Steve Humphreys - Chief Executive Officer Sandra Wallach - Chief Financial Officer Manfred Mueller - Chief Operating Officer and General Manager

Good afternoon and welcome to the Identiv’s Q1 2019 Earnings Call. My name is Denisha and I’ll be your operator for 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 projection, including adjusted EBITDA. In addition during the call, management may be making forward-looking statements. Any statement that refers to expectations, projections or other characteristics of future events, including a financial projections and future market conditions is a forward-looking statement. Actual results may differ materially from those expressed in the 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 we speak of as today. I will now turn the call over to CEO, Steve Humphreys, for his comments. Sir, please proceed.

Alright, thanks operator and thank you all for joining us today. As you've seen the first quarter of 2019 continued the momentum of growth and development of the business from the fast pace of 2018. We started out 2019 fast also. In the very first week in January, we welcomed the Freedom, Liberty, and Enterphone MESH product lines to Identiv. These products round out our technology platform, following the successful acquisitions of Thursby Software Systems and 3VR Video Analytics in 2018. We think these three acquisitions complete the core components of our platform, bringing us much closer to our vision of cloud-based, software-centric, and mobile-enable digital access, immediately accelerating our growth and penetration of current customers as well as adding the multi-tenant market, a range of products that fit the distribution channel, and a perfect fit with the IT channel buyer, which is where some of the fastest growth is happening. Looking at some of our key metrics, we delivered 18% year-over-year revenue growth, continuing to gain market share in our industry which is growing at less than half our pace. This underlines the intersection of both positive industry trends and our customers’ increasing desire to secure critical information and infrastructure, address mobility and BYOD, and to do it with Identiv’s integrated and IT centric solutions. Most of our segments experienced strong double-digit growth. Premises was up 25% and Identity up 13% year-over-year. Premises, which now includes our Freedom and Liberty platforms, also grew 5% sequentially. Now typically we’ve got a seasonal decline in the first quarter, and we've broken that trend this quarter. Both this sequential growth and the even stronger year-over-year growth were due to continued traction we are gaining across all of our verticals. On the Identity side we grew year-over-year 13%, helped by another major delivery…

Thanks Steve for providing the context for our financial results for the first quarter of 2019. Before we dive into our Q1 financial, here are a few key metrics that we think are important in analyzing the broader trended performance of our business. The first one is revenue growth as represented by our trailing 12 months, ending March 31, 2019, which is up 28% compared to the prior period. Our standalone software and services business has increasingly become a bigger component of our revenues, enabling us not only to expand on our growth, but also become more consistent in our results and drive higher margins as well. Standalone software and services on an absolute dollar basis have actually doubled year-over-year, disproportionately contributing to our overall revenue growth. Non-GAAP gross margins have continued to increase with our trailing 12 months at 45%, up 416 basis points year-over-year, as we drive stronger sales of our higher margin value added offering while not being pressured by commodity type prices. In addition, our non GAAP adjusted EBITDA margin increased to 8% compared to 4% in the comparable trailing 12 months ending March 31, 2018 as we continue to combine our strong growth, while maintaining our expenses and ensuring we have the appropriate cost structure to scale even while we integrate recent acquisitions. Finally on the right you’ll see that we maintain a stable and balanced revenue mix, both from a segment and a geographic perspective. Our revenue in the first quarter was $19.5 million, an 18% increase from the first quarter of 2018 and an 8% sequential decrease compared with the fourth quarter of 2018. This sequential decreased on a consolidated basis is in line with our historical seasonality. Our Premises segment generated 48% of our total first quarter revenue, or $9.3 million, an…

Thanks Sandra. So from Sanders comments you all can see the financial strengths of the business and the progress we're making along all metrics. Gross margins that are higher than industry comparable and growth rate that are also more than twice the industry’s, when you compare us to Johnson Controls, Tyco, NAPCO or virtually any of our competitors and comparables in the marketplace. Now the reason is graphically visible at customer and industry events like ISC West, which I mentioned in the introduction. But I want to go in the implications of some detail here. This image you see is our booth from ISC West and it shows several things that are important to our business. First the entire solution built on great brands and great technology; Hirsch, 3VR, Thursby, Freedom, Enterphone and Identiv itself. Second, we integrated solutions across all these capabilities; and third, probably most importantly, the crowds themselves. The energy and the interest that we've got at these events really speak louder than any of the data or metrics I can throw out there. But our message is clear. When I was doing the booth prep for our trade show, we talked about every single attendee at ISC West or another tradeshow like RFID Journal that I mentioned. Every attendee is a customer for atlease one of our products and the vast majority of our customers for nearly all of our products. So if you think about it, every security leader for an organization these days needs video, access, data security, mobility security, and then the more progressive ones are expanding to real time location security, tracking of every person and devices that moves throughout their organization. They are doing this for security and then they are extending the solution in the convenience of productivity. Now some…

Thank you. [Operator Instructions]. We will go ahead and take our first question from Mike Latimore. Please go ahead. Your line is open

Congratulations on the great start here.

Thanks Mike.

I guess just on the gross margin, you may have given this Sandra, but do you have gross margin by the two segments there?

Yes, from a GAAP gross margin perspective, Premises was 47% on Q1 ’19 and Identity was 42% on a GAAP basis.

Got it, okay, great. And then on the 500 sites in the federal government, roughly how many doors per site would that be?

It varies dramatically. It’s anywhere from a couple of dozen to a couple of hundred.

Per site?

Yes, per site.

Okay, got it, great. And then I guess just the implication of your comment, Steve, about having sort of most of the components you need, I mean should we just interpret that to mean that you're unlikely to do another acquisition this calendar year.

Calendar year is a long time, but in terms of near term, we are certainly focused on consolidating, integrating our platforms, getting leverage out of it all, leveraging the channel, make sure the dealers have full understanding of the full product line, and so you know certainly for the next several months that’s our intention.

Okay, got it. And just a last one, to the extent that there's a lot of the – increasingly, the IT decision maker who is making the kind of physical access decisions, security decisions, does that change – I mean does that change any of your channel strategies or does that sort of fit into what you sort of already have with that?

It fits into what we have largely because we’ve developed the IT dealer channel, which is different from the physical security dealer channel, but especially with our Cisco partnership that started almost three years ago now, that got us into the IT channel and it really is starting to expand. We've been talking about it in the industry for several years, but I'd say in the last few months I've seen that you know a couple of times greater percentage of IT CIOs, they are really leading the discussion, including physical access.

Very good. Okay, thank a lot.

Thanks Mike.

[Operator Instructions]. We will go ahead and take our next question from Nehal Chokshi. Please go ahead your line is open.

Yes, congratulations on another solid quarter, especially that strong gross margin, the margin expansion, I am going to have some questions around that. Before I get there, could you talk about the organic year-over-year growth, i.e., excluding Thursby and the Viscount acquisitions?

So, we’ve had strong contribution from all of our products for the 18% quarter-over-quarter and the 28% trailing 12 months where we don't break out specifically organic and inorganic, but we've been really pleased by both a very strong organic movement as Steve mentioned with the federal government, and you know the speed by which Viscount and that team got off the ground and started contributing.

And I’ll just add to that, because there is certainly a financial perspective on that and [indiscernible], but from a business perspective it really gets to be hard to differentiate. For example we have a big drive in to distribution, which we had a nascent position in with our TS readers and our Smart Card readers, but now with Enterphone and some of the Viscount products, Liberty in particular, they are really perfect for distribution and we have a dedicated distribution sales manager who we brought on actually with the profile of driving the Viscount product line, but she is driving all of our product lines through distribution, and so it really starts to morph together in a way that's not meaningful to split it apart.

Yeah, I understand. Okay, so for the third quarter in a row I would say at least 500 basis points of year-over-year gross margin expansion, which is fantastic. Is all that due to growth in software and services or are there other factors at play here?

Yeah, so the other factors, I mean obviously you know the increase in software and services standalone contributes to it, but we disclosed in Q4 and we had another one in Q1, we had a large order that we fulfilled for the Air Force in Q4 for about $2.4 million. That one was actually greater than 10% concentration customer, and as we've talked before, those margins run in the 60%, 70%-plus range, so they are higher and we had another smaller, but still large order in Q1 for the Navy Reserve. So that is driving up some of our gross margins for the last two quarters. We've always acknowledged that that business can be lumpy, but very profitable, and we are also seeing some pick up in some of our higher value-added cards as well as software and services. So, I think a lot of what we're doing is driving the margin expansion, but really those two large Thursby orders really accentuated it.

I think I’d add just from a supply chain or business operations perspective. You know as we are becoming a clear consistent grower, our suppliers have become much more flexible in terms of price negotiations because they know they want to have us as a customer and we're going to be growing in terms of volume and demand from them. So we can drive down COGS at the same time, so we’ve got some benefit going across the board and I think that's why you've seen it sustained for a little while. And as I mentioned in my press release too, we are fortunate, knock on wood that it continues, but we think it will to be in markets that are not seeing a lot of price pressure either. So, we've got a decent stability on our price side and some progress on the COGS side as well as mix.

Right, okay. So the guidance implies that the margin expansion that, this massive margin expansion that you've been seeing isn’t going to continue. And I think as I’m – you’ll probably attribute that to the large orders from Thursby from Q4 and Q1. So you have hinted that you know there might be potential to sustain some of that price from our basis point year-over-year expansion but certainly not at that rate, would that be a fare way to characterize?

Yeah, I think particularly when you think about our scale, you know the challenge of course is in any given quarter we can add mix move even as we're growing and a small mix shift can affect margins you know give or take in a quarter, so we don't want to set expectations. You know when at our scale we are – certain we can buffer those expectations. We certainly hope that it will continue to expand, but we need to plan for a more measured progression.

Okay, very good. Thank you for taking my questions.

Thanks Nehal.

[Operator Instructions]. We’ll go ahead and take our next question from Andrew Uerkwitz. Please go ahead your line is open.

Hey, thanks for taking my questions. I just really have one question here. You made three acquisitions in the last 12 months; there is integration that you're going through. One, how long do you think it will take or how much time do we need to see that full integration play out and then where will see the biggest benefits, will it be margin, increase sales, could you talk a little about that for us. Thank you.

Yeah, I think you are already seeing it play out, partly because the first three acquisitions was over a year ago now in February of last year with 3VR, and it is you know – you are seeing it in the margin line with the mix, with the contribution, both the 3VR and the Thursby and you are seeing it on the topline. I mentioned some of the channels leverage we are getting though distribution with the Enterphone MESH and Freedom product lines as well. So I think you're starting to see it throughout. Then as Sander mentioned in her comments, there's still some more in terms of topics synergies we’ve taken some, but there's always more efficiency you can get. And then as our sales force gets better at selling the entire product line, we get more sales force leverage out that as well. I think you are already starting to see it, but there’s certainly more to move through the business opportunity. Do you want to add anything to that?

No, I think we can really manage, you know getting the sort of back office integration. The real kicker here is how quickly we can get these to really start to drive a very different trajectory on the top line and that's where we think the biggest opportunity is and it is taking some time, but I will tell you that again, you know the team has really embraced the Thursby product and they have certainly run with the Viscount products as well. So I think we feel good that we're getting the traction that we need.

Got it, thank you so much.

Thanks Andrew.

And we will go ahead and take our next question from William Gibson. Please go ahead your line is open.

Thank you. I'm assuming the sequential increase in selling and marketing expenses was related to the two trade shows, is that correct and does that come down in the second quarter?

So actually a lot of the trade show expenses for ISC West and for RFID Live! end up in the second quarter in April. That's historically when we've seen tick-up. So sales and marketing did go up, that's primarily because of two things. Number one, the acquisition of Viscount in bringing over key resources light like Scott Sieracki; and two, we’ve been purposely filling some very strategic rolls as Steve mentioned with an Enterphone sales leader who also is very focused on distribution for all of our products. So we’ve been making some pretty purposeful investments in customer facing resources in the first quarter.

Okay, and so that's a good base going forward with the shows in the second quarter.

Yep.

Okay, and sticking with the show's, you mentioned a lot of people and more – it sounds like more interested this time around. What’s sort of the time line Steve you are turning them into orders.

Good question. Some have already come through, and then it can be anything from a few months if there is something that they already had in the pipeline. And we had some government customers who renew agencies to us that came through and that can be a year. So it’s of that time frame, a couple of months to 12 months.

Okay, thank you. And you also just briefly mention working with some of the start-ups, I think having financing. Is that potentially bringing in technology from them and giving them a channel or how does that work?

So far actually the most engaged activity has been – we are actually – one of the start-ups is using our technology, our reader technology inside their platforms and in other cases we will be integrating some of the start-ups technologies in our platforms and providing some channel for an integrated solution.

Okay, so could go either way. Yeah, thank you. And related to be a preferred stock dividend accretion, is that taking stock on that or is that going to be a cash payment or do we keep seeing that dividend rise?

So we'll see the accretion of the stock dividend, preferred dividend in stock that although if it's still out there until year 10 it’s at the company's discretion to convert it to cash, so that we have a definitive tail on the dilution of the stock through that accretion.

Thank you.

Great question.

[Operator Instructions]. We’ll take our next question from Jaeson Schmidt. Please go ahead, your line is open.

Hey guys, thanks for taking my questions. I know you outlined in the release some of the wins in the RFID segment. But just curious if we look at this year, what end markets are you most excited about seeing some growth from.

So, I’ve actually got our Business Head for that business Manfred Mueller here and he can give it to you straight from the horse's mouth.

Yeah, hi there. So there is a couple of markets that are extremely exciting right now, one is in the pharmaceutical medical space where we have had an increased amount of tenders out there, where we have received an increased amount of orders very recently and it's predominantly brand authenticity and enhanced inventory management, that's the major applications there. Why is it – why we love pharmaceuticals and medical that much, not because of the sales cycle which are extremely long, I mean that also kind of goes along with the other question that we just had; nine, 12 months is nothing in that area, but the loyalty of any of those customers is going to be incredible, it's going to be years-and-years that you are usually locked in by, because you also go through a lot of let’s say audits and dedicated certifications. So that certainly is one area which is very exciting. Another one that’s I'm very excited right now is transits, transportation, not because it is such an exciting market it's just the volumes that are really making a big difference there and that's also relates to one of the major orders that we got this year. Also it was part of the operational highlights there. So that helps to fill the factory and it makes – it moves the needle, significantly. So that's two of the major highlights there that I would like to name here.

Okay, that's helpful and I know there is lots of moving parts with the acquisitions you made last year, but big picture, when we think of seasonality for ’19, anything out of the ordinary or different from sort of historical trends we should be thinking about?

Yeah, good question there and the answer is no. If anything we're seeing the seasonality smoothed out a bit. I mean we've always had a large third quarter due to the federal government year-end. But typically we've had you know for example first quarter sequential lead decline across the board including Premises, but as we noted here we actually had a growth in Premises fourth quarter to first quarter, that's the first time that's happened that I can remember. So we're seeing aggregate growth rates that that offsetting some of the seasonality. With that said we expect our third quarter to be our strongest quarter and we certainly expect our third and fourth quarters to be the two strongest quarters in the year, but it's becoming less pronounced than it has been in the past.

Okay, thanks a lot guys.

Thanks Jaeson.

And it looks like we have one final question and it comes from Jeff Kessler. Please go ahead, your line is open.

Yes, thank you for finally letting me on the call.

Hi Jeff.

Hi, how are doing? A couple of questions; number one, are you seeing with the amount of new access and card systems that are out there, that are trying to put identity closer to the door as well as inside, basically based on entitlements. What are you folks seeing in terms of your demand from these new verticals you are talking about for essentially idea at the door? Is this something that can be done on the web, on network or does it have to still be after that wired, and if you can just speak to that.

Yeah, there’s a lot of dynamics in there as you know. So certainly the predominant mode is going to be you know at the door and the conventional infrastructure. However, there's a couple of caveats on that. We demonstrated at ISC the Viscount mobile access, whereby you can come and wave at the reader and it can either do a directly Bluetooth communication with the reader or it can do a web geo fencing, that frankly doesn't even use the reader at all. It simply indicates by location where you are and if you are authorized to open that door it's actually going through wide area network, to the cloud, to the panel and opening the door from the inside out. That’s total adoption and a lot of folks are using it, but it's important to have it. And then the third use case is a pier cloud used case and again, we were demonstrating at the booth a reader that only has an Ethernet port connected into it and a panel that’s just you know POE, Ethernet port and can be accessed with a mobile app either directly at the door or simply you know hitting through the mobile app, open this door and it does, and that of course is just communicating to the controller and popping the relay. So I think you're going to see all the three modes.

That’s why I kind of asked the question, so that effectively you have a multiplicity of ways of going about this and you are not just stuck with that thing at this point.

That's exactly right, and the interesting thing, the reason we really wanted to get out there and pilot and demoed is the thing people always worry about is latency. You know if I’m doing what I just described, you know connecting it through geo fencing and end up in the cloud and around, but we were getting 200 to 300 millisecond response time, so you just – you’d wave at it and yes it was going through the cloud and AWS, but you couldn't tell the difference. It was just as if it was a door reader that you tapped and beeped.

Okay. Follow-up is that is you mentioned earlier, several of the industry's vertical markets that you are looking at, are reaching critical mass, not just in terms of their revenue, but in terms of their ability to understand what a network situation is and how it can be used among the various divisions of those verticals as opposed to everything still being in the silo. You talked about RFID and traffic as being two areas that are hot, but I'm wondering in a more general sense, what vertical markets have reached this area of say critical mass that allowed you to go in and proved your value proposition to them more easily than you could have three or four years ago.

Yes, so it’s a good question and there's actually a couple of them. Certainly retail is far along, both because they've had it on the supply chain side, but they are now using it for heat mapping as they move around stores and for improving the customer experience, as well as security and they are in such a fight with their lives, for their lives with Amazon that they are fighting for any advantage and any improved experience as well as loss prevention to reduce shrinkage. So retail is an early adopter of the full range of solution we’ve got. Another one, it’s a lot slower, but it gets the whole value is healthcare because the same thing, they have to track high value assets around whether the consumables or equipment, but they also have to track people with very high certainty and lots of people coming in and out sometimes they are doctors, sometimes they are patience, sometimes it indicates emergency rooms they can be you know frankly potentially criminals with gunshot wounds and other things and they are all mixed together. So healthcare is piloting almost everything, they are just slower to adopt and deploy. And then the interesting thing is that more general tech enterprises are adopting a lot of the platform, mostly in pilots right now as well, but they are really seeing the benefit of tracking everybody as they move around. A lot of them have open campuses and they want to secure them, but they also want to take it to the next level of when a product is getting launched what do I see about the personnel movements between product and engineering and marketing and how are my teams working? So they're taking from security into operational improvements and interaction. So there's a lot going there, but I would say retail is probably far just along in terms of actually adopting and deploying and the others are piloting.

And finally, while it appears that the education market, and I know you folks have been focused – have that success with large installations. Over the last couple of days, I’ve been visiting around with a couple of your competitors, one very large and one very small one, your size out in Long Island. All talking about how wonderful the education market is for them or could be for them and looking at whether or not you are – you know how far do you think you are in integrating or getting involved in both the inside the dorm, inside the commercial building versus campus ID itself. Are there areas in education that you feel you might be able to play a role or are you going to leave that to other companies and focus on government and the vertical markets that you just talked about?

Yes, so its good clarification. So we captured it all on SLED, State, Local and Education as a market. So when I talk about government, I actually include education for the most part and we're in a number of the major community colleges for example, Santa Monica Community College, Huston Community College, some of the units on the others as well as school districts and we're finding a lot of adoption happening is with the wireless infrastructure. So wireless locks and the ability to lock down across the campus and across the buildings, as well as selective unlock, you know all of that and we are very active in that space. Perhaps we should focus on it more and emphasize it more, but we've been in it for so long that we don't always emphasized and separated from out of state and local government initiatives. But schools are certainly very important as an infrastructure that needs security and the inspectable security.

While you’ve been in it a long time that area, you consider that an area that’s reached critical mass for you at this point?

It's so big frankly, it's hard to say that it's – it certainly meets critical mass in terms of virtually all of our regional managers have several educational institutions in their reasons and so they'll know them well and we've typically got multiple products of ours going in. And especially our Velocity 3.7 that we launched in the first quarter, that has very smooth wireless lock integration just particular for the Schlage locks. So it is at critical mass, it's nowhere near saturation. There is a long way to go in education.

Okay, great. Thank you very much and congrats on a great quarter.

Thanks Jeff.

At this time this concludes the company's question-and-answer session. If your question was not taken you make contact Identiv Investor Relations team at I- N as in Nancy, V as in Victor, E at Gateway IR.com. I'd now like to turn the call back over to Mr. Humphreys for his closing remarks. Please go ahead, sir.

Okay, thank you and thank you all for joining us. As always we’ll keep informing the investor community as we go forward. Next week we will be in New York at the Oppenheimer Emerging Growth Conference and Houlihan Lokey Industrials Conference and then in June of course we’ll be at LD Micro Invitational in Southern California. So we look forward to driving the business forward and to continuing to keep you all informed as we make progress. Thanks again and have a great evening.

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