Good afternoon. Welcome to Identiv's Presentation of its Third Quarter Fiscal 2023 Earnings Call. My name is Tom, 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. In Q3, we continued to focus on high-margin revenue growth in our strategic business lines to strengthen our balance sheet and our business growth. Our Premises business grew 15% year-over-year to a record $13.6 million, and our video software revenues more than doubled year-over-year. This brought our software services and recurring revenues to a record over 20% of our total Premises business. However, in the Identity business, mostly within the lower-margin products of our RFID segment, we had a major revenue shortfall, coming in about $3 million below what we had planned. We'll talk about this in more detail later, but I wanted to address it early. We had three customers, in particular, push out orders in the library, packaging, and warehousing and logistics categories that delayed shipments, which we expect to recover by the end of Q1. We also had a design change in a logistics application that affected Q3 revenue. One action we're taking immediately from a planning and communication perspective, we're moving to quarterly revenue guidance. This way, we can factor in every upside and downside and give clear projections as quickly and completely as possible to our investors and analysts tracking our business. Now, let me first address the RFID segment of our Identity business. I want to be clear about one fact, our RFID strategy is intact and making progress. The revenue miss is very frustrating, but it does not harm our core business progress in high-value Specialty Complex RF-enabled IoT solutions or SCRI. This is a category where truly leading is happening, but it's still early stage. This is a high-margin business opportunity in the RFID segment. We now have over 50 customers in the $20,000 revenue range who've deployed new innovative SCRI products at…

Thanks, Steve. As Steve mentioned, despite a revenue shortfall in RFID, in Q3 2023, we were able to deliver record revenue for our fiscal third quarter, while also expanding sequential and year-over-year gross margins and EBITDA to their highest levels in eight quarters. We also continue to maintain a strong working capital position. We believe these results prepared with our focus on driving disciplined growth in both our identity and premises businesses, including our new cutting-edge premises products, our focus on SCRI and build-out of our Thailand facility position the company to continue its growth momentum in the fourth quarter of 2023. Third quarter 2023 revenue was $31.8 million, lower than our expectations, as previously noted. This represents a 3% increase versus the comparable prior year period and an 8% increase versus Q2 2023. Third quarter 2023 GAAP and non-GAAP adjusted gross margin was 37% and 39%, both above consensus estimates as we're able to expand margins in our Premises segment offset in part by a decline in margins in our Identiv segment related to product mix, particularly in the Identiv reader product line. GAAP and non-GAAP adjusted gross margin reflects our continued focus on maintaining our margin profile in 2023, 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 third quarter of 2023, our GAAP and non-GAAP adjusted operating expenses, including research and development, sales and marketing and general and administrative costs were $11.6 million and $10.3 million, respectively, a decrease from Q2 2023, marking the second consecutive quarter we were able to expand our operating leverage by delivering expanded revenues in excess of our operating expenses. We expect this trend to continue in Q4 2023. Qur Q3…

Thanks, Justin. As we go into the end of 2023 and into 2024, we expect the shortfall that we had in Q3 and our lower-margin RFID products will be behind us. Although, we're watching very carefully the customer segments that pushed out demand. Despite these concerns, we expect our high-margin use cases in SCRI will continue to grow and expand to new customers. In premises, we expect to continue the growth, margin strength and recurring revenue expansion. As a result, we expect to keep our balance sheet and working capital strong as we build our competitive value in both of our businesses. Let me start by addressing the Identity business, particularly focusing on the RFID segment. In RFID applications for IoT, we build value three ways: first, by supporting NRE projects and subsequent pilots for technically complex applications, which sustained higher margins and give us an edge for full-scale production orders for our SCRI applications. Second, by solidifying a reputation as a specialty applications provider, reinforcing our industry leadership as evidenced by our joint marketing and product initiatives with partners like NXP, Wiliot and CollectID and our R&D lab expansion that can support the entire range of customer profiles. And third, by expanding our lower-cost production footprint in Thailand, giving us the scale and flexibility to be the best provider to the growing demand for RFID IoT solutions while simultaneously lowering our production costs, enhancing our cost competitiveness and supporting gross margin expansion. Now let me now address our premises business. In physical security, we accomplished our leadership goals in five ways: First, by offering a tightly integrated end-to-end physical security solution that goes from identity provisioning to all facets of access control through the integrated video surveillance, all enhanced with analytics-based intelligence throughout with a single pane of glass…

Thank you. The floor is now open for questions. [Operator Instructions] And the first question today is coming from Jason Schmidt from LakeStreet. Jason, your line is live. Please go ahead.

Hi guys. Thanks for taking my questions. Just a clarification on your commentary regarding normal seasonality, looking into Q1, historically the identity business is down sequentially. But just considering some of the pushouts you've seen, could you actually be flat to up? Or do you still expect that normal seasonal pattern?

I think we'd still expect the normal seasonal pattern. Jason, maybe it will be moderated a little bit as you're saying. In fact, I would expect it will be moderated a little bit because we have some things that should push into it. So that should give us a little bit of strength. But as you can hear from the commentary, we're trying to be cautious about customers that might be -- just not reliable. It's very frustrating with somethings to happen. But fundamentally, I think you're right. They're a little bit less down than normal is certainly something we're expecting unless something changes.

Okay. That's helpful. And then just as a follow-up, when you look at that RFID pipeline, understandings, where are the customers pushing things to the right? Have you seen any significant cancellations though?

We haven't. They have all been push outs. But again, I'm just very cautious because there were some push outs that were late in the quarter. And the biggest challenge is when you get a push out late in the quarter because we have to produce, we don't have a lot of flexibility to pivot on there. So -- but so far everything has just been a, oh, we're going to be taking it next quarter and we're managing our inventories. That's the storyline, but the impact we can't tolerate, But that is what we're being told so far. If we hear something different, our intention is to share whatever we're hearing.

Okay. Understood. Thanks a lot, guys.

Thanks, Jason.

Thank you. Your next question is coming from Anthony Stoss of Craig-Hallum. Anthony, your line is live. Please go ahead. Q – Anthony Stoss: Thanks, guys. Good afternoon. Just to confirm, all of your supply constraints have now been fixed or is it just a factor of less revenue or do you think truly if you had unlimited demand you'd be able to get a limited supply?

Yeah. I think the supply side is in very good shape, both from each vendor and also the diversification that we've got on vendors. We've got -- if anything, we've got some positive PPVs and freight and other things that are contributing a little bit to gross margin and OpEx being better. So it has turned the corner from that respect. Q – Anthony Stoss: Got it. And then on your Q4 guide, just curious, it seems like Justin may mention OpEx flat sequentially. Curious on kind of gross margins for Q4, what you expect both OpEx perhaps and gross margins for 2024 as a whole?

Yeah. I think that we'll continue to see what we saw in Q3. I think we talked a little bit out. OpEx is relatively flat and margin. There's a little bit of a mix in there. We do expect a little bit of a bounce back on the identity side, slightly lower margin. There might be a little push on pressure on margins in Q4, but pretty consistent to Q3, which as you can see, we're above expectations. Q – Anthony Stoss: And then just your thoughts, Justin, on OpEx going forward into 2024? Are you going to try to keep them at these similar levels all throughout 2024?

We're hesitant to give 2024 guidance, as you said, but if I were to directionally comment on it, yes, I think it would be consistent with 2023. Q – Anthony Stoss: Got it. If I could throw another one for Steven, healthcare definitely becoming a great category for you guys. I think it's definitely the right place to be. Of the pilots that you have in healthcare, I'm guessing it's a small number. But how many of those or percentage or ballpark, just any more color, would require FDA approval before they would move forward?

Very few are FDA approval folks. In fact, it was just that one which we highlighted from the beginning when we knew we'd have to go through approval. Typically, we're on the device side of things. So if you're just doing a peripheral aspect of the technology on the device, you can typically get, I don't know all the details of the FDA structure, but apparently there's umbrellas in which they can slide it in and carry it under their FDA approval for the overall device. That just wasn't the case for the auto injector, partly because of the volumes and I think the medication that they're thinking about for it that they were being very careful that it was FDA-approved top to bottom. But typically, not nearly as much. In fact, we've got a Amir Khoshniyati on the line. Amir, you want to add a little bit more color to that in terms of what you're seeing directly from the customers related to FDA approvals or not?

Yes, very much aligns to the points that were made. If it's not hindering how the product works, it doesn't strive a requirement to hit the FDA mark. The auto injectors that we're working on and where we make progress, that one had to do with the label adjusting a physician because RFID tag was going right behind that label. That's the reason that one was submitted to FDA. But in summary, the majority of them are not going that compliance route. So, that's to our advantage from the time cycle. Q – Anthony Stoss: Got it. Thanks. And since you're in the line of here, I'm just curious, are you getting any pushback with the slowing economy on ASP or any pricing pressure from your prospective customers?

No pressure, as Steve mentioned, because of the health care focus, it's pretty recession-proof. The only challenge we have is this is a slow-moving segment, just getting the approvals through these organizations. And specifically, when the product does get speced and it goes to from an NRE to a small pilot run to a controlled run, these processes typically move pretty slow because they don't want the product to become a bottleneck in the supply chain. And once we get through that phase, the ramps typically pick up exponentially, but that's our challenge working in health care. It's having the patients to really work through their approval cycle. Q – Anthony Stoss: Got it Thanks for all the color guys. Best of luck.

Thanks Tony.

Thank you. [Operator Instructions] Our next question is coming from Craig Ellis from B. Riley Securities. Craig, your line is live, please go ahead.

Yes, thanks for taking the question and team, nice job on the adjusted EBITDA in the quarter, nice to see it moving up. Steve, I also like the change in the guidance period from annual to quarterly. I think that makes a lot of sense in a macro that is this volatile. But I wanted to make sure I understood what was really changing as we go from where we were, which is annual guidance, which shaded up to $127 million and now calendar 2023, which is $117 million. It looks like from the comments, about 60% of that is the low-margin RFID IoT pushouts in another $15 million was some of the one-offs that you had in premises in the quarter that you detailed. Is that right? And then what would make up the other, call it, 25% to the variance.

Yes, I think you've got it structured right. And the other part, which is Q4 variance per se because you characterized some of the Q3 and the Q4 there is some conservatism. I mentioned that one of our biggest customers in Israel -- and we ship -- we transship through Israel, everything gets tested there and then sent on to a big customer in the US. We just have to be realistic that things could happen there, and we're already seeing some things that are creating friction in the system. And then similarly, I mentioned library and consumer goods. And until we see demand as well as payment reliability and everything else that goes with a healthy customer relationship, we're just trying to be careful that not only will we have the demand, but it will be healthy demand, proper margins, proper payment terms and no compromises on the balance sheet.

Got it. That's helpful. And then next question is related to gross margins. It's actually a two-parter. I'd love to see the premises pop to 60%, the up 200 basis points, is there anything structural there? Or were those more one-time period benefits in the quarter? And then on the identity side, I would have expected with the low margin push out for gross margin to be flat or better, but it was down, so why would it be down if we were mixing out some lower margins that be a push-up?

Sure. I can take that one. On the Premises side, it was largely mix, our readers and controllers and access control. Carry a higher margin. We had a strong Q3 driving the margin up there. So I think that is a good number. It wasn't as much of a one-timer as it is structurally what we're able to sell in the product mix factor within premises in Q3 that benefited us there? And then on the identity side, it was largely attributed to our smart card readers. And we had a pretty big dividend and margin profile there on the smart card readers.

Got it. Okay. And then lastly, if I could just pitch one to -- I mean, as we go from really focusing on NREs within RFID, IoT and really focusing on the next step in the process before we get to volume production. What does it mean for your team operationally? And what does it mean for the way that you feel like you can roll up the business to speed? And what does it mean for the ability to either accelerate, either growth or provide more predictable growth? Thank you.

Yeah. Two-pronged answer to that. So the first is the pipeline and the way that we're getting intake to create NRE opportunities. That is staying in place. We're actually putting a lot more investment from a marketing perspective to make sure the webinar is there. We're creating awareness around the SCRI type applications we have. So the demand continues in a steady stream. But what we're doing with the notation we made with 50-plus customers in the smaller revenue range that are starting to ramp, we're really tasking the sales team to go much deeper into these accounts. To try to find cross-selling opportunities within divisions, not only homegrown, but then also to get involved and try to grow those accounts and ramp them much quicker. So this includes some added services with field application engineering, getting to know exactly how their supply chain works and then really providing consulting level guidance to get the projects to a faster ramp. So it's NRE and then at the same time, it's getting more hands on and much deeper with the customers.

Got it. Thanks so much, guys. I appreciate the insight.

Thank you, Craig.

Thank you. And there are no further questions in queue at this time. I would now like to turn the floor back to Steve Humphreys, for closing comments.

All right. Thanks, operator, and thank you all for joining us today. From this discussion, you can certainly see the strategic opportunities as well as some of the challenges we have in the key parts of our business. Near-term results are certainly what matter the most in public markets. And so we're really determined to make sure that investors have very fast and clear insights at all times, and this is what drove our move to quarterly guidance. We also have three investor events over the next five weeks with Lake Street and Craig Hallen this month and with Imperial Capital in December. And as always, we're available to discuss our business status and outlook with investors. So in the meantime, we're completely focused on building our strategic position in both of our core businesses, driving our Premises and IoT businesses forward aggressively, as well as pursuing our strategic review to maximize the value opportunities for our investors. So thank you all again for joining. And have a good evening.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time. And have a wonderful day. Thank you for your participation.