Identiv Inc (INVE) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Identive Group third quarter 2010 earnings call and webcast. My name is Deanna and I will be the Operator for today. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes and in addition you may also listen and view this conference call as a webcast on the Company's website, www.identive-group.com.

Now, I would like to turn the conference over to your host for today, Ms. Darby Dye, Director Investor Relations. Please proceed.

Thank you. Hello, everyone, and thank you for joining us today. Speaking on today's call are Ayman Ashour, Chairman and CEO, and Melvin Denton-Thompson, CFO. The purpose of today's conference call is to supplement the information provided in our press release which was issued earlier today announcing the Company's financial results for the quarter ended September 30, 2010.

Before we begin I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends and our competitive position constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. The forward-looking statements we make today speak as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today. Please refer to today's press release, our annual report on Form 10-K for the year ended December 31, 2009, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

During this conference call we will also be making reference to non-GAAP results or projections including non-GAAP gross margin, overhead costs, adjusted EBITDA and non-GAAP EPS. These non-GAAP measures exclude all or some of the following -- acquisition, transition and integration costs, equity-based compensation expenses, overhead allocation and amortization and depreciation. Identive uses these non-GAAP measures internally and believes they provide a meaningful way for investors to evaluate our operating performance. But we caution investors to consider these measures in addition to, not as a substitute for nor superior to, Identive's consolidated financial results as presented in accordance with GAAP. A complete reconciliation between GAAP and non-GAAP financial measures is included in today's press release which is available in the Investor Relations section of our website.

And as a reminder today's call is also available as a webcast on Identive's website at www.identive-group.com. If you are viewing the webcast please note that you may enlarge the slides of this presentation by clicking on the magnifying lens in the bottom right-hand corner of your screen.

At this point I would now like to introduce Ayman Ashour.

Good morning and thank you, Darby, and thanks to all of you for joining us today. Q3 was another quarter of positive momentum for Identive in a number of important areas. Sales grew 75% year on year to $23.3 million, and up 10% compared to the previous quarter. Year on year growth was, first of all, obviously driven by our acquisitions. But it reflected very important underlying line growth on a like for like basis of 11.5%. We shipped $2.5 million worth of SCM IT secure reader kits for the first of four large orders related to the electronic system and ID program in Germany. Volume shipments for the remaining three orders including the order through our other division, Multicard, have begun in Q4 and will continue over the next 12 months.

Hirsch benefited from continued demand from the US government sector during the quarter. And TagStar achieved record revenues driven by a variety of new applications including secure tracking of pharmaceutical products and electronic authentication. It's important to be aware that in this particular quarter we actually hit over $12.5 million RFID inlays in production. As in the previous quarter, project delays and again continued shortages of semiconductor components curtailed additional sales activity, particularly in our SCM reader infrastructure business. The overall economic environment is improving a bit in terms of number of codes and project activity, but delays and deferrals continue, in particular in the commercial sector and also state and local government in Europe and elsewhere.

Gross margin in Q3 was adversely affected by the product mix and particularly lower margin on the German EID program. Overhead continued to decrease as a result of the cost reduction initiatives we implemented in Q1. And on a like for like basis again based on non-GAAP overheads we were 18% lower in Q3 than we were a year ago. So significant sales improvement over a year ago like for like basis but important reduction in overheads. We have taken further measures to reduce costs over the course of the year including the introduction of shared services in the US and Germany and reorganization of our Multicard Germany and Switzerland as well as our Brazilian operations. We are pleased with the progress we have made but our cost structure still remains high and we want and we plan to continue to work on this issue across the group.

Adjusted EBITDA performance improved in Q3 and we achieved overall adjusted EBITDA of $1.2 million in Q3. Now, if you look on a year-over-year basis that is a swing from minus $1.3 million last year, again year on year, exactly pro forma basis, to a plus $1.2 million on a like for like basis this year. So that is an important improvement. The combination of strong sales and lower costs puts us on track to achieve our adjusted EBITDA target for the year of between $900,000 to $1.5 million. There might be some changes a little bit in the overhead and the margin where we're expecting the margin to be a bit lower than the guidance and the overhead to be a bit lower than the guidance so therefore we will end up right where we've projected we are going to be. Obviously there's still a few weeks and months left in the quarter. But we are optimistic we will be there.

Cash, our operating results in Q3 boosted our cash position by $1.6 million. And we ended the quarter with cash and cash equivalents at $6.2 million compared to $4.6 million back in June. Another important point is that we entered Q4 with a strong order backlog. And additionally we won important new orders in Q3 or in the last six weeks or so in Q4 including the IRS order in the US, new and existing customers in the telecommunications sector and data center security in Asia, provisioning and services order from rival Rabobank in Holland for cashless payment for their 45,000 employees, worker ID and payment management orders in Australia.

Let us now move on to look at some of the highlights of Q3. I just mentioned the improvement in the cash. That is obviously an important highlight for us. One exciting development of Q3 was the increasing level of synergy we are experiencing across the group, as individual businesses leverage each other, technologies or regional geographic presence and market expertise to win new orders and expand sales. You will notice that TagStar supplied the RFID labels used for the Multicard program with Rabobank in Holland. SCM won its first volume reader orders for government security applications through our ACIG Brazil business. And also ACIG in the US continued to work closely with TagStar to secure orders for limited use RFID-based tickets for major mass transit system in the US. This synergy is a really good example of how Identive's ability to provide secure ID solutions across the whole value chain enables us to capitalize on significant market trends within the whole global market.

Onto government sector. The sales activity in the government sector was strong. Hirsch continues to benefit from high program activities as the various US government agencies, on federal primarily but also state level, implement new enhanced security systems to comply with the various Homeland Security presidential directives, principally HSPD-12 and HSPD-5. In Q3 the professional group within Hirsch received an important order from the US Internal Revenue Service, or IRS, to provide the head to end solution for the Agency as they move to a single enterprise-wide physical access control solution. They plan to have this system deployed across the IRS several hundred facilities. Hirsch technology has been specified by the IRS in their bid request to the market and it's the only manufacturer that can utilize the head to end solution currently being installed.

In Europe, SCM Q3 shipments for readers for the German electronic ID program were ahead of our plans and we shipped the first of four significant orders. And the largest order remains yet to be shipped through our own Multicard division. To remind you, Multicard was selected by the German Federal Ministry of Interior as project manager for the distribution of some 300,000 readers to users in several regions in Germany. Along with application software and related services. The first shipments actually were made already in October. Shipments from both SCM and Multicard will be continuing through the third quarter of 2011.

Another important milestone for us is we have launched Multicard in the US with RockWest which we acquired in Q2 and now have been integrated into the Multicard organization. In the US Multicard saw good activity in the third quarter with projects at state, local governments as well as healthcare and education.

Again in the third quarter we had our share of performance issues, including continued shortages of semiconductor components in both our SCM and TagStar businesses. And at the SCM level this resulted in roughly $500,000 of revenue moving out of Q3 and pushed into Q4. We also did not execute quickly enough on improvement plans for underperforming areas of our business. And as a result it's going to take us a bit longer, and we are going to need to work harder to right-side and align our Multicard operations in Germany, Switzerland, and ASIC operations in Brazil. I'd like to add that we already see good improvement in Q4. Our working capital performance in Q3 was not good. Indeed, it was poor. We need improvement in this area.

We had record sales, as I mentioned, at TagStar. This was fueled by record production of nearly 13 million inlays in the quarter. This is particularly significant because we also had some large production problems in August which resulted in a high scrap rate of the product that impacted our overall volume and impacted the business in the quarter. The underlying performance were corrected in September and, in fact, September was our best month ever, producing just about 6 million inlays. While the production issues were corrected during the third quarter, the growing demand for inlays, transponders and other RFID components highlights our need for additional manufacturing capacity to address our market opportunities.

And this comes in very timely with our planned acquisition of Smartag. The acquisition of Smartag was announced last week. It will add needed capacity enhancing our presence in Asia Pacific region. And it's interesting that a lot of the manufacturing methodology at both TagStar and Smartag are very similar. As a quick reminder, we have entered into a share purchase agreement with the French connector company FCI Group to acquire their Smartag subsidiary and an associated portfolio of RFID and related IP. Smartag specializes in high-performance design and production of both HF and UHF RFID transponders and inlay-based solutions. Smartag has unique expertise in multiple antenna technologies and this gives them significant versatility and customizing solutions. An important thing, and we have looked at Smartag for a long time, is their position in the payment markets and the important alliances they have in the FC technology area. The additional capacity of Smartag will give us great flexibility and improved access to the Asia Pacific channels and markets. It will also be an important launchpad for us in that region. We are expecting that the Smartag acquisition will be an accretive acquisition on an adjusted EBITDA basis in 2011. The transaction is expected to close within the next couple of weeks or so.

In summary, our business continues to gain momentum in Q3. And as we operate to see more synergy out of the individual businesses and we have begun to expand and deepen opportunities for the group as a whole. The government sector employee and citizen ID programs at all levels continue to be important markets for us and the security needs and evolving technologies creates additional opportunities. Outside government, exciting new applications are creating increased amount of demand for ID solutions. In particular, we are seeing strong development and strong opportunities in the area of electronic cashless payment across different countries. We are supporting the sales momentum with continued unrelenting focus on cost reduction across all parts of our business and it's important to see our acquisition and integration costs are also declining. Our CFO Melvin Denton-Thompson will be going into some detail on this below the adjusted EBITDA line.

We expect that much of the momentum we experienced in Q3 will continue through Q4, both in the government sectors through the programs such as the citizen ID program in Germany, worker ID schemes in Australia and employee access control at the IRS and in the US and other markets such as telecommunication and asset tracking. We continue to rightsize the overhead in specific areas of the Company to deliver profit performance and are also enhancing our management team with the addition of experienced professionals such as Steve Summerill who can help us increase the efficiencies and the success of our operations.

We are maintaining our full-year guidance, as I mentioned earlier, for 2010. Our current outlook for 2011 is positive. We will be expanding our sales resources to take advantage of growing momentum in sales across various regions. In particular we will be targeting additional markets in Europe and the Middle East. We are reiterating our guidance for 2011 but we are reviewing the outlook in the coming weeks and will provide updated guidance of 2011 that reflects the addition of Smartag on our Q4 call.

I would like now to turn the call over to Melvin who will be going through the Q3 financial performance.

Thank you very much. I would like to start by comparing the first quarter results with the actuals through the third quarter of 2009. 2009 third quarter actuals did not, of cours, have the 2010 acquisitions, Bluehill Companies and RockWest. Third quarter again showed improvements year and year with both acquisition and organic growth. Third quarter revenues were $23.3 million, showing a 75% increase over 2009 third quarter revenues of $13.3 million. Gross profit margins were 47% compared to 54% in the same quarter last year. The change resulting from business and product mix. Overheads were $9.8 million, an increase of 21% when compared to the $8.1 million in the third quarter of 2009, but that, of course, corresponds to an increase in revenues, as I mentioned, at 75%. The resulting adjusted EBITDA was positive $1.2 million compared to a loss of $0.9 million in the corresponding period last year.

Moving onto the comparisons of the 2009 third quarter pro forma numbers which take into account the effects of acquisitions, revenue of $23.2 million, an effective increase of over 11% over 2009 third quarter pro forma revenues of $20.9 million. The gross profit margin at 47% was lower than the corresponding 2009 period pro forma margins at 51%, reflecting product mix including German EID projects and less ID management. Overheads reduced from $12 million in the pro forma numbers to $9.8 million in this quarter, reflecting the impact of the cost reduction programs. 2009 third quarter pro forma adjusted EBITDA was $1.3 million compared to the $1.2 million positive adjusted EBITDA we have in the current quarter. If we then compare the current quarter with the prior quarter, the third quarter revenues represent a 10% increase over the second quarter revenues of $21.2 million with growth particularly the in the ID product segment, and particularly in Europe. Gross profit margins reduced, as discussed. Overheads reduced by 3% from $10.1 million to $9.8 million. This resulted in the adjusted EBITDA increasing from $0.7 million in the second quarter to $1.2 million this quarter.

In summary for the income statement, the third quarter again showed an increase in revenues over both the previous quarter and the pro forma numbers for the same quarter last year. While the gross profit margin percentage was lower in the third quarter, the gross profit valuing continued to increase both over prior quarter with the pro forma number for the prior year. The cost reduction program continues to have a positive effect. Overheads reduced by 3% from the second quarter to the third quarter, while revenues increased by 10%. When compared to the pro forma numbers of the third quarter 2009 the overhead is reduced by 18% with revenues progressing by 11%. We will continue, as Ayman said, to focus on cost improvements in all areas. The result of these improvements meant that the adjusted EBITDA increased from $0.7 million in the second quarter to $1.2 million in the third quarter compared to the pro forma numbers in the same quarter last year. The adjusted EBITDA progressed from a loss of $1.3 million to $1.2 million positive.

If we look at the items that are shown below the adjusted EBITDA, amortization and depreciation was $1.1 million, $0.9 million of which relates to amortization of intangibles arising from the acquisitions. There was a slight increase in the post acquisition reorganization costs. While there is still some trailing acquisition costs related to the Bluehill and RockWest acquisitions, these costs were much reduced from $0.8 million to below $0.3 million. There was a positive impact this quarter from foreign exchange of $0.4 million.

Moving to the balance sheet, the cash increased from $4.6 million to $6.2 million, reflecting cash generated by the business units including down payments related to the German EID project, partially offset by increased working capital to support the revenue growth. Goodwill increase due to the impact of exchange rates and to the effect of deferred tax calculations in the ex Bluehill companies. The other accrued expenses and liabilities of $16 million includes the effective down payments for the German EID project. As Ayman has said, we are maintaining the guidance for revenues and adjusted EBITDA for 2010 and we'll update the guidance for 2011 to incorporate the effect of the Smartag acquisition.

I think we will now move to questions. I will hand back to Darby.

( Operator Instructions ). The first question comes from the line of Ilya Grozovsky with Morgan Joseph.

Thanks guys. I had a couple of housekeeping questions and also a question on Smartag. In terms of the quarter what was the linearity in the quarter like?

In terms of the month over month type of level, Ilya, your question?

Yes.

I think it was probably, as you can imagine, July, August, the summer months tend to be particularly slower months in Europe. And September traditionally tends to be a strong month. So for us it was very much what we expected which was relatively weak July, August and a very strong September. So that was pretty typical, as we saw.

Okay. Also, do you believe you will continue to generate cash in the coming quarters?

Yes. Our expectation is to continue to be cash generative. As you heard in my comments, I was not particularly satisfied with our performance on the working capital because our working capital went up quite a bit relative to the performance on the sales side. I think these are areas that we need to continue to improve on to be able to generate growth and generate cash. So there is work that needs to be done but our expectation is we will get the job done.

Okay. And then on the Smartag acquisition can you give us a little bit of detail. What were the Smartag revenues, for example, year to date, before you bought them, and what was the price, and are you paying cash, are you paying stock?

There are a number of details I cannot give you until we have actually closed the deal. Because currently Smartag is privately held. I am sure they would not like to have a lot of the information widely distributed. So we will probably be disclosing more detail with our Q4 numbers assuming we close this month. We had issued an 8-K detailing out that we are paying part in cash, part in a note to the sellers. Obviously it's an extraction type of situation where we will be building up a new factory in Singapore, moving from an existing location. But I cannot really disclose too many operational details prior to closing.

Okay. Thank you.

The next question comes from the line of Reik Read with Robert Baird & Company.

Good morning.

We cannot hear you.

Can you hear me now?

Yes.

Sorry about that. Just on the sales side I think it was somewhere in the neighborhood of 340 salesmen last quarter. Can you give us an update on the number of salesmen, where you are adding and what that efficiency is? I know, Ayman, you talked about having to maybe change the footprint a little bit there.

Reik, the total headcount is about 350, not 340 sales. I think our sales and marketing headcount is in the region of 80 or so. I think some of the area, to give you a little bit of color on some of the areas, where we are looking at redeployment in some of the areas. For example, if you take a look at our IT infrastructure business or the SCM and Arygon reader business, in this area there is traditionally significant amounts of resources deployed to sales to computer and PC manufacturers and the like. And we are moving more and more effort towards other emerging areas apart from the traditional contact-based smartcard areas. So deploying resources moving from contact-based technologies and markets to contactless markets. We have added already this year sales resources in different parts. And it's really the three or four big convergence areas that we are always targeting, adding more resources in convergence of physical and logical access control areas, in the mobile ID areas, and also the emerging city and consumer ID type applications.

In terms of geographies, we are adding some sales resources in the US, some in Asia-Pacific and some in Europe. For next year we are looking at several markets where we do not have direct sales presence such as the UK, for example, where we have a good market share in many areas but we can do a lot better. And in some of these areas the entry through acquisition has not been attractive enough so it's a make versus buy scenario for us and we want to do what is the most cost effective and most accretive. I don't know if I have answered the question you have asked or not, Reik.

That is helpful detail. The question behind it a little bit is, you had talked about this as being one of your major initiatives. And I understand that the process is never done. But in terms of that initial thrust with all the things that you just talked about, how far away are you? Are you through the initial thrust or how much longer do you have to go?

In terms of the -- please repeat the question.

You just talked about having to reorient your sales force over the past year.

I would say we are part of the way. It is an ongoing process. I would certainly say we are less than 50% done. Melvin is shaking his head affirmatively in front of me, so we have got a long way to go.

I agree with that, yes.

Okay. And then the other question is part of your comments you had mentioned, Ayman, that third quarter maybe not executing as quickly as you expected, Brazil, Multicard in Europe. Can you maybe talk about what impacted you in terms of taking some costs out? It sounds like it's going better in the fourth quarter, maybe talk about what the catch up is.

It is the normal things. One of the important things, Reik is that when we talk about having 11.5% organic growth, the real underlying growth is actually higher because part of what we do is get out of less attractive businesses. And we have been in a number of less attractive businesses in Brazil in particular which we dragged our feet getting out of and we finally did it. So you are losing a little bit of sales revenue but you are taking away a problem and creating something more positive going forward.

In the particular case of Germany and Switzerland, it was a situation where we had some very strong business in Germany in particular last year. We staffed up at the very high level. Then you had a number of projects go on hold and we were late in rightsizing. So it is basic execution issues that we have to be very diligent on and that we try to be and sometimes we are not. And one of the things that I would like to do in these calls is be very upfront about the good and the not so good. I think we had overall a very good quarter by any definition. But as you can tell, we are not particularly satisfied because we think we could have done better and we plan to do better.

Okay. Thank you guys.

(Operator Instructions ). We will now take a question from the German-speaking audience.

Thank you, Ayman, we had a couple more questions relating to the Smartag acquisition, one of them referring to the production capacity of Smartag. Are you at liberty to discuss that or disclose information about that?

I'm afraid I don't think so. I would encourage people to visit the Smartag website directly. It is smartag.sg. It has a lot of very useful information. Suffice to say I can tell you in different lights I have known Smartag for a long time and it has been a company that I think I visited for the first time in 2003 and I have been very keen on making sure that it is part of our world.

Thank you.

Darby?

There are no more questions at this time, I would like to turn the call back to Ayman Ashour for closing remarks.

Thank you very much. We will look forward to speaking to you at the year-end. And thanks to Darby and to the call organizers. Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect and have a great day.