Good afternoon. Welcome to Identiv's presentation of its Second Quarter Fiscal 2023 Earnings Call. My name is Paul, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steven 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 non-GAAP adjusted EBITDA, non-GAAP gross margin, non-GAAP operating expenses and non-GAAP free cash flow. In addition, during the call management will be making forward-looking statements. Any statement that refers to expectations, projections or other characteristics of future events, including 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 form on report 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 will now turn the call over to CEO, Steven Humphreys for his comments. Sir, please proceed.

Thanks, Operator and thank you all for joining us. Our second quarter continued our strong progress for the year with record revenues for Q2, gross margin expansion and positive free cash flow. We continued to deliver disciplined growth while strengthening our strategic position in both our RFID-enabled IoT and physical security businesses and positioning our balance sheet to support our growth. Reflecting our commitment to balance sheet strengthening growth, in Q2 we delivered positive free cash flow and positive net operating cash, a positive swing in this last metric of over $5 million from last quarter. Justin will comment on the details but since these results reflect our focus on disciplined growth and working capital strength, it's worth noting in the business overview. With a fully normalized supply chain and our position as the go-to company for advanced RFID-based IoT applications, especially in medical and specialty packaging, Q2 has kept us on track for 2023. Because we focus on specialty applications with nearly zero exposure to commodity UHF based retail tags, we've also outperformed some competitors, who've struggled recently and our outlook seems to be in a better position even than some industry bellwethers in the RFID chip category. In our Security business, our Premises segment, where our focus has been on expanding our share of wallet with our comprehensive security platform across video, access control, analytics, credentials and readers, Q2 revenue was up 8% year-over-year. Now behind this aggregate growth, our core Hirsch Velocity platform grew 23% year-over-year, with controllers up 33% and access security readers up 37%. Looking more closely at our business unit performance. In our RFID-enabled IoT business, in the second quarter we shipped over 44 million units. Our non-recurring engineering roster remains strong at nearly 60 projects with more than half of these projects in…

Thanks Steve. As Steve mentioned, in Q2 2023, we delivered record revenue for our fiscal second quarter, while improving year-over-year gross margins and a return to positive free cash flow. We believe these results paired with our focus on driving disciplined growth in our IoT and physical security businesses position the company to continue its growth momentum in the second half of 2023. Second quarter, 2023 revenue was $29.6 million in line with consensus estimates up 6% versus the comparable prior year period and up 14% versus Q1 2023. Second quarter 2023 GAAP and non-GAAP adjusted gross margin, was 37% and 38% above consensus estimates. GAAP and non-GAAP adjusted gross margin reflects our continued focus on maintaining our margin profile in 2023. In addition, we added $1 million in cash and cash equivalents to our balance sheet, while continuing to increase our investment 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 second quarter of 2023, our GAAP and non-GAAP adjusted operating expenses, including research and development, sales and marketing and general and administrative costs were $11.9 million and $10.6 million, respectively. This was consistent with Q1 2023 levels. As discussed in Q1, we were able to deliver on our plan to expand revenues quarter-over-quarter, while maintaining our operating expense levels. We continue to believe our current quarterly operating expense levels will enable us to meet our 2023 goals and we do not expect our remaining two quarters to vary significantly from this amount. Non-GAAP adjusted EBITDA was $0.7 million in Q2 2023, an increase of $1.6 million versus Q1 2023, as we were able to increase revenue, expand our GAAP and non-GAAP adjusted gross margins, while maintaining our operating expense profile. This was concurrent…

Thanks, Justin. As we go into the second half of 2023, we're continuing to build on the work we put in during the first half of the year, as well as taking advantage of the industry position we've built as some of our less well-positioned competitors face some headwinds. In IoT, we accomplished this in several ways. First, by winning NRE projects for strategic technically complicated applications. Second, building our industry leadership in key verticals, as the go-to solutions provider. Third, increasing awareness of our solutions through customer-facing initiatives like our new IoT Product Finder and IoT Webinar series. And fourth, expanding into Thailand for cost competitiveness and capacity expansion to meet growing demand for IoT solutions, while simultaneously reducing our production input costs. In physical security, our complete platform is showing its competitive advantage. Through the first half of 2023, we've kept building out product engineering sales and sales engineering, tech support training and systems. We launched a range of new and refreshed products and our focus now is on leveraging our channels to bring our complete product range into all of our target market segments. For the second half of 2023 and into 2024, our focus continues to be expanding our competitive advantage in our businesses, while strengthening our balance sheet. To drive cash flow we'll keep working down the strategic inventory position we built when we had to manage supply shortages. We're optimizing expenses, as you can see in our reduced GAAP expense levels quarter-over-quarter. This aligns with our financial plan to build our cash and working capital strength over the next few quarters. We're fully supporting our competitive strength while managing our working capital health. We're focusing on inventory turn improvements, AR collections and other healthy approaches to protect working capital using revolver debt only as…

Thank you. [Operator Instructions] And the first question today is coming from Craig Ellis from B. Riley. Craig, your line is live.

Thank you for taking the question and congratulations on the relative performance to other players in the IoT field Steve. Clearly, doing a nice job with maintaining your financial performance when others are deteriorating midyear. I want to start just by digging into the Wiliot commercial opportunity. Nice to see the progress year-to-date and starting on a follow-on order. But can you take a step back and just look out maybe towards next year and provide some broad parameters on what the commercial potential could be for Bluetooth low power and help us understand how that might ramp up and what role Thailand might play in manufacturing?

Yeah. Great question Craig. And I'll try to keep it tight because we can talk about that almost all day. And thank you for noticing the performance relative to some others. We've -- as you know we started shipping Wiliot just in December of last year and the takeoff has been pretty impressive. And there are also other BLE-enabled RFID companies now coming into play. So we're starting to see it as a category of technology. And as I said in my comments, you get the best of the both worlds that you've got the range of UHF and you've got the data intensity and capability of NFC, but without the range constraints of NFC. We're starting to see third-party integrators solution providers coming up with all kinds of new ideas enabled by passive BLE which has never been possible before to actually get sufficient power from the RF signal for a full BLE device. And of course, once Moore's Law starts kicking in you start to get longer range lower power requirements and of course more data capabilities. We certainly don't know exactly where it's going to go but Wiliot themselves is on a continuing growth trajectory. I'll let them comment on their actual numbers but certainly substantially greater going forward. And then now we're starting to see others coming into the category and then that really can create an accelerating effect. Now to be clear, we're not talking about 2024 guidance or anything like that but just in this category, there's a lot going on and people starting to build applications and solutions around it. And then us coming in from the perspective of technologists, we see that, it's solving a couple of things that have been bottlenecks both in the NFC and in the UHF category. That's how I would categorize it. I know, it's a little bit general but does that give you a fair picture, or should we go into some more detail?

That's fair. Just comment on manufacturability Steve and what role Thailand could play as you get to that.

Yes, good point, because it is very complicated. I think we mentioned on the prior call that normally an RFID chip has a few touch points and these BLE chips tend to have a dozen and a half so they're very complicated to produce when you're trying to manufacture 1,000 units an hour. But our Thailand facility has all the capabilities that we have in Singapore and a very skilled workforce there that we've been able to hire frankly from some competitors and former competitors. So we think Thailand actually faster than we expected will be able to cover most of the technology arc that are needed in our products. Now, there's some customers who require that you manufacture in certain locations so you can't move. But Thailand will be able to come online for most of our production capabilities. And actually, we've got on the line here both Amir Khoshniyati and Manfred. So let me ask Amir to comment on the BLE and Wiliot business, and then I'll ask Manfred to comment on the production.

Sure. And then just building on the BLE aspects and Steve's point it is the best of all worlds. Because you are getting supply chain visibility that you would get with traditional UHS. You're getting the consumer experience that you get with NFC. And you get all the condition monitoring value-add. From that spectrum, early-stage technology on a good ramp and we've announced in both the press releases that we are on the right trajectory with the current project expanding to the second site for that large retailer. The project is progressing overall very well and very excited about the progress of the technology.

And Manfred, do you want to comment on high production?

Absolutely, yes. So maybe also on the context of the Wiliot's deal we are preparing -- we are preparing the site for the next wave of BLE pixels. We've had some great learnings over the first seven months of successful producing that type of new technology. And some of the new equipment we are bringing in is also going to be tailor-made to basically produce that type of application. From that point of view, we have had a lot of learning's that are transitioned over into the new pipe side plus new equipment that's coming in there. In general, we are rolling up production in Thailand. The first couple million units are produced. The first ones, already in the month of June so for the opening we've had that. And we are ramping production, we are ramping people and we are basically, getting ready for additional projects being taken on, and if necessary transferring more from Singapore over to Thailand, in order to take advantage of some of the improved production costs related to labor rates, lower labor rates lower overall costs in terms of lease rates and such. From that point of view, we should be seeing that kicking in fairly soon.

That's great, guys. Thanks for all the color on Bluetooth Energy. I wanted to move on and inquire about the comments you made about supply, Steve. You sound more confident in supply than, I think anything I've heard in a year. Can you comment on, how broad-based improved availability is? And then from a cost standpoint, since a lot of component costs rose over the last 18 months throughout the supply chain, I suspect with Identiv, how is the cost trends that you're seeing? And are we seeing decreases versus what you might have in inventory and things that would ultimately help boost gross margin?

Yes. And you're absolutely, right, it's much more positive than we've been for probably 18 months plus. And as usual it flips faster than you think, and that's happened in this case. Costs have come down. Our purchase price variance that we were getting hit on the margin, with last year has really come down. Freight also has come down substantially. And in some cases, airfreight things like that, can be down by a factor of three or four. Lead times have also reduced. So that means, you've got to carry less -- you don't have to carry as much inventory, and you can be more flexible in real time. All of that has moved in the right direction so that it really feels frankly, totally normalized now across all those dimensions. And then as you mentioned, there is still some inventory at some of the lower prices. It takes time to burn it all down and sometimes you have a tale of open POs, at higher prices with providers and so you have to burn those down even while you're doing the brass knuckle negotiations necessary to get it down faster. But as that burns down, then of course that naturally comes in and gives some margin room. Because our intention of course is, the value of our products is the value of our products. And if the cost of input goes down, that should go to our gross margin line for the most part. Yes, it is a much better position than we've been in from a supply and lead time and COGS perspective, than easily the last 1.5 years.

That's, great. And then lastly for Justin, before I hop back in the queue. Justin, I think I heard you mention that you'd expect OpEx to be flattish through the rest of the year. Can you just talk about what the gives and takes are for gross margin, as we look through the second half? Thanks guys.

Sure. On the OpEx front, that's correct, we do anticipate flat OpEx for the rest of the year. We've been pretty consistent. We were consistent last quarter as well, that we've put quite a bit of investment into OpEx throughout 2022, and the first quarter of 2023. We feel we have the workforce and the OpEx, we need to meet our goals for the rest of 2023. We expect some operating leverage there in the back half of 2023, as revenue resumes its cyclical nature in Q3 being Fed yearend and others. As far as gross margin, with the mix that we have, we are -- we don't give specific gross margin guidance going forward, but we do expect gross margin profile to remain consistent with what we saw in Q2.

Thank you.

Thank you. And the next question is coming from Anthony Stoss from Craig- Hallum. Anthony, your line is live.

Thank you. Hi, guys. Steven, maybe I missed it, can you update us where you stand with your strategic review that was kicked off during the quarter? Is that still ongoing? And then, maybe Amir, if he could take the mic, I'd love to hear if deals are taking longer, if pricing is holding up. Pretty incredible that half year NRE designs or engagements are related to medical. I would assume that that's a higher ASP, so anything you could share would be helpful.

Absolutely. The strategic review I did mention we normally don't give specifics in terms of the strategic reviews. There's so much investor interest and it is important so we did say that we have appointed a financial adviser and we're working with them on the proactive process you'd expect with such an engagement. The Board is working very closely with them. And that's in the comments I made so that's moving forward I'd say is the best way to say it. Amir, do you want to comment on the business side that Tony was asking?

Sure. Yes. From an NRE perspective, Steve mentioned it was 60 NREs but I think the important thing to note here is our burn rate through those NREs is a pretty consistent stream. As we're finishing out NREs taking them to the engineering teams with the various customers they're going into evaluation. The team is doing a really good job with the pipeline in advancing new NRE deals so we have a very, very good probability of closing. And then also we understand that the sales cycles within healthcare and pharma and medical devices typically take longer so we need more in the queue to increase our probability of a lot of these taking off in a shorter timeframe. In addition to that the price points are holding. Because these are high-value goods they're justifying the higher price points. And then the chips themselves are a higher tier of chips. They're type 2s or type 4s with added encryption around authentication around capacitor sensing so it justifies the price point and holding the margins for them. So overall, I would summarize that the pipeline looks really good and our number one focus right now is to continue putting more within that pipeline. A lot of these evaluations while they're being tested by the engineers and we're getting feedback we have more in the queue to increase the probability and speed of these projects.

Thanks for the color, Amir. Best of luck, guys. Thank you.

Thanks, Tony.

Thank you. And the next question is coming from Jaeson Schmidt from Lake Street. Jaeson, your line is live.

Hey, guys. Thanks for taking my questions. Just looking at Wiliot you've obviously started shipping against that follow-on order. But when we think about unit shipments for Q3 and Q4 what sort of trajectory should we think about there?

I don't think we've broken that out but I think consistent levels would be -- we mentioned that the follow-on order was of a similar magnitude to the initial order and so I would be thinking in terms of consistent levels. And when we get more of that upside going into 2024 that we were talking about we'll communicate that. Again always constrained by Wiliot themselves. They'll -- there's some limitations to what they'll let us talk about and we fully respect that as a customer.

Okay. Got it. And then just as a follow-up. You called out some commercial wins in the premises business. When you look at the commercial opportunity within that segment is it becoming a growing proportion of that business, or how should we think about that opportunity longer term?

Yes. The commercial part of the business is growing. I mean quarter-by-quarter it varies. This is Federal year end. So Federal will probably have some seasonal strength to it. But we put a real effort into expanding commercial business and it's expanded as a proportion of the business there. We put in more regional sales managers and we've done some product launches. And then this product launch that I mentioned on the call Primis that in particular is focused at commercial and in particular small need business in commercial. I would expect that that commercial portion will continue to grow.

Okay. Perfect. Thanks a lot, guys.

Thanks, Jaeson.

Thank you. There were no other questions. We would now like to move to closing remarks with Steve Humphreys. Steve?

Okay. Thanks, operator and thank you all for joining us today. As always of course we'll keep you all updated as our business progresses. And in Q3 we'll also be at the Rosenblatt Tech Conference in late August and the Lake Street Best Ideas Growth Conference in New York in mid-September. We also have a couple more IoT webinars coming up one with CollectID and another healthcare IoT webinar this time together with NXP. Any of those that you'd like to access please just contact IR and we can connect you into those. With that, thank you all again for your time and support and have a good evening.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.