Earnings Labs

Identiv, Inc. (INVE)

Q4 2013 Earnings Call· Thu, Mar 20, 2014

$4.75

-0.11%

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Transcript

Operator

Operator

Welcome to the Q4 Identive Earnings Conference Call. My name is Angela, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Darby Dye. Darby, you may begin.

Darby Dye

Management

Thank you. Hello, everyone and thank you for joining us. With me on the call today are Jason Hart, CEO of Identive and Brian Nelson, our CFO. In a moment, we will hear remarks from both of them and then we will take questions from our sell-side analysts and registered investors. Before we begin, please note that during this call, we will also be making reference to non-GAAP results or projections including our non-GAAP gross margin, operating expenses and adjusted EBITDA. A complete reconciliation between each of these non-GAAP measures and the most directly comparable GAAP financial measure is included in today’s press release which is available on our website at www.identiv.com. In addition, during our call today, we will be making forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events including financial projections and future market conditions 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 we file from time-to-time with the SEC, including our annual report on Form 10-K for fiscal 2012 and our subsequent quarterly reports on Form 10-Q. Identive assumes no obligation to update these forward-looking statements which speak as of today. Now, it is my pleasure to turn the call over to Jason Hart.

Jason Hart

Management

Simplified, focusing, growth this year. Welcome everyone. Thanks, Darby. I am joined today in California by our company's new CFO, Brian Nelson, Larry Midland, the company's President and other members of our hand-picked Identive leadership team. I want to thank them for joining me today. As we discussed on our last earnings call, Q4 was a transformative year for the company, or transformative quarter for the company as it positioned us to build a platform, so I wanted to spend a few minutes this afternoon and cover some of the highlights of that activity, also then cover a little bit of the forward strategy for the business. Then I will hand over to Brian, who is going to cover Q4 financial performance and give everyone the goodness on the numbers forward. To get going, understand where we are going, we have to understand where we have come from. We implemented a tactical simplification plan in Q4 to establish a single platform. We took 37 different legal entities, 18 different operating business, we took countless IT systems and disparate email products, we took more than 250 domains and points of presence, literally 50 different marketing brands that were [inaudible] this fraud or identity theft. And we took all of those and we developed a strategic plan and we mapped the activities and the assets that we wished to keep that matched that plan, I'm going to tell you a lot more about that plan today. Through this project that I categorize as simplification on the last earnings call, there were approximately 13 major activities from changing the focus of the business, so we are investing in sales and marketing, investing in our product and technology, so moving the corporate headquarters from Germany to the United States. As you have seen through…

Brian Nelson

Management

Thank you, Jason. As Jason has just discussed, we made the decision during the fourth quarter to divest certain businesses that were non-core to our trust solution strategy. As a consequence, these businesses were accounted for as discontinued operations for the quarter. As such, the results we are reporting today for Q4 and our full year 2013, as well as comparable periods, will reflect our continuing operations. The businesses we divested consisted of regionally focused systems integration and customization services that did not fit strategically nor did it exhibit the capability to deliver the high growth potential. In our continuing operations, we are leveraging our existing product portfolio with a focus on cloud and mobile technologies to deliver trust solutions to the three primary markets that Jason spoke of. As a reminder, those are the trust solutions for premises, which include a readers, controllers and software products, trust solutions for information, which utilizes our smart card reader products and our cloud-based credential provisioning and management services, as well as our trust solutions for everyday items which utilize our credential products, including RFID and NFC, Tags and access cards. Beginning with Q1, we’ll report our revenue and gross margin results and new product segments that align with these market areas. Now looking at our financial results, revenues in Q4 were $19.9 million, a decrease of 6% from Q3 and 5% quarter-over-quarter. This was primarily due to the weaker sales of our premises solutions in the U.S. as a result of the October government shutdown and its impact on the budget and project cycles of our federal agency customers. We believe the budget challenges impacting our premises businesses are temporary and we are continuing to invest in new access control products and capabilities to address the emerging security standards and other market…

Jason Hart

Management

Thanks, Brian. Well, I think it's fair to say there has been a tremendous amount of work going on here and I am sure everyone on the call and certainly people in this room have been doing. As we look to 2014, I would like to give you some as to what we are doing and where we are going. I have outlined the new vision and from the top down, we have realigned the company around that vision. We are now complete in all areas and there is a roadmap and plan to continue the rollout, all of the broad, rush, strokes achieve that have occurred. As Brian mentioned, we do see cash as a priority for the business. Certainly, as our working and our predicted growth is increasing as we now have more visibility to our forward pipeline. We are getting a lot more comfort around the need for the working capital. As I indicated on the last earnings call, we had gone to market looking for commercial financing. We will continue to rollout the new strategy, and one thing that's important in any integration of companies, is the development of a single culture, and at all levels of the business with hand-picked and either board people in all promoted from within to help develop that culture. Recall it, our [culture] and it's a very sales-led customer-focused, revenue-driven culture. We continue to invest in our technologies through 2014. You will see certainly over the course of the year as the year unfolds that our expenses in our technology will be diverted from SG&A, so we are putting the money I believe I believe in the right areas, sales and marketing to sell the things that we have and technology, because we believe we have some foundational patents and…

Darby Dye

Management

Yes. Operator, please poll for questions. Thank you.

Operator

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question is from Bryan Prohm from Cowen & Company. Please go ahead. Bryan Prohm - Cowen & Company: Good afternoon, Jason, Brian, Darby. How are you guys?

Jason Hart

Management

Doing well. Thank you. Bryan Prohm - Cowen & Company: All right. I have a lot of questions, in no particular order. I mean, this is a complicated turnaround story. I totally get that and I understand that simplification may not be as simple and straightforward as it might seem, so you cited, Jason, 13 major activities or steps in the simplification process. Are we done with all 13 now, or there are still more here to go here?

Jason Hart

Management

We are done with the bulk of them. We reported to our Board a few weeks back that we have completed all but two of them. Two of them are ongoing. One of them I just mentioned, which is the system integration. One of the areas for the management has been how do you consolidate 11 different accounting systems, how do you bring together processes and expense control? The first thing we did of course is get control of the check book, but we are not complete but we are at a macro level; we have completed all of the major tasks except for the full integration of the underlying accounting systems makes Brian show pretty tough. He is rolling his eyes at me. Bryan Prohm - Cowen & Company: He is smiling too. I am sure. Okay, so the next phase then is the focus phase and it's a much cleaner messaging around the market segments, trust solutions for premises, trust solutions for information, trust solutions for everyday. It sounds like the premises business is still pretty heavily leveraged to governments, both in the U.S. and maybe in Europe too? Is that fair?

Jason Hart

Management

Yes. It isn't. We saw the weakness in it started with sequestering. It started with what was followed on then by de-focusing sales and marketing activities here and what we've done in Q4 to arrest that is open the DC office with rehiring sales people with experience back into Washington; it is where the largest portion of our premises business is. With have some unique technology in that space and I am pretty - I am quietly confident that as the government begins to relax on some of the budget constraints, we will begin to see that our business improved. As a pilot, I was very pleased to see that the Navy got the blue angels back in the air and if they are going to spend money on blue angles, hopefully, we can spend some money in premises. Bryan Prohm - Cowen & Company: That's good. Is it fair to characterize that you are comfortable with the company's [store] [ph] silos are now sufficiently broken down and you're in the way to having a true single sales organization that can cross-sell premises information every day.

Jason Hart

Management

Bryan, I wish you could be in this room, you would see executives and staff from the different parts of the business, all wearing the same logo - and it's always going to be a challenge. We have always got some habits inside the company at being one quarter. We certainly can take this up again next year, but I am just thrilled really with the way the team has come together and embraced the single message. I think everyone internally saw the need to have a simpler architecture of the company and a simpler message. Bryan Prohm - Cowen & Company: Okay. Let me then move onto - the premises business, it seems like the most gross margin leverage lies there as the government business returns over the course of the year, but the real volume driver, the real top line driver ultimately is this everyday business, which is where a lot of the gaming or all the gaming RFID tags came in last year. Is that…

Jason Hart

Management

That is… Bryan Prohm - Cowen & Company: 100 million tags last year, I am trying to reconcile maybe the everyday market TAM that you cited, the 38% growth rates or maybe that's CAGR actually, are we looking at a similar or maybe the best way to - all right, let's ask this question then, what does the backlog currently look like segment-by-segment, by premises, by information, by everyday, and in total.

Brian Nelson

Management

Yes. Thanks for the question, Bryan. We not ready to provide that level of detail based on the new segmentation. We will roll that out and it will be available in our Q1 discussions. Bryan Prohm - Cowen & Company: Okay. Is there more of a general feel for the strength then of the everyday market based on your current customer profile in the gaming space? I mean, was 2013 was an anomaly and it's going to be difficult to?

Brian Nelson

Management

No.

Jason Hart

Management

Not at all. Bryan Prohm - Cowen & Company: That's all right.

Brian Nelson

Management

Exactly. Not all. Matter of fact, we are seeing very strong commitments from customers that were existing in 2013 and potential for like customers in 2014, so we expect some significant growth in that area.

Jason Hart

Management

Yes. Bryan, what I have enjoyed in this new structure is, some of the elasticity. We sold some of the decline in the premises piece of business through 2013, for the reasons that we outlined, but we saw sold strong growth in our new market. Obviously, we did everyday items. We believe that the tam for that according to governor for 2020 is about $300 billion, so we are only at the very beginning of that market and I think that projects that we are seeing roll out so far rudimentary. And as trust is being put into objects, the need to - as those objects is coming online, there is a need for f fundamental trust and trust by its nature is complex. We have been able to deliver a solution now in that sector that simplifies that trust and we will talk more about that as we roll that through the course of the year, but we are pretty excited about some of the patents we have got, some of the technology, integration of cloud, our manufacturing capability in some of the legacy RFID. Bryan Prohm - Cowen & Company: Okay.

Brian Nelson

Management

It's an area of drugs. You can look that up to... Bryan Prohm - Cowen & Company: I have a subscription. I'll check it out. All right, so on OpEx, it sound you are guiding R&D roughly flat, sales and marketing sounds like it's going to increase as an investment G&A is where the cost can be taken out of the business. What's the right run rate? Are we there? Is the 4Q run rate something where this is more potential cost that can be taken out. I am trying to figure what's the breakeven number that the model put out based on the top line growth and your goal for positive EBITDA at some point over the course of the year.

Brian Nelson

Management

Bryan, remember there was an anomaly in the R&D expense for Q4 with the tax credit, so if we normalize it, you are getting in the area of 7 percentage of revenue. We expect that to be 7% to 8% on an annualized basis, so we will increase from a dollar standpoint as well as moderately on a percentage of revenue. The sales and marketing was approximately 23% for the quarter. We are looking to see that increase slightly as well as we continue to invest in the sales and marketing organization. You are right. The G&A is where we really look to achieve the savings to invest in those other areas, so that we can get to the high growth that we are looking for or the reasonable I should say to profitability. Bryan Prohm - Cowen & Company: All right, two quick questions. Then I will pass onto someone else. About the growth rate overall, because you are guiding your growth rate of somewhere in the 10% to 15% range for continuing operations, do you have sense of kind of how does that breakout between premises information every day is one likely to be more meaningful. I mean, given the CAGARs you would think every day is much more meaningful opportunity, but can you comment on that given what you said about the backlog?

Brian Nelson

Management

Yes. Thanks again, Bryan, for the question. I think the critical part here is the focus strategy and a cross-selling. We have an opportunity in each of the areas to bolster the foundation. I do believe we have significant opportunity in the credential area. We talked earlier about where we might get some higher-margin business that credential on the provisioning aspect of it contributed can contribute. We talked about the premises business being somewhat weaker in Q4 based on the government structure, we are looking for some recovery in that, but that's not driving the high-growth or the significant growth. Bryan Prohm - Cowen & Company: Got it. Then finally, any outlook on cash at the end of 1Q? Any guidance?

Brian Nelson

Management

Not at this time. Bryan Prohm - Cowen & Company: All right. Thanks for the time guys. Good luck. I'll talk to you soon.

Brian Nelson

Management

Thanks, Bryan.

Jason Hart

Management

Appreciate it, so I have a couple of more written. I won't disclose the names, because I don't have specific permission what our current is to raise cash. I think at this stage we have already indicated that. We are looking for and have begun activities for traditional commercial financing, the first time I think we have been able to do that now with the new strategy and some of the demonstrated activities that have recurred. Focused growth, what are markets we are focused on? I think, we have covered that. Profitability in 2014, I think we talked about the adjusted EBITDA positivity is our goal. Messaging to our investments, wanting to hear more about what we are doing. I think that's an important topic to cover for just a moment or two. As I said earlier, we have focused internally to build the platform that has taken all of our energy to do that. There was no point coming out to the market with press release about activities. We felt it would set the wrong - moving into CS talking more with some of the investor events. You won't see us beginning to announce some of the activities and partnerships, but meaningful news. Do not expect to see a press release every week or every two days unless you want, but when we do put the press releases out, they will have some very meaningful outcome for us and shareholders. I think they were the main questions. Darby, do you have any other questions on the line?

Darby Dye

Management

Not at this time.

Jason Hart

Management

Great. Excellent. I want to thank everyone here in this room and all [holders] for their support over the last quarter. We look forward to getting back with an update on where we are for 2014. Thanks.

Operator

Operator

Thank you.

Darby Dye

Management

Bye.