Good afternoon. Welcome to Identiv's presentation of its Second Quarter 2020 Earnings Call. My name is Rochanne, and I will be the operator this afternoon. Joining us for today's presentation are the company's CEO, Steve Humphreys; and CFO, Sandra Wallach. Following management 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 and projections, including adjusted EBITDA and free cash flow. 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 obligations 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. Steve Humphreys, the floor is yours.

Thanks, operator, and thank you all for joining us today. Our second quarter showed strength in all the areas we expected. This has lined us up for a strong third quarter and second half 2020, and we're seeing momentum in building backlog carrying us into an even stronger 2021. As you all know, our primary focus areas are RFID and our federal business. I will go into more details, but the headline numbers are this. RFID grew 36% year-over-year, and more importantly, our backlog and shipment rates confirm that we're on track for RFID growth of over 80% for 2020. Now as we've discussed, the broad adoption of RFID within our major customers' core products shows that this growth is a long-term trend that we're just beginning to see takeoff. Our other area, of course, is the federal market, where our Federal Access control business grew 28% year-over-year. Our smart card readers also are largely driven by federal customers, and we saw year-over-year growth in these products of 23%. Now from our experience with the U.S. government, we expect these trends to continue the rest of the year and into 2021. So as a result of these growth trends and largely due to our RFID momentum, our total revenue for the second quarter of 2020 grew 5% sequentially. More tangibly, orders during the second quarter came in at record rates. And as a result, we entered Q3 with a record backlog of over $13 million. This is up 140% from our Q3 backlog a year ago and up 48% from the already strong backlog going into the last quarter. What the numbers demonstrate is that orders were coming in even faster than shipments were increasing during the second quarter. So in tough economic times like these, our business looks like…

As Steve mentioned, the headlines for this quarter are all in the numbers. The first metric is revenue growth. Even with the continued impact of COVID-19 and the shelter in place that started in February, we closed out the second quarter of 2020 with $19.1 million in total revenue, up 5% compared to the first quarter of 2020 and down 14% compared to the second quarter of 2019. Our top line results for Q2 2020 were impacted by continued mixed demand changes across our portfolio, including temporal shifts driven by the shelter-in-place orders impacting our Premises business and select verticals, continuing strength in demand for our Identity business driven by work-from-home actions and sustained growth in our transponder business, in which we saw a 37% increase quarter over comparable quarter in 2019 and a 23% increase sequentially. Our standalone software and services business was 11% of our second quarter revenue and 13% of our total revenue for the first half of 2020. On a trailing 12-month, or TTM basis, our standalone software and services business was steady at 13% of revenue, up 16 basis points over the prior comparable period. Our recurring revenue, a subset of our stand-alone software and services metric, reflecting longer-term multi-period commitments for support and services, accounted for 8% of our second quarter revenue and 9% of total revenue in the first half of 2020. This part of our business remains steady at 9% of our total trailing 12 months consolidated revenue, a 74 basis point improvement over the prior period. For the second quarter of 2020, our GAAP and non-GAAP adjusted gross profit margins were 40% and 42%, respectively. For the trailing 12-month period, our non-GAAP adjusted gross profit margin was 44%. Our GAAP and non-GAAP adjusted gross profit margins for Q2 2020 were negatively…

Thanks, Sandra. Now as I said in the opening section, the RFID growth we expect in the second half is predictable because it's heavily backlog driven. So let me start with an update there. Since entering the third quarter with a record backlog I mentioned, we've now received orders for all of our expected RFID shipments for the quarter. That means any additional orders either contribute to upside within the quarter or drive even more backlog for Q4 and into 2021. Our expected growth in RFID of over 80% this year, especially in an environment that's continuing to be uncertain, sounds aggressive. But as you can tell, it's built on tangible backlog and orders that are continuing to come. Now as I've said before, reporting backlog hasn't been our normal practice. But in the unpredictable economic environment we're in, we're trying to give as much data as we can. So with that in mind, let me give you a little bit of visibility further into our backlog. For the fourth quarter, our backlog already exceeds the total shipments that we had from the fourth quarter of 2019, and it's about 30% above the backlog that we had going moving into the fourth quarter. And of course, we're still building the backlog for the fourth quarter, but already above the backlog we had a year ago. So on the Premises side, our federal business is almost always strengthened with the federal year-end. So let me turn to that a little – in a little bit more detail. This year, we have the benefits of the federal year-end and the products we've launched as well as the new sales leadership we brought on. A month into the quarter, the roughly 20% sequential growth that we're expecting in Premises also on track, led…

Okay. [Operator Instructions] Okay, our first question comes from Mike Latimore. Mike, please state your question.

Yes, thanks a lot. Congratulations on the solid quarter there. I guess, Steve or Sandra, when you talk about – I think you mentioned 20% sequential growth, was that specific to the third quarter? Or is that third and fourth quarter in your prem business?

That was the third quarter specifically that we have zeroed on that because that's where we already have – know where we stand month and into the quarter, frankly.

Okay. You already know that you're going there.

You bet. We have to. With the trajectory there, we're trying to make sure we give solidly based projections on that business.

Okay. Great. And then I wasn't sure how to interpret the operating expense comments, should we think about it as being roughly flat in the next couple of quarters?

Sandra, go ahead with that.

Yes. So we're actually continuing to look at reallocation and redeployment of resources around the key focus areas that Steve mentioned. I think that our plans are that we'll see some of those additional actions rolling into Q3 early, and so we'll continue to see a step down of operating expenses.

Okay, got it. And then I didn't hear anything about sort of supply chain, but it sounds like the supply chain may be – I mean, are you getting kind of all the supplies you need on time and all that?

Yes, good question. The answer is yes. And in fact, we seem to be doing better than some companies. Some of our smart card reader growth and actually transponder, too, is coming because some of our competitors can't supply and customers are coming to us and we're able to supply better. But that said, it is – same as I said on the last call, it's hand-to-hand combat figuring out sources, the commercial flights that were used for logistics, putting a bunch of cargo in the bellies of passenger planes has dried up. So you got to find logistics. And our shipping costs are a little higher as a result. In fact, I was just reading that United has gotten approval from the government to reconfigure a couple of dozen of their passenger planes to be pure cargo, so they're shifting over that. So there's a lot going on in supply chain. It is creating some pressure on gross margins. But we're not going to let it stop us from supplying our customers and Identiv's not.

Got it. And periodically, you have a large Thursby software order. Are any of those types of orders in the pipeline?

They're in the pipeline. But of course, the challenge, of course, is they're so lumpy, as you imply with that, and hard to predict if they're going to fall in one quarter or another. But there's been a lot of individual service people ordering Thursby readers, and they're part of that second wave of work from home as people are realizing it's taking – going to take longer to get back. But in terms of big ones, yes, it works. But whether it comes in this quarter or next quarter, that's never assumed or predictable.

Okay, thanks a lot.

And actually, two things I wanted to follow-up on that I just got a ping from my marketing person. And I just noticed that it was different on the slide here. I mentioned 30,000 samples of the temp tag. And I know, Mike, you were curious about that in the past. We're actually up to 75,000 temp tag samples. My number was from the end of June. And now at the end of July, we've got requests for 75,000 temp tag samples there. So I just wanted to correct that bit that I had in the – in my comments.

Great. Thanks.

Okay. Next on the line we have Jeff Kessler. Jeff, please state your question.

Thank you, and congratulations on a solid quarter. I'm interested in whether or not you can open up the doors a little bit to your Singapore factory and tell us what's being manufactured and for what purposes?

Sure. Happy to. So that's all of our RFID transponders for the vast majority. We do outsource some. But it's all designed and planned and managed out of Singapore. And so that's everything from these authentication tags for luxury goods. We talked about some devices in the mobile space, some that go into some of the COVID test kits that are going in there, some that are going into respirator, breathing tubes to make sure the right tube is going in the right equipment, then some longer-term ones. There's a pharmaceutical company that we do RFID tags that go on pills. So if you're visually impaired, you can tap it with your phone and it will read the pill content in the prescription bottle. And I could go on. But it's all those RFID device applications, mostly NFC-based that come out of Singapore. And we do about 150 million to 200 million units a year, just to give a sense of scale.

Okay. One of the companies I cover is FLIR, and they spend – they had to spend because I've got questions about half the time talking about their infrared and thermal readers that are being used right now for elevated skin temperature. It seems to me that they're plateauing at a very high level. I'm wondering if the nature of these temp tags that you're being – that you're looking at is a little bit different, the end use case may be a little bit different than having a high-end $2,000 thermal reader being used for, let's call it, enterprise commercial security?

Yes. I think that's a very good point because these temp tags are sub-$5 and you use your iPhone or your Android phone to read them. So that's the entire infrastructure. The rest is all data in the cloud. And so our strategy on it is these are consumables, of course. Though they last about 10 days, they're unpowered tags and then you throw them away and use another one. So that's our strategy, is very low-cost of adoption. So it's easy for an assisted living facility or hospital to deploy them and – or even a hotel or a theme park or anything else, they can deploy them with very low cost. And then if the need passes or if there's a different use case they want, they haven't made this multi tens of thousands of dollar investment with a bunch of hard infrastructure around it. So yes, we're – I think that's one of the reasons we're seeing so much interest in it is because people realize, maybe we can just take this and try it, and it's not a major long-term commitment.

Right. Now that kind of NFC has, what I'll call, opened up a bit, and it's kind of standardized here because one company has been able to get its arms around having it for more than just one use, I'm wondering if you could talk about in your total RFID business, are you expecting NFC to become a larger percentage of that 80% growth that you're talking about? Is it part of – is it a larger proportion of the future backlog going forward? And are the use cases for NFC that you're marketing with some of your new people, is that – are they going up?

Yes. I think, absolutely. Most of the use cases that I mentioned are NFC, and that's where the growth is. And the NFC applications are becoming more capable. Some of the NFC chips are getting more capable. And as you alluded to, with Apple, with iOS 14 especially, there was one – I won't take too much time on this. But the one use case that Apple still has not gotten deployed properly was not having to open an app. An Android phone, you just tap it, you see it on temp tags, you tap it, it automatically opens the app and reads the tag. Apple now has that with iOS 14 and with the iPhone 12. And so the use case has become really general. Also, Apple is launching this thing called App Clips, where you can just go up to like a parking meter, instead of downloading the whole parking meter app, there's a – there can be a QR code or an NFC tag. But you think, is it a better use case that you open your camera and do a QR reader and go through all that, or you just tap the thing, the NFC tag automatically drops you into the App Clip, if you download an app, it uses Apple Pay and you can pay for your parking meter immediately instead of spending two minutes trying to figure the thing out and enroll your credit card. So yes, the more broad support of the platform, especially from the company that drives a lot of it, the addition of App Clips, which really shows that it's becoming part of their platform and the use cases that we talked about it. I mean we're seeing it go into everything from bicycles to cars to handbags. So it's really broadening out and going in pretty large volumes when you get into any of these categories.

One final question on the financial side, maybe for Sandra. At what revenue level – it doesn't seem to be quite there yet, but at what revenue level is the inflection point at which the growth in revenues is – let's become – let's say, is overcome by and it becomes a lot slower than the growth in margins and actually – and operating income.

So that's a really great question. We've always talked about our long-term model, Jeff. The – when we're at $100 million a quarter or a year with mid-40s on the non-GAAP gross profit margins. And that gets us to about a 15% to 20% non-GAAP adjusted EBITDA, and we're nicely positive on the EPS line. So it really is, again, breaking through that $100 million revenue number. And getting our – the different parts of our business that we're talking about to grow evenly so that we can get back to the mid-40s in non-GAAP gross margins.

Okay, great. Thank you very much.

Thanks, Jeff.

[Operator Instructions] Our next question comes from Jaeson Schmidt. Jaeson, please state your questions.

Hey, guys. Thanks for taking my questions. You're seeing some really nice tailwinds from sort of a broader macro or even in spite of the broader macro. Just curious if you're at all concerned that this is sort of pulling in demand from 2021 or beyond?

Very good question. And we do have some – we – at the beginning of second quarter, we had some companies that were kind of worried and talked about pulling in some demand and then they pretty quickly backed away from it because we demonstrated that our delivery schedules are still fine, the supply chain is working through. Now where we have had them – we talk with them very closely. There are some pulling in demand because demand is actually increasing. So one of our medical device companies has pulled in much of their first half of 2021 order demand, but they started placing orders to replace that pull in. So where we're seeing it, it seems to be taking advantage of orders they already had to shorten their lead times, and then they're still adding on top of that. But it's a good point. I really want to be sure we're not coming across as assuming the world isn't changing. The world is definitely a tough economic environment. But we see this demand just continue to come in, some of it driven by the environment, but also some of it seems to be regardless of the environment. So some of our bigger companies that are customer of ours seem to be doing very well, and they seem to be taking advantage of it to drive their business. So we don't see pull-ins that are artificially weakening demand going forward.

Okay. That's helpful. And just to clarify, one of the previous questions on the supply chain. So are you assuming that there's no significant improvement in the supply chain here in Q3?

Yes. It's a good question. So we – it hasn't slowed us down, but it has had expenses, logistic expenses, everything else. So you're right, we're not assuming substantial improvement in that because between trade wars and economic battles and next waves of COVID and lockdowns and other things, we think that the second quarter is a good baseline to assume we're going to have to live with that kind of a world. And if we can start doing better, that's great. But we didn't want to assume things are going to start getting better. And again, to be clear, that puts some pressure on margin, but we're not going to – it's not getting in the way of supply or ability to drive revenues. And then as soon as if things normalize a little bit, that will give us some relief on margins.

Okay. That makes sense. And the last one for me, and I'll jump back into queue. I apologize if I missed this, but how are you thinking about the education and school market going forward?

Yes, it's – so the short answer is we're just trying to follow them and support them. They – there was just a survey of teachers, 11% of whom said that their school districts, and this is across colleges and public schools, 11% said that their organizations have well thought out plans that they understand for going back to school, which means 89% are in environments that they still aren't sure how the back-to-school works. And we're seeing the same thing at our customers. They just don't know. Some of them are trying some different things and piloting some things, some of them are looking at occupancy tracking because maybe that's one of the things you want to do to make sure that each classroom isn't overoccupied, some of the colleges are looking at that. So there are lecture halls, they might set limitations on having to be in lecture halls. But right now, that's an area that we're assuming is going to stay soft because they're still trying to figure it all out. So we factored that in that we're not – we're – we've got lots of discussions going on, but we're not expecting a lot of business or recovery out of the Ed parts of our Fed's led strategy.

Okay. That makes sense. Thanks a lot guys.

Thanks, Jaeson.

There are no further questions. Steve Humphrey, I'd like to now turn it back to you.

Okay. Thanks, operator, and thank you all for joining us today. So please, if you do have time, please also join us, we'll be at a number of virtual investor events coming up. Canaccord's Global Growth Conference is just next week, August 11 through 13. I think, we'll actually be presenting on the 13th. The Ninth Annual Gateway Conference is coming up in September 9 through 10. And H.C. Wainwright in middle of September, 14 through the 16. So please join us. We look forward to seeing some of you virtually then. And until then, best wishes, be well and be safe, please, and have a good evening. Thanks again.

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines, and enjoy the rest of your day.