Identiv, Inc. (INVE) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Identiv’s Second Quarter 2019 Earnings Call. My name is Claudia, 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-Q. Identiv assumes no obligation to update these forward-looking statements, which speak as of today. I will now turn the call over to CEO, Steve Humphreys, for his comments. Sir, please proceed.

Thanks, operator, and thank you all for joining us, and especially, thanks for joining us for this particular business discussion today. With the second quarter, our business has turned the corner on virtually every business metric. We had the first positive quarterly EPS from business operations since 2007, positive cash flow from operations and increased cash balance, improved working capital accounts and most importantly, strong business progress across the board. Historically, we’ve consistently had a substantially stronger second half than our first half and the underlying business strength makes us confident, that will be the case again this year. With an expanding revenue line, steady or improving gross margins and controlled costs, we expect the progression of earnings and positive cash flow will continue for the balance of the year. As I’ll discuss in more detail later, our software and services revenue grew 47% year-over-year. In addition to this absolute dollar growth in software and services, it’s now 12% of revenues, up as a proportion of our revenues of about 9% a year ago. Now our recurring revenues, which makes up the majority of our software and services, are now consistently a meaningful portion of our revenues, currently running at about 8% of revenues. So we’re going to start to break out our recurring revenues and track progress there going forward. In addition to tracking the numbers, we will report on the business activities that we think are going to expand our recurring revenues, which include the launch of our cloud-based subscription services platforms for our Freedom, Velocity and SMB access products. We’ve had them in pilots and even generating revenues for a few of our select partners in prerelease, but we’ll be launching formal releases over the next several weeks and months. So the overall business strength and growth prospects clearly are broad based and hitting scale to generate profitability and cash flow. Now looking at the segments. Premises grew 21% over the quarter a year ago, as we continue to generate growth and take market share. The strength of our total solution is really proving out now. If you look at the top 10 customers, four of the top 10 are primarily customers of our 3VR video analytics platform. This is up from zero of the top 10 a year ago. And remember, we acquired 3VR over a 1.5 year ago. So these are all customers who’ve grown into this top 10 position as part of our total solution, not just bought into that position. The addition of the Freedom, Liberty and Enterphone product lines from Viscount have really rounded out our solution. So we’re now clearly the only company in the security industry that brings to our customers full access control systems, access readers, our own access cards, video analytics, mobility, RFID and smart card readers to use to secure credential for data access. I will go into more details of the competitive advantages and business model advantages this brings us in the later part of the discussion, but it’s really showing in our customer mix and in the wins we’re getting, as well as the expanding strength of the financial model that’s created by having our uniquely complete security platform among our otherwise fragmented and often frankly subscale competitors. On the Identity side, our smart card readers grew 11% year-over-year, partly offset by an expected reduction in access card sales where we focus on our higher margin TS Cards and Mifare cards and tightened up on our lower margin third-party products. Now, you can see the beneficial effect of this in our increased margins for these products. In line with the Identity segment itself, our RFID products were up about 1% for the quarter. But our pipeline and recent wins in RFID give us great confidence that we’ll see a return to the 30% to 40% growth range for the second half of the year in RFID. For example, one of the wins during the quarter was a multi-year agreement with Schreiner Group to provide our RFID solutions for device level authentication for one-time use medical devices in hospitals. This win really showed our leadership in IoT solutions and showed that we’re winning worldwide. I’ll give some more examples in my later comments, but this is a sort of multi-year high-value win that underpins our confidence in the expanding growth for RFID. One more RFID industry event that I want to highlight from the second quarter is the launch of Mattel’s Hot Wheels ID. Now this puts an NFC RFID device in every Hot Wheels ID card, which then creates a unique identity for each car and lets you track your car’s performance, race remotely against friends and even transfer your cars real world performance in the virtual races and games. This converging of the physical and digital world is what we’ve been positioning our business for and Hot Wheels’ ID is really a great example of leading companies deploying exactly the vision we’ve had. Just as I mentioned companies in the physical security space are adopting more and more of our complete digital software defined platform in the Premises segment, we are seeing leading companies in the RFID space adopting our vision for where that technology can take their products and their experiences and their engagement with our customers and therefore their monetization of their business model. So you can see how our second quarter results showed the inflection point we’ve reached for our business. This is because the scale we’ve reached as well as the underlying business momentum and entrenched competitive advantages we’ve. This is why I said at the beginning, I was especially looking forward to this business discussion today. We think we’re at the point of a profitable positive cash flow competitively defensible and long-term growth business opportunity as our entire industry transforms. We think this is going to be a multi-year transformation that we’re at the front of, and the second quarter results really reflect our position at the front of the cycle and our establishment of a leverage business model right now that that transformation is hitting. Overall, the second quarter really showed our momentum and business model, as well as how we’ve controlled costs, done accretive acquisitions and positioned ourselves to win from our industry’s transformation. So after Sandra goes through the financial highlights, I’ll go into some more of our business execution, industry dynamics and the outlook for the rest of the year. So let me turn this over to Sandra now.

Thanks, Steve. Before we dive into our Q2 financials here are a few key metrics that we think are important in analyzing the progress and performance of our business. The first one is growth, as represented by our second quarter 2019 revenue, which is up 10% compared to the second quarter 2018; both organic and inorganic growth drove the increase. This brings our first half of 2019 growth rate to 13% over the first half 2018 and our trailing 12-month growth rate to 21%. It’s also important to note that 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 become more consistent in our results and drive higher margins as well. This part of our business grew to 12% in the current quarter, 13% on a trailing 12-month basis and a 417 basis point increase over the prior trailing 12-month period. Our GAAP and non-GAAP gross profit margins have steadily increased over comparable periods based on our stronger sales of higher value-add solutions. With the second quarter 2019 and trailing 12 months, non-GAAP adjusted profit margins steady at 46%, up 482 basis points over the prior trailing 12-month period. In addition, based on our strong growth profile, shift to higher margin mix and consistent OpEx management, this will be the 12th straight positive non-GAAP adjusted EBITDA quarter in a row. This quarter, our trailing 12-month period non-GAAP adjusted EBITDA margin hit 10% over double our comparable trailing 12-month. In addition, we delivered our first quarter of positive EPS since the fourth quarter of 2007 with the exception of Q4 2012 where the Company recorded a GAAP net income of $0.2 million as a result of a nonrecurring $1.4 million benefit for income taxes mainly related to impairment charges taken earlier in 2012. We are also highlighting our second consecutive quarter of generating positive free cash flow, a key metric in our ability to operate the Company efficiently and generate additional cash to provide optionality for Company growth. On our next slide, our revenue in the second quarter was $22.2 million, a 10% increase compared with $20.3 million in the second quarter of 2018 and a 14% sequential increase compared with $19.5 million in the first quarter of 2019. Our Premises segment generated 48% of our total second quarter 2019 revenue or $10.7 million, an increase of 21% from the second quarter 2018 and an increase of 14% from the first quarter of 2019. Total first half revenue generated a 23% increase from the first half of 2018. Comparative quarterly increase was primarily driven by sales of Freedom, Liberty and Enterphone MESH products and services following the acquisition of Viscount in January 2019, higher sales of video technology and analytics software products and related support services, as well as higher sales of physical access control solutions and software sales. The quarterly sequential increase was primarily attributable to higher physical access control solutions, as well as higher software sales. Revenue from our Identity products, which includes the sale of physical access credentials, smart card readers, reader modules, transponder and mobile security products was $11.6 million in the second quarter 2019 or 52% of our total revenue. This increase – this represents an increase of 1% from $11.5 million in the second quarter of 2018 and an increase of 13% from $10.2 million in the first quarter of 2019. The first half total revenue generated a 6% increase from the first half 2018. The comparative quarterly increase was driven primarily by sales on all products, offset by a reduction in revenue from our lower margin access card segment as we discussed in prior periods. This shift in access cards as you will see actually contributed to higher gross margin rates and more absolute GAAP gross margin dollars for this segment versus comparable quarter 2018. The sequential quarterly increase was primarily due to higher sales of smart card readers, access cards and transponder products. This increase was partially offset by a large bulk order of mobile security readers to the US Navy Reserve in the first quarter of 2019. Now turning to our GAAP – our gross margin. Our GAAP gross profit margin was 44% in the second quarter of 2019 compared with 45% in the first quarter of 2019 and 40% in the second quarter of 2018. By segment, our GAAP gross profit margins continued to be strong and stable; Premises at 56% Q2 2019 versus 47% in the prior quarter where we had previously disclosed a nonrecurring charge related to inventory valuation and 55% in the comparable quarter 2018. Identity at 34% Q4 2019 versus 42% sequentially, where we previously disclosed a nonrecurring bulk shipment of Thursby Software solutions and 29% comparable in Q2 of 2018. On a non-GAAP basis excluding certain noncash items, our gross profit margin was 46% in the first and second quarters of 2019 compared with 42% in the comparable quarter second quarter 2018. The comparative increase in both GAAP and non-GAAP gross profit margins was primarily attributable to product mix. If we turn to the full income statement per the earnings release, our GAAP net income attributable to Identiv Inc. for the second quarter 2019 was $0.4 million compared with a net loss of $0.8 million in the first quarter 2019 and a net loss of $2.7 million in the second quarter of 2018. We are recognizing the dividends on the Series B preferred stock quarterly, which reduces the net income attributable to common stockholders, bringing it to $0.2 million or positive $0.01 per share compared with the second quarter 2018 loss of $0.18 per share. We’ve provided here 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 is lower at approximately $0.2 million for the second quarter of 2019 compared with $0.3 million for the first quarter of 2019 and $0.5 million for the second quarter of 2018. Noncash stock-based compensation remains at approximately $0.7 million in the first and second quarters of 2019 compared with $0.6 million for the second quarter of 2018. Depreciation and amortization increased to approximately $0.9 million for the first and second quarters of 2019 compared with $0.8 million for the second quarter of 2018. This increase was primarily related to the amortization of acquired intangible assets associated with the acquisition of Thursby and Viscount assets. Now moving to our operating expense management, which is included in the next graphic on the webcast presentation. Underlying the continued management of non-GAAP operating expenses as a percent of revenue, is a relatively flat expense base, which we have managed to normal seasonality and multiple acquisitions. For the second quarter of 2019 per our earnings release, our total GAAP operating expenses were $9.1 million comparable with the first quarter 2019 and a decrease of $0.1 million as compared with the second quarter 2018. Our total non-GAAP operating expenses adjusted to exclude restructuring and severance costs and certain noncash items normally excluded from our non-GAAP results, such as stock-based compensation, depreciation and amortization, as well as additional non-GAAP items consisting of acquisition-related transaction costs were flat at $7.8 million in the second quarter of 2019 and 2018, as compared with $7.9 million in the first quarter 2019. The graph shows the continued integration in leverage we are achieving with delivering top line growth and steady operating expenses. On a non-GAAP basis, our R&D expenses for the second quarter 2019 were $1.9 million, compared with $1.8 million in the first quarter of 2019 and $1.6 million in the second quarter of 2018, representing 9% of total revenue. Non-GAAP sales and marketing were $4.1 million in the second quarter of 2019 compared with $3.9 million in the first quarter 2019 and $3.8 million in the second quarter 2018, representing 18% of total revenue. And lastly, our non-GAAP G&A expenses for second quarter 2019 were $1.9 million compared with $2.2 million in the first quarter 2019 and $2.4 million in the second quarter 2018, representing 8% of total revenue. Bringing all the pieces back together, given our strong growth profile and ongoing cost management, our non-GAAP adjusted EBITDA gain was approximately $2.4 million in the second quarter of 2019, 2x the $1.2 million in the first quarter of 2019 and 3.5x the $0.7 million in comparable quarter 2018. We believe that our business model is positioned to continue to accelerate towards generating positive and profitable growth. Now, if I could turn to the balance sheet, we will be comparing our position at June 2019 to the position one quarter ago at March 2019 and the prior quarter ended June 2018. Cash at June 2019 was $11.1 million compared with $8.9 million at March 2019. The $2.1 million net increase in cash for the quarter was primarily comprised of a source of $2.1 million cash driven by our net income excluding noncash items, a $1.1 million cash used in operating assets and liabilities. With a de minimis amount of capital expenditures, our free cash flow generated was $0.9 million. This trend reinforces our ability to effectively run the Company and generate cash for future uses while retaining excess availability on the line of credit of up to $20 million if needed for sprint capacity. Under financing activities, we had $1.2 million net cash generated by a $1.4 million net increase in borrowings under our East West Bank revolver, offset by $0.2 million tax payments related to RSU releases. And lastly, there was a small $0.1 million impact of foreign currency fluctuation. In our 10-Q filings, we will be providing a full reconciliation of the quarter end cash flows. For completeness, we’ve included the full reconciliation of non-GAAP adjusted results to GAAP and the full balance sheet per the earnings release in the appendix. In the context of our target business model, we’ve delivered what we set out to do, grow and achieve non-GAAP adjusted EBITDA profitability for 12 quarters in a row and we achieved net income profitability for our stockholders, ahead of expectations and for the first time since quarter four of 2007 with the exception of Q4 2012 when the Company recorded GAAP net income of $0.2 million, which was a result of a nonrecurring $1.4 million benefit for income tax mainly related to the impairment charges taken earlier in 2012. As we head into the third quarter 2019, we expect to exhibit many of our target metrics within select quarters of 2019. Today, we are reconfirming guidance for the consolidated results of the Company for fiscal year 2019. With that, I will conclude the financial discussion and pass it back to Steve.

Thanks, Sandra. As you can hear from the financial results and from my opening comments, we’re at the inflection point for profitability and sustained positive cash flow. Another question, any investor will have is how defensible is our position? How leveraged and scalable? And what’s the size of the opportunity? I’d like to focus on defensibility here because that’s where long-term growth and an attractive business model come from. On the other two points though, we’ve demonstrated the leverage we get and our ability to control costs while driving growth and expanding margins. And anyone who follows and invests in our industry knows the massive scale of the market opportunity as the entire physical security world transforms and security becomes digital, software defined and relevant for every individual place, every person and everything. So back to defensibility. Why do we think we win? What’s our defensible competitive advantage? The answer is, the total solution platform we’ve built and our ability to deploy it on conventional infrastructure in hybrid modes and as a fully cloud-based mobile enabled software defined solution. Customers know they need to get from here to there. They want all the benefits, but they need to solve today’s problems today, position for tomorrow solutions and do it with 100% reliability throughout the transformation. Our strategy is to provide all the key components of the security solution and to make sure they work seamlessly but also leverage standards and integrations so we can manage heterogeneous environments. This last part is really critical to integrate with the customers’ physical security and with their existing IT infrastructure. This is a major change. Security like video surveillance, access control, key cards and all the rest of the security infrastructure has stood to the side, mostly making sure it didn’t touch the IT and broader organizations infrastructure. Those days are gone, and that transition is the huge disruption in the industry that we’re really best positioned to take advantage of. So why do I keep saying we’re best positioned? Think about our product line. From Freedom and Liberty for pure IoT based access control through our Hirsch velocity access control platform both enterprise level and cloud enabled, our touch secure range of access readers, our TS Cards with compatibility across every card standard, our 3VR video analytics, our Enterphone entry and audio intercom systems, our Thursby mobility applications, our secure login smart card readers and our secure RFID devices. Every customer uses virtually every one of these capabilities. Now they’re usually cobbled together from a half dozen vendors. The result is a very expensive to manage system, very hard to maintain security protocols and no leverage from the huge investment they’ve already made in their own information infrastructure. Our vision is seamlessly interoperating, highly manageable all with secure platform that leverages and augments the existing physical security and IT infrastructures. From the product range we put together, we’ve got the solutions already. So let me try to make this concrete. Think about where you are right now, whether you’re in an office, on airport or anywhere else, you’ll always see those door readers to let you into a door, there is always an access system behind those readers to open the doors or keep them locked, you probably used a key card to get into one of those doors, and you probably see video cameras around you or there is some nearby with analytics behind them. If you came into the building, you might have used an intercom building system to get in, if it’s not you’re building. If you’re part of a progressive organization, you’ll probably have mobility solutions to get into the doors with mobile apps and to get to your critical data from your phone. And wherever you are, if you look closely enough, you’ll see RFID devices connecting hundreds of the things around you and securing them. For example, access cards themselves, which I mentioned earlier, as well as those door readers, they’re all RFID devices. So the point is, virtually every customer needs every one of our products. There is a buyer for all the components of the infrastructure I just ran down, but right now, if they buy from any of our competitors, they have to go to multiple ones and then they have to manage multiple ones. So our industry grew up so proprietary, so siloed that no other vendor that we know of provides all the parts of the solutions I just described, which we’ve. And yet when an industry is getting so much more complicated, customers want solutions that just work very Apple like. At a minimum, if you’re selling a customer one part of the solution, if you have other parts of it, you’ll always get a look from your customer for your other products. Trusted relationships are so precious that we all want to buy more from the people we already trust. So if we’re selling our Velocity, Freedom, Enterphone, smart card readers, Thursby mobility, 3VR analytics, TS access readers or anything else, a customer is already using any one of our products will give serious consideration to our other products. So let me give a quick recent example of this in our own marketplace. We were recently involved in a deal with the US Army for their new health clinic, which will be part of the US Army Medical Command. The army was looking for one company to provide a complete physical access control system solution for a 100-door clinic. They decided to deploy our Hirsch Velocity software for security management, our Mx edge controllers and our FICAM-certified TS government readers. Now they’re planning future security infrastructure to include our 3VR, VMS analytic solution for channel surveillance. Now, additionally this is the DoD facility, so our smart card readers are already being used for secure login for the laptops and desktops. Now we haven’t gotten TS Cards and Enterphone systems adopted into this account yet, but you can be sure, since we’re on the inside already as a partner for so much of the solution, we will have the opportunity to keep on sharing the benefits of our mobility and identity solutions and intercom solutions. Also, as I think about transforming their infrastructure to cloud-based mobile enabled software defined, either on a systems or services basis, we’re there with Velocity cloud, Freedom and Freedom Cloud, our mobile and web apps, and these are all solutions they can migrate to seamlessly and at the pace and budget they want. So you can see how our total range of solutions gives us a huge advantage. This is what we’ve been building and are now seeing adoption across all of our verticals. And I could give you a dozen examples like this that are well underway and several dozen that we’re lining up for demonstrations of the one Identiv solution. Most importantly, customers are asking us what additional parts of their needs we can help them with, and we have the total solution ready for them, which they can then adopt when, where and with what budget they choose. We’ll be showcasing our entire suite of solutions at the Global Security Exchange Conference next month. Now you might know GSX by its former name as is, which is one of the biggest events in our industry like ISC West, which was a huge showcase for us. The significant majority of customers that attend aren’t just interested in one or two of our solutions, but virtually all of them especially now that we’ve built out the portfolio with Freedom, Liberty, Enterphone and some of our recent product launches, we’re getting even stronger traction than we had when we showcased the beginning of the platform last year. So customers are really starting to see us as the one-stop shop trusted provider of IoT platforms for all things identity and physical security across access, video analytics, RFID, mobility, you name it. And their actions are starting to show up in our financial results. We’re seeing our vision of cloud-based software-centric and mobile-enabled digital access becoming a solution customers are demanding. When they investigate vendors’ capabilities, they find that we really are the only company they can turn to for control over the total solution and clean integration with their IT infrastructure. So the second quarter was a major step forward for Identiv. As we continued our top line growth and margin expansion, while reaching GAAP profitability on a shareholder level for the first time in over a decade. More importantly, frankly is the integration of Freedom, Liberty and Enterphone along with the growing cross selling pipeline and customer adoption that we’re seeing. This is the foundation for our growth going forward, and it’s also the core reason our software and services grew at that 47% rate, and that our customers are now comfortable committing to recurring revenues in their relationships with us. As we drive our cloud subscription services more aggressively going forward and as more of the total solution becomes available as a service, we think we’ll see continued strength in recurring revenues, software and services. Now the growth in recurring revenues are critical in themselves but now in particular, they really drive our business model as we are reaching scale, driving margins and growing our profitability. Q2 is a great example of these factors coming together. We continue to see a long runway for growth, margin expansion and EPS accretion as we move closer to our target model. Now about that target model as you might recall, we’ve moved past what we used to have as our near-term model, past our medium-term model and now we’re on our clear path to what used to be our long-term target model and that was just our target model. But as you can see with the numbers, we are rapidly converging that model. So from a business perspective, we have the most complete solution, the progressive architecture, the customer base and customers demand and complete IT integrated platforms, all of which are driving our business forward. As a result, we think we’re on track to deliver our financial guidance for the year, as Sandra mentioned. Particularly with the government’s fiscal year-end this quarter, we think our Hirsch, TS reader, Thursby and smart card reader products are positioned for near-term strength. The increasing endorsement across all of our verticals of these products, as well as our Freedom, access cards, RFID and 3VR video analytics, gives us strong momentum in both our business segments for the rest of the year. So to wrap up, you can see the solid competitive advantages we built with virtually all of our verticals undergoing a massive transformation that’s the convergence of physical and logical security. We’ve strengthened our people, products, technology and channels to aggressively go after these opportunities. The results are showing across every metric. You can see the progress of our strategy, helping us get better visibility to recurring revenues scale the business, accelerate our growth and drive higher profitability. So with that, I’ll turn it over to the operator to open up the call for questions. Operator?

Thank you. We will now take questions. [Operator Instructions] Our first question is from Mike Latimore with Northland Capital Markets. Please go ahead.

Great. Congratulations on the excellent quarter there.

Thanks, Mike.

Just thinking about the second half of the year, sometimes your fourth quarter has been higher than your third, sometimes third higher than fourth. How are you thinking about it this year?

We think there will be a little bit of our usual seasonality with government year-end. So third would be a little higher than fourth, but fairly close because fourth should be strong, particularly with the RFID pipeline we’ve got.

And in terms of the – you have the sort of full product portfolio now, One Identiv. So sometimes when you try to sell everything to a customer, the sales cycle can slow, but it sounds like in this, like with healthcare example that you’re able to kind of sequence things, but how should we think about I guess one sales cycle selling kind of the full portfolio into what is kind of the uplift for customer in terms of value, if you can kind of sell everything?

Really good question. And this is where the fragmentation of the market kind of helps us. It’s typically the customer is really targeting to buy one part of the solution, like the army they were looking for access control. And with access control came in readers and that’s great, and then we were able to position 3VR as their next deployment phase. So it didn’t slow down because the contract officer was letting the RFI for access control. So it doesn’t seem to be slowing things down. And you’re right, we want to make sure we don’t end up turning it into boil the ocean sales activities. It’s, get your rifle shot, have the rest of the portfolio, which you all need. But usually they are turning over parts of the infrastructure at different times. It’s rare that they’ll be turning over access and video and ID cards and cyber access at the same time. So we think we can spread it out that way. Then in terms of the value of the customer, you know, single customer, it’s hard to quantify, but the goals in the profiles looked like, you know, instead of a customer being worth anywhere from $0.5 million to a couple of million dollars, we should be able to double the value of each customer. It’s of that magnitude.

And then just last question. You talked about, I think, Hirsch, TS reader, RFID and you see strength in the second half in those areas. Any other areas that you’re seeing strength or weakness in the second half?

So, Hirsch, TS readers and Thursby particularly because of the government exposure. Freedom with more of the commercial fourth quarter strength that you see there, as well as RFID with both third and fourth quarter, that’s much more pipeline driven than any particular seasonality. So there is pipeline and strength across the board, but the first couple of because of the federal government. I would add – of course, smart card readers are generally strong in the third quarter because of the DOD CAC reader cycle.

I have to get my kid on of those Mattel ID cards for Christmas this year.

They are super cool, if you haven’t seen them on YouTube, they are very cool.

Thanks a lot.

Thanks.

Our next question is from Jeff Kessler with Imperial Capital. Please go ahead.

Thank you. With regard to your defensible position, you do have one major competitor out there who probably would take issue with – but they may be lacking in a couple of areas. I’m just wondering are you finding that end users are talking to you in a different way than they are talking to your competitor? And what I’m trying to get to is, are you able to show your value proposition to the extent that you’re convincing customers to use you and not a larger company?

Yes. So, actually, I’d love to hear you think might have the full range we have, but…

There will a competitor to a company I’m about to ask you about them next.

Okay, fair enough. Because we really don’t see somebody who has it all, even HID who is the closest, they don’t video solution and everybody needs video and they don’t really have an access control solution, they got panels and they got mercury panels, but they don’t have the full solution in a lot of spaces. So anyway, back to your question. Yes, customers are turning to us for two reasons; one is the full solution and it’s getting so complicated, in particular when you’re trying to maintain your security protocols, you’ve got to manage all of your endpoint devices in all of your attack surfaces, and if you got five vendors that you’re trying to run patches out forward, it’s much more complicated than if they go to us and say, okay, have all the patches for the latest worm virus has been pushed out. And then the other aspect is, we are progressive in our architecture. We aren’t trying to tie them into a panel-based hardware system and no path forward. We’ve got software enabled architectures, we’ve got edge devices, we’ve got cloud solutions and we are getting to the point of having fully containerized apps that can even run on IT infrastructure. So they see the direction we’re going. We’re not trying to tie up and we’re not beholden to making numbers because we’re part of some multinational company. We’re trying to drive the industry and grow our business and that’s our absolute focus. And I think the customers see that, in fact, I was – just before this call, I was at a major tech customer here in the Silicon Valley and they have exactly that vision and exactly that problem with some of the legacy infrastructure.

Do you think we’re finally seeing the end of proprietary technologies and the beginning of a world in which everything has to be open for both APIs and because it does cut down on margins in the view of some people, but it obviously helps a company like you if you can offer a multiplicity of solutions?

So, I absolutely see that path and it’s irreversible and it’s going to happen. To be clear, we’re pragmatic and this is very similar to when telephony went from PBXs to IP infrastructure and now to Twilio type infrastructure. So that was that 30-year process. I think it’s going to be a 10-year process before you’ve got more than half the revenues that are of the more software-defined architecture takes a long time to change these things, but I think everybody who is investing capital these days, any major corporation doing an analysis, they are already thinking about this in their planning for the future. But there is still stuck with, yes, but today, I’ve got 10,000 of these panels deployed worldwide and I can’t rip them all out, but they’re all talking to us about, how can we migrate and how we can get from here to there.

One final question of about a couple of months ago, you announced integration of Allegion and you announced an integration of some of the Schlage – of some of the Schlage Wireless Locks that they have out there. Does this open up a – because – since Schlage is so involved in spec writing and architects, does this open up a new market to you that you had been perhaps not been able to capture before?

And there’s two aspects to it and Schlage has been – Allegion has been a tremendous partner, both the individual people and the teams and the technology. And two aspects, one is the partnership. They’ve got almost 300 salespeople for wireless lock infrastructure and they’re very supportive and proactive that way. And the other part is wireless, more and more is going to go wireless and is there new wireless protocols that really pervade – we’re putting more wireless capabilities into all of our infrastructure whether it’s edge devices or the door readers and I think they are at the head of the curve as well at this whole information transformation. Wireless is going to be a fundamental part of it. Now of course assuming the wireless, you’ve got to have the security, right. You really got to have PKI infrastructure because that’s the only way to secure wireless infrastructure properly. So it’s been a really good partnership.

If you permit, just one last question and I promise I’ll get off. And all of these shows that you discussed whether it’s ASIS or whether it’s ISC, companies have been talking about integration – companies with a lot of different products have been talking about integration and unification now for four or five years and really there is still some [indiscernible] with being able to put these things together. Again, most of these are very large companies with large product portfolios and they’re trying to convince people that they can put together – that can integrate and put it in for them, and you are saying that you believe that your product and services capabilities are fully unified and integrated at this point.

There is always more you can do in terms of integration for sure across the range. I mean, I’d love to see more of our RFID technology integrated into our security platform and infrastructure and we’re not that far along on that front. But when you talk about video and access and obviously readers and cards and even cyber security integrated, it really is quite integrated and one of the important integration parts is AD integrates – active directory integration, right. It’s with the IT restructure, so you got to be seamless with, and again, I was just having this conversation with a customer this morning, that it’s not download a bunch of data from AD and then bounce against that data and then upload another image of it, it actually interact with the AD infrastructure of the organization you’re working with on a transaction-by-transaction basis, and then you’ve got an integrated system. And that part, we do have, and that part we’ve been built from the beginning. So I don’t want to overstate it because there’s always a lot of integration to do, but we really are quite far along there and when our corporate customers, in particular, look at it, they are impressed that it’s an integrated architecture approach we’ve been taking versus the silo that just kind of reaches out and leverages things.

Okay, great, thank you very much and congratulations on getting profitable. Thank you.

All right, thanks a lot, Jeff.

Our next question is from Nehal Chokshi with Maxim Group. Please go ahead.

Yes, thank you. Nice set of results. Thanks for the color there regarding the components of the 10% year-over-year growth that both comes from organic and inorganic. I guess, one of the things that you just described, Stephen, was a more qualitative way that you are seeing strong evidence a good return on the acquisitions that have been made by signing that some of your 3VR and Viscount customers have grown into a top 10 customer. Any way to provide a little bit more of a quantitative assessment as far as what has been the actual return that you’ve gotten on these investments? I would imagine that it might be quite material given that these were not large acquisitions in terms of dollar amounts.

It’s hard to quantify them specifically, but in terms of the nature that they’ve been very positive, yes, you just need to look at the acquisition prices we paid for each kind of in that $5-ish million plus or minus range for each of them, and 3VR, you can clearly see the contribution there that they’ve already returned a multiple of that on the top line. And similarly with Thursby, we’re right in the fourth quarter and the first quarter, we had pretty substantial contracts multi-million dollar revenue recognition coming through. And Viscount, it has been performing above our expectations already, and you’ve heard me talk about Freedom, Liberty and Enterphone. So I’m not trying to avoid it, just very hard to quantify it specifically. But the performance of the businesses themselves and the cross selling opportunities that each of them have brought and the credibility and scale that it gives us with their customers is actually beyond what would we thought they contribute. They’ve really been winners. I mean, execution is hard and we certainly had plenty of challenges and lots of working with people at an individual level. But now that we’ve got a few quarters behind our belt for all of them Viscount being the most recent, we really see the benefit both in just the raw business they brought in, but in the complete solution in the cross selling.

And then on the software and services, maintaining very high growth rates here. It looks like there is some seasonality there as I believe it was down QoQ, is that correct and B, what’s the driver of that seasonality, and then how should we think about the seasonality going forward?

So, actually the standalone software and services as a percentage of revenue in Q2 was down on a percentage of revenue, but that’s just because our revenue went from $19.5 million to $22.2 million. So on an absolute basis, it’s growing. It’s just a smaller percentage of the total for that as we’re ramping through the second half of the year.

And then in terms of your seasonality question, yes, there really is some seasonality in it. It’s just – we’re still small enough at $20 million to $25 million a quarter that a couple of deals can drive the absolute dollars in any given quarter, but it’s – we think it’s growing on a sequential basis, overall, and as a percentage – as a portion of our business.

And then my last question is that, let’s see, how was learning early within the quarter? How would you describe that?

Well, we are a tech company, so we always have some back-ending to it. And the third quarter, there is always some back-ending because the federal government year-end is the end of the quarter and it is what it is. So it’s always back-ended somewhat. On the other hand, we’ve got a lot of visibility going into the quarter, we end up pretty close to where we expect to end up because we’ve got long-term pipeline and contracts, we’ve got, as I mentioned, the recurring revenue portion that’s growing, and then we have long-term programs and projects as we talked about there won’t be a contract per se, but we know government agency for example is rolling out several hundred sites over several quarters. So we’ve got a lot of visibility there. So it’s certainly a bit back-ended, but that doesn’t reduce our visibility into the quarter.

I guess I should ask the question, how was linearity in the quarter relative to a year ago relative to what typical Q2 represents?

Good question. I don’t know that – it certainly wasn’t out of the ordinary, if that’s what you’re getting at, has it flattened out a lot over the period over the years? I wouldn’t say so. It’s more driven by – sometimes we’ll have a larger deal come in sooner and we’ll fulfill it. But the linearity hasn’t changed too much. But I’m trying to make sure, am I answering the question you’re trying to get at?

Yes, I think you have. I’ll come out clear what I’m actually trying to get out now. So DSOs was up year-over-year, cash receivable was up 17% year-over-year versus revenue being up 10% year-over-year. That being said, I think that your Q2 2018 was at relatively low DSOs, so that’s the way I was framing up that question to understand if it was indeed – if Q2 2018 was indeed a little bit better DSOs for whatever reason there might have been, whether it was linearity within the quarter or related to how some of the deals basically timed out or the payables terms associated with maybe some larger deals.

I’d have to go back and Sandra is flipping back a little bit right now. We’d have to go back and look at it that might have been a quarter in which we had a big reader deal early in the quarter. But I’m – we’ll look at it and we’ll get you some more data. I will let Sandra see some.

So, we have the DSO – so, Q2 2018 was 55 days and Q2 2019 was 58 days. So it’s not shifted materially. We are seeing some longer terms as we get into these multi-year agreements or we are in with these larger enterprises that we’ve talked about that’s driving a little bit of our aging that’s in receivables, but we haven’t seen a significant shift in DSO.

Okay, great. Thank you.

Our next question is from William Gibson with ROTH Capital Partners. Please go ahead.

Thank you. Steve, you gave us guidance that RFID picks up 30% to 40% in the second half. Now was that on orders already booked? It sounded like it was, and so that if we see large orders announced in the second half, is that additive to that?

It’s a bit of both. So I mentioned the Schreiner win and there have been a couple of others that are multi-year contracts that are providing the base of that and then it’s pipeline that adds more to it. But yes, because of the lead times within RFID, most of it has to be either under contract or very close if it’s going to be hitting in the third and fourth quarter.

And secondly, could you give us a little color on the video and analytics business and I’m speaking them a competitive front where we’ve got a relatively small competitors out there. Are you picking up share from cross selling or just new orders coming in that area?

It’s a good question. It’s a bit of both. Our approach to analytics with 3VR with our event cards whereby we pre-index the metadata out of the camera and so you don’t have to ship around as much data. It’s a lot lower cost to store which people are really starting to run into as a problem, especially if they are storing it up on the cloud and they’re getting charged for it and it’s a lot faster to do the case management aspect of it. So the case management positioning, we’ve got for 3VR and the managing the data, which means you don’t have to store as much, which means is lower cost to operate, are really advantages that are resonating. We’re seeing that in cross-selling and we’re seeing that in greenfield sales where especially the case management when an event happens, we’re looking at some sales into some major sports venues. And if something happens in a stadium, they want to immediately identify it, grab the video, rap it into a case, get it over to law enforcement and 3VR is really designed specifically for that. So we’re seeing some advantages there. There is some cooler, wheezier machine learning, all singing, all dancing facial recognition. But the real use case is – that real security people have to deal with is the one I just described and that’s where we’re particularly good at. And then the last thing of course is the Made in America benefits us with some cross-selling in a lot of our federal government and regulated industry customers.

Thank you.

Sure.

Our next question is from Robert Hellauer with Casey Capital. Please go ahead. Please go ahead.

Hi, guys. Thanks for taking my question. I know we’re running up on an hour, but great results and my main question is around the Defense Information Systems Agency and their release of the strategic plan recently. And I think that was posted in early July. About a week later, there was an article detailing that I think the Navy decided to rollout a customized version of the Thursby Sub Rosa to their to the Navy reserve. Is that – can you guys just comment on that? Is that – how should we think about that rolling out over the next four to six quarters and is that for all the reservist or just some? Any color on that. And then to the extent you have any color on other departments within the DoD, that would be really helpful as well.

So yes, Navy reserves has rolled out about half of their 60,000 reservists. So there is still activity there. Then also, we’re looking at additional capabilities, which you were asking about is the R2S app, the Ready-2-Serve app, which – if you – if anybody googles it there is some great YouTube’s about R2S works, which is basically Thrusby software we designed the R2S app and designed it to the reserve specs and so they have their UI and splash screens on it. And of course their email and websites that they want the reservists to access. So that’s really just the beginning. What the DOD CIO is assessing right now, which this is part of is, what should be the mobility architecture going forward, and Thrusby and related apps like R2S, are the only ones that are currently being deployed in volume for pure BYOD web and email access. And so the various users of it, of course, are putting effort as the right architecture for overall DISA and DOD. And there is – I certainly don’t want to go into specific departments or any, but there are several departments just assessing it. And we already disclosed that the Air Force has deployed a similar number to reserves across various Air Force wings and they’ve consumed all 31,000 of the licenses that they had initially contracted for. So we think it’s a marketplace is going to have a lot of runway for us.

And then, you also mentioned earlier in the call that the 3VR backlog – you had mentioned that there are several customers, you know, top 10 customers that are now from the 3VR in that. I think you mentioned that the backlog for the second half is looking healthy. Can you just give us a little – can you contextualize those comments around where you’re seeing success and how we should think about that evolving over the back half of the year?

So in terms of 3VR, you got it right that customers are coming into our top 10, which means of course their growing substantially. I don’t think we specifically comment on backlog related to specific product lines. Sandra, did I?

No. It was more about the comfort level going into that strong third and fourth quarter.

Yes, exactly. So, what we did – yes, exactly. What we did comment on is our second half is almost always stronger than our first half and we certainly don’t see anything that would cause us to feel differently about that. We feel like we’ll have our typically strong second half and maybe even a little bit stronger than normal because where we’re going in with strength across the board and a fair amount of cross-selling opportunities. I think that was the extent of how much we comment externally on it. But I’m happy to go in any other aspects of it that you want, Rob.

And then, my last question and then I’ll sign off. So you did mention that from an R&D and product pipeline perspective that you guys are still pursuing the cloud product. I think, SaaS product focused on SMB. Can you just talk about the timeline to roll that out and then what channels you think you’ll start pushing that out into and kind of how you view the uptake potential within the market? And thanks again and great quarter.

Thanks, Rob. And there’s a couple of aspects to that question. So we actually already are operating in pilot and some of our dealers are actually taking on revenue on a SaaS basis for our access control products. And we’ll be rolling it out, I think, I said over the next few weeks and months. So it’s not a long period of time it’s and it’s not a technology issue at this point, it’s a go-to-market issue because some dealers want to have it operated on their cloud and as their service branded as that dealer service. But that’s great, we’re happy to enable them to do that all day long. Others want to have it done as an Identiv service, but they also don’t want to lose control over customer. Some of our competitors who have gone to cloud, notably Brivo, says, thank you very much dealers, now it’s our customer, and that’s really created friction in adoption. And so we are going to go to market both ways. If a dealer wants us to manage the customers, that’s great. If they wanted to manage the customers, that’s fine. And indeed if they want to put up their own branding on our cloud service, we’re happy to do that as well. So that’s what will be phased out over the next several months is as we launch various go-to markets for our cloud architecture. And then we’re going to start out with access with Velocity and Freedom and then drive video cloud and then of course the converged solution.

Our next question is a follow-up from Mike Latimore with Northland Capital Markets. Please go ahead.

Well, that was really my question. I’m going to ask a little bit more about cloud. So I guess just to be clear, the end target is the small business, is that right or is it more varied in that?

Good clarification. No more varied in that definitely. In fact the most progressive movers we’re seeing are in the medium and larger enterprises. So when I mentioned SMB, we actually repositioning as specific product for SMB to target that environment for the four- to seven-door and two- to five-camera environment, but our early was – because it – and probably it is because of the nature of our customer base and our dealer channel that deals with large organizations, we tend to be exposed to that first.

And then to the extent there is hardware involved here in the total solution. Would you recognize that as a one-time upfront sale when you sell cloud or would it get bundled into the cloud itself for an overall subscription fee?

Very good question. That goes back to my comment on go-to-market. Some customers and dealers want to do it on the subscription basis all the way top to bottom, which frankly, we like the most. Because – this is frankly because our hardware lasts for a very long time and we’d rather get some recurring revenue out of that. But others – dealers, for example, they’re wrestling with, I do an installation in the system and I got to pay my people and my business model is based on charging a couple of thousand bucks a door for the hardware and for the installation. I guess still get the installation, but how do I cover the cost that I used to cover with the income from the hardware. And so for those dealers, we will make it available on a paid for the hardware basis and then services going forward and then for other dealers, on a pure services basis. We want to go to a pure services, no upfront cost adoption because we think that will be the lowest friction, but different parts of the market is going to go different ways.

And I know it’s still early, but what is the catalyst for a customer to go to the cloud. I mean, when I think about like the phone system market, you know, you have these nine-year-old PBXs and they’re ready to go to the cloud as their kind of end of life those things, they fully amortize them or depreciate them. Like, what are you seeing as a catalyst to move to the cloud in this kind of market?

As you say, with that, it’s almost always economics of some sort. It’s – my maintenance fees have gotten so high on my hardware that it almost maybe I can shift over to a full cloud and my monthly rates hardly go up or my hardware no longer supports the latest Windows operating system and patches, and so we win our works, I’ve got a transition or we’ve merged with another company and now we have heterogeneous systems and we’re either going to have to invest in a whole bunch more hardware to have heterogeneous systems or pull it all out and go to cloud. So there is usually some sort of transition event that drives them to assess and then they assess buying a whole bunch of hardware, most of which is proprietary or going onto a services basis. Thanks, Mike.

Our next question is a follow up from Jeff Kessler with Imperial Capital. Please go ahead.

Just quickly on the same – in the same vein. You’ve just described part of what is going to be your recurring revenue. Can you just define what you – how you – can you define, how you define recurring revenue, so that when we talk about it in the future, even though part of it’s going to be cloud and SaaS related to cloud, what other items will be inside of recurring revenue?

So, obviously, it will be SaaS and cloud. Our software services agreements that typically are three-year agreements and are therefore are predictable recurring. And our services agreements that are multi-year with some of the government agencies and same thing; multi-year recurring will be in there.

Okay, great. Thank you.

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@gatewayir.com. I’d now like to turn the conference back over to Mr. Humphreys for his closing remarks.

All right, thanks very much, operator, and thank you all for joining us. Sorry, we’ve gone a little bit over the hour here, but please do join us any of you can at the Gateway Conference, we’ll be in San Francisco in the first week of September and then at GSX, as I mentioned a couple of times in the second week in September in Chicago, if you want to see all of the Identiv solution and the way we present it, we will have it there. And then right after that we’ll be at the Lake Street Big Ideas Conference, also in New York, and a couple of more just a little bit further out in November at the ROTH Capital Tech Day, and of course, in December at Imperial Capital. So looking forward to continuing to update the investor community as we build the business. Thank you again and have a good evening.

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