Identiv, Inc. (INVE) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Identiv's Q1 2018 Earnings Call. My name is Devin and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steve Humphreys; and CFO, Sandra Wallach. Following management's remarks, we will open the call for questions. Before we begin, please note, during this call, management may 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 those 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 latest Annual Report on Form 10-K. Identiv assumes no obligation to update these forward-looking statements, which speak as of today. I would now like to turn the call over to the CEO, Steven Humphreys, for his comments. Sir, please proceed.

Thanks, operator, and thank you all for joining us today. The first quarter was a very strong start to 2018, building on the momentum we had coming out of 2017. We grew revenue 23% year over year, which is the fastest growth we've had in over six years. It's also two to three times the industry growth rate, showing that our strategy really is kicking in and we're taking market share. We also hit our seventh consecutive quarter of positive adjusted EBITDA, showing the consistency of the business model we built and positioning us as we scale to deliver positive net income. Now most importantly, probably are the next two bullets. The key components of our vision really are now in place to make the physical world digital. And we're already starting to expand into vertical applications that leverage the security platform, which is our core value-add, and the massive data flow it generates. Later on, we'll actually go into a few examples of the vertical applications that we've specifically deployed recently, and hopefully, will give you a sense for how we're leveraging the infrastructure we're deploying for security and then selling additional value-add into our customers. The other thing that really is promising for the way the year has started out are the product developments and launches that we've had. In fact, in the first quarter of 2018, we probably launched more products than we did in the entire second half of 2017, so a very good start to the year. The result of this, from the product launches and the strategy execution, is we're really realizing business strength across all our segments. And we expect our forecasted revenue growth of more than 20% for the year to be comprised of a balanced mix across Credentials, Identity, and Premises. So first with Credentials, this was up 26% year-over-year. And we continue to see customers ramp up their orders for their current product lineup. But perhaps, more importantly, we're also seeing them take our solutions and apply them across a wider range of applications, all in an effort to create more customer engagement and brand loyalty. This involvement gives us visibility into not just one or two product lines, but potentially several, as we increase our stickiness with these customers and prove our solution suite across many different emerging use-cases. Looking quickly at our Identity segment, we're progressing nicely with our smart card reader solutions, as we further solidify our leadership in our core government space, while making inroads in payments, and other design and applications that are going to drive the growth for the next several years. Then finally, in Premises, we grew revenue from this segment 40% year over year. And we saw a very nice sequential uptick in revenue during the first quarter, compared to an already strong fourth quarter of last year. Now, this has been driven by the addition of 3VR, as well as growth in our core physical access control solutions. It also reflects our deep-rooted position in the market, our longstanding customer base and the channel success we rebuilt. Later on the call, I'll touch further on some of the growth drivers we're seeing and have been seeing. But as you all know, our focus for the last couple of months has been integrating 3VR, and really leveraging the highly demanded data and analytics capabilities that we can now deliver to the marketplace. So looking at the next slide, as I mentioned, the product throughput really is accelerating. Not only have we brought to market more products in the first quarter of this year than in the second half of last year, but it's been across the board. Our Identiv Global Services, which is an extension of our professional services group we had a launch of in the first quarter of this year, which has been very well received. And we've got a broad pipeline of bids going in for IGS. Additionally, we came out of the chute very fast, already delivering our 3VR Velocity video and access security integration. We've got a new integration with our 3VR video platform with Locality which is a real-time location services solution, an IoT solution which is with an elder-care application I'm going to talk to in more detail later on. But it's a company called BTTN, B-T-T-N, you might have seen. We also have a brand new digital management kiosk solution, and our iAuthenticate smart card reader for mobile devices was launched. So it's a little bit hard to see, but all of these products were demonstrated at our both at ISC West a few weeks ago. And so, I wanted to really make it tangible and walk you through that briefly. If you look at the picture on the right, at the far end is our physical access station, and this included the web console for mobile device access to our platform, wireless locks integrated with our new Mx-1 controller, Bluetooth readers for accessing your mobile phone and the rest of our Velocity line. And so, these three areas right there, web access for a - onto a cloud device, mobile access, wireless locks, and Bluetooth readers are all technology categories that we wanted to put out there for a while, and now we're showing them live in our booth. Next to that is our Cisco partnership station, showing ICPAM integrated with Cisco's video management system, VSM, as well as with our full range of readers and credentials. Next over, as you move closer on the picture, is our federal government station. This showed our FICAM solution, a full range of one-, two-, and three-factor readers, including biometrics, and our new smart card enabled scramble pad that we just launched. And moving in closer, closest to us is the 3VR station, showing our event card analytics platform and integration with the real-time location services that I mentioned earlier from Locality. And Locality now uses mobile phone MAC addresses to track around, as I said, for real-time location services. We can then correlate these MAC addresses with video images at events and get much higher fidelity in terms of person identification and in-situ movement around the space. And again, this was something that was not done when we completed the acquisition of 3VR, already done and demonstrated, and we got a range of interest out of ISC West, and the number of demos and follow-ups from there. So leaving then back to the left, and you can hardly see it through the crowd, the booth was mobbed and nearly for the entire show. But at the far left there is our IGS station, and this is where we showed the IoT BTTN I mentioned, integrated for the elder care application. We also had our Velocity with 3VR integration already done, and the visitor management system, which we'll also talk about in more detail and give you a close-up of. But again, these are things that got a lot of traction with our customers. They're now seeing us as the trusted solution provider for a range of solutions. And because of that, even with demos at a booth in ISC West, we're getting follow-ups and actually orders coming for some of these solutions and some of these devices. The other thing that's important here is I talked about a bunch of launches, and these aren't pre-announcements or anything as you can see. These are actually capabilities that are being demonstrated, customers could get up and personal with, and really build the basis for that confidence in us as bringing cutting edge solutions to the market and as their trusted advisor as this explosion of technology is really hitting the entire physical security space. So, while the customer response is great and it helps generate additional buzz in the industry about our products, what's even more important is that this is happening - helping expand our backlog and our pipeline. So when you bring it altogether, it really is demonstrating the accelerated pace in execution. And that really is what's underpinning the growth that we expect going into 2018 and the solidity we think we've got with our vision that we're - we've established. So with that, let me turn it over to Sandra for some of the financial results. And then we'll go back and go into more detail on some of the business execution.

Thank you, Steve, for providing the context for our financial results for the first quarter of fiscal year 2018. Revenue in the first quarter remained in line with revenue in the fourth quarter of 2017 at $16.5 million and a 23% increase compared with $13.4 million in the first quarter of 2017. This represents another change in our historical seasonality, with our Q1 results holding up to the Q4 results for the year we just exited. And our Q4 results increased over Q3 last year, again, our historically strongest quarter, so we continued to change the historical seasonality that we see, as we build momentum in the businesses. Our Premises segment generated $7.5 million of revenue in the first quarter 2018, up 6% sequentially from $7.1 million in the fourth quarter 2017 and up 40% from $5.4 million recorded in the comparable quarter of 2017. These increases were primarily driven by higher physical access control solution product sales, higher sales through our channel partners, increased product software sales, and sales of video technology and analytics hardware and software solutions, along with related services. Revenue from our Identity products, primarily smart card readers, reader modules, and chipsets were $2.8 million in the first quarter. This represents a sequential decrease of 25% from the $3.7 million of revenue in the fourth quarter of 2017 and a comparative decrease of 10% over the $3.1 million recorded in quarter one of 2017. These changes reflect lower sales of smart card readers in the Asia-Pacific region, partially offset by higher smart card reader sales in the Americas. Approximately 38% of our first quarter revenue or $6.2 million was derived from sales in our Credentials segment, which comprises both access control credentials and our transponder products. This revenue performance represents a sequential increase of 9%, from $5.7 million recorded in the fourth quarter of 2017, and a comparative increase of 26% from $4.9 million recorded in the first quarter of 2017. These changes were primarily due to higher access card product sales in the Americas region, partially offset by lower RFID and NFC transponder product sales in the Americas and Asia-Pacific regions. Now turning to our gross margin, our GAAP gross profit margin was 39% in the first quarter of 2018 compared with 30% in the fourth quarter of 2017 and 43% in first quarter 2017. The quarter-over-quarter increase in GAAP margin is primarily a result of a non-recurring transponder-related inventory reserve adjustment recorded in the fourth quarter of 2017 associated with a customer relationship which ended at the end of 2015. On a non-GAAP basis, excluding certain noncash items and other onetime items, our non-GAAP gross profit margin was 41% in the first quarter of 2018, compared with 43% in the fourth quarter of 2017 and 45% in comparable quarter first quarter 2017. The sequential and comparative decreases in non-GAAP margins were attributed to the impact of mix across and within reporting segments. However, we believe that the 41% for Q1 is well within the historical range over the last five quarters, which has fluctuated between 40% and 45%. We now look at the full income statement per the earnings release. Our GAAP net loss for the first quarter was $2.3 million compared with a loss of $4.5 million in fourth quarter 2017 and a loss of $0.7 million in the first quarter of 2017. For the first quarter 2018 per our earnings release, our total GAAP operating expenses were $8.3 million in the first quarter of 2018 compared to $7 million in the fourth quarter of 2016, and $6.6 million in the comparable quarter of 2017. The sequential and comparative quarter-over-quarter increases are primarily due to $0.1 million of restructuring charges incurred in quarter one 2018, $0.5 million of transaction costs associated with the acquisition of 3VR Security, plus the additional ongoing operating expense with the full consolidation of 3VR into our results for quarter one. On the next page, we provided a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. There are few items worth noting at this point. Interest expense was approximately $0.5 million for the first quarter of 2018, $0.6 million for the fourth quarter of 2017 and $0.7 million for the first quarter of 2017. Non-cash stock-based comp was approximately $0.6 million in the first quarter of 2018, fourth quarter of 2017 and the first quarter of 2017. Amortization and depreciation increased in quarter one by approximately $0.1 million, and that's related to the mid-quarter addition of the intangible assets related to the 3VR acquisition. In addition, we incurred approximately $0.5 million in acquisition-related transaction costs and the $0.1 million restructuring charge associated with the facility that we picked up as, again, part of the 3VR acquisition. On the next page, we now move to our operating expense, which is the next graphic on the webcast presentation. Our non-GAAP operating expenses, adjusted to exclude restructuring and severance costs and certain non-cash charges normally excluded from our non-GAAP results such as stock-based compensation, depreciation and amortization, impairment charges and loss on extinguishment of debt, as well as additional non-GAAP items consisting of acquisition-related transaction cost in the first quarter of 2018 were $6.6 million, as compared with $5.8 million in the prior quarter and $5.7 million in the first quarter of 2017. On a non-GAAP basis, our R&D expenses for the first quarter of 2018 remain in line with the fourth quarter and first quarter of 2017 at $1.4 million, representing 9%, 8%, and 10% of total revenue respectively. Sales and marketing expenses were $3.4 million in the first quarter 2018, compared to $2.9 million in the fourth quarter of 2017 and $3 million in the first quarter of 2017. The sequential and comparative increases were primarily due to the additional headcount and related cost associated with the acquisition of 3VR. In addition, our non-GAAP G&A expenses for the first quarter remain in line with previous quarters at $1.7 million versus a fourth quarter of $1.5 million and first quarter 2017 at $1.4 million. If you look at the next page, this is really the page where we put the pieces back together before we turn to the balance sheet, and just reiterate that we have seen significant revenue growth in our first quarter. We have not got seven consecutive quarters of positive non-GAAP adjusted EBITDA, and our business model continues to deliver a stable base for which we will be launching additional growth. Our first quarter non-GAAP adjusted OpEx prior to 3VR was still at our committed levels of sub-$6-million. And we believe that given our global platforms, we can aggressively integrate and strategically reinvest, while holding our cost base relatively flat going forward. On the next page, there are selected summary highlights for our balance sheet and our statement of cash flows. Cash at the end of March was $16.7 million, compared with $19.1 million at December 2017. The $2.4 million net decrease in cash for the quarter was primarily comprised of a decrease of $0.8 million, driven by our net loss, excluding non-cash items, a $1.2 million net change generated from operating assets and liabilities. If you add those two together, our core business for working capital was actually positive $0.4 million. The acquisition of assets, which is the acquisition of 3VR, was a net use of cash for $1.4 million, and the net usage from cash from financing activities of $1.5 million, primarily comprised of $7.3 million repayment of our debt, including interest commitments, a $0.2 million tax payment related to our key [ph] releases, partially offset by $6 million in proceeds from the issuance of the debt. In addition, there are very small impacts from CapEx and foreign exchange. On the next page is the full balance sheet as per the table in the earnings release. We define working capital simply as accounts receivable, plus inventory, less accounts payable. This was $17 million at the - at March 2018, compared to $17.5 million at December 2017. The slight decrease was driven primarily by a higher accounts payable balance as we closed March 2018. With respect to accounts receivable, our days sales outstanding was 59 days at the end of the first quarter 2018. Inventory net of reserves increased to $11.6 million at March 2018 versus $11.1 million at December 2017. Our adjusted inventory turnover was approximately 4.1 at March 2018, versus 3.8 at December 2017. Accounts payable balance at March 2018 was $7 million, an increase of $1.1 million from $5.9 million at December 2017, due to a higher volume of current payables related to the acquisition of 3VR, partially offset by the reduction in volume of our overdue payables. A couple of noteworthy items in the balance sheet: First, with the acquisition of 3VR, we've increased our deferred revenue balance on our balance sheet. That's increased from $1.090 million in December 31, 2017 to $4.4 million as of March 31, 2018. This represents a shift which is complementary to our trend as Steve spoke of an increasing backlog that we carry forward each quarter, both of which gives us additional predictability as we move forward, and we believe that that balance will continue to grow. Accrued expenses and liabilities are comprised of employee compensation, legal and professional fees, restructuring charges, and other items amounting in total to $5.1 million as of March 2018, an increase of $1.6 million over December 2017, primarily driven by a $1.0 million share - holdback related to the 3VR acquisition. In addition, our long-term payment obligation decreased from $3 million at December 2017 to $2.7 million at March 2018, reflecting the continued quarterly payments made, partially offset by the accretion of interest. Our long-term financial liabilities decreased from $2.9 million at December 2017 to $2.6 million at March of 2018 reflects as a result of more of our long-term debt moving to short-term. On the last page, in the context of our target business model, where we measure ourselves with you quarterly to assess our progress, we have delivered what we set out to do, grow and achieve non-GAAP adjusted EBITDA profitability for seven quarters in a row, significantly closed the gap to get to net income profitability. Today, we are confirming 2018 guidance for the consolidated results of the company. We expect 2018 revenues to be in the range of $74 million to $78 million with a non-GAAP adjusted EBITDA range of $4 million to $6 million. With that, I'll turn it back over to Steve.

Thanks, Sandra. Now, before we go into our execution updates from the quarter, we'd like to put them in context with our vision, strategy, and the financial results we expect from executing our strategy. Our vision's always been to make the physical world digital and secure. We're laying the foundation for the connected world by securing the infrastructure in objects, while identifying people and resources. These Internet of Everything trends are happening today, and we are in a great position, because we have the complete product suite to address customer requirements. We have the deep channels to deliver solutions, and we have the industry reputation, and now improved financial strength to accelerate the initial success you've seen in our results. By delivering solutions that enable secure, convenient, frictionless access and identification. We're scaling into a much larger and sustainable business, driving substantial leverage in the model and multiplying the returns we can deliver to our shareholders, so that's the vision. Our plan to get there is a five-stage strategy, as you see here. First is the core, which is physical security and attaching digital identities to physical things. The trust we've built with our customers has enabled us to become one of the leading providers of physical security solutions, and very high switching costs then give us a platform to expand, continuing to address our customers' evolving physical needs. This business model is built for scale, and we believe that by leveraging our trusted brands, strong execution, and deep relationships with our customers, we can drive significantly higher growth and profitability. Now, from this established position in our core physical security markets, we're expanding into related security and business-enabling solutions, which is our second key initiative. As we talked about on the last call, there's a real opportunity for us to tighten our customer engagement by delivering value-add solutions, such as complementary services and software. These value-adds don't just enhance our relationship with the customer, they also present significant recurring revenue streams. Our third key initiative is the interconnectivity happening between information security and physical security. This is becoming a major customer pain point. As a result, it's a significant opportunity for us to expand our thought leadership and provide a full range of services to complement our solutions. We're positioning Identiv is the true partner and solutions provider for customers to solve their physical security needs, particularly where those needs intersect with the information data security platforms that are so critical to operating our businesses. So having established ourselves with our customers as trusted partner for the widest possible range of digitally enabled physical security solutions, we're in a position to leverage their major investment in infrastructure and the resulting massive data flow, to deliver expanded customer benefits through vertical application software. Now, we already have proven applications across queue line management, loss prevention, situation awareness and more. The challenge here is not just compiling the data, but extracting the business insights. By leveraging our established infrastructure and proprietary analytics that go beyond these data feeds, we can deliver actionable business insights that can drive incremental value for our customers. I will drive - describe a couple of these applications in a couple of minutes, but what's important here is it's very hard for the companies to justify an investment from the ground up in these business insights. But when the platform and the data generation devices have already been paid for in order to deploy the security infrastructure, the incremental cost to use that data, to use this platform to generate the business insights relatively low. It's great for us, because we can deliver software-based solutions on an existing platform. The customers can get great value for their money, and we get substantially expanded gross margins in our business model due to the software component. And then finally, our fifth strategic initiative is strategic M&A. We of course completed the first major step in our inorganic growth strategy with 3VR in February. I won't go through all the highlights again, but the combination of with 3VR really demonstrates our ability to find a highly complementary business at an attractive price. 3VR strengthens our position in the Premises space and provides a beachhead in the fast growing higher margin video space, particularly with analytics. It really epitomizes our vision of making the physical world digital and secure, and we see it just as the first of hopefully many to help us realize this vision. So by executing on these initiatives, we'll realize greater business and financial scale, and also extend our margins near-term through growth and operating expense leverage. Then, in the longer term, we'll expand our margins much further by adding the software application value on top of the digitally enabled physical infrastructure that the customer has already paid for. Combined, this will lead to our long-term business model, which Sandra highlighted earlier, while building a fully-scaled business, driving continued, profitable growth moving forward. Now, this all requires very aggressive execution, so I'll spend a few moments now giving you an update on our execution progress. As I mentioned, last month we showcased nearly our full range of solutions at ISC West, ranging from Premises to Credentials to Identity, and integrations across all of these categories. In the Premises security space, we had multiple product launches and developments. I mentioned a bunch of these at the outset, but there are even more. So first, we recently enhanced and upgraded the Hirsch Velocity platform and integrated new capabilities for government-grade security. We also released a smart card contact ScramblePad, for use primarily by the Department of Defense for the common access cards. Also in the quarter, we announced the technology integration with Telaeris, integrating our Hirsch Velocity software for mobile emergency evacuation tracking systems. We also, at ISC West in particular, started seeing cross-selling opportunities between access, video, and analytics. It was really impressive to see customers that came in, who had been either customers only on the access side or on the video side, because of the trusted relationship and the range of solutions they saw there, being even after just one demo, ready to have demonstrations and pilots, and ultimately, purchases on their premises over the next several weeks. We already have several that we're following up on, and they look like solid leads. Additionally, the focus on vertical specific value-added solutions really hit in the quarter, and again, I'll touch on a couple of those in a couple of minutes. And then, the last two points here, growing the contribution from software and services revenue is really starting to kick in, both through our IGS solution and through our software licensing initiatives on our core products. The last one here is particularly interesting. We've been active in the OEM space with our identity readers, of course, but much less so with our physical access readers, and we're working with a San Francisco based very aggressive IoT company that has integrated our physical access reader technology, and is already ordering in its - in volumes of thousands, so we expect that to be a category leveraging our technology platform more aggressively through an OEM model. In the Credentials space, as I mentioned earlier, we're really seeing a strong pipeline growing, and that pipeline now extends not just into the rest of 2018, but into 2019. And again, the pipeline customers that we're thinking about are generally ones that are currently customers of ours, so very good visibility, and the fact that they're committing with tangible orders for nearly a 12-month period is great credit to the strength of the products as well as the commitment to the customers, and the criticality of the products in their strategic product lines. Now, underneath all this, of course, is production capacity. We're already planning to see increases in excess of 30% year-over-year volume growth in our transponders, and we're already planning, towards the end of this year, to add production capacity. Now, when we're talking about production capacity added here from a capital equipment perspective, it's not very onerous. A $0.5 million to $0.75 million investment is all we're talking about. We have the cash reserved, and with that, we can add substantial volume to our production capabilities, so it's a very capital efficient utilization, and you can see the kind of growth we're looking at. And obviously, we're thinking it - of growth beyond that 30% unit volume growth, when we're talking about adding capacity expansion. The interesting thing is, the areas of growth are not just products for brand protection and consumer - but other areas, such as real-time location services, supply chain management, and other device tracking and product tracking solutions. Let me just give you an example of where our technology advantages are creating whole new categories for us, still related in our core technologies, but new market segments. We're coming out with a triple technology credential, which can have UHF, HF, and LF technologies all together. And for this, you can use the UHF tracking for 30 or 50 foot read range, and of course the HF for secure data encapsulation and transmission. And so, you can actually simulate nearly all of the benefits of BLE beacons from a tracking perspective and real-time location perspective, with a much lower, and indeed, much more reliable technology base. And it's really only because we had this experience across all of the frequency ranges, all of the antenna design capabilities, and the reader infrastructure, that we can deliver this kind of solution. Now, right now, it's just going to the point solutions. We have some paying customers, who of course will justify the products themselves, but it actually has the potential to go much more broadly. Turning then to the Identity side, as you can see here, we really have our major focus on mobile readers and tokens. Now, in addition to the USB token now for Type A and C, we've come out with the mobile readers for Android with USB Type B, and iOS devices through the Lightning port, are really expanding the reach of our technology platform for smart card readers. And if you followed us, have heard about the iAuthenticate 2, it's now fully out there in the first quarter, came out in the Otterbox version, and in the current quarter, we actually have multi-thousand unit orders coming through for the iAuthenticate 2, so we're really starting to be validated in the marketplace, which is a remarkably fast start for a hardware product like this. We're also continuing to build OEM relationships in our pipeline of design and projects, and again, similar to the Credentials business, this gives us great visibility in terms of pipeline, and in terms of recurring customer orders, because when you're designed in, you have tremendous stickiness, which is a common theme across all of our segments. So we're entering the second quarter with great backlog visibility, and we believe that will be building throughout 2018. Now, as I mentioned a couple of times earlier, I'd like to turn to some of the applications, because it's easy to generically talk about software value-add applications on top of your platform, but we actually have deployments happening, and they're great characterizations of how we're delivering value and why it's unique. Over on the left, you have a picture. Actually, it's from our ISC West booth. We probably could have done better graphics and better picturing here, but I really wanted to show you that it was live, in the booth, being demoed. People can come up, bang on the demo, and if it's going to be weak, it's going to wobble in a demo station with random people coming up and working on it. But it held up wonderfully, as it is working in the real world. And this is an elder care check-in application. You can see those white devices on the table down there. Those are the IoT buttons that I talked about before, and they truly are IoT devices. They're not just WiFi and Bluetooth enabled, but they're LoRa enabled too, one of the leading IoT protocols. And the way they work is they're placed in elderly residences, in their rooms, and the residents use them to check in. when they're going out of the room, they just bop the button, and when they're going back in the room, they bop it. In the evening, they check in when they [shring in] [ph] for bed. If they have an emergency situation or they need a call, they can do a double hit on it. And one of the important things about this is, it's integrated with the access control system, so if they send out an emergency call, you want that door to unlock, don't you, so that you - so the responders can get in quickly, don't have to be looking for keys or cards, or heaven forbid, break down a door. And then, similarly, because they're IoT devices, they're completely untethered. They're unwired, and this is very important for - in elder situations. Well, people don't want to have to walk up to their doorway and push a button, or something else. They might want to have it, on the table next to them when they're sitting on the couch. They might have it somewhere near the TV. Whatever it might be, their activity, it's convenient for them, so they can move it around with them, and that way, you get much higher compliance and much higher check-in, check-out, and availability for emergency systems. So that's the kind of vertical application that we love seeing, where we can do a lot of the integration, some of the software, the solution or access platform, obviously, is important, and then partners, both in this case the BTTN provider company and the integrator that know the elder care market were critical to bringing it to market. And obviously, this is an application, which can have use cases across all of the elder care residents, which is a substantial and growing market in every country. In the middle there, you got the queue line management, where again the software component is the critical piece here. It's not that hard to figure out if there's a straight line coming out from a cashier, but to actually understand, if it's not a straight line. Some of our customers, for example, use some of these snaky, serpentine lines. They reconfigure them during the course of the day to actually have the analytics and the information to recommend, okay, that line is breaking our parameters for how long it is taking people to get through the check stand. Maybe for retraining, this checker is taking longer than the other checkers and might need to be retrained. Also, at different times of the day, they can see what the demand, load factor is, and they can anticipate and have check-out experience that is much more customer friendly. And the opportunity here is substantial, because bricks-and-mortar retail is really fighting with the online world of Amazon, and Amazon realizes that the queue, the lines to check out, are one of the fundamental friction areas of retail. That's why, for Amazon Go, the main thing they put all their technology into was not having any check-out lines. So our technology is enabling bricks-and-mortar retailers to have the most efficient, the most frictionless check-out experience are actually some other, even more progressive things we're doing on it that we can talk about in a longer session. But our position is, with the video surveillance cameras already deployed, you can use software upgrade and analytics to do queue line management training, some of the other benefits, that really go to the bottom line of the business, and increase the competitiveness of the business, and that's exactly where we want to be positioned, when we talk about these add-on value applications. Then over on the right is a visitor management kiosk. Visitor management is one of the least glamorous areas of physical access, but it actually is one of the most pervasive and the greatest pain points of physical access. Everybody's had to deal with, going up to the guard and presenting your driver's license, and getting some dorky piece of paper. Or, if they actually have a more secure visitor management system, enrollment that can take 20 minutes or longer, just to get in the door and do whatever you're doing. This year has our software and access control integrated with a visitor management kiosk from a company called Sadevio that we've partnered with. And a couple of cool things here, you see there's a camera on top, and you see card slots down at the bottom, so when you come up there, it can immediately take your picture, sends a note to who you're supposed to be meeting with in the building, let them know you're there. If you're a fairly low-security visitor, they can simply issue you a paper card, and then match you with your host when they come down. If it's a higher-security environment, your host actually puts their ID card in the slot - the bottom slot on the right. It matches the security authentications that you're actually going to be allowed in that building, and issues you a physical plastic card, which has the right access credentials on it. And then, that is automatically really have issued that card, enrolled in the access control system for where you're allowed in the building, and what kind of authentication you need to have. Completely seamless, but also very effective and very highly secure, so really epitomizing frictionless but high security that is really core to our vision. Additionally, when you leave, you take your card, you stick it in that middle slot up there, and it recycles the card for subsequent use. If you happen to be a regular visitor, repeat visitor, which many companies have, then it can hold that card for you and reissue it to you when you come up to the kiosk, and it doesn't have to have, basically, another card running around out there, but when you visit, make it very frictionless for you to get in. So I just wanted to highlight some of these vertical applications so you can get a sense, number one, that they are real now. We have paying customers for all of these that I've described. Number two, you can see how our position in access control, analytics, and video really positions us well to be the trusted supplier of all these solutions. And then, number three, to see the scope of the market opportunities that you have in each of these areas. Elder care, brick-and-mortar queue line, and visitor management are substantial markets in and of themselves. So to wrap up, I think you can see we've got a very strong start to our 2018 with our 23% year-over-year revenue growth. This has really been underpinned by the product launches and the partnerships that are accelerating, both that deliver that growth, and that we think positions us for that or better growth going through the year, as we have growth that's building us into a business at scale that we believe we can get cost leverage off of, and that leads to our EBITDA expansion and our delivery of net income positive as we go into the second half of the year. We're building on top of a strengthened balance sheet with nearly $17 million in cash and a much stronger debt position as well, in terms of our high interest debt mostly being retired, and much lower interest debt with substantial headroom and availability on it. And all of this really puts us on track to achieve that double-digit revenue growth. You can see on the right there, where our growth rate is really stepping up, due both organic and inorganic. I mean, it's important that both parts of the strategy are hitting solidly. That, then, results in expanded EBITDA growth and EBITDA margins. And so really the execution of the company, we believe, is in a solid position, and the vision that we've always had is really starting to come to fruition, when you look at how we're deploying and generating these numbers now, and the applications that we're starting to build on top of our platform. So with that, we'll open it to questions on any aspects that you want to go into in more detail. Thank you.

We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is with Mike Latimore with Northland Capital Markets. Please proceed with your question.

Hi, thanks. Congratulations on the quarter, looks great.

Thanks, Mike.

Just wanted to clarify a couple things that you said, did you say you expect year-over-year growth in all three of your business segments this year?

Yes, absolutely.

Okay. And then, on your Credentials segment, I mean, it's grown sequentially, I think for four quarters in a row now. And it sounds like you have some good visibility there, so I guess the - should we think about that continuing to grow sort of sequentially throughout the year?

Yes, I - as far as we can see and that we got pretty good backlog visibility, that's the segment that I mentioned we've got backlog already rolling into 2019.

Okay, great. And in terms of 3VR, any change in kind of what you forecast for revenue on that this year or whether your internal forecasts, I mean, any change in kind of what your revenue expectations are for 3VR?

No change. We guided to $10 million to $11 million and that they would contribute for the year. The activity is - not to get running away with numbers, because sales cycles are long, et cetera - the activity is very encouraging. There's a lot of interest. As I mentioned, we've had some very live and engaged demos at customer sites in Europe with some of our government customers, and with some expansion in the verticals that we're in already. So there's a lot of interesting activity out there. Additionally, I don't know if you saw in the - today, there were a couple other analytics companies just acquired in the industry market space, so I think a lot of people are recognizing it's the right technology and strategic position. So, long answer to your question, the straight answer is no change in the numbers, but underneath, the market is encouraging.

Okay, great. And then, I'm guessing the order sizes for 3VR, they even going to be all over the map. But is there sort of an average order size, as you think about here, like what would be a normal kind of initial purchase or annual purchase from a customer?

It is all over the map. It's somewhat similar to access control, except it tends to scale across a larger number of facilities, is what happens. So, if you can imagine a retailer putting in - our video platform would get somewhere around $7,000 to $10,000 per site, but you could easily have retailers that have several thousand sites. And so, customer-wide, it becomes a much larger number and a much larger lifetime value of the customer. But, actually, implementation by implementation, it's a similar order of magnitude. And that's just for the base platform and for the software on top of it, it's really all over the map. It can have recurring revenue component to it, upfront NRE, as well as software licensing. But that's early days and so we're just getting the revenue model figured out on that one.

Okay, and then the last, do you have gross margin by segment for the quarter?

Sandra, do you want to take that one?

Yeah. Yeah. Yeah, we normally show those in the prior chart, so just one second. And you want the GAAP gross margin, right?

Sure.

Okay, I've got that.

I guess I'll ask one quick question in the meantime. The relationship with Cisco, how is that going? Is that growing, kind of expect that to grow this year, just some general comments on that channel?

Yeah, yeah, continuing to grow. It was kind of hard to see in the ISC West picture there. But all of our signage and positioning, you had Identiv, 3VR, and Cisco, with the logo there. We had our usual joint Cisco customer event [at talk of] [ph] there. And we're having monthly and quarterly QBRs with them as well. So, it's a great relationship continuing. It's a big company; it always has this choppiness to it and complexities to it. But it's as good as we have hoped it would be.

Okay.

Okay, Mike, let me give you the numbers. So, Premises, GAAP gross profit margin was 55%, Identity was 33% and Credentials was 23%, so that's how we get to the total weighted average of 39% on a GAAP basis.

39%, okay, great. Thanks a lot.

Hey, Mike, before you drop off.

Yeah.

Just back on your Cisco question, another thing we talked about the IoT BTTN and such. The Cisco platform, their Kinetic platform, is so IoT centric, a lot of the applications that we're building, they're actually following on and looking for opportunities to extend. So I think there's an interesting leverage there, as we move into the application space, and especially IoT applications that they are very interested in, and it gives them a position that can help them keep competitive against some of the competitors that are actually coming after them, that we have some pretty good applications around. So I just wanted to add that part. That's part of the strategic interest that keeps them engaged with us.

Okay. Fair enough. Thanks.

Thank you.

Our next question is with Jack Vander Aarde with Maxim Group. Please proceed with your question.

Hey, guys, I just had a few questions kind of regarding the Premises segment. With the acquisition of 3VR now contributing to revenue, I know, you guys guided for the year roughly between $10 million to $11 million, I think. So for the Q1, did you guys provide explicit March quarter 3VR revenue?

Jack, this is Sandra Wallach. So we don't - we are not splitting out 3VR as part of our segment results. What we can tell you is that we're on track to hit the $10 million to $11 million that was the underlying assumption in our guidance, and that we have line of sight to the high-single-digits for our core Premises business, which again, was one of the assumptions that we shared as part of our guidance.

Got it, okay. And then, just a follow-up to that. So Premises' revenue for the quarter was up 40% year-over-year, but if I just - I assumed 3VR was linear across the quarters for fiscal 2018, and I take out $2.5 million, it seems that Premises' revenue was down year-over-year on an organic basis. What is driving, or what is hindering the organic Premises?

Well, you've got to factor in that we only had half a quarter of 3VR, and then you'd actually have closer numbers. I don't want to go give you Hirsch's [ph] specific data there, but you only have half a quarter of 3VR. And so, yeah, the physical access business is growing organically.

Understood. That's very helpful to know. Thank you.

Yeah, sorry about that.

And then, for EBITDA for the year, you guys are still on track. Do you expect that to ramp primarily in the back half of the year, or will we see that increase in Q2 at all?

So our strongest quarters are Q3 and Q4, and our sweet spot for getting EBITDA to be in the range of positive that allows us to see net income positive is really in the $20 million plus range. So that is the seasonality that we would see in the second half of the year.

Okay, got it. And then, just one more, kind of a broader question of market. In terms of the FICAM initiative, are you guys getting a sense of increased customer demand related to FICAM initiatives for your Premises segment products?

Yeah, certainly. We've talked about this transition before is, what's happened is there had been a fair mix of non-FICAM and FICAM purchases going on, and even though FICAM isn't mandated, the costs have dropped so much on the FICAM solution that the majority of our sales going into the government at this point are FICAM ready, or directly addressing FICAM deployments. So, yeah, it is picking up, both in terms of it's the right default platform you should be deploying, and it is getting deployed in active FICAM implementations in more and more agencies.

Okay, and it's still like a 5 to 10 year potential growth driver? Is that still how you view it?

It is, yeah, yeah, and if you - when you think of a couple of million government electronically-accessed doors, and about $1,000 a door, that's the scale of the opportunity over that 10-year period.

A $1,000 a door, okay. And then, there was a presentation you guys put together, I think in September of 2017, outlining 200,000 potential government doors in an eight-door hypothetical system. Is that still the opportunity over a 10-year period you're looking at, or are those 200,000 doors - is there any context you can give me around the timing of how those would be replaced?

Yeah, those 200,000 doors are actually the doors that we already have under Hirsch access control, so that's the portion of the market that we are fairly confident, I should say, very confident, that we will have, as they convert to FICAM. And then, we have good visibility in there, because it's existing customers. And then, the broader market is where, in some cases, we have to drive for rip and replaces or operating side-by-side with other systems.

Got it. That's very helpful. Thanks guys, and great quarter.

Thank you.

Thank you.

Our next question is with Robert Hellauer with Casey Capital. Please proceed with your question.

Hi, Steve and Sandra. Thanks for taking my questions. It sounds like backlog is strengthening, and really across all business segments, so I was wondering if you could give a little more color around this or contextualize the growth by business segment.

So in terms of backlog related to growth by business segment, the physical security business, the Premises business, for example, is less backlog driven, because typically orders come in, we turn around and ship them, and as you might imagine, for security systems, they generally need a pretty short-term. And so the visibility in that segment is due to knowledge of the deployments that are going to happen over the next several quarters, as some government agency goes out, of course across several hundred facilities, so that's how we get visibility there, less backlog driven than deployment visibility driven. The Credentials side, on the other hand, is very much backlog driven in that, it's typically being built into the supply chain for our end customers, and so they'll be ordering several quarters out, as they manage their own supply chain. So some of our consumer oriented customers are already planning for the holiday season and next year. And then, the Identity business is a bit of a mix of both, in that you've got near-term orders, things like the government's secure sign-on desktops. But then a substantial portion of the Identity business is also in the OEM side, and so that again is a B2B business, whereby it's being designed in, and that will be long lead times and orders. So backlog more heavily driven in Credentials and Identity; less so in Premises. But it's becoming more so, but it's not as dominant a factor as it is in the other two sectors.

Okay, and how is the quoting volume trending in the Premises side?

We are running hard to keep up, is the best summary. We are growing without adding headcount, because we want to be careful on our OpEx side, and we're fine, we're able to deliver. But it does mean we have to stay very close to how fast we're turning around quotes, and the quoting activity is definitely kicking up. And especially now that we've added analytics and video, that's - that makes the quotes more complicated. The good news is they're larger and stickier, but we also have to have all the aspects of the solution that go into the quote, and there's a lot of activity and a lot of interest there.

That's really helpful. Thank you. So regarding 3VR, now that you've had time to look under the hood, are you as excited about that as when you first purchased it? And can you talk a little bit about how cross-selling is going and whether we should expect the 3VR portion of your revenue to be accretive in the second half of the year?

So on that first part, yes, I would certainly say in the second half of the year that will be accretive. On the first part, it's - I think the strategy in the alignment is even stronger than we thought. I mean, we started talking to them in July of last year, and now you are starting to see, I mean, you just saw Canon acquiring BriefCam, which is an analytics company and milestone. I'm sorry, Nortek just acquired IntelliVision, which is another analytics company. And so people are seeing that you need to - you really do need to have this in your platform. I think we got ahead of it, and we've also - because we're two fairly manageably sized companies, we're doing these integrations very fast that you saw. We've already got our Velocity and 3VR integration we showed at ISC West, and the so we can show the customers the benefits right off the bat. And then, we're also fairly flexible. When the customer says that's great, here's the aspect of benefit I'd like to see, we can adjust. And 3VR has a culture, as Identiv has that culture. I should stop using them separately, because we combined have that culture. So it's exciting, it is. But, the cautionary tone is it's long sales cycles. You have to be a trusted vendor, and so there's plenty of diligence that customers will do. So for the first eight months, it will largely be companies that we're already in either customer base or the pipeline that are driving meaningful numbers. But in terms of demos, on-site visits, and quoting, it's moving fairly quickly. One area, for example, we're seeing more than we expected was international. Our international sales team has a lot of experience with video, as it turns out, and we're filling up all their bandwidth available with combined customer opportunities.

Thanks. That's really good color. It actually leads into my third question, which is about Europe. I've been reading a lot about the GDPR implementation. It sounds like some of the IT teams there are panicking, given the implementation date coming up here pretty soon.

Right.

Have you guys - is any of the activity around 3VR related to that or even on your core Premise infrastructure business, are you guys starting to see some of that kind of GDPR demand filter through to your business?

Yeah, the General Data Protection Regulation is a - it's kind of like Y2K, it drives a lot of activity and it drives a lot of fear. So on balance, it's probably net neutral. Some - we've always had a heritage of a focus on IT security, even when it wasn't popular in the physical security space. So we've been seen as leaders that way. And so, we are getting some positive movement, because we're one of the trusted IT security providers and we can talk to GDPR when other companies are not quite as proactive with it. But there are other companies that are a little bit immobilized by it. So they just want to wait and see how the first enforcement actions come through from Brussels, and then decide how much they have to act on. And that's the same kind of thing that has happened with other big C changes like this. So it's a bit of both I would have to say. It's certainly a big topic. One area that it's very helpful is it's an opportunity to come in and talk is, you just tell the customers we want to come in and talk to you about GDPR, and how we fit in, and how we can help you solve it. That almost always gets a meeting, so that's very helpful. But like I said, then about half the time, you find people that wanted the meeting, so they can just duck and cover, and others who wanted the meeting to actually do something about it.

Right, but are you expecting to generate some revenue as we kind of move into the back half of the year in Europe, just based on some implementation there?

Yes, for sure. You know, it's always hard to tell what is really driving and motivating. The biggest motivator for purchases still is systems that just can't do what the company is trying to get them to do or the customer is trying to get them to do. And our systems tend to be very flexible, easily integrated. And so - and then with our Identiv Global Services, we can get to the yes-can-do. The GDPR compliance is one of those, yes-can-do things for us.

Great. And then my last question, you actually just hit on it, it sounds like you guys rolled out the Identiv Global services in Q1. Can you talk a little bit about how you envision the revenue ramp there, and kind of how we should be thinking about gross margins on that side of the business? That's my last question, so thank you very much.

Sure, thank you. And so the gross margins are in - similar to the physical access business, they're in the mid-60%s, so it's not a hourly body shop kind of business. It is value-added solutions we're delivering. And it's going to be similar to the vehicle [ph] side of the business and that it is long sales cycles, of course, you're talking about big projects. We've got some quick hits that have already come in place, because we had some pent-up demand from customers who were saying we need extra help, and as we launched IGS, we were staffing it up to serve those customers. So, I'd say it's the - a quick pick-up in the next couple of quarters, then probably sales cycle time will take a little move through, and then it will be really hitting its pace into 2019.

At this time, this concludes the company's question-and-answer session. If your question was not taken, you may contact Identiv's Investor Relations team at inve@liolios.com. I'd now like to turn the call back over to Mr. Humphreys for closing remarks.

All right, thanks a lot, Devin. I appreciate it. And thank you all for joining us today. We will be at the Houlihan Lokey conference next week in New York City with some side meetings as well. So, hopefully, we can see a number of you there. This has run a little bit long and apologies for that, but we wanted to communicate very tangibly all the things we've got going on that are going to be driving our revenue model going forward, because there is a lot going on and a lot being executed by this company, altogether underneath the vision that we've had actually in place for years. So, thank you for joining us today, and look forward to seeing you either next week in New York or at our next investor [opportune meeting] [ph]. Thanks, and have a good day.

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