Good afternoon. Welcome to Identiv's Q3 2019 earnings call. My name is Carl, 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 managements, 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 will now turn the call over to CEO, Steve Humphreys, for his comments. Please go ahead, sir.

Thanks, Operator, and thank you all for joining us. The third quarter continued the growth in profitability trends from the first half of the year, showing that our strategy is getting traction right now. With revenue growth of 38% in the Premises business year-over-year, we're growing much faster than our market, which is growing at around 7%. Just as important, our progress on profitability took another major step. Last quarter was Identiv's first profitable quarter in a dozen years, and this quarter we grew our EPS to about $0.05 a share, quintupling over the prior quarter. Now it's just the beginning of course, but it shows how clearly we've turned the corner on profitability right now. We grew our recurring revenues to about 8% of revenues, and our total software and services revenues grew sequentially, from 12% of revenues to about 14%. So expanding profit and profitability, core business growth at a rate that's a multiple of our market's growth rates, growing recurring revenues and software revenues all show why we think our business is hitting its inflection point right now. The EPS growth was especially meaningful because it came through while some large deals in our Thursby business pushed out to later periods. We've already had major wins in the Air Force and Navy Reserves with TSS, and we expect to close another branch of the armed services, but it didn't happen with year-end funds in our third quarter, which was the federal government's fiscal year-end. As a result, we had a couple of million dollars of high-margin Thursby business that will be coming in a future period instead. To expand our profit as we did based on growth within our core Premises and RFID businesses really shows the strength of the business model we've built. Now you can…

Thanks, Steve. Before we dive into our Q3 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 third quarter 2019 revenue, which is up 15% compared to the third quarter 2018. Both organic and inorganic growth drove the increase. This brings our third quarter year-to-date growth rate to 14% over Q3 '18 year-to-date and our trailing 12-month growth rate to 17%. 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 our growth but more consistent in our results and drive higher margins, as well. This part of our business grew to 14% of our total consolidated revenues and 422 basis points over the prior trailing 12-month period. We are starting to report on recurring revenue as a key driver for our business growth. As a reminder, this is a subset of our standalone software and services metric, reflecting those longer-term, multiple-period commitments for support, services and maintenance. As we bring our solutions as a service from pilot to market we will report those revenues as part of this new metric broken out. 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 our third quarter 2019 and trailing 12-month non-GAAP adjusted gross profit margin steady at 47%, up 460 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 13th straight non-GAAP adjusted quarter in a row. This quarter, our trailing 12-month period non-GAAP adjusted EBITDA margin hit 11%, over…

Thanks, Sandra. As you heard from Sandra's commentary our foundation of profitability has been established now and our growth rates of 38% in Premises and 15% in transponders and over all gives the revenue growth to drive expanding net income. So just like last quarter, given growth and profitability, the core investor questions we want to address are how defensible is our position, how leveraged and scalable is it, and what's the size of the opportunity. I focused last quarter on how defensible our total solution strategy is as the only company in our industry with a total solution, the technical capabilities needed to develop all the parts of a total solution and the customer trends to consolidate vendors. Now obviously, our strategy is highly defensible, but it's also very attractive to the fastest growing customer segments, which is why we're seeing such strong growth in Premises. [indiscernible] this validated at the GSX trade show in Chicago in September. As I said on our last call, we were planning to show our total solution, challenging any other company to provide the same. We did exactly that at GSX and, indeed, they can't match it. Our position is unique, highly defensible and it's where customers want to go. So with defensibility established, today I'd like to focus on how leveraged our strategy is. Since leverage is the key to expanding profitability, this is the base for our 2020 guidance that you just heard and especially validates our expectations for EBITDA and net income expansion. So our leverage is built on two components: customer leverage and technology leverage. As a single customer acquires identity cards, access systems, video analytics and integrates them into their IT systems, we do one sale and manage one account, generating business for a range of products. Our…

[Operator instructions] The first question comes from Mike Latimore, of Northland Capital Markets. Please go ahead.

This is [Beejay] for Mike Latimore. So could you talk a little bit more about your U.S. Marshals deal in terms of what the size and what the time frame and does it include hardware and software? Any comments on the deal would be very helpful.

Of course we can't disclose what's not already in the public filings there, but it is 900 sites. It will be a 4- to 5-year program across those sites. Each site for us will be $20,000 to $30,000 of revenue. And that will guide you into the scale of the overall business opportunity. It's a mix of services and systems. And also I would point out it is part of an overall BPA. So those contract line items I indicated in there we can move our entire range of products through. So at the outset it's direct Hirsch, FICAM, readers, IGS services and software to drive it forward. We expect over time that that will expand into other of our products, as well, into Marshals.

Sounds good. And what are the key verticals that's driving Identity right now? And going forward, in 2020, do you see the same verticals driving revenue and profitability?

So there's two categories of verticals on the Identity side. On the RFID side you'll typically see consumer goods, retail and hospitals and hospitality, very heavily. On the Identity, as in smart card reader, Thursby software, it's very aligned with our Premises business in terms of federal government and then security-conscious enterprises, such as banking and healthcare.

Okay. And a quick question on bookings in terms of the mix between new customers and existing customers. So how do you see that booking mix? And do you see a specific trend in terms of for the next year?

As we've always talked about, the predominant portion of our revenues come from expanding sales into current customers because we've been in the market so long. But we're actually seeing the proportion of new sales to new customers expanding, as well. For example, with Thursby software, those are -- even though it's in the federal government, it's different agencies and departments within the federal government and that's often new. Similarly for video. That's going into a number of new customers. And as we bring in the Cloud-based platforms, we expect that will also open from our mainstream state and local, federal education markets and large enterprises into small and medium businesses. So I think, going forward, you'll see more brand new customers and names, often at smaller scale, but a more diverse customer base.

The next question comes from Reed Motulsky of Imperial Capital. Please go ahead.

As you were talking earlier about the seasonality, it's been a couple of quarters or a couple of years in a row now where the third quarter has been a little lower compared to what the fourth quarter is now expected to be. Do you see that continuing, going forward into future years, where your earnings continue to grow throughout the year and it's less of a middle year peak?

Very good point, Reed. I do believe that will be the case. The diversity of customer base that we just added, talked about in the last call, I think that plus the non-federal parts of the business that are growing and typically grow strongly in the fourth quarter of the year. Enterprises are using their year-end budgets up. Consumers, you have the holiday buying season on some of the products that RFID is associated with. So I think you will see more of a sequential quarter-on-quarter growth throughout the year versus heavily driven in a third quarter spike. That said, we'll always have third quarter federal year-end buying in the third quarter. So it could push it up higher than fourth in any given year, but there will be more sequential linearity.

And talking about the state and local government education, have you guys seen a significant uptick, especially in the educational market, for any sort of access control? Has there been any sort of pressure there?

Very good question. So we've been in education for a long time. We do some of the Houston Community College, Santa Monica Community College, a number of the large community colleges. Local school districts are a little more reticent to allow disclosure of their names because of the sensitivity around security that requires, but we are seeing a lot of growth there. You may be aware the Department of Justice has a program, about $70 million that they apply as matching funds to local school districts for physical threats, is what they call it, for threat risk. And we have had especially our wireless infrastructure going into school environments. So yes, it's very active.

And in terms of recurring revenue, I know you guys disclosed that's 8% now, which is great. What is causing the uptick there? And which portions of your revenue do you see contributing to that, going forward?

So in terms of technology platforms, access control is the furthest along on the recurring revenue platform. But I expect as we do more product launches and get our mobility as well as our Cloud infrastructure in place next year you'll see it in access control, in video and also in identities, as well, with Cloud issuance of identities. So I think you'll see it across the board, but it will be led I think with access control.

The next question comes from Nehal Chokshi, of Maxim Group. Please go ahead.

I apologize if my questions have been asked already. The U.S. Marshals win seems really huge, and that's awesome. I was wondering if you could talk about who were your primary competitors in that particular competitive case.

Sure. We did talk about Marshals a little earlier, but didn't talk about the competition. So that's a good one. It was certainly the mainstream, the Lenel's and Software House's of the world, and that really demonstrated the strength of our FICAM solution, which really is the best in the industry for the federal government. Gallagher is in strongly with GSA. And so they're always somewhere in the hunt, and we beat them out soundly, as well. And there was also an assessment of some of the Cloud platform infrastructure, like the Brivo's of the world, and I think we've got a superior approach there, as well, as I mentioned in the comments. So as you can imagine with a deal that big, 900 sites, all the federal courthouses nationwide and a number of other security sites, it was, everybody in the industry was competing for it.

And just to give some context in terms of this win relative to the overall [indiscernible] it's huge for Identiv, but just reframe it up again as far as how big is this relative to the 10-year opportunity that you guys have been talking about in the past?

So it's a substantial portion of it. What I mentioned earlier is across 900 sites, it will be anywhere from $20,000 to $30,000 a site for us. So that gives you a sense of the scale of it for us. So it's very meaningful and -- what context were you trying to put it in? I just want to be answering the right question.

The overall FICAM opportunity as you have guys been talking. As the federal access refreshes to be compliant with FICAM, I believe you guys have talked about it being, I can't remember the number, but I believe it's much, much bigger than this 900-site opportunity here.

Yes, exactly. The federal government is the largest property owner in the country, by far. So yes, this is something in the high-teens to low-20s millions worth for us, and it is less than 1% of the total government opportunity.

Great. Thank you. And then I wanted to talk about the video surveillance space. Recently the United States has placed a couple of key vendors onto their export restriction list; that being Dahua and HIK. I presume that they have -- you have no exposure to them. And is this actually an opportunity for you guys?

It is. First, on the first question, no, no exposure. We don't license anything from them. We don't resell anything of theirs, et cetera, unlike many of our competitors who have. And they do -- we of course don't directly compete in cameras, which is their core strength, but they also do have video management platforms and video analytics. And of course there there's an opportunity to displace them, which we're working hard on. And then even on the camera side it's just becoming so risky because often even American companies are labeling cameras from these vendors and other Chinese vendors as nominally American, and it's getting hard and tricky for a contract management officer to make sure they're not stepping on a landmine. So we're evaluating licensing some very clean, completely non-Chinese, including no Huawei chips or anything else, that we can then provide as a trusted technology vendor to our customers.

The next question comes from Jeff Kessler, of Imperial Capital. Please go ahead.

I'm sorry for overwhelming you with Imperial Capital people here. But the first question I have is recently Apple has allowed, has started to allow the use of NFC around college campuses. And I'm wondering if as we begin to broaden the amount of credential technologies that can be used for identity, is there a way for you to drive a higher value proposition? Meaning, not so much -- it's more of the identity than it is the actual card itself. And how do you take advantage of that if there are multiple ways of being able to access or be allowed inside into given places? How do you basically leverage that, the fact that there's now multiple ways of getting involved in checking out who can get in and who can stay in?

There's a number of thoughts in there. First off is it really starts to enable frictionless access, which is something we've been talking about for a long time, that makes your phone very usable and frictionlessly usable. Because with other technology you've got to open an app and then you've got to click to open a door, and that's not very frictionless. But with NFC of course you can just use the device and tap it right to an NFC reading in the reader. So that's certainly one of the areas that we're going to leverage. In fact, we've got a development partnership with a company in the PKI space, because one of the issues with mobile identities is security of the mobile identity. And so this development activity we're working on involves issuance of a secure cert for a derived credential that then is very secure and non-transferrable and non-repudiatable. And then you just use NFC at the door. And like you said, because Apple has now completely opened the NFC stack that becomes practical, that all the iPhones and everything from iOS 13 on are enabled with. Then on the identity itself, not to rat hole too far with it, as you may know, we actually have had Cloud-based secure identity issuance capabilities for a long time. And we have been careful about launching it because the market hasn't really been ready to adopt them quite yet. It's like Bluetooth access: it's great, everybody wants to see it and then they don't take it. So we'll see how that takes off. But we're pretty close with Apple, as you know, on a number of fronts, and we think that will enable a lot of activities. Since you mentioned Apple, the other thing they have in there enabled that has been much less publicized than NFC is Apple fully enabled ultra-wideband, UWB, in the latest iPhone 11. And that gives you real-time location services with very high granularity in virtually every phone. So between NFC and UWB there's going to be lots of capabilities that we can bring to market. And I think we have one of the much better technology platforms to leverage those capabilities.

Thank you. And one other question, and that would be I know Reed was asking you about your recurring revenue, the 8% recurring revenue number. Where are you with regard to the acceptance of your customers and your willingness to provide either video, more or less for you folks access-control-as-a-service, which is beginning to accelerate throughout the entire industry, and also video-, obviously, as-a-service, where you don't have the hardware but you do have the software capabilities of being able to do that? Obviously, it would be beginning of life. You'd have to convince certain customers to be able to start doing this on a monthly basis instead of paying upfront. And I realize that most, a lot of what you do is gross margin upfront. Where do you seem to stand on being able to start using or promoting a service-based application?

Good question. And we are absolutely committed to the services platform. I kind of mentioned this in my comments. One of the reasons I think it's been slow to take off is some of the Cloud-based access-control-as-a-service and video-surveillance-as-a-service companies have tried to keep control of the customers, which is really counter to the way the channel and the industry has worked. So our strategy is to empower the dealers in the channel, let them basically make Hirsch and Freedom capabilities available through their own dealer-branded Cloud. And they keep the customer, but we get the recurring revenues as part of the provision of that service. And I think that will, then you can have hundreds of dealers pushing recurring revenue services to their customers, and you're not sitting here one at a time trying to sell them and ramp them up over time. And so I think that will really start to break the bottleneck that companies like Brivo and others have created by trying to grab all the customers for themselves. So we're very bullish on the recurring revenue aspect of business. We think that going to market through the dealer channel is the way to really have thousands of feet on the street in parallel.

Is this something you've begun to do already?

We have pilots going with several dealers right now, and we expect to turn it live this quarter, yes.

[Operator Instructions] The next question comes from Matthew Galinko, of National Securities. Please go ahead.

I'm curious how you think about the margin contribution from early Cloud service subscriptions that you might start generating in what sounds like 2020?

So you mean how we'll calculate the cost of goods that goes into the recurring revenues? I just want to be sure we're answering the right question.

Yes, or maybe in aggregate, how you start hitting operating income. Are early subscribers going to be kind of lower margin while you scale up the platform? Or are the early ones going to be relatively high margin relative to the current P&L?

If you talk about it on a variable basis, because most of the cloud platforms are variably priced, yes, there is a little bit of start-up cost, but then it scales with utilization. No, we won't be going under water from a gross margin or profitability perspective on subscription customers. They'll be nicely, very solid contribution margin from the beginning. Yes, as you get up to scale of course you always get greater contribution margin, but it will be fairly continuous throughout. Is that what you were trying to get at?

Got it. It was. Thanks. I appreciate that. And maybe just, I assume you won't speak too strongly to 2020 and adoption there, but how quickly do you see scaling the subscription business?

So it's already been growing nicely, certainly. It's really what I just answered to Jeff about the parallelism that we can get by selling through the channel. If that works the way we hope it will work, because they seem to be very hungry for this capability that they can actually brand and sell themselves, we could see it taking off relatively quickly. If it turns out that it's more of an enterprise type sale, which is what most of the competitors have done going to market and you've got to sell one individual end customer at a time, it will still be a great SaaS profile takeoff but, as we know, that takes a little bit more time. But I'm very optimistic that the dealer parallel selling effort will take this off a good deal faster than SaaS businesses typically take off.

That being said, we do have some expansion built into our guidance, which is also what's driving the gross margin and the EBITDA margin expansion. And I think the question is we think we're going to move aggressively and bring customers on, but it is still a smaller part of our total revenue. And as we've talked about, we don't expect that we're going to have large installed customers rip out and replace stuff. So it's going to continue to grow as a nice addition to our portfolio, and it will drive probably one percent of total GAAP gross profitability upward, giving us some great pressure, but it is baked into our guidance.

The next question comes from Jeff Kessler of Imperial Capital. Please go ahead.

Sorry. Can you just give me some update on how you are developing the channel? Are there -- going forward, as you hit this kind of inflection point that you are in your revenues, how are you dealing with partner programs? Are there -- under which circumstances are you going direct? Under which circumstances are you going through various forms of the channel, probably being the integrators? And how are you dealing with them, making sure -- obviously, you've just won a marquee contract. How do you keep your name in front of those installers and those integrators in order to basically build up confidence of you in the channel? [Technical Difficulty]

Okay. Sorry about that.

All right. Did you catch the question? Or did you want me to repeat it?

If you could repeat it, I'd appreciate it.

Okay. I want to know how you're going to market with, how you're developing the channel. Now that you've gotten to a certain level of revenue, obviously you have a chance to go direct a little bit of the time. But generally, it's going to be through the channel. What are you doing to create partner programs and to create more relevance and more recognition in the channel with the integrators so that they all know who you are and that you can compete more easily for many more, let's call it, singles and doubles types of contracts?

Great questions. We talk about that a lot. And the answer is twofold. One is on the Cloud side where we are doing these as dealer-branded portals and services, they love that. That gets people's attention immediately. The other one is back on the total solution part that we approach dealers -- as you know, it's a relatively interconnected industry. So we approach them with different products for different dealers. So if a dealer is just stuck in being a Lenel shop, they all hate HID. So we come in with TS Cards and TS Readers and we say, don't get screwed by buying these HID cards and readers. Here's a perfect solution and alternative. They'll say, great. I get higher margins on those things and they work better. And then they can swap that out. And then they say, "Okay, what else have you got? And then the other thing, the third thing we're doing is with the addition of Enterphone and some of the other products, Enterphone and Liberty, we've got distribution products, products that are going through distribution. And a lot of dealers, as you know, buy through distribution. And so we're also putting our TS Cards and we're putting our readers going through distribution, as well, so they can get recognition and exposure to it. So 3-pronged program. One is land and expand, find out where the entering point is. The other one is distribution so they can get exposure. And the third one is dealer-branded Cloud.

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 call back over to Mr. Humphreys for his closing remarks.

All right. Thanks, Operator. And thank you all for joining us and especially for hanging with us with a little bit of phone glitches and running a little bit over. But we really do welcome you all at our industry and investor events if you have time to attend them. We'll be at the ROTH conference in New York next week as well as at Imperial Capital in early December. Also we're going to be opening our federal government Open House to the investor community in the Washington area. So that's on December 5th. And last year this was a tremendous event, with decision makers from a whole bunch of agencies and departments, a number of our current customers as well as new prospects. We'll also of course have our entire range of products and services, including Cloud and mobile solutions, there. So we'd welcome anybody who can make it down to DC on December 5th. And of course we'll certainly keep updating throughout with our press releases and other communication methods. So thank you again for joining us all, and have a very good evening.

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