Good afternoon. Welcome to Identiv’s Presentation of its Fourth Quarter and Fiscal 2022 Earnings Call. My name is John 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 may be making references to non-GAAP financial measures or guidance, including adjusted EBITDA, non-GAAP gross margin and non-GAAP operating expenses. 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 and quarterly report on Form 10-Q. Identiv assumes no obligation to update these forward-looking statements which speak as of today. I would now turn the call over to CEO, Steve Humphreys for his comments. Sir, please proceed.

Thanks, operator. And thank you all for joining us today. In 2022, we built out our teams and technologies, executed our strategic plan and made progress towards our target business model. This shows in our 2022 results. We delivered record revenue and adjusted EBITDA, while expanding our gross margins. Revenue was $112.9 million, reflecting 9% year-over-year growth while full year adjusted EBITDA grew 33% year-over-year to $5.4 million. Gross margins were strong, up 72 basis points over fiscal 2021 to 37.6%. Our IoT security strategy is to focus on high value solutions in verticals that value the technical benefits we bring to their products. We have to be carefully balancing and limiting our participation in more commodity products but we need some participation in the low end because it drives lower average costs, because of volume and scale. But we have to be very selective so that serves our scale needs but doesn’t dilute our margins or our strategic focus. We struck this balance in 2022. It shows in our gross margins, and in the nearly 20% revenue growth in our RFID-based IoT business. However, some of our transformational opportunities, the use cases with both strong margins and major growth and scale potential didn’t take off or grow as fast as we wanted. Now each opportunity is still intact and we expect them to reach scale. We built the solutions, the relationships are in place. So we are confident that will grow as they deploy and ramp up. In our physical security business, our Premises segment, margins are consistently strong without the volume versus margin trade-off. In this business we also built out our complete team in 2022. With the strong foundation and a focus on growth, we grew revenues 17% for the year in Premises, more than double the…

Thanks, Steve. As Steve mentioned, in 2022 we delivered record revenue, along with expansion in gross margins and adjusted EBITDA. This is in addition to a total future backlog increase of 16% year-over-year. We protected our margin and maintained tight control over our operating expenses. We believe thse results, paired with our continued investments in our IoT business position the company to continue to grow in 2023. Full year 2022 revenue was $112.9 million, within our guidance range and slightly below consensus estimates. This was up 9% versus the comparable prior year period. Fourth quarter 2022 GAAP gross profit margin was 36.5% a significant increase compared to 33% in the fourth quarter of 2021. For the full year 2022, our GAAP gross profit margins were 36.3% versus 35.7% in 2021. For the fourth quarter of 2022, non-GAAP adjusted gross profit margin was 37.9%, which was higher than consensus estimates of 37.2% and an increase compared to 34.2% in the fourth quarter of 2021. For the full year 2022, non-GAAP adjusted gross profit margins were 37.6% versus 36.9% in 2021. GAAP and non-GAAP adjusted gross profit margin changes resulted primarily from our product mix, our continued focus on higher margin customers and raw material cost reductions through strategic inventory purchases. We were able to increase margins year-over-year, while continuing to increase our investments in technology and manufacturing processes and equipment. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. In the fourth quarter of 2022, our GAAP operating expenses including research and development, sales and marketing and general and administrative cost were $10.2 million, compared to $11.3 million in the fourth quarter of 2021. For the full year 2022, GAAP operating expenses were $41.3 million as compared to $38.4 million. In the fourth quarter of…

Thanks, Justin. Our focus for 2023 is delivering healthy growth with strong margins, expanding the strategic position we established in 2022, while sustaining our balance sheet and making clear progress towards our long-term business model. In IoT, this means expanding our leadership in strategic long-term markets, building the capacity and cost competitiveness to grow with a wide range of applications and to sustain accelerated growth and margins when our customers launch transformational applications. In Premises, our focus is on maximizing per customer share of wallet and expanding our leadership in both the commercial and federal markets through the team, channel and technologies we’ve built as well as through strategic partnerships. In IoT, in order to keep expanding our industry leadership in strategic markets, we are focused on making progress within each of our transformational opportunities. Beginning with mobile, we are supporting five designs with our largest mobility customer. This is down from eight designs as two amended and one we’ve exited due to low margins. As I mentioned earlier, this customer faced declining sales last quarter. So we are paying close attention to their volumes. They kept afford us last quarter, but shipments haven’t yet returned to historic levels. However, we are also working with them on a different application area with more volume potential than the ones we are currently in combined. So we’ll report details as they develop. Moving to healthcare. Specifically, in the auto injector category for our initial customer, we started a second NRE to further develop the design which we are working on through the first half of 2023. Our second project an applicator test for the same end-customer, we’ve been working with the supplier for specialty in coating. In the third project for a different end client, an NRE design that we delivered is…

Thank you. [Operator Instructions] And the first question comes from Craig Ellis with B. Riley. Please proceed.

Yeah, thanks for taking the question and Steve, congratulations on a number of the strong annual financial metrics in the business, especially around profitability. I wanted to start just by following up on some of the supply points that you made. Can you go into more detail around alternate sources of supply and what the COGS profile of some of those sources looks like relative to your historic lead supplier?

Sure and I'll make a couple of comments, and then Amir is here with me, too. So I'll let him jump in on that as well. But of course, ST Micro is the closest alternate that we work with. Although there's some other smaller ones as well, EM and others. And then also in this year, we get a little bit of latitude because Wiliot provides their own chips that they get out of the fabs. So that portion of our demand and our revenue isn't constrained by our largest supplier. So we've got some diversity as always it takes time for designs to come online, something that's been designed with a chip from somebody else do you want to design in an ST Micro, that part will usually take a few months, but others can come up faster and because Wiliot, it's a bit of a larger share of the proportion, that also diversifies our supply. Amir, you want to add anything else?

Sure. And just building on that, the second half of the year was all about cross qualification. So with the ST announcement that we recently had, we got the highest runner chip cross-qualified so it takes a little bit of pressure from one of the largest suppliers leading into it. And then to Steve's point, we are really focused on IoT solutions as a whole. So Wiliot, it also is creating a very good buffer as well with an alter technology. So we are very well positioned.

Got it. And then, related to supply, as we look at the balance sheet, Justin, we see inventory ticking up $4 million to $5 million in the quarter, cash down. Is the change in inventory really related to some of the supply things that Steve and Amir just talked about or is it something else? And when should we expect inventory to normalize? And what's your outlook for what that means for the cash balance?

Yes, we've talked about a little bit in the script as well, but we actually have made strategic purchases in Q4. I expect those to continue a little bit into Q1, but we will right size and get cash back to previous levels in Q2 and beyond. So what we're looking at is we're targeting working capital more than we target our specific cash balance, Craig. And we're maintaining a target of over $50 million in working capital. The inventory is good, strategic inventory purchases we met to repurchased strategically, and we're going to build that up a little bit, and then we're going to balance it out towards the back half of the year.

Got it. And then, if I could just close it out with a two-parter, the first part for Steve, the other part for you, Justin. So Steve, I didn't catch all of the elements that fall within the $125 million to $130 million revenue outlook beyond the 20% premises growth. So can you repeat those elements? And then Justin, clearly, the company is prioritizing gross margin EBITDA. Nice to see it, but what should we think about with respect to the contour of gross margin through the year given some of the gives and takes strategic mix outs, improving supply in the back half, et cetera.

Okay. Absolutely. So first, on the growth side, the premises growth in 20% range you said the IoT solutions growing in the 25% range overall, but there's also some lower margin revenues we're rotating out of about $5 million to $7 million that offset that growth, and then the smart card reader revenue is staying flat. We don't expect any further declines from them. They should be solid, but flat and therefore, that moderates the blended growth overall. Does that fill in what you're looking for, Craig?

Yes, and just within that, Steve, before we go over to Justin, where do you feel like you've got the most confidence in this year's growth versus things that may either be timing related as we always see with enterprise-related IoT projects and periods of macro uncertainty or things that might be more source of supply or supply dependent.

We think we've factored all those in now, and that's why we tried to give the underlying growth as well as some of the things that we're rotating out underneath that growth. So the 25% growth overall, we have built up project by project, and there's a couple of customers that were low margin that we know we want to rotate out of, and we have that factory in is very specific. So we think we have it pretty well built up. Amir, do you want to add any color commentary to that?

Yes. I would say we're very well positioned and again, goes down really to the products that we're offering. We're in alternate technologies, and they're both very well positioned both in RFID and MBL. And then it positions us very well in the prominent segments that are fast growing. So within health care, smart packaging, specialty retail applications, they get embedded into products and live with the life cycle of the products, so they're not commoditized. It gives us a really good mix and a balance, and that's very high probability and puts us in a good position.

Got it. And then any thoughts on the contour of gross margin Justin, yes, thanks.

Sure, absolutely. We're very specific in our guidance that we gave the full year annual revenue guide. But we were clear as well coming out of this quarter and what we've done for 2023 from a bottoms-up perspective. We do expect margin expansion without giving an exact number, I'd say in the 1% to 2% range, somewhere around there would be a good number for 2023. It is a key focus as we talked about, we are trying to move out of some of our lower-margin products, and that's going to be a key for us. So we've done it. I think you were here, Q4 of 2021, where we had the big message. We've been able to maintain a stable margin profile for all of 2022 right in line with what we wanted and we expect that to continue into 2023.

Great. Thanks for the help guys. I'll hop back in the queue.

Sure. Thanks.

Our next question comes from Brian Ruttenbur with Imperial Capital. Please proceed.

Yes, thank you very much. Let me dig down now into the cash burn in the period. I know that you inventory, working capital, a variety of things happened in the fourth quarter. What do you anticipate for the year in 2023 in terms of cash burn, cash generation, give us a ballpark?

What we think we'll do for the year will actually be flat to exiting 2022. We'll be up possibly $1 million or $2 million in exiting 2023 as well. We do feel – like I said, in Q1 and Q2, we'll have some cash burn for Thailand expansion, some CapEx that we're going to be doing over the next four to five months, and getting that facility up and running. So the first half, you could expect it to possibly decline a little, but we will get that back plus more by the end of 2023.

Great. And then, I think the one question was asked a couple of times in your confidence in where we are right now. I guess, the question at this point is what could go wrong that you haven't factored in. It seems like you've taken a lot into consideration thought this through, but where are the holes in the theory for growth going forward? What could go wrong that you haven't factored in?

I think we've tried to give some pretty good visibility that we've built it up from the ground up. And it really is important to us that we put numbers out there and we commit to them and stick to them and we deliver on them. I think we factored in the risks of dependency on customers launching products, the risks of that are always there in the physical security business and how fast the projects are going to deploy. We've got a good funnel that gives us a fair amount of upside protection on that. I mean downside protection. So I think we've tried to factor in supply and demand as well as sales cycles and customer uncertainty in terms of deployment. If a major recession hits, then as I mentioned in my comments, things like cannabis, specialty packaging, and mobile devices, those can all be recession affected. But we factored in – frankly, we are expecting some recessionary effect. So that would be as if it was a bad, a strong recession than most people are thinking.

Great. Thank you very much.

Thanks, Brian.

Our next question comes from Jaeson Schmidt with Lake Street Capital. Please proceed.

Hey guys. Thanks for taking my questions. Just want to dig into sort of that lower margin, that $5 million to $7 million that is offsetting the growth in that IoT solutions. I mean, how much of that is a function of just lack of supply and therefore, are you guys having to prioritize higher margin business? And how much of it is a function of kind of the pricing environment changing?

Yes, it's those two factors and you're exactly right that with constrained supply, we'll prioritize higher margin business with some categories that are just lower-margin library, for example, is a lower-margin category. And then also there is some projects that we started early that were strategic and we've been very open about that that some of them we enter into in the beginning with lower gross margins in order to get the business going and then expand as we go forward. And I mentioned in my commentary that in the mobility space, there is one that we've moved on from, because the margins were low in that. So it's in all three of those categories.

Okay. And just to follow up on that, I mean, is this sort of a new situation? I mean, when you had given guidance on the Q3 call, was there an assumption that you would have some natural low margin business that you wouldn't go after, but now you are seeing more of that, hence, sort of the revised guidance? I am just trying to factor in, yes, what was factored into previous guidance compared to kind of this updated outlook?

Yes. So a couple of things. Certainly, the rigorous attention to gross margin is one of them. And we do think that there is more of a recessionary risk we're hearing from our customers caution about demand in mobility, even in the medical area where they are just cautious about when exactly they are going to pull the trigger on launching projects. I think that's working through the budgeting process of a number of companies and so we're trying to be thoughtful about that and make sure that we factored it totally in and it's not going to be something that we have to come back and comment on again.

Okay. That's helpful. And then, just the final one for me and I'll jump back into queue. Justin, how should we think about OpEx throughout this year?

We are going to see an increase in OpEx. Obviously, we increased our overall headcount in 2022. So that will be fully burdened and fully loaded into the 2023 plan. We are continuing to make some strategic hires and we'll make some hires within – along with our Thailand expansion in 2023. So they'll be without the exact guidance that we do. There will be an increase in our non-GAAP OpEx and our GAAP OpEx as well in the15% range, somewhere around there.

Okay. Perfect. Thanks a lot guys.

Yes, thanks, Jaeson.

The next question comes from Anthony Stoss with Craig-Hallum. Anthony, please proceed.

Good afternoon guys. My congrats to the Premises team, they did a really good job. Steven, I wanted to focus in on to last quarter, you took down the full year guide predominantly on issues on the supply chain side. You're taking it down yet again. Is this all demand-related or is there still some further issues you see on the supply side? And then also, I'd love to hear more color from Wiliot, you expected them to ship 10 million or are you expected to ship 10 million units in Q4. You shipped one not too long ago, you thought you'd ship $100 million in 2023. Anything you can update us on both the quarter and then the full year.

Absolutely. Yes, supply is continuing to be a challenge, and that's why we said we – and that's also why we've put some specific market data points in there. We hate to name companies, but we need to have credibility in the statements that are made. And the fact that this supply is going to continue to be a challenge in the IoT space from one major supplier. Offset somewhat like we were talking about earlier with the SMicrochips and the fact that Wiliot does their own chips, and there is some demand softness in there. That's why I tried to make clear where we see good demand. We have this breadth of customers in health care, and that means a lot of smaller demands that are more reliable versus waiting for a couple that are large takeoffs. That gives us a much more reliable base but we are watching carefully. Again, as I said in my comments, mobility and a couple of areas and cannabis, we'll see when that takes off. We basically said, let's not expect that to move in 2023 versus that expectation that there's legislation going through. There's all kinds of positive things that the MSOs will say, but we want to be cautious about that so that no matter what happens, we're delivering. Then on Wiliot, you're absolutely right. We had initially believed that we could get out to about 10 million units of Wiliot in the fourth quarter. We hadn't done NRE on it, other technology. It is a really tricky technology. And what was very clear is they've got to be high quality, high yield and the engineers part in partnership with Wiliot have put in a lot of work – and I think - and you all can diligence this with Wiliot directly by all means because we've built a great relationship with them. They were very impressed with how fast we got up to speed with the production and the quality of the production and the yield of the production that's coming out. That gives us confidence that we will be in a good position for deliveries that I already mentioned. I also would mention, as you said, we were planning more really at the fact that, that wasn't coming through, we could pivot in and bring in more demand at good gross margins to fill in what we had expected would be Wiliot shipments. It does show – gives you a data point that there's some breadth of demand there. So, I'll stop there, and I can add more color if you want. But did that address each of the questions you were asking?

Yes, no, to some degree, I wanted to shift gears on STMicro, as you know, I'm a big fan of STMicro in covering it. The one fast track design that you talked about, was that a new customer, new design? Second part question is, given the issues you've had with NXP, can you - are you focusing on STMicro going forward to try to bring that down from 85% of your designs to 50-50? Or I guess, how extensively do you plan to use STMicro?

Amir, you want to hit the specific project and shipment of chips?

Sure. So, I would say the first step here with ST was to cross qualify a product that would be agnostic in the market. So it wasn't just defined as a partnership that's tuned down to one customer solely. Now we do have one customer application that's picking up traction around it. So we have a use case. But at the end of the day, we're putting all of our weight on the customers to make a selection of which direction they want to go. We have options for them, which mitigates the risk and the dependency on one supplier. The other side of it is with the NXP, they are a strategic partner of us historically. So they act as an extension of our sales team. They walk us into a lot of opportunities. So that still is fully intact. Our hope is now with the ST partnership, customers now have more flexibility, not only with the decisions they make, but also we have two suppliers that act as extensions of our sales force and walk us into more opportunities.

Got it. Thank you. If I could just sneak in one for Justin, on the Thailand facility versus Malaysia, how big a bump overall when it's fully ramped? Do you think you can get to gross margins from Thailand versus Malaysia?

Probably 5% to 6%.

Perfect. Thanks guys. Best of luck.

Thanks, Tony.

The next question comes from Mike Latimore with Northland. Mike, please proceed.

Hi guys. This is Alan on for Mike. When was the next tranche of manufacturing capacity to be complete? And will that get you to the $500 million unit level?

Sure. The next step is when Thailand is coming online, which will be in the June time frame, that will get us into the high 300s, 400, and then, there will be more equipment delivered in the fourth quarter in the October time frame and that will get us to that 0.5 billion unit. It was now. Again, 0.5 billion units in terms of process passes. If you have something like a Wiliot or a mobile device that will sometimes take two passes and it won't be that many devices coming out. But from a price point perspective, if you think about low $0.20 per unit then that times the capacity gives you more of a sense of the revenue capacity. Does that answer what you're asking for?

Yes, for sure. And then, if I could squeeze one more. I guess, how is inflation affecting your customers' demand levels from their customers if it is at all? And have you been able to raise prices and if so, by how much?

So that’s two questions there. First, inflation. We haven't seen inflation hit it so much as fear of recession and recessionary effects. So handset sales dropping a little bit, that's more recession than inflation, I think, similarly, customers being cautious about budget deployment for new product launches, that's more recessionary concern, I think than inflationary concern. And then price rises, Amir, you want to touch on on?

Yeah, customers are happy to get products. So from our standpoint, prices have not affected them and we've been in a healthy position to raise them and we did two of them. We did one last year, midway through the year and then we did another one effective January 1st.

Great. Thanks guys.

We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.

All right. Thanks, operator, and thanks to all of you for joining us today. As you can hear, we're very positive about the business opportunity and especially the new markets that we're already leading in and we're expanding into. And we really expect this lead to expand because the teams we've built really are best-in-class. And I think you'll see that it shows in the market share we're already winning, the partnerships we're building, the ability to expand production and win some strategic business, while we're also expanding gross margins and EBITDA margins and that all comes from the strength of the technology and the teams. So, as we go forward next to here, my final comment is that rebuilding investor confidence is really a top priority for us this year, and we really appreciate the continued support we've been getting. We'll keep giving updates on our progress with milestones and metrics and ongoing investor and analyst access and outreach. And then, meanwhile, of course, the vast majority of our team will be focusing on building our business. So, thank you all again for joining us and have a good evening.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.