Good afternoon. Welcome to Identiv's presentation of its Fourth Quarter and Fiscal Year 2023 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, 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 and non-GAAP operating expenses. 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, strategic review 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 the 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 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. Before we get into our business and financial comments, I need to acknowledge a mistake we just made in our processes. We mistakenly put our earnings results up on our website shortly before the market closed. We pulled it down when we became aware of it and immediately contacted NASDAQ. This has never happened before and we've already put in place very tight cross check processes to make sure it never happens again. We pride ourselves on careful and complete disclosures and communications with our Investors. Investors depend on our communications being available as expected and only then. I personally apologize for this and we will not let it happen again. That was doubly unfortunate, because it's a negative way to open comments about our business where we're making some very good progress. So we'll address any questions you've got about this or anything else in the Q&A section as always. But let me first get into our business update. 2023 finished with a fourth quarter that reflected our priorities of disciplined growth and balance sheet strengthening to position us for investment to accelerate our strategic position in both our RFID enabled IoT and physical security businesses. Consistent with that strategy, in Q4 we kept our focus on high margin revenue that supports our balance sheet and margins. Q4 net revenue was $29 million, while we drove balance sheet and working capital strength by reducing non-GAAP operating expenses below $10 million. Our cash position was improved by $3.6 million in free cash flow in Q4, the highest free cash flow quarter since Q4 2020, reflecting a sequential $4.7 million swing from Q3 2023. In addition to driving revenue in the fourth quarter, we put in substantial efforts towards the future direction…

Thanks, Steve. As Steve mentioned, in 2023 we were able to deliver revenue growth, consistent margins, controlled operating expenses and generate positive cash flow from operations. This enabled us to maintain a strong working capital position. We achieved these results, while focusing on driving disciplined growth in both our Identity and Premises businesses, including our new cutting edge Premises products, our focus on SCRI and the continued build out of our operational Thailand facility, which positions the company to continue its growth momentum in 2024. Fourth quarter 2023 revenue was $29 million, in line with our previously announced guidance range and flat versus the comparable prior year period. Fiscal year 2023 was $116.4 million, a 3% increase compared to fiscal year 2022. Fourth quarter 2023 GAAP and non-GAAP adjusted gross margins were 35% and 37%, respectively, as compared to 36% and 38% in 2022. The year-over-year decline in margins versus the prior year period is attributable to the product mix between Premises and Identity segment sales. Fiscal year 2023 GAAP and non-GAAP adjusted gross margins were 36% and 38%, respectively, which is consistent with 2022. GAAP and non-GAAP adjusted gross margin reflect our continued focus on maintaining our margin profile in 2023 despite the rising cost of materials, 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%. GAAP and non-GAAP adjusted operating expenses for the fourth quarter 2023, which include research and development, sales and marketing, and general and administrative costs totaled $11.8 million and $9.8 million, respectively, as compared to $10.2 million $9.3 million in 2022. Fourth quarter 2023 GAAP operating expenses include $0.4 million in strategic review related costs. GAAP and non-GAAP adjusted operating expenses for fiscal 2023…

Thanks, Justin. Across 2024, we expect use cases in SCRI to continue to grow and expand to new customers. In Premises, we're positioned with the strongest refreshed product lineup to support growing 2024 revenues of our end-to-end platform with continuing margin strength and expanded recurring revenue software and services. As we develop our competitive value in both of our growth businesses, we'll keep both our balance sheet and working capital strong. 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 pilots for technically complex SCRI applications, particularly in the healthcare and consumer engagement verticals. Healthcare and medical devices are the most strategically important market for our RFID IoT solutions. Our focus is on delivering solutions that meet the challenging technical requirements of our SCRI customers, which positions us to lead entirely new categories. Now healthcare projects move slowly. There's progress quarter-over-quarter, but large scale ramps are hard to forecast. The NRE and pilot pipeline is healthy and we've been devoting more resources to the best near term production rollout revenue generating opportunities. Now this is a key category for increased investment. We're balancing relatively near term use cases like auto injectors with the long term transformational market for medication compliance. Now this compliance category is possibly the healthcare industry's biggest opportunity to generate economic benefits. As an indication of the scale of the opportunity, nearly a quarter of all first time prescriptions aren't filled and of these, almost half aren't taken according to their administration protocol. We believe RFID provides a unique platform to address this multi $100 billion issue for the healthcare industry. We'll focus more on this when we complete our strategic activities since this will take time, focus and…

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Craig Ellis with B. Riley. Please proceed.

Thanks for taking the questions and all the information guys. Steve, I wanted to follow-up on a couple of things and just clarify the revenue items. So one, it sounds like given what's happening with Wiliot strong production in the fourth quarter, but a period of digestion upcoming, so that would impact the Identity business sequentially in 1Q. And then you mentioned, as you closed out your prepared comments that there might be some near term impacts on the business from strategic efforts. And I'm wondering if there was any additional allowance factored into headline revenue guidance or anything you'd expect in either segment that we should look to in the first quarter, potentially the second quarter on that matter?

Yes. Thanks for the question, Craig. I think those cover it in terms of the headwinds and there are a number of tailwinds in all these areas. But we want to be very careful that we're setting ourselves up to meet what we put out there. And so, I think that's exactly the way to characterize it. There's a couple of things that we're offsetting, but we also are seeing good momentum and we talked about the consumer electronic company that's growing, some of the other healthcare areas that are growing nicely and physical security with all the product launches are going well. And I also mentioned the Identity reader order that we had in the first quarter, which was pretty substantial. So it's got pros and cons pushing it, but we wanted to be sure to get the cons out there as well and you identified the ones that we wanted to highlight.

Got it. And just on the revenue point, Steve. We have a very challenging macro that lingers at least from the mosaic we put together. How are you feeling about the businesses forecast stability on the top line now? Is it starting to lock in? Is it still a little bit difficult just given the crosscurrents from the macro? Can you give us a sense for how you're feeling about the visibility that you have and the ability to forecast each segment of business overall in the top line?

Yes. Thanks for that also. We're feeling good about the visibility and that's why we wanted to be granular about what the forces are to the positive and that are creating things that we have to overcome. We don't think there are many -- in the old phrase of unknown unknowns. We think we've got line of sight to the factors that are driving our opportunity. So we think we've got pretty good predictability, actually quite good predictability.

Got it. On that note, I'll flip it over to Justin. Justin, on gross margins, can you give us some help with the gives and takes just beyond volume for the first quarter from the level that we hit in the Q4, I think, at least versus my model, gross margins were lighter mostly due to significant mix shift towards Identity from Premises. But what are the gives and takes with first quarter's gross margin, please?

Yes. We do see a bounce back. It's primarily going to be mix in Q1 when we do anticipate a bounce back to Premises on that side. So we'll see a slight bump in margins for Q1 off of closing out what we did in Q4. We're trying not to go too granular, but yes, we should see a rebalancing in that in Q1.

Okay. And then lastly, you had talked last year about improving cash generation with better working capital management. It does seem like that came through strongly in the Q4. The question is, how much of that is still ahead of you and what can we expect with cash from operations over the next couple of quarters? And for debt pay down, what linearity should we expect through the year? Is it going to be first half weighted, ratable, more back half weighted? Thank you.

Yes. I think it will be more back half weighted. I think as you saw in our Q4 press release, we had some pretty significant costs related to that strategic transaction and those will be cash that's going out the door and that's going to continue into 2024 as well. So we did from my prior guides that we do have some pressure on cash with the strategic review and other items that we're working on. So it will be a little bit more back half weighted than we had originally anticipated.

All right, guys. Thank you. I'll hop back in the queue.

Thank you.

Thanks, Craig.

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

Thanks, guys. Steven, you're blow by the Wiliot explanation pretty fast in your prepared remarks. Is it purely an inventory digestion? Or did -- I hear you say they're moving to next generation technology? And also the guide lower in revs, how much of that was related to Wiliot?

So it is a technology transition even more so than in inventory topics. Again, I'll let -- they need to address that, but we wanted to address that as well. And that's the major factor there. What was the second part of your question, Tony?

How much of the reduction or the down sequential revenues can you attribute to Wiliot? Is it half the reduction for Q1 or ballpark?

It's of that order. They were a couple of $1 million a quarter customer. So that's material and we're -- we expect to offset a chunk of it, but we want to be careful about how much how fast.

Got it. And then just bigger picture, you guys you surprised yourselves in a lot of healthcare related design wins, a lot of healthcare revenue, which typically isn't cyclical. Are you now seeing more a cyclical nature even from your healthcare customers?

Good question. The answer is no. There is some seasonality to different healthcare use cases that we find when there's different -- for example, we do some -- a lot of surgical instruments and ICU devices. And there is some seasonality to how busy those categories are. But it's not like federal government where you know you have big bump in the third quarter and the cyclicality you see there. So it's more product specific than it is macro seasonality in healthcare that we're seeing, because as you say aggregate for healthcare is not a cyclical business.

Got it. And then lastly for me, Justin, just when you look at kind of the starting point for Q1 and the nature of Wiliot going to pause for two to four quarters? Help us understand, to me it looks like 2024 revs are probably going to be low 2023 revs.

We typically try not to give full year guidance. We're getting away from that. We're going quarterly at this point, but we don't think it'll be less than 2023. No.

Okay. Appreciate it.

Yes. Thanks.

Okay. Our next question comes from Jason Schmidt with Lake Street. Jason, please proceed.

Yes. Thanks for taking my questions. Understanding sort of the dynamics with Wiliot. I think last call you mentioned seeing some kind of order push outs across the board. Just curious if you're still seeing that occur?

In terms of related to Wiliot per se or other category, just want to be sure I'm answering the right thing?

Yes, just within the RFID business.

No, we're not seeing push outs in RFID in terms of delays or people having oversupply or something. It's much more project specific like I was mentioning, whether it's the healthcare products and their project cycles or with the BLE applications or any others, it's very much project specific.

Got it. And then just as a follow-up, Justin, how should we think about OpEx trending throughout this year?

I think what we're looking at -- are you talking about non-GAAP or GAAP or both?

Non-GAAP.

Yes. Directionally, it'll go up a few percent. Basically, we have a merit increase here in April that will be throughout the organization, that will be upping it a little bit, but not a significant uptick, but slightly up from 2023.

Okay. That's helpful. Thanks a lot guys.

The next question comes from Michael Piccolo with Imperial Capital. Michael, please proceed.

Hi, guys. Thanks for taking my question and I appreciate you taking the time to chat. One statistic stood out to me in the presentation. I wanted to get a better sense of how it's changed as the percentage of recurring revenue in Premises. I think you guys said it was above 20% in 2023. I'm not sure if you guys have disclosed it before, but just curious what that percentage may have been in the one or two year prior? And how high of a percentage of revenue do you think that could go on a longer term basis like out years?

So I'll take that from a couple of angles and then Justin just jump on in if you want. That number has been 15% a year ago and in fact now it’s – we want it to be roughly round, but it’s around 24%, so it's well over 20%. And where we expect that to go, we want to drive it in the physical security business to be clear. We want to drive that to be the majority of the revenue base there. It's going to take five year to seven year transition. But when we talk about that Primis cloud and our Cirrus products, those are all driving towards a recurring revenue model, which we want to become the core business model for the business.

And just one follow-up on that. I think you mentioned that it was a shift in contracts that they were changing the terms, I think you had said, forgive me if I misunderstood?

That most of our market opportunity near term is selling to current customers and transitioning them from an on prem solution to a cloud solution. That's certainly the case for commercial velocity customers. In federal, we've got our FedRAMP cloud solution. And then with Primis with SMB, there's a predisposition towards cloud and that's very much a cloud natural product. So it really is across the board. But what I was referring to was Velocity Commercial and Velocity Federal were the vast majority of current customers are perpetual license customers and they're the lowest hanging fruit for conversion to recurring revenues.

Got it. That was very helpful. Thank you.

Thanks, Michael.

Okay. We have a follow-up coming from Craig Ellis with B. Riley. Craig, please proceed.

Yes. Thanks for taking the question. Steve, it seems like the Thai facility is having a really nice ramp. And my understanding from past conversations with the team is that, that is a location where we were working on Wiliot production. So one, can you confirm that that's where that production was based? And two, as we think about the Wiliot pods, what does it mean for utilization in that facility as we look out at that facility and then just overall for Identity segment gross margins in 2024?

So actually the Wiliot production was in Singapore. We balanced the technology, so we can do it in both locations now, but that's actually a new event there. And you're right to point out the Thai facility, it's been very much a highlight that when we did our -- we've now done our first COGS qualification run because we reset our standard costing on a regular basis, the cost of operation at Thailand was actually lower than we had originally done when we did our ROI calculation on it. We've also found really a production being an example that we can move higher technology process capabilities faster in the Thailand than we expected. So we think we can move there faster and get some gross margin advantage out of it. And then your last question I think is around overhead absorption on gross margins. And that's something we're constantly balancing. That's one of the things that does keep us taking some of the lower margin business, because it absorbs capacity and therefore liquidates your overheads. So we're balancing to keep that, but it's certainly possible that there will be some pressure on margins for ops overhead absorption, offset by moving more of the production to Thailand versus Singapore where we have better gross margins.

That's very helpful. And is it possible to quantify the mix of production you'd like the team to achieve out of Thailand as we look out over the next 12 months and maybe 24 months? Are there some milestones that you have, whether it's getting to 30%, 50%, whatever percent of total production given that significant cost advantage that you have there?

Yes. So there's two factors in that. There's -- you say there's just the scale of production and then there's the processes. And actually with the progress we've made, we accelerated moving some of our higher end processes into Thailand. We took advantage of Chinese New Year when there was some shutdown to move a little bit faster over to Thailand. I'd love to see more than 50% of our production out of Thailand going out of the year. We of course have to balance that quality and production times and run times and what the sales folks bring in and what we can balance. But I think that would be a good goal to have 50% there. What we have learned is, there's really no technology limitation. The workforce in Thailand is well able to manage the technical capabilities both at the engineering and the production level and the costs, of course, are lower. So as you can tell -- and the fact that we leased the additional building right next to our current building means we can expand in a really efficient footprint. If we'd let that building go, the second expansion spot would have been a distance away and you'd have been in a trucking logistic situation instead of clean flow production. So we're -- I think Thailand is going to be a competitive advantage for this foreseeable future.

Very helpful. Thank you, Steve.

Thanks, Craig.

Okay. We have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.

Okay. Thanks, operator, and thank you all for joining us today. We really appreciate the continued support of both our team and our shareholders and all of you who are listening to us. Anyone wanting to keep up with our business' progress, please join that Mazars webinar on March 28 that we mentioned. Also visit us in early April in Las Vegas, both RFID Journal and ISC West are in the second week in April, both in Las Vegas. So you can visit there in person for both parts of the business. And then we'll also from an investor perspective be holding an NDR with Lake Street Capital Markets in April likely. And of course, we'll be at the B. Riley Conference in May. So again, thank you all for joining us. And of course, we look forward to communicating thoroughly as soon as we have a strategic action that can be shared. So thanks again and have a good evening.

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