Identiv, Inc. (INVE) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Identiv's Third Quarter 2017 Earnings Conference Call. My name is Melissa, and I will be operator this afternoon. Joining us for today's presentation are the Company's CEO, Steven Humphreys; and CFO, Sandra Wallach. Following their remarks we will open the call for questions. Before we begin, please note that during this call management will be making references to non-GAAP measures or projections, including adjusted EBITDA. In addition, during the call, management 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 company's 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 conference over to CEO, Steven Humphreys, for his comments. Sir, please proceed.

All right. Thanks, Melissa. Good afternoon, everyone, and thanks for joining us today. The progress we made during the third quarter had its challenges but also marked key steps in our three year growth plan of significantly scaling the company and in getting better predictability in our near-term results. Our Identity and Credentials businesses are performing particularly well, but our physical access revenues have grown more slowly. As we discussed on our call a few weeks ago, we didn't see the usual seasonal acceleration from the government fiscal year-end, which impacted our results for the quarter. And [ph] in our scale, one quarter's variance can alter a year's results even though it doesn't reflect the overall market nor our opportunity within the market. We're still encouraged by the balance in our business and our competitive advantages within each segment as we build towards optimal scale. Whether it's growth in our transponder or smart card reader businesses, our expanding channel relationship with Cisco, our strong core government business, or our recently launched Mx-1 controller, we continue to strengthen our position. Looking specifically at our PACS segment. This segment encountered some hurdles during the quarter despite growing 10% sequentially. On our business update call on October 23, we talked about why we reduced our revenue guidance for 2017, but let me explain why we adjusted it down by $5 million instead of a lower amount. This was because of a few factors: First, as we talked about a few weeks ago, we received more than $1 million of government orders either late in the quarter or just after it ended and we didn't get the seasonal government fiscal year-end boost we usually do. To add to that the launch of our Mx-1 single-door edge controller was behind schedule and came at the end of the quarter. However, the additional reason we adjusted our top line guidance was to make sure we're setting near-term expectations that are clearly visible. We believe in our long-term growth and the great market position we're building, but at our scale, a few events can move results a lot. We've seen this in both transponders and smart card readers, too, where we've seen 30% to 40% year-over-year upticks in individual quarters despite long-term growth rates to the teens. Now we've seen the converse of this in premises, where we also have strong long-term growth expectations but individual quarters have been flat at times. Now we expect the current quarter in premises to be back in the high single-digit growth rates, but we need to focus on building our real business potential, not jeopardizing that opportunity with near-term numbers that are exposed to quarterly swings. Given the subscale state of our company, it takes a few slipped orders or one delayed launch to tip the scales even when the overall business is otherwise building well. Even in this most recent quarter for example, Identity was pretty flat, but year-to-date it's up 18%. So the growth rate is very clear and quarter-to-quarter changes aren't as worrying. Premises is actually an even stickier solution. So it takes longer to build that momentum. Since it hasn't had definitive upticks yet, any shortfall gets more attention. But the market and our position in it is just as strong as in other segments, and that's what we're building towards. So even though our revised guidance is a conservative step we think it was a reasonable one that supports our long-term growth, market leadership and value creation. Now I would like to spend another few minutes on each of our segments as a framework for the rest of today's call. The opportunity in the PACS market is still strong and developing now. We're well positioned with high-performance products, a great quality technology reputation all very competitively priced. Through our conversations with customers and industry partners, we know FICAM compliance is very real. Now one of the challenges in the federal government -- as you know, it's a massive market and our FICAM is a trend that is going to be going over the next five to 10 years. What we've done in our approach to the market is focusing much more on the end users. The typical approach to government sales is go through large system integrators. When the deals come, they fall and then you deploy. Because of the nature of FICAM and because of our reputation as a technology leader, end-use customers in the government are actually very interested in engaging with equipment manufacturers such as us. And so we've done is we've actually changed our approach to make it bimodal over the last few months, going directly to the end users in the government, getting awareness of how and when they're going to deploy and then knowing exactly what's going to happen. This gives us a couple of benefits: One, it helps us get visibility of course, in what the actual deployments are. Two, there are often challenges in deploying a complex solution like this. We can solve them much more quickly and much more transparently than intermediary system integrators can do. Then the third benefit actually is the federal government customers are very interested in service contracts to deliver this capability. They're simply most concerned with high-quality, high-security implementations that work the first time out. So they're very open to providing larger services contracts to us and you'll see that coming into our market business as we talk about it later in the call. Now part of our success outside the federal government space and in premises, in general has been how quickly our Cisco channel is growing. We again had record revenues through Cisco in Q3, which contributed well above 10% of our revenues for the PACS segment. Now moving on to our Credentials business. This has performed very well all year, up 10% year-to-date and up 16% year-over-year. Much of this growth has been driven by our transponder products, where we've been securing more design-ins with strategic product lines and key customers as well as continuing to take share across libraries and other verticals. Now as I always have to say, we can't disclose much about which products we're in or who we're working with, but I can say that the two areas that we've been making inroads in are brand authenticity and customer experience. Later, we'll provide some industry use cases of each, but it helps to add that NFC is a major enabler of our activity in the space. So two is iOS now allowing NFC functionality. In fact, earlier last month, we announced our NFC Tag Starter Kit and SDK to bring the power of NFC to everyone and to solidify Identiv as the go-to development partner for all things related to NFC apps. We're not just closely aligned with custom development projects, but also strong market trends, and we believe our strong and diversified pipeline will continue to be a big growth driver for us in the near future. So finally, our Identity segment is another area we've been gaining some solid traction in. As many of you know, our Identity segment is mainly our smart card reader products, including desktop readers, modules, components and tokens. We've got a very strong position in the federal government market, which is balanced nicely with our exposure to commercial and industrial applications. Our growth accelerators are smart card readers with secure access both in the federal government and in the commercial information, security and payments, particularly payment modules and vending machines, kiosks and other offline applications. Additionally, we recently recruited a senior smart card reader sales professional from one of our competitors, who's now helping us drive our sales for Europe. This area of our business continues to generate strong demand, and I'll go into much more detail when we talk about it later. Now before I go into those details about our operational progress as well as our future growth strategies and outlook, I'll turn the call over to our CFO, Sandra Wallach, who will walk us through the financial results for the quarter. Sandra?

Thank you, Steve, for providing the context for our financial results for the third quarter of 2017. As Steve mentioned on October 23 after the close of the market, we provided a set of preliminary third quarter 2017 results with total revenues in the range of $15 million to $15.5 million and non-GAAP adjusted EBITDA of $0.5 million to $1 million. Today, we will provide the full financial results as committed. Revenue in the third quarter of 2017 was $15.4 million, a 4% sequential increase compared to $14.8 million in quarter 2, 2017 and in line with the $15.6 million in the comparable quarter of 2016. Our physical access control segment generated $6.4 million of revenue in the third quarter 2017, up sequentially from $5.8 million in the second quarter and down 11% from $7.3 million recorded in the comparable quarter of 2016. While revenue increased sequentially, we did not experience the historical seasonal demand from the federal year-end government partially due to the timing of orders arriving late or just after the quarter. Revenue from our Identity products, primarily smart card readers, reader modules and chipsets, was $3.4 million in the third quarter. This represents a sequential decrease of 16% from the $4.1 million in the second quarter of 2017, reflecting lower sales of smart card readers and a decrease of 2% over the $3.5 million recorded in quarter 3 of 2016. Approximately 36% of our third quarter revenue or $5.6 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 represents a sequential increase of 12% from $5 million recorded in the second quarter of 2017 and a comparative increase of 16% from $4.8 million recorded in the third quarter of 2016. As previously anticipated and disclosed, we have no revenue in our All Other segment in the third quarter of 2017 as a result of phasing out our digital media product lines and the discontinuation of our CHIPDRIVE product line in the fourth quarter of 2016. Now turning to comments on our gross margin. Our GAAP gross profit margin was 38% both in the second and third quarter of 2017 and 44% in the third quarter of 2016. On a non-GAAP basis, excluding certain noncash items, our non-GAAP gross profit margin was 40% in both the second and third quarter of 2017 and 47% in the comparable third quarter of 2016. The comparable quarter-over-quarter decrease in both GAAP and non-GAAP margins was attributed to the mix across our reported segments with physical access control, our highest gross margin business, representing a smaller percentage of our total revenue; with lower gross margin segments representing a higher percentage of our total revenue compared to quarter 3 of 2016, along with the mix of channel and distribution partners within our reporting segments. Now moving on to our operating expenses, which is the next graphic. GAAP operating expenses totaled $6.2 million in the third quarter of 2017 compared to $6.9 million in the second quarter of 2017 and $7.1 million in the comparable quarter of 2016. On an adjusted consistent basis to exclude restructuring and severance and certain noncash charges normally excluded from our non-GAAP results, such as stock-based compensation and depreciation and amortization, our non-GAAP operating expenses in the third quarter of 2017 were $5.2 million as compared with $5.8 million in the prior quarter and $5.5 million in the third quarter 2016. The comparative decrease is primarily due to a continuing cost focus across the business and lower professional and legal fees. Our R&D expenses in the third quarter of 2017 were $1.4 million compared to $1.3 million in the second quarter of 2017, representing 9% of total revenue. The increase in these results, compared to $1.2 million or 8% of revenues incurred in the third quarter of 2016 were primarily due to higher product certification cost associated with our Mx-1 product. Sales and marketing remained consistent at approximately $3 million in the second and third quarter of 2017. Again these results are comparable to expenses incurred in the third quarter of 2016 at $2.9 million. G&A in the third quarter was $0.9 million compared to $1.6 million in the second quarter and $1.5 million in the third quarter of 2016. The sequential quarter-over-quarter decrease was related to lower professional and legal fees, which included reimbursement of $0.8 million from our insurance provider for legal fees incurred in prior periods in connection with matters related to a complaint by a former employee alleging expense reimbursement issues with respect to certain of our former executive officers and other employees, related investigations, the class and derivative litigation and all related proceedings. We now look at our full income statement per the earnings release. Our GAAP net loss for the third quarter was $1 million compared to a loss of $1.9 million in the second quarter of 2017 and a loss of $0.7 million in the third quarter of 2016. Our non-GAAP adjusted EBITDA gain was approximately $0.9 million in the third quarter compared to $0.2 million in the second quarter of 2017 and $1.7 million in the comparable quarter 2016. We have provided here a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. There are just a couple of items worth noting at this point. Interest expense was approximately $0.6 million for the second and third quarter of 2017 and $0.5 million in the third quarter of 2016. Non-cash stock-based comp was approximately $0.7 million in the second and third quarter of 2017 compared to $0.9 million in the third quarter of 2016. And as always, we do not expect to incur any further restructuring charges in connection with the implementation of the first quarter 2016 restructuring plan. Now if I could turn to the balance sheet. I'll be comparing our position at September 2017 to the position at June 2017. Cash at the end of September 2017 was $15.7 million compared with $18 million at the end of June 2017. The $2.3 million net decrease in cash for the quarter were comprised of primarily an increase of $0.6 million driven by our net loss excluding noncash items, offset by a $3 million net usage of cash in operating assets and liabilities. The next slide is a full balance sheet for the table in the earnings release. We define working capital simply as accounts receivable plus inventory, less accounts payable. This was $16.5 million at September 2017 as compared to $14.7 million at June 2017. The net increase was driven by an increase in inventories of $0.9 million and a decrease in accounts payable of $0.9 million. With respect to accounts receivable, our days sales outstanding decreased from 52 -- 55 days at the end of quarter 2 to 52 days at the end of quarter 3. This is a result of collections being $0.9 million more in Q3 versus Q2 of 2017 while sales also increased $0.6 million quarter-over-quarter sequentially. Inventories net of reserves were $13.4 million at September 2017 compared with $12.5 million at June 2017. Our adjusted inventory turnover was approximately 3.6 for the third quarter compared to 4 for the second quarter of 2017. Accounts payable decreased by $0.9 million from $8.5 million at June 2017 due to decreases in 0 -- in 1 to 180 days payable of $0.7 million and a $0.2 million reduction in over 180 days payable. A couple of other noteworthy line items in the balance sheet. Accrued expenses and liabilities are comprised of employee compensation, legal and professional fees and other items, amounting in total to $4.6 million at the end of September 2017 and $4.8 million as of June 2017. The net decrease of $0.2 million was primarily driven by reductions of $0.3 million in accrued legal fees. In addition our long-term payment obligation decreased from $3.5 million to $3.3 million, June 2017 to September 2017 respectively, reflecting the continued quarterly payments made and partially offset by the accretion of interest. Our long-term financial liabilities decreased from $7 million at June 2017 to $6.5 million at September 2017 as a result of moving more of our long-term debt into short term. Moving to the next page. Given our Q3 2017 and financial performance year-to-date, we have kept our commitment to manage and hold our non-GAAP operating expenses to sub-$6 million per quarter and have added another quarter to our now five consecutive quarters of positive non-GAAP adjusted EBITDA. We've also strengthened our balance sheet through this year, as evidenced by the market increase and the difference between our reported current assets and liabilities, which stands at $18 million at the end of September versus $9.1 million at the end of December 2016. And we've preserved our cash through the year at $16 million. For the last page of the financial segment, as previously announced, we're confirming our guidance for revenue for the fiscal year 2017 to range between $59 million and $62 million and positive EBITDA between $2 million and $3 million. We're confident in the projections of 5% to 10% top line growth for the total year and another and sixth consecutive non-GAAP adjusted EBITDA quarter to close our financial year. As is customary with our practice in the past with this earnings release I will be providing top line guidance in the form of expected ranges for full year 2018. We believe that our physical access controls business will see growth in the mid-single digits, with our Identity and Credentials businesses growing in the low double digits year-over-year. We will be keeping our non-GAAP operating expenses at or below an average of $6 million per quarter, evidencing our ability to fully leverage our existing infrastructure and resource footprint to support higher growth. And we believe that based on hitting several of our mid-term target model metrics this year that we will be able to exhibit many of our long-term target metrics within the quarters of 2018. These ranges will be updated as a full set of guidance for our financials in early 2018 for the full year. With that, I conclude the financial discussion, and we'll pass it back to Steve.

Thanks, Sandra. Picking up from where I left off, I'll spend most of the rest of this call getting deeper into our progress across our three segments, both near term and long term, and I'll bring it all back together with our three year growth plan and the long-term business model we're working towards. In my opening remarks, I talked about the market opportunity in federal access security. We continue to believe that our FICAM solution is a quality price and performance leader in the federal government. Now on top of this position, a further step ahead is our Mx-1 single-door edge controller, which is FICAM-compliant out of the box because it's built on our proven Mx-1 platform. The Mx-1 has been very well received in the market with demand ahead of our initial expectations. As I mentioned before, it represents a key piece of our controller suite of products, providing the best of all worlds for our access control customers. What makes it particularly appealing is the fact that it comes at a lower entry price point and works extremely well within a small and medium business customer environment, and it aligns well with major trends, like Power over Ethernet and wireless locks, which extends physical access to doors not served before. Now to be clear, our initial Mx-1 launch is into our core federal government and commercial Hirsch channels. Over the next few quarters, we'll launch productizations and configurations of the Mx-1 that are specifically tailored for the SMB market, for our Cisco commercial channel, for the Cisco federal government channel as an access control hub for wireless locks and other market segments. So you can get a sense of why we're so excited about this addition to our product line. But each market segment and configuration requires proper packaging, pricing, channels, training and support infrastructure to get to its full potential and really grab market share in these expanded segments. We're determined to do each launch right to maximize our market share and competitive advantages. The good news is the core development work is done and the core product can be a wedge into several strong market segments. The reality is that decisively winning every battle will take time and focus. So we're going to go about it right over the next few quarters. But in short, the Mx-1 is a very flexible, low adoption cost, sub-enterprise scale product, scalable to enterprise-level capabilities. And we expect it to contribute to our top line this quarter throughout 2018 and well beyond. Now as much as we're encouraged by the early start with the Mx-1, we're even more encouraged by the rising demand we're seeing in the broader federal government market as FICAM directives increase and our domain expertise becomes more valuable both from a product and service perspective. I ran through this in some detail in my opening about how we're getting closer to the end users and leveraging our expertise into our services model. So I won't reiterate that. But that's certainly a part of our government go-to-market going forward. Now we're also encouraged by the leverage we're seeing in our Cisco channel partnership with another record revenue quarter through Cisco, again representing over 10% of our revenue for the PACS segment. Another important trend for our long-term business position is our expanding software-plus-services value-add. Now we're doing this by increasing the direct end user contact in the commercial market just as we're doing in the federal market and also through productization of our services packages. Now if you think about it, just as the federal government is going through complexity with FICAM, the commercial market is now having to deal with video integration, sensors, mobile devices, IoT platforms, but fundamentally, all that the access control people want to do is open the door but they're in an increasingly complex situation. So this is really rare shift in the marketplace. The increasingly complex situation in the premises environment is a long-term trend that we think is going to drive more and more customers to look for an ongoing services relationship with the core technology vendors, not simply the installers. The legacy access control industry has kept these roles separate, but this is an area where we're changing the equation and getting actually a stronger section from customer. This is very much customer-pull-driven, not supply push. Now we're also driving this with new sales leadership, which should help us make a bigger impact through both our Cisco channel and the broader federal government both with our products and our services. Now the key takeaway here is that we're now generating more recurring revenue streams from services and software, which not only diversifies our revenue base but also enables us to be stickier with our customers. As a metric, for example, services represented over 10% of our premises revenues this quarter, and we expect to continue to grow the service portion of our premises segment. Now on a final note for our access control business segment, we're seeing consolidation in the market at high multiples, including ASSA ABLOY's acquisition of Mercury Security and August locks, and JCI's purchase of Tyco as well as others. We think we're expanding our key position in this increasingly strategic industry. So shifting gears now to our Credentials business segment. Revenue in the segment, as I mentioned at the start, was up 10% year-to-date and 16% year-over-year. And in fact, our transponder products, which make up the majority of the revenue here, are growing even faster, up 16% fully year-to-date. And that's clearly an area that's driving growth for us not only in the segment but across the entire business. Now I mentioned two key areas of focus within transponders, brand authenticity and customer experience. So independent of Identiv, these are trends that can be validated externally if you look at the NFC-based applications that have recently been launched into the market. I'll talk about some of these external use case examples happening in the industry, but to be clear, these are industry examples and we're not saying that they're in any way affiliated with Identiv. But as industry examples, it's illustrative to see the reach and capabilities of NFC-enabled solutions and how this technology that we're truly a leading provider for can give brand experience a whole new meaning. So, one industry example which is getting big visibility is Nike's NikeConnect NBA jerseys. They've been called the future of fan apparel, and NikeConnect space [ph] lets consumers of the jerseys tap their smartphones to the tag at the bottom of a jersey where an NFC chip is located and they instantly access an exclusive experience through interaction of the jersey itself and their smartphone. This means unlocking special team and player content, such as pregame arrival footage, highlight package and exclusive offers on the game day. So just think about it. If you're wearing your Steph Curry jersey at a Warriors game, you can tap the NikeConnect and see where he recommends you go for beer after the game, where his favorite restaurant might be. You can imagine the commercial potential. Now their primary motivation was actually brand protection and authenticity. These are a couple of hundred dollar items and they wanted to make sure they weren't going to be cloned, but they turned it into a real revenue-generation opportunity. So you can imagine the design and time that went into bringing this to market. Another thing to point out, which is why we think there's a true inflection point happening here, is a product like this is years in the making. It's not a coincidence that iOS 11 and the new iPhone 8 and X are all supporting NFC data exchange, which none of the iPhone brand did before. They just launched this fall, as you know, and NikeConnect became effective on September 30. So you can start to see the major technology and consumer forces that are coming together here that are driving this forward. So jumping to another example, which ties even more to the consumer experience, is what Nest home security recently launched. Last month, Nest Labs introduced their NFC tag, the Nest Tag, which is a convenient fob that can attach to a keychain, allowing users to easily arm and disarm their alarm system without a passcode. Now again, as you can imagine, Nest is one of the most consumer-oriented companies in the world. They looked for years at how to make security ubiquitous. And one of the first things they wanted to do away with is something we've all experienced. You come in your house and you're frantically punching in the disarm code, trying to make sure it doesn't go up and call the police. Nest figured out that the dominant solution to this is a fob you're going to bring in, tap on it and go. Now if you forget your fob, you can put in a disarm code and that's great. But they see this as the best approach to solving their customer engagement and convenience. And this is the type of technology that we're providing in the marketplace. Now the common theme of these NFC-powered products, like NikeConnect or the Nest Tag, is the substantially improved customer experience and increased revenue opportunities through much deeper customer engagement. So again, I want to reiterate these are just industry examples, the kind of things that our technologies can provide, but they are far better than QR codes, punch-in codes, SMS and other earlier approaches, which is why we've been doubling down on our investments to better respond to the proliferation that we think is coming out of NFC-enabled products. In fact, we already have several products of our own coming through the pipeline, including the full launch of Temp [ph] Sense, which is an NFC-readable temperature tracker, a high -- a temperature -- sorry, temper detection HF tag, an NFC-enabled blister pack which was launched in October; and perhaps, most interestingly, our SDKs launched for Android and iOS for NFC. Now all these products should position us well for continued growth within our Credentials segment for the next few years, but let me just draw on the SDK for a minute. It's pictured on the screen at the right. And if you think about it, as I mentioned earlier, when large consumer companies bring a product to market, they've been in gestation for years. They've been doing focus groups, developing exactly what the product should look like. We've been involved in this industry and in this segment for years as well, building out the platform. Now that they're coming out in force, Nike and Nest, Hilti tools and other early adopters are really showing the possibilities. If you add to this Apple's adoption of NFC data reading in the iOS 11 in iPhone 7, 8 and X now, the opportunity there is clearly substantial. By being out there with our SDK and with our sample tags, we think we're enabling the next generation of developers to launch these applications. But to be clear, the SDKs themselves won't drive much revenue, but we've got in those SDKs a range of demo tags and apps. And when developers build on our devices, their default is to scale up on those devices that they know work with their apps. So this is a very good example of our multiyear plan, some fast growth now, which is very visible, because we're in early and we have an advantaged position because we're the trusted provider for lots of early adopters. But will each growth spurt hit in a particular quarter and exactly which application will take off exponentially? We can't tell you. But it has to be a major inflection point in customer experience, brand authenticity and other applications. And we aren't even seeing the range of applications that are being -- that are coming out. But we know we're on the inside track in this market race. And now to our last but not least segment, which is Identity. At the core of the segment is one of our initial product lines here at Identiv, our smart card readers where we're seeing major growth drivers in secure access and payments. Yet as I mentioned before, we're not dependent on a single market. In addition to our continuing strength in federal government applications from our desktop readers through our new iAuthenticate reader for government employees' mobile devices, we're also launching commercial and industrial applications, including our project with OtterBox going live during this quarter. Another reason for our growth and our expectations that will continue to expand is the fact that we're expanding our international presence, which we've demonstrated with the hiring of a senior smart card reader industry leader to bolster our sales in Europe. As you heard me talk about on several occasions, our people truly are our primary growth engine. Making these key additions helps us solidify our leadership position in the smart card reader market and expand on it. We've also signed new distribution relationships in the U.K. and the Middle East to expand channel sales reach. Yet another growth engine for us is in offline contactless payment modules which go into vending machines, kiosks and other unattended sales environments. We've got a very strong position here. We're actually deployed in over 20,000 contactless payment terminals already mostly in the European market, and the volumes are growing fast. A similar category we're penetrating is in the gaming industry, where high-end gaming machines are adding contact and contactless readers both for loyalty and for payment applications. I'd like to go through a half dozen similar scale applications, but the point is these are categories that are clearly going to be central to the commercial world's infrastructure, and we're entrenched in them early. The other point is exactly how the growth emerges and when acceleration happens is hard to predict. We just believe we're in the right place to win as it does take off. In the Identity segment, it's already showing. But really, it's early days. We're convinced there are going to be even more major markets. So as you can tell, we're excited about the growth prospects in all our segments. In a moment, I'll bring them together into our vision and three-year growth plan, but let me focus on the current quarter for a moment. We had a tough third quarter on premises, but our core business strength really has continued. In our Credentials segment, we've carried in a strong backlog, got good visibility as we fulfill supply chain demand, and we're already building backlog into next year. In Identity, demand continues to be strong. Our design-in customers give us good visibility into the quarter, and product launches like our iAuthenticate provide new revenue opportunities. In premises, the late orders in the third quarter are fulfilling now and Mx-1 shipments are starting. And the commercial strength combined means we're looking at the first sequentially higher fourth quarter versus third quarter in many years. So, turning back to longer term. As we look out into 2018 and beyond, we certainly can be exposed to fluctuations that can impact our quarter-to-quarter revenues and distort the traction we're gaining. While this is true when taking a short-term view of the business, especially given that we haven't yet grown out of our subscale structure, this isn't the case when looking at the business longer term. All three areas of our business are expected to contribute meaningfully to our results and growth trajectory. Looking at 2018, as Sandra mentioned, we expect premises to grow in mid-single-digit range and Identity and Credentials in the low double-digit range, but all with the potential to greatly improve as we achieve greater scale and move toward our long-term business model. I won't reiterate all the growth drivers we're leveraging, but you can see that any of our segments can sustainably accelerate because of the competitive positions we're carving out. Also, we're already approaching our mid-term model just eight years after introducing it as a medium-term target -- sorry, eight months after introducing it as a medium-term target. So also, I'm confident that we're on track to achieve our long-term model and to be the at-scale company with sustained growth and an extremely attractive operating model that we envision Identiv to be. There will be bumps along the road, seasonality, starts and stops, timing issues and other fluctuations, but we'll continue to keep tight control on our expenses and redirect investments into our fastest-growing segments to accelerate reaching the scale where we get meaningful leverage in the model. We already know we're in exciting markets with great competitive advantages. As we grow, that reality will be increasingly reflected in the financial results. And with that, we're ready to open the call for your questions. Melissa, could you open the question queue?

Thank you. [Operator Instructions]. And we'll go to Mike Latimore with Northland Capital Markets.

Thanks a lot. I think some of the examples there. On the Credentials side of the business, how many customers would you say are going to be some sort of volume shipment in the fourth quarter?

Well, we break out our Top 10 customers in each segment, and you can see how that spreads out. There isn't heavy concentration. But when you look at our top 10 Credentials customers in the third quarter, they represented about 16% of our total revenues and 44% of the segment revenues to get a sense of 0.25 million to 1 million plus customers.

There also has been a pretty consistent set of customers in that top 10. So we haven't seen any churn or any customers drop out. So we feel as we're tracking the customer concentration, we're also seeing the same names repeat quarter after quarter. So we're aware of where they are in the portfolio.

Okay, got it. Then on the premises side, it seems like you have a number of drivers there, Mx-1, Cisco, FICAM, services. I guess any way to sort of prioritize those in terms of the drivers? Or do you expect them all to be similarly helpful [Indiscernible]?

I expect them all to be similarly helpful at different paces. Services is obviously something that can move quickly because you can expand your sales and your current customers and just offer services as their next deployments happen. So that moves up. And then Mx-1, of course, because it's a new product coming into the marketplace and people understand can adopt it, that can be more near term. Although I was trying to be careful in terms of some of the broader markets like SMB, that will be a subsequent launch. So I don't want to get ahead of that. And then in terms of scale, of course, federal government and FICAM is one of the largest scale opportunities there. But the timing on that can be lumpy and can take time, but it's certainly deploying right now. In fact, FICAM opportunities, we'll be seeing in the form of services actually early on, where they're starting to say, Look, tell us exactly how a migration and deployment should happen. And we're picking up the services revenues, where, in the past, we would have left those aside, the integrator would have taken them, and we would have waited for the equipment revenues to come through. Does that answer the question?

Yes, yes. And on the services side, I mean, that's kind of -- I mean, you have to hire and -- I assume you have to hire additional consultants and people to implement. I mean, is that -- is there somebody that's going to sort of manage a kind of services group peer and build that out over time? And how many people do you expect to hire?

Yes. So we've had a professional services group for years, actually for decades. So it's a part of the service that we've always provided. And to be clear, we're not doing this on a system integrator or [Indiscernible] or hourly basis. What we do is we say, Okay, you're going to be deploying across 200 sites and five agencies. Here is the architecture you should apply. Here is the type of configurations you should do. And here's what the roll-out should look like. And it's very much on a services package basis, not an hourly basis. Our new head of sales, as you might know, is from Oracle. And so we're picking up their playbook and their approach to services, which creates a partnership for the lifetime of the relationship, not simply an hourly basis. So we don't expect to hire a lot of people in the space actually. We're going to get more and more leverage out of them, and we do already have a platform and a system up and running on it.

Great. And then on the Identity side, did the federal government spending pattern have any influence on Identity in the September quarter?

So, the short answer is no because the way -- most of our Identity federal government sales are smart card readers that go into laptops and desktops which are going throughout the year. And also, what happens is the federal employees buy them directly through PXs [ph] and everything else and then get reimbursed. So it's much more of a steady flow business and isn't really driven by federal government budget cycles.

Got it. Okay. And then just on the segments, there might have been the slides I might have missed it. But what were the gross margins by segment?

So on a GAAP gross margin basis, physical access is 53% GAAP gross margin, Identity was 36% and Credentials was 22%.

Okay, great. And I guess just last question. What's the latest number on the NOL you guys have?

I don't think it's changed much since last quarter. Let me find that and I can get back to you.

Okay, great. Thanks a lot.

Thank you.

Thanks, Mike.

[Operator Instructions]. We'll take a question from Saliq Khan with Imperial Capital.

Hi, guys.

Hi, Saliq.

Just a couple of questions on my end. First one is, Steve, when you've talked about the opportunities that you have in the consumer market, you named a couple of heavy hitters, like Nike and Nest. So in order for you to take advantage of this opportunity in front of you, do you need to hire more people to help grow and then manage this opportunity?

Yes, a great question. The answer is unequivocally no. We've got our engineering development center in -- both in Singapore and in Germany. It's in place and it's handling the throughput. You might look at, like, one inside sales support person for the volumes, that sort of nature of things. But no, when Sandra talked about holding OpEx at a $6 million average throughout 2018, we're confident that we're going to do that while we're also supporting the growth we're talking about.

If you're higher a little bit -- if you're going to be able to hold this OpEx greater than the $6 million mark and you see this great opportunity ahead of you, what types of efficiencies are you building internally that makes -- that you actually take advantage of this opportunity?

Well, the nice thing about it is most of them scale up. So when you look at -- in the Credentials space, for example, whether it's the access cards or it's the transponders, the design-in takes time. But then fulfilling the supply chain is something that we have capacity for in our Singapore facility that we are 50% utilized. So we have plenty of capacity there without addition. And then on the sales and development side, it can sometimes be an additional engineer, but it's not an army of engineers you need. What you need is a few, very experienced people in the space, which we already have. That's the team we've got. And then it's the customer side that often has an army of engineers on and working with us. So we can scale up on the space in all the segments, both in the smart card readers, in Credentials and in premises.

And Steve, when you -- when we talk about the fact that you guys did not see the usual seasonal acceleration that you were looking for from the government side, what is it that you can do and you have to be able to build in more visibility? I recognize that on the government side, it might be more difficult. But in other avenues or in other segments of you businesses, how do you build in more visibility you have currently?

You bet. So on the government side, as I said, one of the main changes we've made is to directly connect with the end users. And frankly, they were hungry for that connection. And so working directly with them will give us better visibilities that we know site by site and location by location, where they're deploying and when. And then also, we can help break down any technical barriers to them, actually making their deployments happen and basically removes some of the excuses, frankly, that system integrators sometimes throw out there and that they use as a way to generate more and productive money, to be blunt. So we get visibility there. Then the other part, as I mentioned, in other parts of our business, we have a pretty good backlog visibility. We're already building backlog well into 2018 in our Credentials business and in our smart card reader business. So we think our visibility is increasing over time in all segments.

Thank you, Steve.

Thanks, Saliq.

Thank you. At this time, this concludes the company's question-and-answer session. I'd now like to turn the call back to Mr. Humphreys for closing remarks.

All right. Thanks, Melissa, and thanks again everyone for joining us on our call today. We appreciate your support and look forward to speaking with you at our investor events and our next earnings conference call. Thanks, and have a good afternoon. Melissa, I think you can close the call.

Thank you for joining us today. You may now disconnect.