Welcome to the Q2 2015 Identiv Earnings Call. My name is Bakiba 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 David Isaacs. David, you may begin.

Thank you, Bakiba. With me on the call today are Jason Hart, CEO of Identiv; and Brian Nelson, CFO. In a moment, you will hear remarks from both of them and then we will take questions from sell-side analysts and registered investors. Before we begin, please note that during this call, we will also be making references to non-GAAP results or projections, including non-GAAP gross margins, operating expenses, and adjusted EBITDA. A complete reconciliation between each of these non-GAAP measures and the most directly comparable financial measures can be found in today's press release, which is available on identiv.com. In addition, during our call today, we will be making forward-looking statements. Any statement that refers to expectations, projections, or other characteristics 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 filed from time-to-time with the SEC, including the Annual Report on Form 10-K for fiscal year 2014. Identiv assumes no obligation to update these forward-looking statements, which speak as of today. I'll now turn the call over to Jason Hart for his comments. Jason?

Focus, partnering and growing, our core themes. Thanks David. Hello everyone. We continue to make good progress on focusing the business, its products, its systems, and its structure throughout Q2. Having started as 37 entities a little more than a year ago, we are today focused around a single vision and one that's gaining traction and I will cover that in some detail today. Our new wins are developing some strong momentum. In the last six months we’ve won a major airline, a major sporting apparel company, a major technology company, a major bank opportunity, a major wearables company, and the sales pipeline has grown by over 300% in the first half to little over $260 million of identified and engaged opportunities. We’ve also developed a channel and partner program and partnered very heavily with some of the largest brands in the market. But we have seen some weakness in our traditional international markets; we’ve seen faster than expected weakness in our legacy products. We’ve been slow at modernized, some of that products for some of our traditional government markets and customers. We've also overestimated, in my opinion, the deployment schedule of some of our largest customers. This has resulted in some very poor predictability during the first half of this year. Therefore, as my illustrious CFO sitting next to me says, control the controllable. We are focusing on the bottom-line. We've begun to take measures that will ensure financial strength in the business. We got out in front of our skis a little bit in the first half of this year and we didn't see the revenue materialize. So, we're taking a bit of a backward step and we're focusing and we're investing on our current customer deployments. We're going to make them extremely successful and predictable. We're rallying…

Thank you, Jason. Now look at our financial results. Revenues in the second quarter of 2015 were $15.6 million as compared with $22.3 million in the second quarter of 2014, a decrease of 30%, but a sequential increase of approximately 4% from the $14.9 million reported in Q1. Approximately 47% of our second quarter 2015 revenue or $7.4 million was derived from sales in our credential segment. This compares to revenue of $13.2 million in the second quarter of 2014, a 44% year-over-year decrease. This decrease was primarily due to the timing of orders in both North America and Europe for products used in electronic game toy applications and other Internet of Things applications. In addition, we deferred $3.2 million of credential revenue shipped in Q2 and expect we will recognize it in Q3. Sequentially, as compared to the $7.2 million reported in Q1, credential revenues increased $0.2 million or 2% from the $7.2 million in Q1 2015. Our premises segment provided $4.6 million in revenue in the second quarter of 2015 which is comparable with second quarter of 2014, as well as sequentially with Q1 2015. Our first half 2015 premises business is up 14% from the comparable period in 2014, as we continue to see the stronger demand with our government customers. Revenue from our Identity products, which includes smartcard readers, was $3.3 million in the second quarter of 2015, a decrease of 13% over the second quarter of 2014 revenues of $3.8 million, and an increase of 26% sequentially from our first quarter revenues. Identity revenue for the first half of 2015 has decreased 33% from that in the comparable period a year ago, reflecting the weaker demand in our international markets. Revenue in our all other segment which represents sales of our digital media and chip…

Thanks, Brian. As Brian highlighted, revenue hasn't been to expectation for the first half, yet the underlying sales momentum has continued to grow. We think it’s prudent at this point to focus the physical resources we have on the areas of strength in the business and to that end, this quarter we've attempted to pull together some more information about what we're seeing in terms of their pipeline, why am I so excited about the business. So for those of you that have joined us through the multimedia portal, you'll now see slide number 9, which is the first of the few slides that we're going to cover. We'll make this presentation and the replay available post the earnings call and then progressively each quarter we hope to provide some updates to this information. I wanted to start over the next six seven minutes with who do we sell to, then we'll talk briefly about our sales cycles, and then I'd like to give you 10 examples in summary form of the projects that we're tracking, how we track them and where they are through the majority of the sales cycle, and what it means to us when we do our sales forecasting for the remainder of this year and for 2016. So, slide number 9, who do we sell to? Well sell today predominantly to an enterprise customer, a customer that generally has three reasons of buying apps, the first one is premises, they're looking to secure their physical access, they're looking to identify their people. The second is new for us, and that's enterprise security. It's trying to address the username and password problem. And third, IoT or everyday items and this is an area where we've been investing with Identiv Labs. A traditional customer comes to us…

[Operator Instructions] Our first question is going to come from Saliq Khan from Imperial Capital. Please go ahead with your question or comment.

Great, thank you. Hi, Jason. Hi, Brian. First of all, the slides were pretty good way of getting a bit more clarity regarding the pipeline, what the Company is doing, and what you guys are really engaged in, and walking backwards a little bit, as you're taking about the three big segments, the enterprise, the everyday items, and the premises, where are you finding - between all three of those segments, where are you finding the biggest bottleneck is for you guys? It seems like the evaluation design portion could vary anywhere from one month to 48 for premises and then obviously four to 12 on the enterprise. So where the bottleneck is and obviously how do you - how are you able to go ahead and reduce the overall time as well.

Really good question, Saliq, I appreciate it. It's different in the three areas, so let me cover very quickly. In premises, it's mostly access to market. As you know the Company formerly had diverse business, it was very, very contained in one particular market segment. With the investment we've made in the last 18 months in terms of all the new technology that's going into modernizing and quite frankly revolutionizing our premises offering, we've really begun to open up opportunities that the Company was never able to get into before. We have seen some extremely good momentum in the last two quarters, and I outlined some of that in the - on Slide 11 of the deck, but there's so much more that sits behind that. So I am really excited in particular in that segment. I would say it is at the moment the high margin growth path for us over the next 18 months or so. Cisco coming on board with that is just again a major differentiator for us. It has opened up access to markets and customers that as a small business we were just not able to get into. So, the first thing on premises it was access to market. Enterprise, it has been our focus. In that we really hadn't focused as hard on enterprise because we were focused on getting the premises technology. You know my background is enterprise, so we took a strategic view that said, on the premises segment first, all of our competitors attempt to own enterprise and get lost in the noise. We believe the real secret to success here is owning premises, and then being able to become a strategic partner to the enterprise customers to move into the enterprise category. So - there's only relatively new sales team that's been put in place, and again, having some early wins it's not growing as fast as premises however. On the everyday items area, Identiv Labs was one of our better ideas in the last four, five quarters. Identiv Labs is really kicked up and being able to win whole bunch of early pilots, we list a few of them on Page 11, including large boarding apparel company that you'll see is listed at over $5 million a year annually, we suspect it could be larger than that, that's just one of the many projects that the team there have been working on. They are a brilliant team and every week I get some new invention or idea coming out of them where they're working with everything from smart battery companies through to the apparel company, through to even some organizations in aviation and how we can provide very simple IoT, low cost IoT devices for aircraft. So, the everyday items barrier is generally aligning with the design-in customer's view of what they want to do. So it's - but once you've got past that stage it's really predictable.

And as you look at the relationship with Disney, could you give us an update on that and how you're viewing that opportunity as you go into the second half of 2015 and then full year 2016?

Yes, we can't comment on any one large customer in terms of naming them without their consent. But as we look at the everyday items business and we look at the predictability around that business for this year and for 2016, it's actually a really predictable business, once you have won the project. And however, once you see some big numbers starting to come through, it does have the ability to sway our revenue quarter-to-quarter as may have occurred in the past where you may see revenue pushing forward and whereas sometimes it's deferred. So, we've got some decent visibility into the forward everyday items pipeline, it's probably the most predicable one we have and we obviously leverage that pretty hard.

Jason, as you’re looking at the available cash that you have which is somewhere around $30 million, $31 million, the market cap obviously the company has come down [indiscernible] as well. How do you view the opportunity for either buybacks and or strategic acquisitions?

The strategic acquisition discussion is a Board level discussion, so the Company is always inquisitive but that's something that's discussed at the Board level, obviously I can't really talk about it today. So, the second question about use of cash for buybacks and alike, again, we're just not able to comment on what the Company's strategy may be in relation to that, except that I can confirm that in October of last year, the Board did authorize a buyback program, but I'm just not able to comment on the nature or details of that. I do believe that at some point is disclosed in our filings.

That's fair. Hey guys, thank you and best of luck to you.

Thanks Saliq, I appreciate the questions.

Thank you. Our next question is going to come from Bryan Prohm from Cowen & Company. Please go ahead.

Hi, good afternoon, Jason and Brian. I have a couple of questions on the one year term related to revenue guidance for the back half. If I model it out based on some of your comments, it sounds like you've got some sustained momentum in the premises business, the deferred revenue coming through on the credentials line, could you maybe give us a little more clarity around what your expectations are for maybe for Q3 versus Q4, is there a - are you guiding in such a way or is the visibility in the pipeline significant to give it to us some visibility around revenue in Q4 potentially being up year-over-year or is that as a function of the $35 million to $40 million guidance in the back half? Thanks.

Yes, I think you hit it on the nail, Bryan, it's a function of the back half and the spread because as you know the predictability of deployments quarter-over-quarter has been challenging and that’s why they are slower than anticipated at times, things shift by weeks which means if it's supposed to be at the end of June, it goes into July, it supposed to be at the end of September, it goes into October, which there is a defining line there. So we do look at it from a perspective of what we believe the second half will be. I can't really comment on each of the components in the quarter.

Could you comment on the individual segments on a year-over-year basis? It feels like Identiv obviously has some challenging comps for year-over-year growth, but premises potentially could be a year-over-year grower based on the momentum we've seen in the first half, is that a fair way to think about how to model this?

Yes, exactly Bryan, and I think as I mentioned in my comments, one of the things that we've seen is that there's been some stability in that segment based on all the work that was done over the last 12 months. And as Jason, mentioned in his comments with regards to the new products coming on APL, we feel real confident in the premises segment.

Bryan, just to reecho that, it has been a major investment for us, when we took over the - we did not have a Washington DC office, the business had been neglected the premises sector but we have turned that around. We have a strong presence in Washington DC now. We've got deployments in just about all of our major customers. We expect to see some really good predictability because of the requirements to upgrade. We have approximately 20,000 panels in government that need to be upgraded for IPv6, that product is currently in the labs with the government, so we expect to see that through Q4 and into 2016. We expect to see FICAM driving our touch secure, read online that we launched on the IPO, obviously over the last couple of months and most notably yesterday with the ScramblePad. We've upgraded our ScramblePad product where we had seen the sales in prior years declining, we now expect to see that actually stable and grow where we still hold a couple of patterns in that area. So, overall when I do the internal sales modeling and hand them over to Brian, I've got a great deal of confidence in our premises sector because we've done the hard work there. And our sales team in Washington DC is first grade, they’ve done a tremendous job in briefing our customers and aligning them with this vision that we have around providing identity with a crossover to enterprise and being out of leverage IoT.

Great, thanks for all the color there. So, another question, do you have any - could you provide us with any updated OpEx guidance for the year Brian, I think previously you've given kind of range, should we expect a similar level of OpEx q-on-q and then meaningful tick down in Q4 as some of the cost reduction programs come into play, is that the right way to model it? Thanks.

Yes, thanks for the question, Bryan. I think what we do expect to see is that Q3 we'd have some improvement in our G&A area and then in Q4, we would see significant improvement across sales and marketing and G&A. That's based on what we're projecting from our topline perspective, that's how we'll get to adjusted EBITDA positive in Q4.

Okay. And then last question from me on gross margin. If the deferred revenue from the credentials come through in Q3, is that likely to be a headwind gross margin this q-on-q?

Yes, from a bit, but again given the strong premises segment and the improved margins there, it will partially offset the headwind.

Okay, great. Thanks, and I'll pass it on.

Thanks, Bryan.

[Operator Instructions] And our next question is going to come from Mike Latimore. Please go ahead.

Hi there, this is Jim Fitzgerald in for Mike Latimore. So my first question here looking at the international biz, saw a little bit of weakness there in the quarter, how much exposure do you guys have going forward here internationally and how do you kind of expect that to trend here over the rest of the year?

Hi, Jim, good to meet you, and thanks. So, we in the lowering of the guidance, we have really taken a tough view on where we think the legacy parts of our business will be and in particular some of the international areas. The weakness didn't come just from international, it also came here in the U.S. domestically from some of the slowness in the products and product delivery and customer roll-out, but specifically related to international - on the new guidance, we think we have taken a very conservative approach.

Okay, great. And then turning back to Cisco, when does that really start to ramp up and start to add to bookings and revenues? I know you guys mentioned the three phases, but going through the rest of the year here, when does that really start to materially impact revenues in your view?

I think being fair about it, it is a 2016 activity for some solid contribution to the business, but we have already begun to see, even this year the impact both directly and indirectly. The indirect is coming because as we're doing this joint activities and our products coming onto the solutions plus price list, we're seeing Cisco partners beginning to work with us, bring us new opportunities and, for example, in the last few weeks we've begun shipping to a number of the Cisco partners advanced product. So, it's already beginning to have an impact - meaningful to us is well greater than $1 million, that's a thing we'll start to see that early next year.

Okay. And would you say that in line or with your original expectations, or is that kind of changed over time?

I think it's a little slower than I hoped. We do talk a little bit about Cisco on Page 11 of that presentation, you can kind identify it there in terms of what we think the numbers going to be. But I do think that it has been slightly slower to get out the door, we had hoped to beat through the Q3 date, but we haven't, so I would like it to be faster, I think as the short-term answer.

Okay, got you. And then looking at everyday items, do you see your main customer there kind of remaining at a similar percent of revenues in second half compared to first half, how do you see that changing?

Thanks for the question, Jim. We generally don't guide on a customer-by-customer basis, but it's indicative of what the sales order volume is quarter-over-quarter based on their needs. We do have a deferral that's coming into the quarter. We did build up inventory in anticipation of fulfilling additional Q3 orders, but I can't give you guidance on a specific percentage of that customer will be each quarter.

Okay. No problem. Thanks guys. Appreciate it.

All right, Jim. Thanks.

Thank you. And at this time we have no additional questions.

Great. Thank you, everyone. Appreciate your time, and will be talking with you all again next quarter. Thanks very much.