Welcome to the Q2 2013 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. Darby Dye, you may begin.

Thank you. Hello, everyone, and thank you for joining us today. We appreciate your patience. We've had a few technical difficulties this morning, so I'm glad that you're here with us and ready to start the call with us. 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 second quarter ended June 30, 2013. Speaking on today's call are Ayman Ashour, Chairman and CEO; and David Wear, CFO. On today's call, Ayman will review our vision and quarterly business highlights, and David will follow with a review of our non-GAAP financial results and then Ayman will close with our view of the future. Before we begin, I'd 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 today's press release, our annual report on Form 10-K for the year ended December 31, 2012, and our 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. We've cautioned 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 that 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 slides of this presentation by clicking on the magnifying lens in the bottom right-hand corner of your screen. It is my pleasure to turn the call over to Ayman Ashour.

Thank you, Darby, and thanks to all of you for joining us today. I'm going to begin today's call with a quick reminder of Identive's vision to be the premier supplier of Secure ID solutions. Our offerings protect and securely utilize the digital identities that enable dozens of everyday applications where a digital credential is needed, be it physical access to payment or logging on to computers. We leverage significant engineering expertise in IP to deliver end-to-end solutions for multiple high-growth end markets. To drive growth, we're building a robust foundation of IP and expertise in RFID, NFC and Smart Card technology, which are the building blocks of Secure ID. Combining these engineering prowess with our relationships with key clients and understanding of their needs, we are establishing sustainable differentiation. Today, we hold key positions in key established Secure ID markets, including physical and cyber security, as well as in emerging areas such as NFC and SaaS-based ID systems. We are leveraging our advantages to exploit pivotal trends in the market towards smarter ID credentials that enable multiple secure applications and which work in many different form factors, be it a contact or contactless smart cards, tokens or key fobs or embedded in mobile phones or in the cloud. To exploit these trends, we have been investing in emergent markets with hypergrowth potential including NFC, cashless payment and identity as a service or identity -- or SaaS-based identity management. During the second quarter, we continued to increase the stickiness of our offerings by moving closer to end users. In addition, we believe our investments are coming to fruition and our results demonstrate just that today. We have also announced the capital raised that will contribute new funds to further our execution. During the quarter, we delivered growth in key areas…

Thank you, Ayman. As noted by Darby, today, we will present our non-GAAP figures for which we will provide a reconciliation in the earnings press release in the appendix of this presentation. During the second quarter of 2013, total revenues were $23.6 million, up sequentially from $21.1 million, and relatively unchanged from $23.9 million in last year's second quarter. Revenue from the Identity Management segment was $10.6 million, down 26% compared with $14.2 million. Revenues from the ID product segments were $13 million, up 35% compared with $9.7 million. As Ayman highlighted, our performance by segments diverged greatly. I'll provide some more color on the year-over-year variances. First, in our ID product segments, Transponders revenues reached $7.2 million, an increase of 81% year-over-year and reflecting several large NFC product orders for mobility and M2M applications. ID Infrastructure revenues were $5.8 million, remaining stable, with improved revenue in North America, offsetting the slight reduction in the Asia-Pacific region. On to Identity Management, cloud-based identity management recorded its first meaningful revenue as $0.6 million. Access Control & Security revenue was $4.4 million, which decreased 41%, largely reflecting the U.S. government federal budget sequester, the impact of which we do believe is temporary. Integrated ID solutions revenue was $5.5 million, lower by 16% due to the timing of contract awards for our mobility solutions operations in the Netherlands and low demand from health care providers in the U.S. Looking at the operating highlights, non-GAAP gross profit margin was 41%, declining 4 percentage points year-over-year, primarily due to lower access control sales, but it remains unchanged from the previous quarter. As Ayman touched on, our overall revenue year-on-year remained similar and the higher revenues and improvement in our transponder gross margin assisted in partially offsetting the impact of lower sales in our higher margin…

Thank you, David. I would now like to give you a close look at our business as we enter the second half of the year and discuss product and market momentum. First, a look at the backlog and the outlook. Overall, we have strong momentum across much of our business. As I noted, we entered the third quarter with a record $27 million order book. In addition, next quarter, we expect -- or this quarter, rather, we expect to experience at least a modest benefit from the favorable seasonality through additions associated with the U.S. Federal Government year-end spending. We continue to focus on reducing OpEx. We remain optimistic about our near-term prospects. However, we must temper our outlook with the risk related to the impact of the U.S. Federal Government sequester on our access control sales. Keeping this in mind, for the third quarter, we are expecting revenue between $23 million and $25 million, and adjusted EBITDA of negative $0.5 million to positive $0.5 million. For the full year 2013, we're tightening the range of revenue to between $98 million and $105 million and broadening the range of EBITDA between a negative $1 million and a positive $1 million. We are estimating the U.S. government business will wind up being between $15 million to $18 million, compared to $20 million last year -- $22 million last year. Entering the year, we expected the business with the U.S. government to be $7 million to $10 million higher, or $22 million to $25 million this year. So we're sort of dealing with a shortfall of $7 million to $10 million against our expectations. Looking ahead, we're particularly excited about delivering the next-generation applications for emerging secure ID opportunities, such as converged access cashless payment, NFC, mobility and identity as a service.…

[Operator Instructions] We have Bryan Prohm online from Cowen and Company.

Ayman, first off, so it looks like there's another pretty tough quarter of access control and security sales. I mean, obviously, that's largely U.S. Federal Government sequester-related. You sound confident that the business is going to rebound, but then in your comments on the call, you're sort of less clear when that might happen. Has that come down to a fiscal year transition and you'd see that in Q4 and start to rebound then?

I think we're -- I acknowledge that we're probably giving you a little bit of a contradiction here, because we're guiding relatively low and saying that July has been good and August is shaping up better. And we're seeing a lot more requests for quotes and activity and the U.S. Federal Government customer is getting the hang of sequester and learning how to work under it and beginning to ask us for more bids. So we are -- but we've had the feeling, in June, we've had the feeling that we will have a fantastic June, then with the access control, ended up being weaker. So we are getting more and more cautiously optimistic and perhaps had I -- been another week from now and we're having this call, I'll be much more upbeat. It is just really the uncertainty of it that continues to be uncertain. But the kind of programs that we're on, be it customers like the IRS or the Department of Justice, different agencies and Department of Energy, DoD, et cetera, Department of Safety [ph], these are all long-term customers and in many cases, you are working on a sort of 8- or 10-year sort of refresh cycle and so it is -- and some of these programs are 20%, 30% of the way. So we're very confident and in our discussions, we're not aware of any single program we're on that's been shelved or put on hold. So they are all there. It's just a matter of both time and getting budget allocation. I don't know if I'm over-answering, Bryan, but I just wanted to try to give you a bit of color about it.

No, that's fine. That's -- because when it comes back, it comes back. I guess my -- I should segue into my next question, because more significantly for the company, the backlog -- you referenced the strongest backlog in the company's history. The order book looks like it's up about $12 million since the beginning of the year. Can you walk you through some of the details of that? I mean, obviously, if it's not access control and security sales, it's coming from things like tags and transponders. Can you walk me through some of the details of that?

Sure, sure. The -- I'll talk about the larger number, the $27 million. David sort of takes things that are not scheduled within the next 12 months and sort of treat them separately, so David can talk to that afterwards. But basically, we announced a while back a large retail application for payment solutions in Central Europe, actually in Western and Central Europe, covering multiple countries with some 350 stores with an element of recurring revenue. That, alone, was about $4.5 million or so, of which about $1 million is this year. We also announced early in Q2, the contract with a major technology company for idOnDemand that's about $2 million. And we've announced in June a major transport win with a 3-year contract where basically, in our business, transponder quite often is a razor blade business, because you're selling a consumable where people are using electronic tickets or using amusement park passes and the like. We've announced a new contract for 3 years with a major -- for a major metro application and that, I think, is about $3.5 million. And then our work in the electronic games we supplied, that has really been a large portion of our transponder business and, I think, the backlog in this area at any one point is probably stabilizing at about $2 million, $2.5 million, because we're continuing to be booked solid through probably half of Q4 right now in this area.

You're going to run at full capacity?

We're running flat out. Absolutely flat out, and sort of like breaking records pretty much every -- I guess [ph] every month, every week in terms of productivity and productivity improvement. And that's really one of the exciting things for us on the transponders side. David, I don't know if I left anything out that you'd like to add.

Yes. I think the only other area -- the cloud solution side where we -- Ayman alluded to another major contract and that we're actually operating on. But we -- again, we only take into the backlog the revenue that we can see, and the delta between the $19 million and the $27 million is part of it. I think most of the growth that you see in terms of the backlog is on the transponders side, but in terms of the delta between, what we've talked about, that of $19 million and $27 million, that's actually across 3 different business units. It's partly, as Ayman alluded to, the transponders side in the metro, partly the ID Solutions business and then the cloud business. So it's a very positive trend and one that we're hoping continues.

Great. A couple of quick questions then on the outlook, David. So with most of your restructuring now completed, is the Q2 OpEx run rate something that you feel the business can maintain over the medium-term even if some of the new growth drivers emerge and fuel the top line?

I think so .I mean, it's something that we're not complacent about. We want to make sure that we're investing appropriately, so we're looking to manage the OpEx we have to ensure that we don't strangle the growth opportunities while being cautious in areas that we're not really seeing as much traction. So it is something that we are conscious of. We're also looking at how we can continue to be more efficient in OpEx, and again, use it to invest elsewhere and continue to drive top line assets.

Great. And do you have projected cash flow number for the coming quarter?

I would suggest that, typically, it would be around the value of the debt service, not dissimilar to what we had in the previous quarter. And obviously, we have the investment that closed today. But in terms of the operating cash flow, the cash flow from operation, I would expect that to be relatively neutral in this quarter. And therefore, really the cash relates more to debt services and negated to the degree that we do look at means of raising funds for the equity line, et cetera.

Understood. All right, last question for you, Ayman. NFC is roughly a quarter of transponder shipments, I believe, if I read the release correct. Is that number -- where does that number get 6 months from now or 1 year from now? Is it 33%, 40%, 50% with some of the new markets that you're selling into?

That number has been steadily growing and it sort has been growing every week. And our expectations is that it will continue to grow. And frankly, in some cases, we're looking at other traditional RFID applications that might be less differentiated and moving from freeing up capacity from these areas for NFC. So our expectation is that it continues to grow and become a more and more meaningful part of the company as a whole.

Our next question comes from Chris Basta [ph].

Just had a question on the guidance. I hate to jump ahead to Q4, but if you look for the guidance you gave for the year, even at the low end of the $98 million for the fiscal year, you're at the highest quarterly revenue rate for Q4. I'm just trying to figure out, is that assuming a big recovery in the government business? Or is that still being driven -- are you being cautious there and that's still being driven by the growth in the new product lines?

I think we're -- as I sort of mentioned in the comments on the government business, our expectations for the government business for the full year is somewhere between $15 million and $18 million. And we've had expectations last quarter -- we entered the year with expectations between $22 million and $25 million. Last quarter, the expectation, I think, were $18 million to $20 million and we've downgraded that again. So we're still having a degree of optimism in looking at the U.S. government business, but we're not betting on any big recovery. We're betting on recovery from Q2 levels because if you look at the first or second slide on the deck, you will see that the U.S. Federal Government business for Q2 2013 is the lowest we have -- I think we've had since the sort of Identive, sort of, journey started 3 years ago. So it's been much weaker than we've ever had. So that's been unusually weak. And as I said, July is already better than it has been, August is shaping up better, and we do expect a little bit of recovery in September. In terms of the calculation that you have done of taking the full year guidance minus sort of the guidance for Q3 plus the actual of Q1 and Q2, that means that Q4 would be quite substantial. That is not unusual for us, for our business is normally second half year loaded. So we've -- what we've really -- we can see anywhere between the first half being 38%, second half being 62% to being 45%, 55%. So it is not at all unusual and if you'll see in the prior years, that has been pretty typical for us.

Yes. No, I understand. I guess you're above the $30 million threshold, though, which would be a first, and that would be good to see. So thank you for the color on that.

Absolutely. And I mean, perhaps one of the things that we should mention is sort of like we look at our breakeven point with our -- when Access Control & Security is reasonably strong, which is our highest margin business, we look at Access Control -- our breakeven point being about $23 million a quarter. When it is a bit weaker, then it is $24 million to $25 million. So once we get above that critical factor, the leverage is considerable. And one of the things that we're doing with the pipe funds that we've raised is further opportunities for OpEx reduction, which obviously takes cash to achieve. Thank you.

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