we actually have and what I'm telling you on the call is that we have received the first order from our #1 target prospect in this area and we are -- we expect to be deploying a few thousand for that customer this quarter and we expect follow-on orders in the -- during 2013.

Okay, great. Just one last question. So just regarding CapEx execution, what are the expectations for the rest of the year and into next year? And how much would that effect the expansion of transponder capacity?

I'm sorry; again, I cannot hear exactly what you're saying.

Sure, sure. So what are your CapEx expectations for the balance of 2012 and into next year? And how much would that effect the expansion of transponder capacity?

Okay, I think you're asking about the CapEx and the transponder capacity, so I'll -- we're not expecting a significant CapEx the balance of this year or next year, unless we see a major uptick in volume. In terms of the overall capacity right now, for -- and remember in transponders, we have 2 processes. One process is the inlay and we believe right now it varies depending on the mix, but we believe we have the capacity in inlay manufacturing of somewhere between 140 million to 180 million inlays between Singapore and Germany. And on the converted product, which is taken the inlay and making it into a ticket or a tag, the capacity is somewhere, again, depending on the complexity of the product, somewhere between 45 million to probably 70 million or 80 million. And we've been building up or converting our secondary process because that brings us closer to the market and actually increases the ASP.

Our last question comes from Bhakti Pavani from C.K. Cooper. Bhakti Pavani - C. K. Cooper & Company, Inc., Research Division: Could you guys talk a little bit about what's the backlog number at the end of the quarter?

One of the methodologies -- we changed our methodology on the backlog, so we now take out the recurring service numbers. So when we take out the recurring service numbers, it's $13 million. When we add the recurring service numbers back, that comes back to about $17 million. And we have taken out some of the long-term transponder orders that we have had on the book. So we've taken out during the last quarter, so about $1.7 million worth of orders that were on the books. I think David has been changing a lot of the methodology. And David, perhaps you want to talk a little bit more about that.

No. I mean, I think you answered the question very well, Ayman. I think the only difference or the only thing I'd add is that, as Ayman iterated, previously the backlog included what I would call a service portfolio which doesn't get exhausted. It's sort of -- it's contractual and typically continues year-to-year. So going forward, obviously, one of the things we will be doing is tracking our product and service backlogs separate from our service maintenance portfolio. And obviously, we'll provide future updates in future earning calls.

Yes, I believe, because we've now hit the milestone with the service exceeding 10% of the revenue that we have to report that separately, so that sort of triggered the more accurate measurement for the backlog, Bhakti. Bhakti Pavani - C. K. Cooper & Company, Inc., Research Division: Okay. And during what timeframe or during what period of time is this backlog convertible into revenues?

Generally, a lot of our backlog tends to be in for out. There will be some stuff left over. But, as you know, our business is -- we only have the 1 10% customer, the U.S. government. And even with the U.S. government, a lot of our businesses comes across into many, many orders. But David, perhaps you can talk a little bit to that if you care to.

No, I mean, I think, Bhakti, as Ayman said, 10 typically is [indiscernible] in the infrastructure and ID solutions, or ID in the cloud management side, so I don't expect a significant change. I mean, the orders, quarter-on-quarter, tend to be relatively consistent recently. So yes, it isn't a long period of conversion. Bhakti Pavani - C. K. Cooper & Company, Inc., Research Division: Okay. My other question was related to the iAuthenticate reader that you recently introduced. Would you, by any chance, have information on the accessible market? Because it said that it is available to the federal employees, 5 million federal workers, but was not clear on what percentage of the federal employees will have the access. I mean, can use the reader, maybe? If you could shed some light.

Well, I think the whole concept of Bring Your Own Device is a big thing that is happening everywhere and the U.S. government is no exception. So this will be the first product -- or this is the first product that will be able to authenticate credit cards and the like. I cannot tell you how many employees of the U.S. government have iPhones or iPads. I just don't have that sort of information. However, I can give you a little bit more, sort of better information in terms of telling you that we've -- we're already seeing significant order activity on that product and we probably have about $250,000 this quarter from this product and we have not even started shipping yet. So -- the other thing to keep in mind that the PIV is a, and the government market is a start. But clearly, the same applies into a lot of enterprise that have high security or network security and yet, their employees, executives or what have you, have iPads at home or traveling with an iPad, rather than a laptop and want to be able to access their email. So they'll be able to use this product with government-like grade or high-grade security to access their networks and their emails. Bhakti Pavani - C. K. Cooper & Company, Inc., Research Division: Oh, okay. And just a follow-up on the comments that you made. Since you are already seeing significant order activity in this product line, would you have any revenue expectations for this product, particularly in 2013?

Yes, but I'm not going to share them with you right now. I think we're sort of -- we don't really want to be sort of -- we're trying to be as forthcoming as possible in terms of giving you color on the revenue and where it's coming from, et cetera. But I don't think I want to get into a product line by product line for obvious competitive purposes.

I would now like to turn the call back to Darby for final remarks.

Thank you, and thank you for joining us today. We look forward to providing you with further updates on the progress of Identive's business and to speaking with you again on our Q4 earnings call in a few months. Goodbye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.