Welcome to the Q2 2017 Identiv Earnings Call. My name is Ally and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. On the call with me today are Steven Humphreys, CEO of Identiv and Sandra Wallach, CFO. In a moment, you will hear remarks from both of them and then we will take questions from the sell-side analysts. Before we begin, please note that during this call, we will be making references to non-GAAP measures 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 documents filed from time to time with the SEC including the annual report on Form 10-K for fiscal year 2016. Identiv assumes no obligation to update these forward-looking statements which speak as of today. I will now turn the call over to Steven Humphreys for his comments. Steven?

All right. Thanks, Ally and thank you all for joining us. As we highlighted in our earnings announcement this afternoon, we continue to see organic year-over-year growth across all three of our business segments as well as strong 11% sequential growth in the business overall. And we previously talked about the importance of balanced growth in all of our segments to provide stability, especially for a small public company. Last quarter was the first quarter in several years when we had growth in all of our three core segments and that trend has now continued into this quarter, led by 39% year-over-year growth in our identity reader segment, 2% in Credentials overall, but solid 10% growth in our RFID products, which are in the credential segment and 5% in our physical access segment. As you might recall, last quarter, our growth was led by RFID business at 40% year-over-year growth. And now looking ahead, with the current quarter being the fiscal year end of the federal government's budget year, we expect physical access products to be one of the fastest growing segments for us for this quarter. So as you can see, having growth in every segment continuously with varying segments leading with the strongest growth in different periods gives us great balance. Now conversely, it does expose us to margin shifts as different parts of the business drive growth in different periods. We expect this variability to continue and we have to keep our expense controls tight and manage gross margins extremely carefully to deliver consistent predictable results. We didn't manage this as well as we would have liked in the second quarter and on our scale, a few transactions can change outcomes. So we always need to have more than enough safety factor to offset them all. The…

Thank you, Steve for providing the context for our financial results for the second quarter of financial year 2017. Revenue in the second quarter was 14.8 million, and 11% sequential increase compared with 13.4 million in quarter one of 2017, and a 10% increase compared with 13.5 million in the comparable quarter of 2016. In fact, if we remove the all other segment, which are discontinued businesses today, our current quarter is also 11% sequential growth over the comparable quarter of 2016. Our physical access control segment generated $5.8 million of revenue in the second quarter of 2017, up 9% sequentially from the 5.4 million in the first quarter and up 5% from the 5.5 million recorded in the comparable quarter of 2016. The increase sequentially and comparably is the result of higher sales of physical access control solutions attributable to higher demand from our federal government customers and higher sales through our channel partners. Revenue from our identity products, primarily smart card readers, reader modules and chipsets was 4.1 million in the second quarter. This represents a sequential increase of 31% from the 3.1 million of revenue in the first quarter of 2017, reflecting higher sales primarily in the Europe and the Middle East and APAC markets, and an increase of 39% over the 2.9 million recorded in quarter two of 2016. Approximately 33% of our second quarter revenue or $5 million was derived from sales in our Credentials segment, which comprises both Access Control credentials and our broader Internet of Things transponder products. This revenue performance in the second quarter of 2017 was 5.0 million was comparable to the results achieved in both the first quarter of 2017 and the second quarter of 2016 at 4.9 million. As previously anticipated and disclosed, we have virtually no revenue in…

All right. Thank you, Sandra. In my opening comments, I mentioned two growth drivers for the quarters ahead. These are the current quarter's federal government business and the fourth quarter’s balance business momentum, which includes our backlog, but especially our current customer demand rates. Successful shipments of our customers owned products drive increased demand in the subsequent periods, which is looking strong across all of our segments. So I'd like to discuss these two drivers, some product progress, some insights into our accelerated sales drive and some insights into our inorganic growth plans. Now, as many of you know, the fiscal year end for the federal government is always a growth driver for Identiv. This year seems to be more so than usual for three reasons. Number one is our FICAM solution, encompassing our Hirsch systems as well as our TS and scramble Pad readers. This serves a serious need of nearly all government agencies. By providing a phased adoption path, agencies can both deploy at their own pace and acquire as budget is available in a usable today, but FICAM compliant tomorrow platform. Additionally, even when they're competitive incumbent systems, since it's less expensive to put in an entirely new Hirsch system than to upgrade in place a competitive system, it's a safe purchase for any government agency at any time. This makes it an ideal end of your purchase. So our greatest challenge is simply getting that message out to all the agencies in the government, because when it's understood by federal buyers, it results in a high conversion rate. Now related to this last comment, Ed MacBeth who I mentioned earlier has launched an accelerated sales process in both the centrally located headquarters of the federal agencies in Washington DC and also a nationwide and worldwide outreach…

[Operator Instructions] Our first question comes from Mike Latimore. Please go ahead.

Just on the federal government strengths, I guess, can you talk just - you gave very good detail, but I guess, is most of the strength coming from current customers that are upgrading or some of these new agencies you've won starting to pick up steam in this quarter. I guess maybe can you talk a little about sort of current versus new customer demand?

Sure. In terms of numbers of course, current customers are always going to be the bigger number because it's so easy for an agency CIO to, you know, knowing us knowing our products to make year-end buys. So that's very straightforward and we've got a number of activities going in that front. But what we're finding is especially out in the regions, over half of federal government purchasing occurs outside of Washington DC. Getting to people we hadn't been touching before out of the VA hospitals, out on the bases, other things and demonstrating how we can get them along the along the FICAM path with infrastructure that they can already deploy and works with their systems, but then is FICAM-ready and really will make them look like heroes. That's an area where we're seeing a lot of activity, it won't be as big numbers, but it will drive a lot of growth. Even in Europe, we had a big open house just a few weeks ago and we had a bunch of army bases there, some other government facilities and customers we had not been closely enough engaged with saying, this is a great use of our funds right now. So there's a bit of both.

I believe you won a couple new agencies earlier this year, have they started to purchase products yet.

A couple of them have. One of them is still doing their PSG analysis, their infrastructure analysis and then there's a couple others that are coming in even as we speak. So the expansion across the federal government is working pretty well.

And then on – as it relates to Cisco, sounds like it was a strong quarter, I guess how was the momentum there, what does the pipeline look like and then maybe a little more color on, is it international versus domestic, yeah, just a little more color on Cisco a bit.

The National versus domestic is a good one, it's a remarkably global pipeline that they've got. And it is starting to appear more in verticals. I mentioned education, there's a lot going on in the, - what they call SLED, the state and local education vertical for them. And they also spill over into some federal government agencies as well. So we're seeing across the board adoption. It's always exciting working with a company as large as Cisco. Sometimes we get lost in the noise, but we're so small that even a little extra noise pick up from them is substantial for our numbers. So it’s feeling very positive.

And then, you talked about a kind of balanced demand for the fourth quarter, but did you say that you thought there is a chance that the PACS revenue segment might be up in the fourth quarter versus the third or did I miss to hear that?

No, you’re right and that would be the first time in a while. So we're going to watch it carefully. But as I said with the broadening visibility for the Hirsch FICAM solution, we think that will be purchases that go even outside of the fiscal year end with new accounts in particular. And then Cisco is not as seasonally driven as Hirsch without the government concentration. So if you put those both together, we definitely have a short at it.

And then just last, you mentioned the Apple iOS, I guess if that benefits your credentials business, is that more of a 2018 revenue lift or would you have some benefit in the fourth quarter potentially?

No, that would be 2018 in terms of anything specific and it drives our RFID business. Now, where it can go you know into ’18 and beyond is our early adopter users of RFID technology have some of these very nascent applications, as the iOS platform becomes a user of NFC-based applications, it really just opens up the whole marketplace. And we've got some interesting developer’s kits and other things we're putting out there to have us be kind of the reference supplier in this space as Apple moves into it. And like I say, I was hesitant even putting that into the conversation because today's been so tactical and that really is an ‘18 and beyond thing. Where it might show up earlier is if customers for transponders also believe that Apple is going to go in this direction and therefore they might start projects earlier and a little bit more aggressively.

[Operator Instructions] And it looks like we have [indiscernible] on with a question. Please go ahead.

I have a couple questions, I was wondering on a clarification, so beginning of the year when you put out the guidance and you put out the $64 million to $68 million in revenues, which is a nice increase. I don't recall any kind of breakdown between organic and inorganic and my assumption was that that was all organic. Now you're talking about some inorganic growth potentially, although you haven't done a deal yet. But can you just clarify that number is that an organic growth number?

Yeah, fair question, that's an organic growth number, yes. And I didn't mean to confuse anybody with that.

And then, so the second thing is, your growth, while you've had growth in the first half of the year, it's obviously lower then on a pro rata basis kind of that year-end number. I recognize you're talking about some or expecting some nice lift here in the second half. So you would be talking about I mean real numbers here of something like 36 to 40 million bucks in the back half of the year to make those numbers. And I guess you've got - I'm just trying to understand the visibility into those numbers at this point. I mean is that pretty visible, I mean you don't talk about bookings and things, but you guys are pretty comfortable that you're going to land in that number - in that range.

Yeah that's why I tried to go into a fair bit of detail in terms of the federal government buying motivation in terms of the projects and programs we've got going on at the local and European even for federal government level. The fact that we're seeing production volumes for our transponder customers that give us insight into what their reorders are going to be as they go into the holiday season. So I tried to build that up as well as you could, but you're right, we don't go putting backlog numbers and other things out there.

And then another one if I may, regarding margin. If I remember correctly, I mean it sounds like you had a really strong business on the reader side. Correct me if I'm wrong, but going from memory that that might be the lower end of your margin spectrum. You're also talking about continued strength into the back half of the year in that area. But I guess where I’m really going with this is, so that range of revenues is not from the low end or the top end for the entire year is not really that big its $4 million difference, when you get to EBITDA, you've got a what four to seven that's $3 million range. So I guess your range on the EBITDA side, I don’t know if you can talk a little bit more of your expectations on margins, but is that really going to be dependent on kind of the mix of the credential versus say the access control business? I mean, I’m sorry, not credential but the readers versus the access control.

You mean, is hitting EBITDA going to be dependent on mix?

Yeah, I mean, how dependent on mix and kind of your visibility in that at this point?

I mean the mix of course affects aggregate EBITDA, although the EBITDA is fairly solid in all of our segments. But I’ve tried to give some insight into, you know, third quarter is always skewed towards to Physical Access System, which is our highest gross margin segment. And fourth quarter as I answered Mike's question a little earlier, we still expect to have a good mix of Physical Access even though in the fourth quarter, we often see some more transponder and smart card reader business. So does that get at what you're asking?

It does I guess, [indiscernible] [00:45:31] try one last one, as we go into next year, over the next few years, can you comment at all on what you see as far as you get these three verticals, any one that will take over more than another as far as again influencing your margin as you grow your business going forward? Also when you look at inorganic growth, are you focused on one area over the other? I'm just, you know, six months ago or maybe a year ago now, you had a slide in one presentation that had kind of your I think you called it a mid-term target range as far as trying to get your EBITDA up to I think it was a 10% kind of number. And I'm just - now that we're six or nine months beyond that, how you kind of triangulating that going forward?

Yeah, well I think as you saw even in the last half of last year and under most modeling scenarios you could look at this year even if you were flat, you'd have something in the range of that model for the second half of this year and going out of the year. So we're certainly comfortable with those models. Back to your earlier question of, is there any particular segment, from an organic growth perspective, I think they'll all be growing at healthy clips, I don't think there's going to be a substantial mix shift. From an inorganic perspective, we are certainly more heavily leaning towards higher gross margin acquisitions in all the areas, Physical Access is where you'll find more higher scale acquisitions just because it's a bigger industry overall. So from a mix perspective, you’d probably expect to see more mix shifting topline towards the Physical Access business.

And we have Mike Latimore back on with a question. Please go ahead.

Steve, you talked about some accelerated sales efforts, but what does that mean generally for just kind of sales and marketing spend let’s say.

Good question, yeah well hopefully you know us long enough that that means no increase in spend. It means we have three - really four categories of customer facing activity, we have our sales engineers, we have our direct sales people, we have our inside sales and we have our professional services group, which is paid for basically. So you'll see us doing more in professional sales - professional services because when we add a person, we actually get 1.5 to 2 times their all in cost in revenues. And you'll see us shifting more towards highly leveraged inside sales lead gen that makes our sales guys more productive, sales guys and girls. But not an aggregate increase, you know, not a dollar increase and certainly not a percentage increase.

And then on the just channels and partner front, did you added any new channel partners in the quarter or sort of develop additional partnerships that sort of can help with the channel and then how does that look for the second half of the year.

From a channel perspective, yes, although we don't call them out. We haven't - needed to be clear, we haven't added a Northrop Grumman scale system integrator or a Cisco scale partner. But we've added a number of regional dealers and super regional dealers as our channel builds out.

And then on the government strength that you're seeing, does that flow through to the identity segment as well or do you see it more on the access?

Mike, you cut out, I'm not sure you're…

Right. Is this better?

Oh yeah, I heard you say, then on the gov and then lost you.

The strength of the government you're seeing does that also flow through to the identity segment income?

Yes, good point because the smart card reader is a portion of that volume especially the desktop readers for smart card readers are driven by network log in for the DOD as well as our OtterBox project when that comes online that will be for mobile email access also for DOD and government security applications.

And just last one on the Physical Access Security, you mentioned FICAM a few times, I guess just you know can you compare the FICAM initiatives that you're seeing in the second half or is there a pick-up in FICAM activity or is it more really tied to just kind of more kind of second half government spending.

No, there is a pick-up in FICAM activity actually. Partly - you might remember we went on the approved product list in, is either January or the first week in February this year. And so the message is just really vetting in now. We've repeated a couple of times when people are coming to seminars. And so it's picking up.

And we have no further questions at this time.

All right, well, thank you and thank you all for joining us today. We look forward to keeping you updated on our progress as the business goes forward, particularly at any of our investor conferences and our third quarter earnings call when that comes around, but thank you again for your time and have a good afternoon and evening.

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