Good afternoon. Welcome to Identiv’s Presentation of its Second Quarter 2022 Earnings Call. My name is Matthew and I will be your operator this afternoon. Joining us for today’s presentation are the Company’s CEO, Steve Humphreys; and CFO, Justin Scarpulla. Following management’s remarks, we will open the call for questions. Before we begin, please note that during this call, management will be making references to non-GAAP measures or guidance, including adjusted EBITDA and free cash flow. In addition, during the call, management will be making forward-looking statements. Any statements that refer to expectations, projections, or other characteristics of future events, including future financial results, future business and market conditions, and future plans and prospects 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 second quarter, Identiv continued to make progress securing our leading position in the expanding RFID-enabled Internet of Things sector. We had two primary goals in Q2, growth in RFID of over 40% validating our long range plan and gross margins holding at the 37% or above range we guided for the year. We beat both goals. RFID growth was 41% and non-GAAP gross margins expanded to 38%, showing margin expansion even while driving RFID growth. Two other key goals in Q2 were growth in our Premises business and expanding EBITDA. Our Premises business grew 19%, another quarter of growth that three times the industry’s growth rate and bringing our half year growth rate to 21%. We think this level of growth is sustainable throughout this year and next. EBITDA of $1.4 million was above our projections as we go into choppy economic times, growth has to happen with strong, positive EBITDA. So we can self fund our growth regardless of the macroeconomic environment. And we demonstrated this in Q2. Now we see a clear path to continue and to expand these growth and profitability ranges, our core markets, medical devices in RFID, and security and Premises are both reliably stable and grow even in recessions. And we’ve shown their strength in inflationary times with our ability to raise prices, to hold and expand gross margins. As a debt-free company, we’re also not exposed to interest rate rises. These all give us confidence that our long-term strategy is paying off in growth and EBITDA results. And that the nature of our business and balance sheet have us in a good position to execute our strategy, regardless of macroeconomic issues. In Q2, we kept discipline in our business execution to drive…

Thanks Steve. As Steve mentioned, our financial results reflect our continued strength exiting the second quarter of 2022 with the delivery of sequential and year-over-year growth in revenue, sequential increases in GAAP and non-GAAP gross margin and a positive non-GAAP adjusted EBITDA. Both non-GAAP gross margin and adjusted EBITDA were above consensus estimates. In addition, total future backlog increased 23% year-over-year. We believe these results demonstrate our continued commitment to protecting our margin and maintaining tight control over our operating expenses, reflecting strong operating leverage. To close the second quarter of 2022 at $27.9 million in revenue, up 16% compared to the second quarter of 2021 and up 11% compared to the first quarter of 2022. Our revenue in the second quarter of 2022 was slightly below consensus estimates, primarily due to supply chain issues in our legacy smart card reader business. The trailing 12 months revenue was $110.5 million, up 15% versus a comparable prior year period. The sequential and year-over-year change in revenue was across both our Premises and Identity segments. Second quarter 2022 GAAP gross profit margin was 37%, an increase compared to 36% in the first quarter of 2022 and comparable to 37% in the second quarter 2021. For the second quarter of 2022, non-GAAP adjusted gross profit margin was 38%, which was above consensus estimates and an increase compared to 37% in the first quarter of 2022 and comparable to 38% in the second quarter of 2021. Non-GAAP adjusted gross profit margin changes resulted primarily from our product mix, as well as our continued focus on tracking and the prioritization of higher margin products. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. In the second quarter of 2022, our GAAP and non-GAAP adjusted operating expenses, including research and…

Thanks Justin. As you can hear from Justin’s comments, our growth in RFID and Premises continued gross margin expansion, and EBITDA strength show our business model continuing to strengthen, trending towards our long-term operating model of growth, gross margins and EBITDA margin. Now, every business is exposed to macroeconomic forces this year, but because of our technology position and the market segments driving our growth, we think results in our strategic businesses will continue to be strong. This means our business path is all about execution. Regarding macro forces let me address them quickly so then we can get back to execution for the rest of this discussion. Now, in terms of macro forces, one of the top concerns people have is recession risk. And our RFID focus on medical devices and healthcare, and our Premises focus on federal state and local government security are both categories that are strong, even during economic downturns. Regarding inflation and increasing interest rates, we’ve proven we can raise prices when our costs increase. We’re debt free and capital light. So interest rates aren’t a major factor. Now, geopolitical risks are also in everyone’s minds, but again, we have a strong position. If anything, in times of geopolitical risk investments in security increase and certainly government security budgets grow, which we’re seeing. Now regarding supply chains, nobody’s immune to some supply pressures these days. We’ve shown that we can manage supplies and costs so that our RFID and Premises businesses grow fast with strong margins. And we have the demand strength to keep our strategic businesses on track. If we need to we’ll maximize margins in our growth categories over our legacy business lines. We know supply chains are always a source of risk. So, we’re managing them closely. For at least the next…

[Operator Instructions] Your first question is coming from Jaeson Schmidt from Lake Street. Your line is live.

Hey, guys. Thanks for taking my questions. Just want to start with the 2022 guidance, just so I can fully understand maybe the slight downshift that’s entirely due to you guys just baking in the potential to walk away from some low margin legacy business in the future. Or does that also bake any RFID projects, maybe being pushed to the right, given the macro?

Very good clarification, Jaeson, thank you. No, it is totally the former and none of the lot of the RFID business has got a lot of momentum and strength behind it. And that led us to even include the comment that in the current quarter, we’re looking for north of 50% growth in RFI D and that is certainly the trend that we’re on it. It’s sequentially increasing its growth rate as we look at it. And – but we know how important gross margins are in the blended gross margins and want to have the flexibility to do what we did in the current quarter, which is protect aggregate gross margins while making sure we’re creating zero headwinds. In fact, we’re putting everything behind investment in our growth businesses.

Okay. That makes sense. And it’s really helpful. And then just looking at the auto-injector market, I mean, Steve, based on your commentary, it sounds like you’re seeing some really nice momentum there. The comments regarding discussions with some additional customers, including the largest auto-injector are those in data trials or are those just initial discussions? A – Steve Humphreys: So Amir’s right here across the table from me. So I’ll let him answer that. And also that’ll make sure that I don’t step across any lines on customers because he’s the one talking to them. So he knows that we can’t comment on.

Sure. Still confidential phase, but this is another enterprise level customer that’s committed to NREs to us. So they’re binding NREs, we’re in design phase right now. And we anticipate hopefully to get something over the next two quarters, that’s actually tangible volume.

Okay. And last one from me. And I’ll jump back into queue, you mentioned four other pharmacy chains in pilots and deployments. How many of those pharmacies do you think could actually be in full on deployments by the end of this year, early next? A – Steve Humphreys: Full on deployment as in all of their pharmacies equipped and rolling there might be one of them by then. They’re all pretty measured in their rollouts. But in terms of by early next year, I expect that they’ll all be in that – they’ll all be fully commercialized in that timeframe.

Okay. Got it. Thanks a lot guys. A – Steve Humphreys: Thanks Jaeson.

Thank you. Your next question is coming from Anthony Stoss from Craig-Hallum. Your line is live.

Hi guys. Nice execution in a really tough market. Steve on the 38 NRE projects you have ongoing, do you expect all of them will be commercialized at some point by the end of 2023? Any hints at potential volume when you lump them all together. And then do you – in terms of component supply issues, do you see that they’re starting to get better? Then I have a couple follow-ups for Justin? A – Steve Humphreys: Sure. And I’ll talk about NREs and I’ll let Amir add to it as well. So typically somewhere around two-thirds of our NREs turn into commercial business, there’s some that just turn out to be experiments and that’s fine. They often come back around, but the vast majority of them definitely do turn into business and we expect that to do. That said it’s sometimes non-linear, sometimes you start out with a project, do an NRE and then the product direction changes and you end up doing another one or some variation on it. And then that ultimately becomes the business you choose. And that’s actually the main reason that it’s less than 100%. Yeah, the customers themselves did engage in NRE, the vast majority of them convert into business over time. And then there’s just, there’s always the time phasing there because this is sometimes medical device, it can be a year and a half from NRE to production and I’ve mentioned in the past that for our mobile customer who we love very much, but it was two years plus between our first designs with them and actually getting it to ramp up. So that’s how I’d characterize that profile. Then to characterize volumes, the numbers get – they get rather extreme because athletic shoes of course, there’s 7 billion of those sold a year. Just in the True Athletic use category and similar with some of the medical devices, you quickly get into several hundred million uses, but I’d say there’s two to three new use cases that would be certainly very much could be in the well over a 100 million units amongst that cohort of new NREs. Some of the NREs in that 38 are ones that have been underway in auto-injectors and others, but there’s a few that we aren’t going to add to the list and be tracking every day, but we have them as part of our business model that can be driving substantial volumes. But let me let Amir comment further on that.

Yeah. Just to add there’s, a lot of these NREs are turning from reference selling opportunities. So what may have taken us a longer cycle on the first design now is becoming much simpler in the second and third path. We’re also getting a lot of assurance from these customers that are coming forward on the NREs because they’re coming forward with multiple NREs. And one of them is on an application. The other one may couple with a feasibility study behind it. And when that usually happens, they know exactly what they want and they want our expertise to craft around it. And then hopefully then it goes to the standard sales cycle and the right project planted to ramp up. So all the right signs here, and definitely they are growing quarter-over-quarter, which is the right trajectory for us. A – Steve Humphreys: Does that answer, which you were trying to get to Tony?

Yeah, I think so. And I guess either for Amir or you, Steve, when you look at this tranche of potential new customers and the ASPs, it sounds like ASPs are moving up. But if you looked at a year ago kind of the – if you had a similar tranche NREs, what was the average ASP at that time versus what you’re at now? And if you don’t know, maybe just a percentage guess would be helpful trying to figure out or get a better sense of how much ASPs are going up? A – Steve Humphreys: So, yeah, two dimensions to that is on, pure ASP side. Partly because of the focus that we have on it and the rigor that Amir’s put into his team and everything else. It’s probably, near nearly doubled, it’s certainly 50% higher and it’s some from 1500% on that. Even the auto-injector we mentioned at $0.35, a good proportion of NREs a year ago could have been in the $0.20 range. The other thing I’d add is really just the volume. We haven’t really been talking about NREs and tracking them as a pipeline into the last few quarters. And as I mentioned, last quarter, it was a couple of dozen. Now it’s more. And truth be told, I do say we never want to be gated by NREs, but, but Amir will tell you that we probably could have done 20% more coming in the hopper. And so we’re adding people as quick as you can on that. So the growth aspect of it is both that we’re adding the number of opportunities. A lot of them as Amir mentioned are references now that people just coming to us and it’s the nature of the opportunity as people are getting more comfortable and sometimes second generation designs that you get a lot more value-add, a lot more complexity and therefore higher prices. You want to add to that, Amir?

Yeah. The only addition is really the price points are going up, because the innovation is going up. And with innovation, what we were doing last year was more around validation. Just simple authentication. Now we’re doing that coupled with capacity sensing many other add-on capabilities around tampering. And as we add that more value, we could justify a higher price point and the customers are willing to pay for it.

Super helpful guys. And then Justin really strong gross margins, 38% guys were the second half relatively flat from Q2 of now. Q2 came in higher than what you were anticipating. What do you see for Q3? You think gross margins are roughly flat or can they keep growing a little bit each quarter?

Yeah, we try not to go too granular into quarter-by-quarter analysis. I think we had put out, we’re trying to shoot for 37% for the year and I think that’s a big target for us. As I mentioned with Identity, taking a bigger and bigger piece and knowing that Identity is in the 25% range, that mix might keep us right around the 37% would be a target for us.

Okay, perfect.

It’s not that any margins are going down in our eyes. It’s more just the mix and taking a little bit bigger piece of the pie.

Got it. Thank you,

Thank you. Your next question is coming from Mike Latimore from Northland Capital.

Great, thanks. Yeah. Great execution and EBITDA levels here. So Steve, did you say that the 41% growth in RFID did not include any transformational deal revenue?

Effectively, yes. I mean some people count the mobile customer in those transformational deals, but of course that’s really part of our base for the last year and a half. But for that, it didn’t include anything meaningful. I mean, we previously disclosed 50,000 units that we sent for the cannabis pilot and some 10s [ph] and 20s and 30,000 of units in that category. But in terms of a multi-million unit ramp up, which is when I would characterize one of those actually ramping the answer is no, we’re that growth. And to be fair, the growth I characterized for the current quarter is really Amir and his team driving the business and the real embrace of some of these higher end advanced RFID devices.

So that, I guess that was my next question. So that acceleration this quarter still doesn’t include the sort of transformational projects beyond the mobility customer?

Not a big one. They may surprise to the upside, but that is not at all necessary for the numbers we referenced.

And then, you expanded the guidance range for the year on the legacy product category, I guess, as you look at the second half of the year and the kind of the sales plan, what percent of the planning would legacy comprise at this point?

Well, Justin will remind me because he has in preparation for these conversations. We don’t break them out. They’re in the Identity business segment. But we don’t break out the pieces there. But you can see that it can happen, when you pull a couple million out. It can have an effect at our scale in terms of, I mean, if we had included those, but at substantially below gross margins that we wanted, it would’ve had an effect as well. So, we’re just trying to manage to make sure that we’re supporting the core RFID and Premises growth. There’s nothing diluting the margin or growth message on that. And if the legacy business can contribute to basically, funding growth and the rest of the business, that’s primarily what it’s there for.

Got it. And then also just last quarter, you gave a number on backlog plus committed contracts as a percent of, I think it was RFID goals. Have those rough percentages changed much?

No, they have if anything they’ve progressed because I don’t remember the exact number off the top of my head, but for the fourth quarter it was lighter coverage and of course, as we move our bookings that gets higher coverage there. So it’s moved along sequentially.

Okay, great. Thanks very much.

Thanks, Mike.

Thank you. Your next question is coming from Craig Ellis from B. Riley Securities. Your line is live.

Yes. Thanks for taking the questions team, and congratulations on the margin execution in the quarter. So Steve, I’ll just start by saying, I like what you’re doing with security card and really trying to prioritize strategic growth at the right margin structure at the overall business. The question for you and Justin is really twofold off of that one. Just from what you’re seeing in the supply chain, as you look out here in early August, can you give us any sense for the degree to which you may be expecting a similar impact, in the third calendar quarter and the fourth calendar quarter, it would seem that would something similar would fit real well with where the midpoint of the new guidance is. But I wanted to check on that as for supply chain question.

We are optimistic, but we have to plan for the worst, frankly. It may already be behind us. I believe it’ll be behind us, certainly by the end of this year. But supply chain is very strange right now. Some places are – some categories of advice for loosening up others are just $2 devices that are costing you $50, if you want to get them and build today. And we’re just not going to do that. So, we are assuming that the world is not going to get a lot better, even though we see some signs that might get a lot better, but I think it’s really important. We’ve got such good growth going on in RFID and in Premises that, we just don’t want to create pressure on supporting that growth and driving it. Because they’re, there are other areas that have A, they’re supposed to be cash [Technical Difficulty] way for the business and B, I do think the supply chain issues will sort out and then that’ll, come back in as opportunity. But if it’s not in this quarter, next quarter, we don’t want to be pressured on the growth businesses to manage our way through that. Does that answer what you were looking for?

It does with one clarification. I think there were a couple references in the prepared remarks and in Q&A thus far about the security smart card business within Identity, but are there potentially other businesses that, that you would be more opportunistic about that have a potential supply chain impact? Or is it just that one business that’s really in quite?

Yes, it is really, the security cards and smart card readers. Yes.

Okay, great. Second question, if I could for Amir. Amir, I think over the last couple quarters, one of the things that I believe we’ve heard from you is, an interest and a prioritization in sales related hiring. And so with comments today around a priority of light with capability around NREs, does that mean you’re really trying to press ahead on two levers with incremental talent additions, or if you really swap one for the other, a different picture it’ll – will you help there please.

So right now are, we’re still commercially facing 100%. So revenue is top priority. Top margin business is top priority, but as we’re scaling, we are trying to find the good balance to support the number of projects, which are coming in, because of this year demand that currently is inbound. Now, outside of that we’re hiring very strategically. So, what I keep given as an analogy is they’re Navy SEALs are not soldiers. So all of our sales people are technical enough, that they basically cover two or three competencies in one. They’re usually sales people that have came up in the factory. They understood the production runs. They went into inside sales and now they’re in the field organization. So as a result of it, they can carry the solution selling the criteria much further than a green salesperson would coming into the organization.

Okay. And the hiring that’s being done is that inside of the prior OpEx outlook for the business? Or are you nudging that up just because of the magnitude of the opportunity that’s, in play with potential demand, 20% above where you are based on Steve’s comments?

No, it’s all, all within budget. Justin is right on top of me on that. So…

Yes, and then finally Steve interesting opportunity to expand capacity. Can you provide us some color, on the timing for that and what the capital cost would be and when the outlays would occur?

Yes. And actually we’ve got Manfred Mueller on the phone as well from Germany who has been driving that initiative. And we’re moving it very fast. Actually, so Manfred, do you want to comment on the, the timeline and process for Batam and then Justin can comment on this.

Hey Manfred, nice to speak with you. Thanks.

Hey, nice to meet you. And so timing wise, we have boiled down the respective locations in Batam to only two, we will be basically assigning a contract within the next week or two. In addition to that, knowing that some of the machine lead times along, we have already started communications with the factory [indiscernible] again. So we will be adding an additional two pieces of equipment. We are starting to hire and the people in order to basically train them in Singapore and then basically get them ready for the Batam facility. It is supposed to be up and running by the first quarter of 2023.

Got it. And then lastly one of the things that we’ve seen in the broader industry team is that as capacities needed in the current environment, customer deposits have been one way to sometimes partially or meaningfully fund capacity. Is that something that team is considering? And if so to what extent?

We’ll certainly have those conversations with our broad base of customers there’s, that generally is not the way we go for it, but the other aspect of it is you’re talking, a couple of million dollars in aggregate that, and as Manfred said, we expect to be fully up and running in the first quarter, which means we’ll be starting pilot runs an early runs before the end of this year. So we think we can cash flow it reasonably well and have the capital outlay, be pretty well balanced. Justin, do you want to add anything to that?

Sure. I mean, we’re taking a look at another mobile, which we all know is roughly in the $900,000 range. And we are looking at a DDA [ph] type machine, which is an upgrade from there. It’s about $2.5 million. So as Steve mentioned, our CapEx is somewhere in the range of $3.5 million to $4 million over the next, let’s say, 18 months. And we have the working capital and the cash today to fund that.

Excellent. Thanks team.

Yes.

Thanks Craig.

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

Yes. Thank you very much. A couple – up questions here. In terms of cash generation, you just answered the, the CapEx question, but do you anticipate in 2022 generating positive cash for balance?

I don’t see a big cash drain. I don’t think we’re going to be generating cash only because of the outlays. Even when I talked about those, those two machines, there’s a 30% plus deposit that goes in for 60 days and we have a pretty early payment stream on those as well, within 2022. So because of the nature of the CapEx and the timing on the cash flows I don’t see us being generating cash in the next six months, but I don’t see it going down significantly.

Okay. So cash remains around the same. And does that change in 2023? I know that you can’t give us guidance for 2023, other than you’re looking for X amount of growth, but will the cash situation change significantly in that, that year, 12 months, 18 months from now?

I don’t see it changing significantly if it, I think that we’ll be able to, we’re continue to invest in CapEx. So when I, even, if you look at this quarter, that’s the easiest way to describe it. Let’s say, we went down about $2.5 million, but if you look at my cash flow, our cash flow statement $1.8 were just strategic inventory purchases. We’re really trying to get out in front of those. And a million of it was cash CapEx. So if you just combine those two, you’ll see that we’re running really neutral on cash flow from operations, and we don’t have any debt to serve. So we hope that trends continue. So if there is a, the decrease in cash, I’m talking about would be for either strategic inventory purchases or additional CapEx.

Okay. And then one other housekeeping question I have is RFID units. Did you state the number of units shipped in the period?

We did not.

Can you?

We’ll follow up with you on that one. Because I don’t have it in front of me.

Yes. Okay. That’s it then. Thank you very much. Great quarter.

Thank you.

Thanks.

Thank you. That concludes our Q&A session. I’ll now hand the conference back to Steve Humphreys for closing remarks. Please go ahead.

All right, thanks. And again, thanks to all of you for joining us this evening. And so it’s, we know it’s very important to keep our investors updated on our business progress. So we’re going to be redoubling our efforts on that. But I think the main message will be conveying is that we’re executing on our plan. The market segments are growing very strongly despite any of the macroeconomic forces around us and we really think that’s going to continue. But to keep you updated more specifically on our progress, we’ve got several events coming up among investor events; we’ll be at the Needham Conference. Actually just next Monday, which is Virtual, will be at Canaccord in Boston in person on August 10th Lake Street BIG conference in New York in middle of September, September 14. The Craig-Hallum Conference also in New York on November 17th and Imperial Capital in New York on December 13th. So you can see a couple right off the bat and then monthly phased out. And then also we’ll certainly do some investor outreach and events along the way. So we’ll keep you posted and as always if you have any other questions or follow ups, please reach out to our IR Team and we’ll be happy to keep you posted on all the progress in the business. So again, thank you all for joining us and have a good evening.

Thank you, ladies and gentlemen, this concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.