Identiv, Inc. (INVE) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Identiv's Q2 2018 Earnings Call. My name is Savvis 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 that 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 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 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 turn the call over to the CEO, Steven Humphreys for his comments. Sir, please proceed.

Alright. Thank you, operator, and thank you all for joining us this evening. The second quarter was another big milestone of growth and business progress for us. Our second quarter grew 37% over last year, the fastest growth we had in more than six years. This followed our 1% year-over-year growth in the fourth quarter of last year, 23% growth in the first quarter of this year and now 37% growth. For the first six months of the year, we grew 30% compared to the first six months years. We'll be commenting a more detail on what's driving our accelerating growth rates but the numbers really do speak for themselves. Most importantly, this is driven by organic growth in the high-teens low 20% range with inorganic growth adding to it. But in both the recent quarter and the first half more than half our growth was organic. We also feel good about the execution that's delivering these results. Our markets are growing in the high single to low double digits. So it's clear that we are growing faster than the markets and taking share. And we had other important milestone this quarter both business wise and financially. On the business side, we shift our first several thousand units of our new iAuthenticate mobile smart card readers for the iPhone and iPad. These went into mostly depends the partner customers showing our increasing strength in the federal government as well as the mobility space. We also launched our new mini tokens for mobile strong authentication. In this quarter, our USB Type C tokens are coming out. So it's really a strong mobility position we're building. We also shipped over 50,000 units of our brand new triple interface cards. In our last quarter, I mentioned these were coming, a capability combining UHF/HF/LF RFID all in one device. We brought them out at schedule and even got the first volume shipments to customers. Now remember these put together is a long range capability of UHF with the data intensive application capabilities for high frequency devices and very widely used low frequency physical security infrastructure. So we think this combination really creates a whole new category of solution and it's now launched and being adopted. In our core FICAM-enabling federal market, we are seeing more tangible movement than even. We saw several large rank of purchase agreement RFQs come out, specified first systems as their FICAM solution. As just as important, some of you might recall that adding a greater services component to our solutions is the strategic goal of ours particularly in the federal government. In the second quarter, our Identiv Global Services launched one of our first broad services implementations for federal government customer. And the important thing here is that the facilities were generated a couple of hundred thousand dollars of equipment revenues, generated almost twice as much revenue of combined systems and services. Now demonstrated opportunity with a very satisfied customer. This makes this constant that our revenue and margin opportunity per FICAM-enabled facility will be a good deal more than before. We will know the pace of government deployment is always a long process, so the best way to have faster growth is to increase the value of each department rather than trying to increase the rate of the deployment themselves and we really now demonstrate our ability to do this. I could go with other business milestones, but let me just mention a few financial bellwethers and turn is over to Sandra to go into the full financial results, then I'll come back and go into more of those details. First financial milestone is it we paid off the last portion of our high interest rate term debt. This is the first time since 2012 that the company has been entirely term debt free. The second milestone of course is our eight quarters of positive adjusted EBITDA. And third and most important, as you can see in our financial results a clear path to net income profitability. So sustained in increasing organic growth augmented by inorganic growth, much lower debt expense, continued operating discipline, business execution fundamentals and our proven market opportunities give us confidence in the business results going forward. They all came together this quarter and we think they are in place to continue for the balance of the year and into 2019. With that I will turn it over to Sandra.

Thanks Steve for providing the context for our financial results for the second quarter of 2018. The revenue in the second quarter was $20.3 million, 37% increase compared with $14.8 million in the second quarter 2017, and a 23% sequential increase compared with $16.5 in the first quarter of 2018. Our Premises segment generated 43% of our revenue or $0.8 million in the second quarter of 2018, up sequentially 18% from the first quarter 2018 and up 53% from the comparable quarter of 2017. These increases were primarily driven by higher physical access control solution product sales, higher sales through our channel partners, higher software sales, as well as sales of video technology and analytics related to 3VR acquisition. Revenue from our Identity products, primarily smart card readers, reader modules, and chipsets were $3.2 million in the second quarter, representing a sequential increase of 13% from the first quarter of 2018 as a result of higher smart card reader sales in both EMEA and APAC, partially offset by lower smart card reader sales in the Americas. Comparably Identity revenue decreased by 22% from quarter two of 2017. This represents higher sales of smart card readers in the prior year for a large bulk government project in the Asia-Pacific region which this year was partially offset by prior smart card reader sales in the Americas. Our second quarter revenue derived from the credential segment which comprises both access control credentials and our broader Internet of Things transponder products was $8.3 million. This revenue performance represents a sequential increase of 33% from the first quarter of 2018 and a comparative increase of 66% from the second quarter of 2017. These changes were primarily due to higher access card product sales in the Americas region and higher RFID and NFC transponder sales in the Americas, EMEA and Asia-Pacific regions. Now turning to our gross margin, our GAAP gross profit margin was 40% in the second quarter of 2018 compared with 39% in the first quarter of 2018 and 38% in the second quarter of 2017. On a non-GAAP basis, excluding certain noncash items, our gross profit margin was 42% in the second quarter, compared with 41% in the first quarter of 2018 and 40% in the comparable second quarter of 2017. Our sequential and comparative increases in both GAAP and non-GAAP margins were primarily a result of the higher proportion of high margin sales of physical access control solution products. We now look at the full income statement per the earnings release. Our GAAP net loss for the second quarter 2018 was $2.7 million compared with a loss of $2.3 million in first quarter 2018 and a loss of $1.9 million in the second quarter of 2017. The quarter two results include the recording of $1.4 million loss on the extinguishment of debt and $0.3 million in restructuring charges in collection with the 3VR security acquisition. 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 additional noteworthy items at this point. Interest expense was approximately $0.5 million in the first and second quarter of 2018, and $0.7 million for the second quarter of 2017. Non-cash stock-based compensation was approximately $0.6 million in the first and second quarter of 2018, and $0.7 million for the second quarter of 2017. On the next page, we now look at our operating expense, which is the next graphic in the webcast. For the second quarter of 2018 for our earnings release, our total GAAP operating expenses were $9.2 million compared with $8.3 million in the first quarter of 2018 and $6.9 million in the comparable quarter 2017. The sequential and comparative increases were primarily due to additional headcounts and other related costs associated with the acquisition of 3VR including acquisition related transaction cost and restructuring charges. Our non-GAAP operating expenses adjusted to exclude restructuring and severance cost and certain noncash charges normally excluded from our non-GAAP results such as stock based compensation, depreciation and amortization and loss extinguishment of debt, as well as other non-GAAP consisting of acquisition related transaction cost in the second quarter were $7.8 million as compared with $6.6 million and $5.8 million in the second quarter 2017. On a non-GAAP basis, our R&D expenses for the second quarter were $1.6 million compared with $1.5 million in the first quarter and $1.3 million in the second quarter of 2017, representing 8%, 9% and 9% of total revenue respectively. Sales and marketing expenses were $3.8 million in the second quarter, compared with $3.4 million in the first quarter and $2.9 million in the second quarter of 2017. The sequential and comparative increases were primarily due to the additional headcount and other related cost associated with the acquisition of 3VR. In addition, our non-GAAP G&A expenses for the second quarter were $2.4 compared with $1.7 million in the first quarter 2018 and second quarter of 2017. These increases were primarily due to higher legal fees incurred in the second quarter of 2018 compared to prior periods and the impact of an additional headcount and other related cost associated with the acquisition of 3VR. On the next page, where we bring all the pieces back together. Given our strong growth profile and ongoing cost controls and aggressive integration of 3VR infrastructure, our non-GAAP adjusted EBITDA gain was approximately $0.7 million in the second quarter compared with $0.2 million in the first quarter of 2017 and $0.2 million in the comparable quarter of 2017. We believe that our business model is positioned to continue to generate positive and profitable growth. On the next page, if I turn to the full balance sheet, again comparing our position at June 2018 to the position one quarter ago at March 2018. Cash at the end of June was $17.9 million compared to $16.7 at March 2018. The $1.8 million net increase in cash for the quarter was primarily comprised of an increase of $0.3 million driven by our net loss excluding noncash items, a $3.3 million net usage from operating assets and liabilities, $0.2 million net cash usage from capital expenditures, and net cash generated from financing activity totaling $4.9 comprised primarily of $7.9 in proceeds from the issuance of Series-B preferred stock, $2.6 million net borrowings under our revolving credit facility partially offset by the payoff of the balance remaining outstanding under our term loan of $5.2 million including interest commitment and tax payment of $0.1 related to RC releases. And last, $0.4 million impact of foreign currency fluctuation on our cash flows. With respect to some of the key accounts that we highlighted, accounts receivable, our balance increased by $1.5 million to $14 million with days sale outstanding increasing from 59 days at the end of the first quarter 2018 to the 67 days at the end of the second quarter. Inventories net of reserves increased from $11.6 million at March 2018 to$12.8 million at June 2018. Our adjusted inventory turnover at June 2018 remained at approximately $4.1 million compared with March 2018. Other assets are presented decreased to $0.8 million, driven primarily by ongoing depreciation and amortization of assets. Accounts payable balance at June 2018 was $7.2 million, an increase of $0.2 million from March 2018, due to higher volume of current to 180 due payables partially offset by the reduction in volume of over a 180 days payable. Financial liabilities at $15.6 at June quarter end, reflect our East West Bank card financial liabilities though out the $2 million note related to the 3VR acquisition. As of June 2018, we no longer have long term financial liabilities as a result of the pay downs of the WTI term loan. Our other liabilities decreased in Q2 by $1.3 million. This category includes the current and non-current portions of payment obligations, deferred revenue, accrued compensation and other accrued expenses. This change was primarily driven by $0.7 million share holdback reduction related to the 3VR acquisition. In addition, our long term payment obligation decreased from $2.7 million to $2.4 million at June 2018, reflecting the continued quarterly payments made offset partially by the accretion of interest. On the last page, in the context of our target business model, where we measure ourselves with you quarterly to assess our progress, we continue to deliver what we set out to do, grow and achieve non-GAAP adjusted EBITDA profitability for eight quarters in a row, significantly closing in the gaps 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 $4.4 million to $6 million. For completeness, we've included the full reconciliation of non-GAAP adjustments to GAAP and for balance sheet for the earnings release in the appendix. With that, I'll conclude the financial portion and turn it over to Steve.

All right. Thanks, Sandra. The numbers really do speak for themselves, so let me just keep some insight into the business activities that are driving them and while we take where the position they continue to deliver such good progress. Looking segment by segment. I already highlighted in the opening, the launch and initial volume shipments of our iAuthenticate iOS mobility leader are many token from mobile security and now this quarter USB Type C token, all in the Identity segment. Together this is the wide suite of solution for mobile security particularly for the defense department and other security sensitive federal government customers. Also in our Identity segment, our embedded readers and keyboard continue to be the top solution for desktop from Dell, HP and others. So just as a reminder, adding up embedded keyboard readers and PC connected and mobile readers, we have over 25 million smart card readers out in the field that we've shift over the years. Dispositions of these trend all will give you confident that our Identity segment is on track to deliver the double-digit growth we expected this year and into 2019. And in the Credentials segment, we had really encouraging growth of more than 60%, driven by combination of transponder and access cards. Looking first to transponders, this is where authenticity and consumer engagement and library are the use cases that really continue to drive a lot of the growth. Going forward, our already demonstrated lead in progressive UHF applications are expanding even further. As we implement additional capacity inn technical capabilities later this year, we do have a little cash impact through financing of the equipment that will be deploying these new capabilities and new capacity. Transponders are one of the most promising growth drivers both in terms of growth rates and visibility. And it is because the growth is coming really from the three distinct but related areas. The first of course is our current customers with their current product lines, we already shipping into. As those lines grow, our volumes continue to grow with them and we get great visibility there because we have forward forecasting what they're going to need into their supply chains. The second of course is same customers, when they expand in more of their product lines. So more devices that they may be shipping into supply chain that then gives us an additional growth path on top of the base product line they started with. And the third one of course is new customers and used cases. And really in this category, this is the richest pipeline across more customer opportunities than I've ever seen in our business. Let me just give you a couple of examples to give you some sense of what kinds of applications we're seeing. So one of them is the major global retailer that's automating their preparation of online orders for in-store pickup. So with doing this, they got a full robotic systems going into their warehouses and RUH UHF devices are enabling the robots the find the right products in the right bins. And think about it, if you have the warehouse system and an order comes in, if that robot is going to find that artichoke or that set of headphones like going get reckoning to the right box that box has to be in the right place at the right at all times. With our UHF devices, they can move the boxes around and the robot go find it. If it has a replenishment problem, UHF device can be disabled to robot won't go that empty bin. So this means a whole warehouse doesn't have to be 100% perfect because the bin themselves are intelligent and can communicate with picking robots. So you can really see here we're driving cost and quality capabilities in a use case, that's going to scale in a several million years. Another example, some of you may be familiar with baking devices and obviously as they go into more valuable products if they are deploying, when they go from to tobacco to marijuana for example, authenticity becomes very important and the value of the pod becomes very important. We're moving in with some of the leading waiting devices with RFID devices to ensure that it's the right product with the right dispenser and it's the right content there. And as you can imagine for high value product like this, it's very important that's an optic phones and that the content be right because you actually don't want to have any of the help or experience issues to happen from the wrong device. So we see as another great use case for authenticity, but authenticity is really core, the quality and business model of dispensing products. So we could go on and on in different use cases. That gives you just a couple of examples that we're confident, both cases will be in the several millions of units and potentially tens of billions of units. The common theme is here, these are growth areas and there are core to the business model models some of the companies deploying them and they really provide both revenue and cost reduction, as well as quality experience. So we're in upswing now in the economic cycle of course. But for the longer term, we actually see many of these applications has been very resistance recession because they actually cut costs, increase revenues and sustain margins. So we think we're in a good position as the economy's growing but even at the economy flattens which it will at some point we think we're going to be in a stronger growth position continuing. Looking at the access card portion of our credentials business. As you heard from Sandra, with very strong growth but at lower margins. So as we go forward, our focus is more heavily on the transponders portion of credentials where there's a higher sustained growth opportunity and higher margins. So most solid contribution to our profitability which is of course the core goal of our business direction. Turning now to the physical security business, also known as our Premises segment. Here we also had over 50% year-over-year growth. I've already commented on the federal government both the FICAM and our strategy to increase revenues per system with our Identiv Global services business. These were both demonstrated in the second quarter and continuing into the third quarter the balance of the year. We're seeing RFPs that are specifying our systems in FICAM platform as well as having our high end services for technical design configuration and analysis built into the overall solution. On the product side, also in the Premises segment, the ISC West tradeshow which seem like long time was also in the second quarter of this year in April. And some you are actually at that show and saw the front row of product launches that we had there, wireless locks, integrated visitor management, a brand new version of the velocity, our 3VR video platform integrated with locality, a real-time location system, really that the product launches are the core of we think that will be the growth going forward in our Physical segment, as well as our customer base. So that's actually a very good segue into 3VR which is also executing well, particularly due to deep and wide install base of the customers within the targeted verticals of banking, retail and healthcare, as well as cross-selling opportunities with our Physical access business. So three areas to highlight. First is in Banking. And some of you know with 3VR we're deployed across over 170 banks and financial institutions. So the banking vertical is very deep and broad. And it's a very powerful decision both to deploy more services and applications and to expand across the financial services industry. And second area to highlight is really the analytics platform itself. More and more of the world realizes that there's far too much data being generated particularly in the video and access security space and analytics is the only way to manage the flow of data and really make it manageable. And both because our 3VR platform is designed from the ground up to be an analytics platform and because we have deep integration inside across access control which is the other core driver of events for analytics. We really have a competitive lead and a comparative advantage. Now since we have such a strong platform, we're finding also to the novel use cases for analytics. Let me just give you an example here because it's easy to think okay, it's video, it's surveillance, you basically see some of the events that go along with it. But recently in a pilot with a shopping mall in Europe, we had a tremendous use case. Someone walked in and then Europe the right to be forgotten. They came into the physical security operations center and said I want you to erase my image from all of your cameras, you can't be tracking me around. We were in pilot with this mall and we were able to find them with our thumbnails. And within 30 minutes, we were able to permanently erase all of the thumbnail we had with that person's image. The physical security manager told us that when they tried to do that with their prior system took him over two days. So whereas video and surveillance and security is part of the benefit we provide, our analytics strength means we can start to address areas like the right to be forgotten and privacy, as well security. So there's a number of applications. And again if we want to go in to more, in Q&A we can. But I just wanted to give you some of the segment specific opportunities that we're seeing. Now I'd also like to turn some industry and market events that play very much in our favor. We often talk internally about what we're doing from a customer and product perspective, but we are in markets now that are very dynamic and that extra factors, in fact the couple of them actually been the moving very much in our favor. The first is the McCain National Defense Authorization Act, (NDAA), which we just passed last week by both housed of Congress. And the headline around this act was the strongest Chinese prohibiting measurements we actually emitted, once run Huawei and ZTE. But inside the bill, the prohibitions that are extremely relevant to the physical security industry who have access control in video stayed in there. And it mandates that government agencies are going to be required not just to stop buying systems from the two largest Chinese video providers, Hikvision and Dahua. But within the next year, it develop plans to uninstall them. So that any of their devices previously bought have to be removed. Now in federal government legislation, of things always take a long time, but this really got some teeth in it and then it says, yeah you don't want to do this for year, but it says when that time comes, you're going to have to uninstall whatever you bought. So immediately today contracting officers know this is coming down the pay. So if you install Hikvision or Dahua system, next week you know you have to pull it out. You installed in a couple of months, people are going to be asking why you spent that money and then had to get rid of it. So this part really is a big opportunity for us because Hikvision and Dahua are the leading Chinese providers of video surveillance equipment and they had some access products. And a number of both American and European competitors of ours OEM from them and the bill makes it very clear that affiliates, as well as these company themselves, anyone OEM-ing their equipment that will have to be uninstalled as well. So we remain as one of the few trusted advisors, purely American company, our products especially in the video space are manufactured in Wisconsin in Arizona and we can go to them and say, will do certain site surveys for you, we'll find all those equipment and we'll build your migration plan and you can move out and safe. And in fact even a number of our major competitors not being Chinese perhaps but also are non-American. So you might remember milestone is owned by Canada and Japan. Genentech is up in Canada. So all these companies are really somewhere outside of the U.S. and the Chinese prohibition is the strongest one, but several customers are really going to be turning to okay, you can be trusted advisor here. And just the position we've been building with Identiv Global Services in addition to visual products is really strengthened by the fact that yet again we are a clean solid partner for you for deploying going forward and when problems like it come up, we're the ones you can turn to. So, something from the outside looking in that I just wanted to highlight. So, I'll stop there and just summarize for a moment and open it for questions. But if you look at the current progress we have the very positive market trends in the markets we are in the midst, our own strong position across products, verticals and services and some of the events in the industry that really are growing in stage room the position we've carved out and you can see why we think this quarter was very positively successful and those trends we think will carry forward into the quarters for the rest of this year in 2019. So that I'll open it for questions. Operator?

Thank you. We will now take questions. [Operator Instructions] Our first question comes from William Gibson with ROTH Capital Partner. Please go ahead.

Thank you. That was certainly a powerful quarter. Does that kind of strength on the repeatability of the multi-interface cards and transponders continue in this quarter?

Yes. Certainly yeah I think - this is Steve by the way. Now 50,000 units say dollar wise not the major drivers but going forward absolutely, it's a great use case. In this case, it's a large utility that one and all of people are in case they have to evacuate the building rather than putting expensive Bluetooth speak and trackers or something on them, realize that UHF readers and capability inside the same Identiv cards, they got in the user track people on facility. So with indication services, there is a lot of interesting use cases that are definitely going to driving it going forward.

And in regards to 3VR, are we done with the restructuring expenses?

In terms of actual changes in the organization or anything, yes. In terms of well into the P&L some of that voice is going on at the beginning of the quarter, so we do think that the run rate operating expense that will be continuing a little bit downward. And Sandra, you want to add to that?

No, I think we may have some very small items but the majority of the onetime charges occurred in the second quarter and we are just continuing to look at every piece of our operating expense to continue to lower the cost going forward for to the second half.

Okay. And are they on target to meet their earn-out?

So, no, they are on target to meet their earn-out, their earn-out was 24 million, they are absolutely on target to make what we mentioned when we set guidance which was to add roughly $10 million to $11 million of top line for the year.

Thank you.

[Operator Instructions] Our next question comes from Mike Latimore with Northland Capital Markets. Please go ahead.

Hi, great results there. Excellent to see.

Thank you, Mike.

You guys, you should hire a lot to give to doorstep. That sounds pretty interesting.

The best thing is we didn't spent a dime on it. Hikvision reported, we spent like $150,000, trying to stop it.

That's interesting. So I guess on the Identity part of business, you were down year-over-year in the first half and you expect it's a double-digit growth by year-end. So can you talk a little bit about what would drive the rebound in that business in the second half of year?

Yeah, you bet. It was up sequentially second quarter and first quarter and also second quarter last year had a big transaction from Australian government entity. So the underlying growth we're seeing is very solid. U.S. Federal government, as well as commercial, as well as our offline payment viewers across the board certainly solid and then there is also some upside in gaming and other categories.

Got it. And then, did you basically say that the operating expense should be down as a little bit in the third quarter relative to the second quarter?

Company management never want, they are going to be a big example. Basically there is some actions we already taken and that is going to flow through the P&L. So nothing major event wise ahead. But expense is just naturally would be gone down.

And just last question is and you reiterate guidance for the year, I guess if you hit the midpoint of your guidance, it almost implies that third or fourth quarter would be lower than the second quarter. And I guess is that will be different from historic patterns?

Yeah, that would be different from historic patterns and no, we aren't expecting sequentially down quarters. Now that said we are talked about in every quarters that sometimes there is business that falling apart couple of days literally and order in other quarter. We do have a couple of quarters that are into this quarter that customers really wanted the product shift. And so certainly strong a little bit beyond its standalone base but the plenty of strength going to all the business going forward.

Okay. Great. Congratulations.

Thank you.

[Operator Instructions] Our next question comes from Jack Vander Aarde with Maxim Group. Please proceed.

Hey, guys. Great quarter by the way.

Thank you.

So, I missed to ask the last from the last question about Identiv revenue, it's going to be double-digits for the year but is there any color you can provide on perhaps allocating the remaining Identiv revenue between Q3 and Q4? Is Q4 maybe more lumpy year or Q3, could you just provide color on that, that would be helpful.

They are usually both good quarters in the markets. The federal government certainly drive some year-end buying in the third quarter, so that's always our strongest. But with the pipeline that we see, we expect strength in that quarters with the third probably a little bit stronger.

Okay. That's helpful. And as far the transponder new applications you discussed, those sound like definite new mover, in response to the - in reference of the new waiting technology that you quoted could be a ten to million unit volume type opportunity. Was any of that captured in Q2 to increase revenue and will it captured in the back half of '18?

It will be captured in the back half '18. That was the small part of the Q2 revenue. It is the characteristic of a very common use case that we drive and actually even much a larger consumer products companies that are driving larger volumes. So this whole idea of insuring that some sort of disposable or consumer or usable is matched properly in its authentic is something that we see in healthcare for example and you got consumables and it's got a match with the equipment that is being used your product continue products light weighting and then everything from government we are seeing it happens. So just to be clear it's a bit broad use case.

Okay. Got you. And then in terms of Premises, I don't believe you, is the first quarter of 3VR generating revenue. You commented on some updates on 3VR but can you a sense of 3VR's revenue for the June Q, or if can't, give it exposable in terms of was it on track with you initial expectations heading to the quarter and is it so on track to hit that $10 million to $11 million range that you provided earlier?

Yeah, as I mentioned when the question is asked about the earn-out, in terms of their core business and the guidance we given there is absolutely on track. Do you want?

No.

Comfortable with that. Yeah then I think that's the way we'll continue to address it. But especially the technology integration and the combined platform and the cross selling opportunity I'd say especially saying three or four different item. In the vertical strength, that have a very encouraging in as we brought the business together and we have been finding outside.

Got it. Okay. And then I guess still on the Premises segment, how - can you provide - did you provide a percentage of total Premises revenue for Cisco channels, I think it's been around 10% or north of 10% in the past I am just wondering where that is directionally trending?

Yeah. It is so if I look it up traditional physical access so I will sort of curving out the video piece of it to be comparable to prior periods. We are still the Cisco channels doing an excess of 10% of our physical access sales.

Is that increasing or is it maintaining at that north of 10%?

It's maintaining probably north of 10%.

Great. Okay. And then lastly in terms of the RFPs from the government customers that are expecting [indiscernible] is any sense of incremental new RFPs you could provide in relative to June of last year?

It's highly characterized in terms of number of RFPs because there is about half dozen government purchased vehicles that can affect us, everything BPA, purchase agreement you know IDIQ, RF2 or direct purchase. And they can range anything from a few hundred thousand dollars to tens of millions. So it's all characterized that way what I would say is government contracts are published on government websites, so you can see them go out there, we don't name our direct customers or end customers here but it is information that you have get. But what you would see is there were number of kind of $1 million to sub $10 million of programs are there. Now there several sub $10 million programs and a few multi-tens of millions to dollar programs are there. So that's how you characterize. And I said in my earlier comment too, timing of the government is always tortures. So we were try to do it make sure, we make more money out of each deal and then when timing comes through, if it does comes through faster then that's great that's upside for us.

Okay. Thank you. That's helpful. Great quarter again. I'll turn back to the queue. Thanks.

Thank you.

Our next question comes from Michael Latimore with Northland Securities. Please proceed.

Great. Thanks. I may suspect did you give gross margin by a segment?

No. We did not. But I can give you those numbers.

Okay. Great.

Okay. GAAP gross margin for Premises was 55% for the second of this year versus 53% comparable quarter for year. Identity with 35% versus 32% comparable quarter 2017 and Credentials were 27% compared to 26% comparable quarter 2017. So each of our segments up just five by driving the 2 point increase from 38% in quarter one 2017 to 40% in quarter two of 2018.

Great. And then obviously the third quarter here as well we have access the federal government fiscal year-end. Any kind of general color on the indications you getting from the federal government how is feels sort of this year heading in this quarter relative to this prior third quarters?

At deals it feels normal I should say which is strong as the third quarter in the federal government they have all funds to use it at the end you make a number there that those all continuing their solution going on in January, February and then March and they settled on a budget which was for the full-year. But full-year ending the end of September so they not have fund that instead of having 12 dues knowing exactly with funds out they have had 5 or 6 months to use them. So there is some fiscal year-end activity going on that's said they going to use the appropriate contract vehicles and they all go at the major government phase were we do expect some decent activity for fiscal year-end for the government.

Okay. Thank you.

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. Please proceed.

All right. Thanks again operator. And thank you all for joining us this evening. We'll certainly continue driving forward our business and drive forwards communication with you all in the ongoing events. Early in September, we will have the Wireless Conference in San Francisco and if anyone can come by, will be - have a strong presence of access in Las Vegas at the end of September. So we look forward to containing to update you on our business process. And thank you again for joining us.

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