Good afternoon. Welcome to Identiv’s Presentation of its Third Quarter 2021 earnings call. My name is Katherine, and I will be your operator this afternoon. Joining us for today’s presentation are the Company’s CEO, Steve Humphreys; and Interim CFO, Ed Kirnbauer. Following Management’s remarks, we will open the call for questions. Before we begin, please note that during the call, management may be making references to non-GAAP measures or projections, including adjusted EBITDA and free cash flow. In addition, during this call, management will be making Forward-Looking Statements. Any statements that refer 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. Sir, please proceed.

Thanks, operator and thank you all for joining us. In the third quarter, we had record revenues of $29.1 million led by sequential growth in our Identity business of 27% and overall sequential growth of 21%. We also generated 2.9 million in cash flow from operations, and 2.5 million in GAAP net income, or $0.09 a share EPS. In Q3, we also retired all of our debt, giving us a strong balance sheet with 29.2 million of cash and no debt. We think this gives us the capital strength to drive for industry leadership as our markets take off. On the growth side, stepping up more than 20% quarter-on-quarter, especially with the supply chain stresses and other challenges around us shows the underlying demand strength in our markets. This is why we're confident in our outlook for the rest of the year, and for strong growth into 2022 and beyond. Now, I will go through our key growth metrics first, which made progress across growth backlog cash flow and profitability. In Q3 though, we also made progress that's even more relevant than these numbers in a couple of our major RFID opportunities and in developing our RFID team to drive growth in 2022. So after the metrics, I'll update you on those steps and the opportunity for next year. For our core metrics, in addition to the sequential growth I mentioned, we grew 17% year-over-year overall, and 21% year-over-year in our Identity business. This is especially meaningful since in Q3 of 2020, we had over 100% growth in our RFID business making for a high comparable bar. Even without high bar, our RFID units grew 19% year-over-year, for a year-to-date total of nearly 120 million units. As expected, our premises business also grew solidly, up 13% sequentially and up 10%…

Thanks, Steve. As Steve mentioned, our financial results reflect our continued strength exiting the third quarter with a delivery of sequential incomparable growth in revenues, future backlog, cash flows from operations and overall profitability. These results paired with the investments in RFID capacity, expansion of the RFID organization and capabilities in our supply chain, we believe position the company to achieve its growth and profitability potential. We closed out the third quarter of 2021 with 29.1 million in revenue, up 21% on a sequential basis, and up 17% year-over-year. Our recurring revenue was stable at 5% of our third quarter revenue, and 5% of total trailing 12-month revenue. For the third quarter of 2021, our GAAP and non-GAAP adjusted gross profit margins were 38% and 39% respectively, compared to 37% and 38% in the second quarter of 2021 and 40% and 41% in the third quarter of 2020. For the trailing 12-month period, our GAAP and non-GAAP adjusted gross profit margins were 36% and 37% respectively. Gross profit margin changes resulted primarily from the mix across and within our segments. Our non-GAAP adjusted EBITDA margin was 11% or 3.2 million, compared with 11% in the third quarter of 2020 and 5% in Q2 2021. For the trailing 12-month period, our non-GAAP adjusted EBITDA margin was 6%. Our Q3 GAAP net income attributable to common stockholders was 2.3 million or $0.09 per share. This compares with income of 0.1 million or $0.01 per share in Q3 2020, an income of 2.2 million or $0.09 per share in Q2 2021, which included a one-time gain on the forgiveness of our PPP loan. We have provided in the appendix today a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. Our next slide further analyzes trends by…

Thanks, Ed. As our results and our initial guidance for 2022 show, our growth is expanding. We expect overall growth of 25% to 30% for 2022, driven by 40% to 50% growth in our RFID business with the possibility that our major programs could drive RFID growth much higher. In premises, we are expecting 20% to 25% growth, with strong margins and increasing software services and recurring revenues. Beyond 2022, we see overall growth increasing in 2023, at a minimum in the 30% to 35% range, again, driven by higher RFID growth rates. Let me go into the basis for our growth projections and how we're thinking about our base growth that's predictable both in timing and scale, and how we're projecting transformational opportunities. At the core is the 40% to 50% RFID growth. This assumes base growth of our core markets and the wide base of customers; it assumes a measured take-off of a couple of our transformational opportunities. But it doesn't depend on any of the opportunities becoming in 2022 be over $10 million revenue drivers that each can easily reach. The reason is timing. In this industry, we've seen projects move around by six months or more. I'll talk later about how we're mitigating this. We think we've got some different leverage points than the industry has had in the past, so we should be able to project and manage revenue paths better. Right now though, we need to project what we can see, 40% to 50% growth shows a very strong market that we have line of sight too. Our leadership in the market means we'll also most likely be the winner when each use case hits an inflection point. Now, we'll go into details of how we're driving our core RFID growth. We're already far…

Thank you. We will now take questions. [Operator Instructions] Your first question is coming from Craig Ellis with B. Riley. Your line is live.

Thanks for taking the question. And Team congratulations on the financial performance in the progress in the business field. I want to start just by seeing if we could dig in a little bit more to the frame order that you talked about in cannabis. So exciting development, and certainly high volume. Since I'm not familiar with that type of order. What are some of the milestones that investors should be thinking about with that type of an agreement?

So it'll be the usual finalized -- finalization of design process and launch plan that they'll have to go through for the product itself. And then, of course, finalization of the prototypes, the pilots and the production ramp up. And it is actually just a beginning order. It's relatively -- there's volumes that should be substantially larger than that as we go forward with it. But it's that first step that that should start to break some of the logjam.

Great, nice to see. The second question, I think I got most of the points around calendar '22s outlook and nice to see significant growth that 130 million to 135 million. I think you went on to make some comments on calendar '23, which I missed. So could you just recap what you said about '23s potential growth?

Yes, absolutely. We think that growth base that we go out of 2022 into will be the platform for growing off into 2023. So we expect by '23 to be in the 30% to 35% growth range. And that again, as I said, in 2022, we have the base growth. And then we have some of the transformational projects that we think will be coming in but not really driving 10 million plus in the year, they really should be developing the 23 timeframe. And so that's why we expect to see accelerated growth on the back of that. And then, the growth rates in premises we expect to continue as well underpinning the overall business model. Does that fill in the gaps?

Yes, that does. And then if I could flip it over to Manfred and Amir. Guys, the question I had for you is regarding the sales team. So Steve mentioned that there have been a number of direct salespeople added from competitors. The question is, when you're bringing folks in from a competitor, how long does it take for them to become very productive with the different solutions that Identiv has and the capabilities that I Identiv has from engagement all the way through manufacturing and fulfillment? And to which we expect in terms of the timing to their potential contribution to revenues.

Yes, great question, Craig. So in general, all the folks that we are bringing on board are, let's say industry veterans that have like 10 plus, 15 plus years of industry relevant experience, which means there is zero ramp up curve, when it comes to basically make them familiar with the product portfolio there. So all of them are HF, as well as UHF specialists. So from that point of view, we really expect them to hit the road, very, very fast. Maybe a general comment, we have really accelerated to bring in all these people into 2021, most of them because we really wanted to be sure that they are hitting the road hard right from the beginning of 1.1.22. A bunch of them are starting basically, this week, we have some more following in the month of December, with a very, very sophisticated training and other sessions to basically ramp them up. And all of them, of course, know a ton of business. But on the other hand, we also are respectful of respective technologies and other things and IP issues and related things. So from that point of view, I really expect them to basically contribute fast. Amir, any more comments from your end?

Yes, I would just add that they do have rigorous 30, 60, 90 day, ramp up plans for them to get on board. And then in addition to that, a lot of them have that deep channel expertise. So they are familiar with competing with products that are very similar. And the nice thing is, they can step really well into the relationships that they have, and then ramp up from there. So from that standpoint, we're very, very excited. And to add, as we grow into 2023, this layer that we built, it's also a really good foundational layer for any new talent we bring in, because of their senior level experience. They can mentor the new groups that come in and also get them up and running.

And is there a particular geographic profile to the folks that you've added?

Craig, I just was about to comment on that. Absolutely. Yes. So we are filling some of the gaps here in North America, where we see some, let's say immediate needs for, let's say more coverage. Latin America is another area where we are adding. There's two folks in the EMEA region. And we're bringing a couple of people on board in Asia Pac between Japan on the one hand, and then Southeast Asia on the other hand, and they basically blend perfectly fine into the remainder of the team that is on board already. So we're truly doubling the force through the end of the year.

Very good. Thanks for the help, guys. So I'll hop back into the queue.

Hey, Craig, let me just add to that, just put a little more color on it. Because as you can hear how fast Manfred and Amir have moved. We actually accelerated the hiring process, our board supported making some additional investments faster. And these guys really brought in some of the industry's best and worldwide in the last couple of months. So it really is encouraging. And as you can hear from Amir, with 30, 60, 90 day plans in place for each of them, execution that's going to be very aggressive because we wanted to front end load right now, even though they're all industry experts, make sure that they understand our processes, get the lay of the land, know the products, and then by the time we're going into 2022, that we really have all hitting the ground running. And that's what gives us some confidence in the growth is, having a substantially larger team with the expertise that we've got, we think it'll really position us for 2022. And that really is enabled by the confidence we have from the investors the strong balance sheet, and the board backing we have that said, yes, you've got the right leadership, now go ahead and invest and build the team fast. So I just want to add that context, but thanks for the question, Craig.

Yes, very helpful. Thank you.

[Operator Instructions] Your next question is coming from Mike Latimore. Your line is live.

Hi. This is Aditya on behalf of Mike Latimore. Could you give some color on how the demand has been for video analytics?

Sure, absolutely. The premises part of the business has really -- in terms of percentage growth rate, video is probably the area that is growing at the fastest percentage rate. We launched a product called Velocity Vision, which is tightly integrated with our Velocity physical security platform. And from a standing start in May, I think when we launched it, we've got something north of a $9 million pipeline on Velocity Vision. It could $8 million or $9 million, but it's of that order of magnitude. So it is being very broadly embraced, partly for the analytics, but also heavily for the integrated access and video, which is the differentiation of our platform and that's really moving nicely. We think it will be a driver both of growth and the gross margin expansion in 2022.

All right, all right. And could you also tell me how much did your largest customer contribute as a percentage of revenue?

Largest customer, I'd have to turn to Ed for top 10. I know we didn't have any 10% customers. We didn't have any 10% customer concentration. So it was probably of the order of 8%-ish, but I can get to that in detail.

Yes. No one customer exceeded 10% of total revenue or segment revenue.

All right, all right, fine. Thank you.

Of course, thank you.

Your next question is coming from Jaeson Schmidt with Lake Street. Your line is live.

Hey guys, thanks for taking my questions. Steve, I know you highlighted the healthcare sector a lot, but just curious if you could provide some more detail on how the ramp at CVS is going as well as that second customer? And then if you've seen any sort of increasing inbound interest from other pharmacies?

Yes. So the ramp at CVS is going nicely. We expect -- and it's up to them, of course, any day, week now that they will do a press release themselves and some notification on where they're going with it. So I don't want to speak for them, but they should be speaking for themselves pretty proactively before long. It's -- they're a very methodical, let's say, pharmacy and insurance company as CVS and Aetna are combined. But the use case itself and the business is going well, and we're looking forward to when they actually turn up the marketing use on it to really drive it. And then in terms of other interest, we talked about another top five pharmacy chain that is in pilots and they're deploying readers, as well as tags. And because it's such a small industry, I don't want to give too many profiles of others that we're in discussions with. But as you'd expect, most of the major players in the sector are looking at bringing that capability to market now.

Okay, no, that's helpful. And then one of the big themes this year in the RFID business has been your guys' ability to continue to see ASP expansion. Not sure if you want to give specifics, but when we look at your guidance for 2022, does that assume continued ASP growth in the RFID business?

Good question. The short answer is not necessarily that the ASPs will oscillate around and especially with the expanded sales force, we're going to be getting a range of applications. And as long as the margins are where we need them, they can be at $0.80 or at $0.25. So I want to be careful about setting too granular expectations and then things are a little bit different. I think they're actually going to move around times and they can be driven so heavily by one big project or another, but that can skew it also. Now long -- on the long timeline, ASPs are certainly moving up. And as you see, have things like the auto syringe and some of the other use cases, those are substantially higher ASPs. And so over the course of a year plus, I'm certain ASPs will be moving up. But on a quarter-by-quarter basis and even first half of the year versus second half of the year, I can't be certain what the trend-line will be. Does that -- I'm sorry, that's a little bit wishy-washy, but I'm trying to be as responsive as possible. Does that fill it in?

It does, and that makes sense. And just a last question for me and I'll jump back into queue. Looking at the 2022 guidance, I know you indicated that it doesn't assume sort of a significant ramp in some of these transformational opportunities, but if some of these opportunities take off faster than you had anticipated, could you at the very least meet it from a supply standpoint?

So there's -- I want to answer it, but also not create any concern is that we've got plenty of forward visibility and we've got plenty of very good relationships, but I also don't want to be glib about it. There's always possibilities that if suddenly someone needs 20 million units of a particularly high-end multi-sensor capability, it's possible that we'll have trouble ramping up that aggressively. We're buying in advance of everything we can think of, and we think we'll be in good shape, certainly for the plan as we've got here and for some of the upside. But as we said when we're guiding this year, we don't want to have unlimited upside as if there's unlimited supply because that's just not the case. But there's plenty of room in supply and then our ability to work supply chain, so we can deliver a lot of that upside. So we certainly don't think we'll be constraining any of our customers' abilities to ramp at an accelerated rate.

Okay. Appreciate the color. Thanks a lot guys.

Thanks, Jaeson.

Your next question is coming from Brian Ruttenbur with Imperial Capital. Your line is live.

Thank you very much. So just trying to understand a little bit on 2022 and 2023 as you're doing this ramp on the operating expenses side. Can you give us some kind of grounding on either as a percentage of revenue or something or how fast you're going to be increasing those operating expenses?

Yes. And we've been consistent, and our Board has been consistent, and we're excited about the growth opportunity, but you can only absorb so much investment at any given time, and we're on a great growth path. So the framework we're applying is about half of incremental gross margin dollars we want to throw to the bottom line and about half of incremental gross margin dollars we'll invest in the business. And, of course, if we gap up on some of these projects, more of that will fall to the bottom line. But in general, if you think of gross margin growth and about half of it goes to the bottom line and half of it is driving the growth, that's probably a pretty good framework.

Okay. And then another question on cannabis, assuming that $1.9 million order with another $20 million behind it, hopefully, what percentage of your business in '22 is going to be cannabis-related?

So just one clarification there. The 1.9 million is units, not dollars.

Right, units.

And so we're thinking -- yes, and we're thinking in terms of sub $0.20 units for these things. So just to characterize a little bit. So -- but -- so what was your question about the trajectory there?

You just answered it by giving me the ASPs on the units for the cannabis. Are all those 1.9 million units going to be shipped in by the end of 2022?

Oh, by the end of 2022, certainly. But I believe that in that -- both that customer and that category, it will be a multiple of that number in terms of units as it starts to take off, and I want to be very careful. That's a belief from talking to customers, seeing what's going on in the industry, that's not a forecast that if it varies, I want to be overly worried about. But the trajectory would be for -- if you asked Amir and his team from the sales discussions they've been in, and one of the events I mentioned was MJBiz, which was the marijuana business trade show. That -- there's a lot of activity going there, and I think there will be a multiple of 20 million units total associated with cannabis in '22.

Great, thank you.

[Operator Instructions] Your next question is coming from Jay Chung [Ph]. Your line is live.

Yes, great. Again, great quarter, guys, and very nice guidance. Can you give your latest update on your capacity and where you expect it to be by the end of the year next year in -- for the RFID side?

Yes, absolutely. Since we've got Manfred on the line, we might as well go straight to the source there. Maybe I talk to Manfred off-guard.

Can you hear me?

Yes, now, we can, yes. Super.

Can you hear me now?

Now we got you, yes.

Okay, there we go. Sorry, my line just dropped, and I had to dial in again. So capacity-wise, we are heading towards about 180 million this year. We have -- we are at about 120-ish million units as of Q3 and have a capacity of just shy above 200 million, 220 million units as we speak, plus we always have the option with some outsourcing partners to basically cover peak demand. For 2022, we are planning on 285 million units. And in order to do so, we have a bunch of equipment in route already. So there is another flip chip machine basically signed off at the manufacturer close by here in Bavaria and then shipping in the month of December. And we already have requested growth for the next two on top of that. So from that point of view in terms of capacity, we are really planning full steam in order to basically to cover the growth scenarios for the coming year.

Great. Thank you. And then for other, Steve or Manfred, to the extent you're allowed to discuss, how many other transformational opportunities are there that has $100 million revenue potential? I think you mentioned earlier that the company you're working with on the auto-injector has another project that might be comparable to that, but are there few more like that, and to the extent that you can, can you discuss them?

There is and they are in various verticals. So health, there is certainly more than a handful, but I also have projects that we're working on in the smart packaging area, where you have tens of millions to start with and then hundreds of millions thereafter. So there is certainly a couple of will [ph] projects. In terms of the projections for us, we are, let's say, I try to be conservative and just hit one or the other because those alone would already basically meet the necessary volume requirements for 2022 and then beyond. But please rest assured, the pipeline is about 5x to 7x of the revenue that we need to be delivering in the transponder business.

That's awesome. And then maybe just more immediate term, I noticed that the gross margin on the ID segment side moved from 24% to almost 28%, if I'm doing my math right, this coming quarter -- or this past quarter in Q3? Is that -- first, can you talk about what drove that? And then two, whether it's sustainable or given if it should grow going forward?

I wasn't sure I caught all of that, Jay, you were breaking up just a bit.

I -- I'm sorry, I'll repeat it. If I'm doing my math right, it looks like the ID side of the business did almost 28% gross margins this Q3, and that's a pretty nice improvement from what it was in Q2. I was wondering what drove that, and if that 28% level or so, if that is sustainable or could actually be improved upon?

So it's mixed as always, almost always in that case. And so we had some higher margin products in there and in Identity overall. It's going to generally trend upwards as we've talked about, but it is going to fluctuate, again depending on mix, when Manfred talked about some of these will projects, as those kick in, if they're higher gross margin, they'll gap it up. If they're lower gross margin, they'll move it closer to that. So you will see us continuing to move around in the upper 20% gross margin. And then as you go towards the end of next year and we have some of these larger and much higher gross margin projects going, then I think you'll see it breaking through 30% sustainably and going into the mid-30s.

Okay, great. And then obviously, you laid out the opportunities in RFID, you've hired a lot of people from the industry, how about your competitors like HID or SMARTRAC, how are they responding?

I'll defer that to Amir, Manfred as well since they are dealing with it right on the street.

So first, SMARTRAC is not responding anymore because they were acquired by Avery to be very precise here.

Yes, yes.

And in general, we are very, very respectful when there is non-compete clauses. So we try to -- not just we try to, we will not be, let's say, breaking the law in any of these regards. Many of the former SMARTRAC people, for example, they have been with other players in the meantime. So from that point of view, as you can imagine, whenever there is acquisitions going on, even very good people have to leave an organization or the very, very good people leave voluntarily and go for other endeavors and that's basically where we pick them up. And indeed, HID is another example. They're also heavily acquiring same thing there. They have a lot of talent out there, which is both employed with them and which was employed with them. So from that point of view, it's -- I wouldn't say it's easy to find the right people, but the sheer speed we basically put to the table in order to fill all our openings should be giving you an idea on how successful we were in that regard.

Okay, great. And then just on the physical side or the -- you mentioned that growth for 2023 is going to be around 30% or so, but that's for the whole company. Do you see the sustained growth for the physical for a 20%-plus for the foreseeable future or is it something where you see a big bump up now and then it will kind of peer around to high single-digits?

Yes, good question. And Jay, in the spirit of also respecting everybody's time, if we can make this the last question.

Yes, it will be. Thank you.

Great, great. But actually, no, we expect it to sustain. That 20% to 25% growth we see is certainly a several year secular growth pattern. Our illustrious federal government is not going to stop spending, especially for security applications, which are uncontroversial. And securities just become very fundamental, physical as well as cyber in every business walk. And we have a really good total solution. Everybody is trying to consolidate vendors these days as well. So we think we're pretty well in the sweet spot. So we expect to be growing above market for the next few to several years.

Great. Thank you so much.

All right. Thanks, Jay.

Thank you. 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 would now like to turn the call back to Mr. Humphreys for his closing remarks.

All right. Thanks again and thank you all for joining us this evening. As you can tell, things are developing very quickly in our industry and certainly our company itself, and we're very excited about the path ahead of us. We will try to make sure we're continuing to communicate with the investor community as all of these opportunities develop. And in doing that, we'll be at the Stifel Conference next week, virtual, of course, Ladenburg, the following week. Also, we have our Washington, DC Open House on December 9th, which investors are welcome to come to and talk to some of our customers, as well as some of our engineers. And then we'll be at the Imperial Capital Conference in New York in mid-December and possibly a couple of others. So we're going to try and keep the direct communication flowing as we primarily focus on driving the business forward, but also keep everybody aligned as we're going forward. So thank you again, and thanks for joining us, and have a very good evening.

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