Identiv, Inc. (INVE) Q3 2021 Earnings Report, Transcript and Summary

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% year-over-year. Our federal government sales lead the growth pace up 16% sequentially on top of the 34% growth last quarter. Our other key metrics show the progress in our business model. As I mentioned positive cash flow in Q3 was 2.9 million a sequential swing of 5.3 million versus last quarters use of cash or 2.5 million and a cash flow improvement of 3.9 million or even the seasonally strong Q3 of 2020. Net cash flow is probably the clearest indicator of a business's strength, so reaching almost 10% free cash flow while also driving growth and managing supply chain stresses shows the base strength in our business model. This was supported by a sequential growth in non-GAAP gross margins from 38% in Q2 to 39% in Q3. So in Q3, our core business strength that across revenues, gross margins, cash flow and profitability. But even with the strong metrics, our biggest progress in Q3 wasn't in the numbers. Our RFID team made very fast progress expanding and strengthening our already world-class team to drive our 2022 growth and industry leadership. In just the last couple of months, we're on track to more than double our RFID sales team. Some are already on-board, and some are signed up joining over the next few months. We think we're building the best technical sales team in the industry, including hires from SMARTRAC, Omni-ID, which is part of HID, CCRR, which is one of the most aggressive competitors in RFID, Honeywell, Stora Enso and others. Attracting the best talent from our toughest competitors is probably the strongest endorsement of our competitive position you can get because salespeople only go where they'll make more money by selling more. Now Manfred Mueller and Amir Khoshniyati have both led this team building and they're on the call if you want to go into more detail later. Also during Q3 and in the first few weeks of Q4, we've had a busy in person trade show schedule, including RFID Journal LIVE! IoT World, MJ Biz, IFSEC, IC West and GSX. We had a central presence especially at RFID Live, which you can see in the picture here. Our marketing and sales teams managed all of these in a tight timeframe, while still controlling expenses in the quarter. Let me turn now to progress in the third quarter in our core growth strategies of new design wins, moving customers through the production cycle, and expanding new and more complicated designs. These all made progress in the third quarter. So starting with customer launches, expansions and ramp up. Our major mobile device customer increased their marketing emphasis on NFC and on their NFC-enabled platform for accessories. We're confident they'll keep growing NFC use cases in 2022 and beyond, the result of which will be added opportunities for us across eco tag, metal attach tag, and our cloud-based authentication platform. Most relevant for 2022, we also had one of our cannabis-related customers placed first meaningful orders. As we said might be the case, the first movers are coming from the States. Even though Canada's cannabis industry started out working on NFC RFID solutions, and we think they'll be the biggest single market. One of the leading suppliers to the U.S. cannabis market is placing an initial purchase order for 1.9 million units and a frame order for 20 million units. Now this is just the beginning, but it shows that the market adoption is starting. We'll share more information about this in the next couple of weeks. But it's relevant because we've seen this before a first mover then drives others to speed up. Now to keep you updated on the other major cannabis program, it's also making progress. We can't disclose customer details, but it's important for investors to track progress. So here's the latest. Because we program RFID inlays for our mobile device customers, this customer has asked us to apply our production scale programming technology to their products, thereby expanding the relationship and integrating us further into their solution. This could mean more revenues from the opportunity and a stronger differentiation for us, which is even more important. We don't think this changes the timing, especially with others already getting rolling. But I wanted to give insight into the process of projects like this. It's why we're confident in the market and our revenue opportunity. Similarly, our auto injector syringe customer is making meaningful progress. Our customer recently conducted a board demonstration and review and received board level approval to go forward with the program, which gives you a sense for the strategic relevance of this product. We think we're still on track for the introduction mid next year, and volumes are still projected to reach over 100 million units on an annual basis. As we've been able to establish ourselves as a key central technology partner to this customer, we've been asked to and are now working on another RFID application of similar size from this customer. Now, as we did last time. Here are some new and expanding customers. We don't want to go into all the use cases. But you can see adoption is happening fastest in our main focus area of healthcare and medical devices, followed by consumer use cases. So in medical devices and healthcare, new customers include MINIFAB, [Siemens] [ph], Rangers Pharma and Ripley Medical and as always, there are others we can't name. Now among those new customers, we can't name are several that are actually using Fujitsu's radiation hardened FRAM chip technology, which it turns out is ideal for medical devices that use radiation exposure for sterilization. Now, in addition to these new customers, we also had follow-on sales into Carestream, ChemFlow, Schreiner Group, Collect ID, Bullion Works, Cap Online and a couple of dozen others. Now using the many others I went through last quarter, and our 150 plus other RFID customers are the wide base of adopters that'll drive our base 40% to 50% RFID growth, with the game changing projects then adding further to that total. Lastly, and even more broad market initiative is our NFC RFID software developers kit, known as our SDK, which we did launch in Q3. We've had several 1000 increase for developers’ kits that were being selective to whom we send the actual kits because we can only support a limited number of developers at a time. We think this captures the vast majority of the market, because we know most of the serious use cases. So this should give you a sense for the accelerating RFID momentum underneath the numbers in Q3 and the beginning of Q4. That's now in place to drive our 2022 growth. In addition to our high growth RFID segment, in Q3, our premises segment showed the strength we expected, and we expect to expand into 2022. This isn't a backlog driven business normally, but we exited Q3 with a near record total premises backlog of 2.6 million in premises. This is a strong signal of the premises business momentum that we see growing into 2022. Our third strategic focus is on revenue repeatability and predictability. In RFID, predictability is driven by customer attention and our focus on consumable products. In Q3, we kept our track record of 100% customer retention in RFID. In premises, predictability is driven by software services and recurring revenues, which remain strong at over 22% of our premises revenues. So before I wrap up, let me mention something I haven't discussed as a factor in Q3, which is supply chain. Now we're affected by supply and logistics, like any hardware and systems business, but we managed to fulfill every customer demand. We have one of the best supply chain teams in the industry. We got ahead of some of the bottlenecks early on. And we always have some safety room in our planning. Now, we're not immune, but our team is doing a great job. We weren't materially impacted in Q3, and we expect to keep that track record in Q4. We had to be clear from a macro perspective, we think the world's supply problems will get even tougher in Q4 as the holiday shipments surge competes with all the other demands, but we expect to deliver to our customers’ needs and to take some market share as our competitors aren't able to. So in Q3, in the beginning of Q4, our growth, profitability and cash flow showed strength. Beyond the metrics, we made major steps in our RFID organization to drive growth in 2022 and landed an initial cannabis frame order for 20 million units signaling the launch in that category. We made progress in our major opportunities as well as expanding our broad base of customers and use cases in our key segment of medical devices and healthcare, launch our NFC SDK with huge interest and delivered strong software services and recurring revenues in our premises business. These all made great progress in Q3, supporting a strong finish to 2021 and an even stronger 2022. So before getting into the next quarter, and our outlook for 2022, let me turn the call over to Wd to hit the financial highlights for the third quarter. Ed, over to you.

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 segment, beginning with Identity, revenue from our Identity products totaled 18.7 million or 64% of our total revenue in Q3 2021, a 21% increase from Q3 2020 and a 27% increase compared to Q2 2021. The sequential on year-to-year increases were driven by growth across all Identity products with additional customer expansion due to our ability to deliver versus competitors constraints supply chains. Our Q3 2021 Identity segment GAAP margins were 28% compared to 24% in Q2 2021 and 30% in Q3 2020. The sequential increase in margins were due to a greater proportion of higher margin products in Q3 versus Q2. The decrease in year-over-year margins were due to product mix, with a higher proportion of lower margin RFID transponder product sales due to the faster growth rates of this category. Turning to the premises segment, this segment accounted for 10.4 million or 36% of our total revenue in Q3, representing an increase of 10% from Q3 2020 and an increase of 13% compared to Q2 2021. The sequential change in revenue was due to the continued recovery in select commercial verticals like banking and retail along with normal seasonality. The year-over-year increase in revenues from the premises segment reflects a growth in sales to the federal government, the rebound and sales of Hirsch Velocity Software products to commercial consumers and higher sales of video technology and analytics software products. GAAP margins for premises in the third quarter of 57% were comparable to Q2 2021 and higher compared to 55% in Q3 2020, primarily due to the mix of products within the segment. Moving now to our operating expense management. Our GAAP operating expenses for the third quarter of 2021 totaled 9.1 million, which were consistent with both Q2 2021 and the third quarter of 2020. Our non-GAAP operating expenses, adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization, totaled 8.2 million in the third quarter of 2021 or 28% of revenue. This compares to 8 million or 33% of our revenue in Q2 2021 and 7.5 million or 30% of revenue in Q3 2020. Our non-GAAP adjusted EBITDA was 3.2 million in the third quarter of 2021. A 0.5 million increase compared to Q3 2020, and a 2.1 million increase compared to Q2 2021. Turning to the balance sheet, we exited Q3 with 29.2 million in cash, a net decrease of 7.2 million from Q2 2021 and a 16.9 million increase from Q3 2020. The key drivers of our cash activity for the quarter were 2.9 million generated from operating activities, 0.4 million provided by investing activities driven by 0.6 million of proceeds received from the sale of investment offset by 0.3 million in capital expenditures related to our continued investment in our R&D facility in Germany and our Singapore manufacturing plants. These sources of cash for the quarter were offset by cash used in financing activities of 10.3 million driven primarily by the repayment of all principal amounts outstanding under our EWB revolver of 10 million, leaving us free of debt as we exit Q3. In our 10-Q filing, we will be providing a full reconciliation of our year-to-date cash flows. For completeness we've included the full balance sheet in the earnings release in the appendix. As we continued to progress through the remainder of the year, we are refining our full year 2021 guidance today, with a revenue between 103 million and 105 million. Sharing some metrics as we move into the fourth quarter, exiting Q3, our Q4 backlog was 11.7 million up 18% versus Q3 2020. Our total backlog for all future shipments was also up 51% versus Q3 2020. And total new orders booked through the first three weeks of the fourth quarter was 7.5 million up 46% over the same period of the prior year. These trends provide visibility into the business momentum to the balance of 2021 and going into 2022. As a result, today, we are providing initial revenue guidance for the full year 2022 building on the strong base of growth that we have delivered to this point. Our full year 2022 initial guidance is for revenue between 130 million and 135 million, reflecting growth of approximately 25% to 30%, year-over-year. We will be refining that initial guidance when we report our Q4 and 2021 full year earnings in March 2022. With that, I will conclude the financial discussion and pass the call back to Steve.

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 along building the industry leading organization in NFC based RFID. We're developing early adopter customers and use cases faster than anyone else. And we also have a great competitive environment just as end users are adopting. Our strong financial position, now debt free with a strong cash and working capital balance sheet lets us focus purely on execution and driving our unique and massive market opportunity. I'll focus the rest of my comments on our execution plans for 2022, the driver of base growth, and that expand the range of transformational use cases beyond this base growth, especially in healthcare and medical devices. Our expectations for 2023 growth are based on our base 2022 growth continuing, plus confidence that some of the transformational applications will be underway in 2022 and contributing substantially in 2023. In fact, if these transformational applications contribute for the full year 2023, growth rates could be substantially higher than 35%. So the structure of our 2022 strategy is the same we've applied for the past two years, design wins, current customer volume growth, and the technologies programs and partnerships to drive growth. Design wins is our focus. Our organization is built to drive design wins with early adopters in key use cases. We do this through four strategies, chip partnerships, technical sales, strength, engineering and technology depth, and industry design and production leadership. We've talked before about our deep chip partnerships, and our engineering leadership. In technical sales. I said earlier, we're on track to double our direct sales reach with industry experienced salespeople from the best companies in the industry. Now experience salespeople bring with them visibility into almost every design opportunity in the industry. With the team Amir and Manfred have built, we think we're now in this position. Combining that visibility with our full scope design through production expertise, we're able to win designs and then help customers get past the friction that early adopters run into. The biggest problem in our industry has been customers not having experience running into a roadblock and then sidelining the project despite the business benefits. Our technical expertise and experience scaling projects lets us get customers past all these roadblocks. Its basic early adopter customer success focus, which the semiconductor industry has been very effective focusing on in early-stage categories. Intel did it early with CPUs. Nvidia did it early with their GPUs. And we think we're the only company applying it to advanced RFID devices as this market takes off. So with this best in the industry platform, continuing design wins in Q3, more in the pipeline for Q4 and 2022 and with 100% of our current customers staying with us and some expanding designs and volumes. We've got solid visibility into 2022 both from a backlog and pipeline perspective. We're also continuing to expand our technology offerings, there are a dozen technology programs we've talked about before. So I'll just highlight one new one, our partnership with Wiliot and Israeli-based company that recently gotten a $200 million investment from SoftBank. This is the passive Bluetooth RF device company that could be an industry game changer. Our partnership includes both devices and applications, as well as the software platform for product engagement. Also, in the technology front, I mentioned earlier, we're extending our SDK to include a cloud-based authentication server to validate, personalize and then enable customer engagement with any RFID enabled device we've deployed. To make our technology range really accessible to product engineers. We're also setting up innovation labs and customer experience and success centers. Now our engineering center in Germany has proven to be a competitive advantage with great people, equipment and exciting projects that all draw great talent. We're planning similar capabilities, first in our Southern California headquarters, and eventually in Singapore. So we'll have all major geographies covered. Not only Germany is our core engineering center, but our customer success centers, we'll be meeting at workplaces to find use case opportunities, develop project ROIs and break any bottlenecks that come up in the design pilot ramp up redesign process. With the design wins, the team, customer success focus, the technology platform, and our partnerships around chips technologies and channels in place. The final part of our strategy is focus. Our clear focus is in healthcare and medical devices. Our customer specific projects around the auto injector syringe, blood test assays, operating room tools and consumables are the highest margin opportunities. While our standard medical RFID products can scale across customers. These include our uTrust syringe check for single use syringes, uTrust blister check for prescription pill protocol compliance and authenticity. uTrust temp sense for in hospital temperature checking, and our prescription spoken content RFID devices for CVS, Spoken RX and others. We now have medical applications to span syringes, test assays and equipment at home tests operating tools and devices, prescription pharmaceuticals, high end blister pack pharmaceuticals in hospital disposables like thermometers and others. We built a portfolio giving us solutions for almost every aspect of healthcare from hospital to clinic to home. Business development and sales now is the focus to leverage our solutions into every medical early adopter opportunity. Now we're of course going after high end NFC based RFID applications in consumer experience, packaging, libraries, cold chain logistics and industrial use cases to build our scale and cover emerging markets. But you can see where the long-term focus is with our medical initiatives. Now I focused on RFID because that's our core growth driver. The premises part of our business is also lined up for strong growth. In particular, federal, state and local government sales looks strong, as do our software and recurring revenue products. With a focus on physical security in both the federal government and the state and local level, we're seeing great demand strength. Combined the need for improved physical security, expanding federal spending, fiscal health at the state level and infrastructure investments and we see lots of drivers for growth and increasing market share. Now before wrapping up, one other topic I'd like to touch on is our CFO search. After screening several dozen candidates, we have a terrific CFO, we're preparing to move forward with. Now transitions of financial executives are always sensitive. So we're being respectful of his current company's processes. We're not able to name someone today, but we expect to within the next couple of weeks. We'll go into details then. But I'm sure the industry and our investors will be impressed by his ability to lead all financial aspects of our business. As just a couple of background points. This is a finance leader who has been with a public semiconductor company through the growth phase from 70 million to 400 million in revenues over just a few years, which is exactly the growth path we're driving towards. He's deeply experienced in systems as well as semiconductor businesses, which are the best comparables to our RFID business and is operated in 100 million, up to several billion-dollar businesses. He's also built world-class teams and implemented critical financial systems in very intense public and private company environments. He started his career at a big four accountancy, so he's deep on the accounting side, as well as financial planning and operational rigor. I wish, I could say more right now, but this is important enough that I wanted to give very clear update on exactly where we are in the process. So to wrap up, here's some growth indicators from just the last few weeks. As Ed mentioned, we have over 7.5 million in new orders booked in just the first three weeks of the fourth quarter, up 46% versus the same time last year, as we look into 2022, our total backlog for all future shipments at the beginning of the fourth quarter is up 51% versus the same time last year. We've gotten our first purchase order of almost 2 million units for a major cannabis program, part of a 20-million-unit frame order. Our auto syringe customer got board level approval to go forward with the program. And our mobile device customer is increasing their focus on NFC as part of their accessory platform. Our medical device and healthcare focus is getting more traction, both with a growing range of customers, and now a full suite of standard medical RFID devices across syringes, pills, temperature, prescription apps and others. To leverage this technology and customer progress, we've aggressively expanded our RFID customer facing team bringing in some of the best talent in the industry. Federal Security spending is on a long-term growth path and our revenue predictability for the company as a whole is strengthening from the growing range of consumable use cases, returning customers and recurring revenues. So we see the rest of 2021 and 2022 continuing these trends. In 2022, we expect some of these major programs to accelerate our growth even further, as some of the revenue multiplying projects fully ramp later in 2022 and into 2023. We're also confident we'll find more opportunities like these with our strengthened team, our technology leadership, our developer’s kits, and other aspects of the leadership rebuilding in the advanced application RFID industry as it takes off. With that, I'll open to questions and discussion. And as I mentioned before, we have Manfred and Amir on the line also. So if there are RFID related questions, we can cover them in whatever depth we need. So operator, please open the lines for the discussion.

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.