Welcome to the Q4 2012 Identive Group Earnings Conference Call. My name is Dawn, and I will be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Darby Dye. Ms. Dye, you may begin.

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 fourth quarter and year ended December 31, 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 from today, 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. Identive uses these non-GAAP measures internally and believes that 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. Each of the non-GAAP measures we discuss excludes various items, and 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 Webcasts page within the Investor Relations section of our website at www.identive-group.com. If you are viewing the webcast, you may enlarge the size 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.

Thank you, Darby, and thanks to all of you for joining us today. Good morning. We experienced a strengthening revenue trend in Q4, which would increased order flow and improve traction across many parts of our business, particularly the ID Products segment. The structuring program we put in place back in June had a strong impact on Q4, and our OpEx declined 22% compared to Q4 of last year. This enabled us to return to profitability on an adjusted EBITDA basis. Importantly, we -- the level of adjusted EBITDA we achieved has much improved by $1.4 million sequentially and $1 million year-on-year. Approximately $350,000 of that EBITDA is attributable to earlier quarters. Looking at our main business categories, we saw improvement in the market for our ID infrastructure products globally, and it was good to see Europe showing some recovery. This market has been impacted by austerity programs in many countries, so this was an encouraging development for us. We also had strong sales of our Smart Card readers and chipsets in the Asia Pacific region for a variety of eGovernment, employee ID and other applications. The transponder projects that were delayed for much of the year, restarted in a vigorous way in Q4, and we achieved significant new wins as well during the quarter. This was a record quarter for NFC in particular, and RFID projects in general, with a substantial amount of high-volume orders in Q4, applications including the tag-in-the-box applications for telcos event, transit ticketing, ski ticketing and most importantly, the emerging market of Machine-to-Machine or M2M applications, such as electronic games and other medical applications as well. Many of the new orders that we received in Q4 are for the supply of NFC and RFID products through Q2 and beyond. In our ID Solutions business, we…

Thank you, Ayman. So now moving to Slide 8, I'll take you through our results in a little more detail. At $26.6 million, Q4 revenue was 16% higher than in Q3, with strong ID Product sales in transponders and Smart Card readers, as Ayman discussed. Removing the impact of the large German eID program from 2011, revenue in the quarter was flat when compared with the prior year. Non-GAAP gross profit margin declined by 5 percentage points sequentially, as our sales in the quarter had an unusually higher mix of product revenue versus higher margin systems in third [ph]. Margin was also slightly down year-over-year for similar reasons. However, improvement was made year-over-year in the ID Products segment's margins. At $9.7 million, non-GAAP operating expenses were 9% lower than in the previous quarter and down 17% from the same quarter a year ago. The quarter benefited from an adjustment to research and development expense arising from the capitalization of $0.5 million of development costs associated with our Software-as-a-Service offering. Removing this benefit, operating expenses declined by 14% and 15%, respectively. Reflecting our commitment to development -- developing Software-as-a-Service applications, we will continue to capitalize software development expense where it is consistent with GAAP. The restructuring program we initiated in June has been largely completed, following the consolidation of support functions in Germany and in the U.S.A. Overall, cost reductions in 2012 were approximately $6 million when compared with the first quarter operating expense levels. Cost savings associated with the 2012 restructuring are now expected to be approximately $7 million on an annualized basis. No restructuring expenses reported in the period, and training costs associated with the termination of 2 executives continue to be expensed and recorded in our GAAP operating expenses. These are removed in our non-GAAP comparisons. The lower…

Thank you, David. I would now like to discuss some items pertaining to Q1 2013 and the general outlook. First, I will talk about Government business in general, and here, I'd like to remind you that we primarily work with the U.S. government on security-related projects, almost 100% focused on government employees and contractors. We do similar work with some other world governments around the world as part of our employee ID business. Now when we talk about eGovernment, these tend to be typically citizen ID systems that allow citizens or residents to interact with government services and the like. Virtually, all of our eGovernment work is outside of the U.S. as the various electronic ID -- citizen ID programs lag in the U.S. You would recall things like, Real ID Act, et cetera, are being stalled in Congress over the years. Citizen ID was the area where we saw sharp drop in Europe, particularly Germany, last year. Western Europe remains weak in the citizen ID area, but we are gaining business in new countries and markets such as the United Arab Emirates, Eastern Europe, Latin America and Asia Pacific. So we expect this area to be better in 2013, and we are no longer reliant on large contracts from Western Europe as we were. And this, our expectation for an improved outlook in 2013, is based on our visibility of projects and projects we already won such as DOE [ph] , for example. A new opportunity that has opened for us is a new mandate for the Criminal Justice Information Systems, or CJIS, where the new mandate requires a higher level of security for law enforcement personnel to access criminal justice information. So they will essentially be requiring a 2-factor authentication. Typically, that problem is solved with a smart…

[Operator Instructions] Our first question comes from Bryan Prohm from Cowen and Company.

Ayman, give me a little more detail. I'm curious to understand that our -- the risk to the top line guidance here in 1Q with respect to where the U.S. government sales may or may not come in. Is that -- is the worst case scenario the downside to $22 million in revenue and best case scenario all in, there's may be upside to $24 million or is there -- is it more nuanced than that? I wasn't quite sure that I got that right.

Sure. Thank you, Bryan. I think the -- it is tough to sort of peg it exactly. But based on where we're looking right now, it is -- the $22 million to $24 million is where we think it is, but there is significant risk still. Our normal expectation for Q1 would be that the U.S. Federal Government business would be about $5 million. And we can probably, sort of looking at the sequestering being sort of a 13% across-the-board, then you can say, "Okay, there's probably 10% risk." But we had slips in January and February, particularly in February, directly related to sequestering. And so it is -- so it could be -- I mean, it will never be 0 because we've already done some Government business, but it could be that the range, if it goes down as low as $3 million, it will probably be that we've missed the $22 million, then end up at $21 million. That's really unlikely. So I wanted to give you a realistic range and address the risk rather than give you a very broad range. So our best guess is $22 million to $24 million, but there is risk to that -- heightened risk to that just because of the situation. And just really, because the government is usually about $5 million a quarter for us. And as you know, the government tends to be probably the most profitable segment for us because it's part of employee ID. So the corresponding hit to EBITDA is meaningful. So when you look at the earlier -- the other quarters, it is not as hard. But with Q1, it becomes more meaningful, so I just wanted to heighten that, because I didn't want to -- we've done a -- we didn't do a good job last year when we had the Q1 and then surprised you with stuff in the 10-K. So I just really wanted to highlight that, so you guys are not caught by surprise.

Okay. Obviously, I mean -- well it sounds like there's still risk to the downside, but I'll move on to the next question about NFC and NFC penetration opportunities, our new opportunities. I'm intrigued by M2M because it's obviously an area of significant growth opportunity for multiple different businesses in wireless and wireless technology. So tell me a little bit about the M2M opportunities that you see and whether or not that can play out meaningfully here in the near term.

Okay, sure. With this particular question, I'll talk in generic terms, and I hope you appreciate that we are under strict confidentiality for that type of work we're doing with our clients, so I don't -- I obviously do not want to risk any of that. But if you basically just google NFC electronic games, you will see a lot of activity in that area, and it's generally based on the giving the various devices personality. And that allows them, sort of the various game pieces, personality and that allows -- it just makes the -- NFC is all about connecting the cyber world with the physical world or the physical point with an Internet. So taking that into an electronic game environment just makes it so much more fun for a user or for somebody playing the game. And that's why it is an exciting personality. We've -- and we're seeing that users in experimental, and in some games that have been launched, just absolutely love it. The other big M2M application that we've seen and we're seeing is more and more about Bluetooth and WiFi pairing. So you know how Bluetooth can be a little bit of -- it's not terribly intuitive to -- even if you take a new headset that you buy for your phone and you're doing the pairing, or a phone with a car audio system, you have to enter the 4 digits and you have to do this and you have to do that. With NFC, you can basically just touch the device and the pairing is done. So it takes away a barrier. It makes it so much more intuitive. So we're seeing many applications in that nature. We have done some already in the medical field, and we're seeing more and more projects of that. I hope that gives you a bit more color on it, Bryan.

No, that's great. And real quickly to just conclude on NFC. Can you give us a little more update on how business is tracking at the major handset OEMs with respect to NFC. I know that obviously, you're going to be stronger in markets where Windows Phone and Blackberry are stronger, but I'm, I guess, more interested in Android, especially Android in the lower end. How many Android OEMs actually currently Identive customers or potential Identive customers here in the near term beyond Samsung, or any of the other [indiscernible].

Sure. Yes. With -- in terms of the tag-in-the-box type applications, the big user we've had has been Nokia. We've had other users, other telcos like Orange, different other telcos around the world that we've supplied, but it will be the telcos rather than the handset manufacturers. And the -- we've done lots of tag-in-the-box applications, but I think most of the handset makers are now pushing the adoption issues much more into the telcos. So we're spending time with the handset guys, but we're spending a lot more time with the telcos, and people who are really what we call campaign owners. And the other thing is as you -- the Tagtrail, and I don't know Bryan if you had the chance to download it or not, but if you download the app and even if you don't have NFC, just -- it is so slick as an app with the bar code and the tracking functionality, et cetera. And if you just also take a look at Tagtrail.com on the community pages, you'll get a feel for the sort of applications. Now in terms of what other customers IdentiveNFC.com continues to generate, it is really the who's who with the Fortune 50, the Fortune 100, the Global 1000, significant -- not significant in dollars, but a significant number of people ordering sort of 10 tags, 20 tags, 100 tags, 1,000 tags, SDKs, readers, et cetera. So it continues to be sort of a portal that a lot of people developing NFC are coming to, and our position of terms of being offering the tag, the personalized tags, the social media tags, the readers, the SDKs, and being able to offer designs with Broadcom, as well as NXP, as well as Infineon, as well as FTN [ph], other players and Sony and Google Places, et cetera, continues to make us sort of, we believe, the top place, the top portal for people actually doing things with NFC.

Our next question comes from Bhakti Pavani with C.K. Cooper & Company. Bhakti Pavani - C. K. Cooper & Company, Inc., Research Division: You talked about the transponder capacity. You are running at a full capacity level. What kind of time frame are you looking at increasing that capacity? And what kind of impact that, do you think, would have on the cost?

I think right now we're sort of making do with juggling what we have and adding a little bit of capacity here and there. We really -- we need to improve our liquidity and our capital position to be able to add more capacity. So I cannot give you a specific answer right now on that particular question, Bhakti. Bhakti Pavani - C. K. Cooper & Company, Inc., Research Division: Okay. Also you guys did a very good job on reducing the operating expenses. Is that the similar range of OpEx do you think would continue in 2013, or is there some more room to reduce that further? Any color on that?

Thank you, Bhakti. That's a really good question. I think the -- if you were to freeze the revenues at the Q4 levels, there's probably a little bit of further reduction from actions that we've already taken. But as we're seeing growth in revenues and projecting growth in revenues, we would really sort of feel it's more appropriate to talk about sort of the OpEx as a percentage of sales or the percentage of revenue. So we would expect that the OpEx, as a percentage of revenue, would remain roughly the same. But in net terms, as the revenues expand, which we expect them to, that the OpEx would expand in net terms. Bhakti Pavani - C. K. Cooper & Company, Inc., Research Division: Sounds good. Also what kind of capital expenditure we should assume going forward in 2013 and beyond? What kind of levels?

I think right now we're not projecting major CapEx this year, so I think if you assume something in the range of $1 million or so for the year, that, that would be a fair assumption. As we address sort of capital needs, that would be obviously revised and would be updated, and we would come back to you at that point. Thank you. Darby, back to you.

Thank you all for joining us today. We look forward to providing you with further updates on our progress in the future and speaking with you on our Q1 earnings call in a couple of months. Have a good day. Bye-bye.

Thank you.

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