Identiv Inc (INVE) 2015 Q1 法說會逐字稿

Welcome to the first quarter 2015 Identiv earnings call.

My name is Bakiba and I will be your operator for today's call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Mr. David Isaacs of Sard Verbinnen.

Mr. Isaacs, you may begin.

Thank you.

With me on the call today are Jason Hart, CEO of Identiv, and Brian Nelson, CFO.

In a moment, you will hear remarks from both of them, and then we will take questions from sell-side analysts and registered investors.

Before we begin, please note that during this call we will also be making references to non-GAAP results or projections, including non-GAAP gross margins, operating expenses, and adjusted EBITDA.

A complete reconciliation between each of these non-GAAP measures and the most directly comparable financial measures can be found in today's press release, which is available on Identiv.com.

In addition, during our call today we will be making forward-looking statements.

Any statement that refers to expectations, projections, or other characteristics of future events, including financial projections and future market conditions, 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 annual report on Form 10-K for fiscal-year 2014.

Identiv assumes no obligation to update these forward-looking statements, which speak as of today.

I will now turn the call over to Jason Hart for his comments.

Jason?

Focus, partner, and grow.

Thanks, David; hello, everyone.

These are the core themes for the business through 2015.

During the first quarter, we continued to focus the operations of the business and finalize the sales structures.

We did put special attention on some of the strategic partnerships, and especially in our international business, which we will discuss a little bit later on.

While seasonally slow, we did experience unexpected softness in the international desktop reader business, and a short delay in the execution of a very important strategic agreement for the Company with Cisco caused it to fall into the first part of April.

The Q1 result was compounded by some currency fluctuation headwinds and, frankly, a decline in some planned obsolescence of legacy products.

All of this unfortunately culminated in a result in Q1 that we hadn't expected.

We were, however, very encouraged to see the return of strong performance in our premises business and a good performance in our everyday items product lines.

This really was a reflection of the engineering and sales investment that we made in 2014.

We saw this take effect in Q1 and it has continued into this quarter.

All of these actions, however, I have to say, were positively overshadowed by the culmination of a year-long investment in the forging of a new and very public strategic relationship with Cisco.

Cisco and Identiv share a similar vision, and we have aligned to deliver an infrastructure and a set of connected devices for the emerging opportunities in this thing that we call the Internet of Secure Things.

We expect Identiv products to be available through Cisco sometime in Q3, but we've already begun to see a lot of excitement and, frankly, strong demand from the channel.

Additionally, Identiv will be providing the next generation of intelligent building systems to existing Cisco Access Control customers, integrating some of our leading IOT building center systems, enabling these customers and new customers to be able to provide greater intelligence about their environments and objects and people within them.

I can't overstate that this is a transformative relationship for our Company.

We'll have more to come on this over the coming quarters, but it is extremely exciting for us and we've really invested heavily in the last 12 months to get there.

It would be remiss of me to not mention our existing relationship with Verizon.

Verizon has continued to grow and we've continued to roll out new projects.

It's been a little slower than hoped, but the activities with Verizon continue to be very solid.

Our relationship with Verizon, I've been asked a few times, is extremely complementary to our relationship with Cisco.

We actually see real market and customer synergies by partnering with both Verizon and Cisco.

The sales pipeline has also developed strongly over the quarter and the 12-month outlook is positive.

This is supported by a number of new activities, some of which we have published through our Identiv Labs website, but they include some new projects in toys, which we saw continued demand for; wearables, where we have won a number of new projects; smart batteries; and apparel, just to name a few of the new projects that are either in pilot or we've begun to ship product into.

This is demonstrating a continued strong demand for our secure IOT technology and the solutions that make that come together, and, frankly, a demand that did not exist 12 months ago.

Inventions in the quarter.

To me, as many of you know, inventions are a recognition of innovation, and one of my personal goals for the Company has been to drive a high level of innovation and reward for that innovation.

During the quarter, I'm very pleased to report that we received four new patents for our inventions.

This continued to recognize the levels of innovation and provide recognition and protection for our intellectual property in the new and emerging secure IOT category.

We also launched new ideas and projects at the RSA conference, particularly in the area of privacy and security.

We launched and shipped new products in Q1, including a uTrust sense product, which is really a very exciting new line of sensor IOT devices that come in the form of cost-effective stickers.

We shipped a number of these to very specific customers and we've begun to see a high level of excitement in our sales force and our sales pipeline, particularly as people are looking to expand their knowledge of IOT and understand how these sensors can be deployed in a cost-effective way.

We also launched a new line of complementary touch secure IOT building sensors.

And these began -- we really began to see new orders and a lot of interest going into Q2 for this product line.

This product line forms a backbone for being able to connect the low-cost uTrust sense products into the connected fabric of IOT.

Overall, though, I would say our tone for Q1 is humble.

It was -- while we have spent a lot of time building and stabilizing the operations, it is disappointing for us to see some of the revenue activities not materializing.

However, much of this was timing or things related to fluctuations, currency fluctuations, and Brian will cover those in just a few moments.

What's important, though, is that the book of business and our sales pipeline for Q2 and forward is looking good and we are now seeing more leads than we've ever seen, both directly and through our new partnerships.

So at this time, I would like to turn the call over to Brian, and Brian is going to cover the financials, and then we will come back and answer some questions.

Brian?

Thank you, Jason.

Now we will take a look at our financial results for the quarter.

Revenues were $14.9 million, a decrease of 11% as compared with the $16.9 million in the first quarter of 2014, a sequential decrease of 23% from the $19.4 million in Q4 of 2014, and note that Q1 is traditionally our slowest quarter of our fiscal year.

Note that the Q1 2015 revenue year over year also reflects the impact of foreign exchange, as Jason mentioned, as certain of our customer engagements are denominated in the declining euro.

This is estimated to have had an approximate $700,000 effect on our comparable number in Q1 2015.

Now a few words about our segment performance.

Approximately 48% of our first-quarter revenue, or $7.2 million, was derived from sales in our credentials segment, our everyday items, which is consistent with the $7.2 million in the first quarter of 2014.

This compares to a sequential decrease of approximately 15% from the $8.4 million revenue in the fourth quarter of 2014, also reflecting the normal seasonality of the business in Q1.

We do see strong forward demand from current customers, as well as new projects with brand names in toys, wearables, smart batteries, and apparel.

Our premises segment revenue amounted to $4.7 million in Q1 2015, a year-over-year increase of 35% from $3.5 million in the first quarter of 2014.

Premises revenue decreased sequentially by 22% from the $6.0 million achieved in the fourth quarter of 2014.

The increase year over year is primarily a result of our renewed focus and investment that we began in 2014 with our US government customers for physical access control solutions.

The sequential decrease again reflects the seasonality of the business in Q1, as well as projects that were anticipated to come to fruition in Q1 that have moved forward, based on our customers' schedules.

Revenue from our identity products, which again include our smartcard readers, reader modules, tokens, and our cloud-based credential provisioning, was $2.6 million in the first quarter of 2015, declining 48% over the comparable quarter in 2014 revenues of $5.0 million.

Sequentially, our identity product revenue decreased 42% from the $4.5 million in Q4 2014.

Again, these decreases reflect the weak demand in our legacy international desktop reader business and generally the unfavorable condition in Europe with the unfavorable foreign-currency impact, and again the typical first-quarter seasonality.

Revenue in our other segment, which represents sales of digital media and chip drive products, decreased 58% to $500,000 from the comparable quarter of 2014, but remain the same sequentially from the $500,000 in the fourth quarter of 2014.

The decrease year over year is due to the decreased demand for the digital media products.

Our non-GAAP gross profit margin was 43% in the first quarter of 2015, an improvement compared to the 41% in the year-ago quarter and declined slightly with the 44% in the fourth quarter of 2014.

The improved margin on a comparable basis is the result of our consolidation of manufacturing facilities that we completed in mid-2014.

The change sequentially is due to the decrease in sales of our high-margin premises products, the higher concentration of sales of our credential or everyday item products, and lower manufacturing overhead utilization.

Now I'll turn to our operating expenses.

Our non-GAAP operating expenses in the first quarter were $8.4 million, and that compares with $8.3 million in the prior quarter and $9 million in the comparable quarter of 2014.

Our research and development expenses were $1.8 million in the quarter or 12.4% of revenue, as compared to $1.4 million in the same quarter of 2014 or 8.4% of revenue, an approximate 30% year-over-year increase.

This is the result of an ever-increasing number of development projects and expansion of our Identiv Labs.

We expect to continue to invest in development projects and Identiv Labs to deliver secure IOT technology and solutions to meet the ever-increasing demand by our customers.

Our sales and marketing expenses were $4.5 million or 30% of revenues in the first quarter of 2015, which is a slight increase, approximately $100,000 sequentially, and a slight decrease of $200,000 over the comparable quarter in 2014.

We do expect that sales and marketing spend will vary quarterly as a percentage of revenue, as well as in actual dollars, based on the timing of seasonal program events such as major trade shows as RSA that Jason mentioned, as well as our variable sales compensation.

Our G&A expenses were $2 million in the first quarter of 2015 or 13.5% of revenues, as compared to the $2.9 million or almost 17% of revenues in the comparable quarter in 2014.

This is an approximate 29% decrease in dollars spent year over year.

G&A also decreased sequentially by approximately $200,000 or 6%.

These decreases are primarily due to the cost-reduction measures we enacted throughout 2014 with the consolidation of our corporate finance into the US, among other things.

Our non-GAAP operating expenses in Q1 2015 exclude charges for stock-based compensation, restructuring charges, in addition to other items normally excluded from our non-GAAP results.

I'll speak to those two in just a moment.

Based on our operating activities, we recorded negative adjusted EBITDA of $1.9 million in the first quarter of 2015, compared with negative adjusted EBITDA of $2 million in the first quarter of 2014 and adjusted EBITDA of $0.2 million in the fourth quarter of 2014.

With respect to other items on the income statement, our interest expense was $400,000 in Q1 2015, compared to $500,000 sequentially and $2.1 million in the comparable quarter of 2014.

This expense is primarily related to the outstanding principal on the Opus term loan and the revolving facility.

Note that Q1 2014 had an additional $1.6 million in non-cash interest charges associated with our payoff of the then-Hercules debt facility.

Restructuring charges were approximately $0.3 million in Q1 2015, as compared to $0.4 million in Q1 2014 and $0.3 million in Q4 2014.

These primarily relate to severance for employees terminated in the quarter.

Our stock compensation expense was $1.2 million in Q1 2015, as compared to $0.2 million in Q1 2014 and $1.1 million in Q4 2014.

The increase in expense year over year reflects the Company's continued focus on equity incentives for our employees.

Now onto the balance sheet.

Cash was $33.1 million at March 31, 2015, as compared to $36.5 million at December 31, 2014, a decrease of approximately $3.4 million.

This is a function of our operating loss for the quarter, as well as uses of cash for the paydown of current liabilities, servicing of our financial liabilities, and the associated interest.

Working capital -- again, we define this for this discussion as our Accounts Receivable plus our inventory, less our Accounts Payable -- was $12.8 million at March 31, 2015, as compared to $14.5 million at December 31, 2014, a decrease of $1.7 million.

An increase in inventory of $0.6 million was offset by a $4 million decrease in Accounts Receivable, but added a $1.7 million decrease in Accounts Payable.

With respect to our receivables, our days sales outstanding decreased to 58 days from the 63 days in Q4, reflecting good collections in the quarter.

As for inventories, $9.9 million at March 31, 2015, compared to $9.3 million at December 31, 2014, the turnover was approximately 3.6 for the quarter, a decrease from the previous quarter of 4.9.

Note the Company built up stock at the end of Q1 to meet the lead times for customer orders scheduled for delivery in the second quarter.

Some of the other noteworthy line items on the balance sheet.

As noted in my discussion of working capital, Accounts Payable decreased by $1.7 million to $6.7 million at March 31, 2015, primarily due to the timing of payments to our major suppliers.

Accrued compensation decreased from $2 million to $1.9 million, primarily reflecting paydown of variable compensation.

Our other accrued expenses and liabilities decreased to $3.6 million at March 31 from $4.5 million at December 31, 2014.

This net change reflects payments for restructuring charges, as well as certain professional fees.

Our payment obligation is related to a former related party, and that decreased from $6.2 million to $6 million, which reflects the payments made during the quarter, partially offset by the accretion of interest.

Lastly, our short- and long-term financial liabilities increased to $14 million from approximately $13.9 million at December 31, reflecting the amortization of our deferred debt issuance costs in the period.

Note that the $14 million is comprised of our $10 million term loan, repayable on March 31, 2017, and our $4 million in a revolving loan facility repayable in November 2017 with Opus Bank.

Our outlook and guidance.

The Company is providing guidance for fiscal-year 2015 of revenue between $90 million and $95 million and adjusted EBITDA positive on an annual basis.

That concludes my remarks and I'll pass the call back to Jason.

Thanks, Brian.

As I said earlier, we are humbled in our Q1 result.

It is not reflective of the internal operations of the business.

I think the important highlights as we look forward, the business will have -- and it will be lumpy.

We've always said that.

We will continue to maintain that until we can get to some scale.

Our partnerships, one of the many ways that we are looking at addressing that scale, and we have invested heavily over the past 12 months to get there.

Verizon, Cisco, 3M, Stanley, JCI, Tyco, amongst a number of others, are our paths to market.

So I think at this time, I'd like to hand the call back to the operator to take questions.

(Operator Instructions).

Bryan Prohm, Cowen and Company.

Thanks for taking my questions.

Jason, at what point did you know about the decline in the desktop reader business and the conditions in Europe?

You guys reported Q4 pretty late.

Did this all kind of manifest down the stretch?

Any color you can give there would be great.

Thanks.

(multiple speakers).

Yes, thanks for the question.

We had some -- we were watching it, but we knew that it was going to be soft.

We had hoped to see the strategic announcement with Cisco come in into the quarter.

So when we went into the last earnings call, we were fairly confident we were actually going to get the numbers.

The contract with Cisco did come with a payment, and unfortunately that, from a recognition perspective, has flowed not into Q1.

So, again, we are still juggling, if you will, part of the traditional business, which is lumpy, and at the same time building product for the new part of the business.

But if I kind of back into -- you alluded to a $700,000 FX revenue headwind and then the missed window of opportunity on Cisco.

If you kind of factor all that back in, would you guys have grown revenue on a year-over-year basis, or is that too sensitive to the Cisco number?

Yes, Bryan, and I think you hit the latter part of it.

It's a bit sensitive to what we anticipate from the Cisco revenues.

Again, as we went into the Q4 earnings call in March, we fully anticipated that we would achieve our annual guidance based on projects that were in the pipeline.

As I mentioned in my comments, some of the premises projects moved forward, based on customer schedules.

The weakness in the reader -- the legacy reader business, we had anticipated that to slow from -- we anticipated it to slow down, but not to come to a slower position than it was.

So now, again, the focus is growing the business from where we were in 2014.

We've got a lot of great projects in the everyday items space.

We see some great recovery on the premises side with some of the name customers from the past, and that's where we are at.

One other part of this is we've, as you know, always struggled to provide quarterly guidance.

And this is why we just are so susceptible to timing of deals.

It wasn't, as I said, the result we had hoped for Q4 -- Q1.

We did have a number of backups in our pipeline that pushed, but the thing that really kind of nailed us was some of that legacy reader business.

We hadn't predicted some changes in our European business.

We did in Q1 change out the management, the sales management, for Europe and international in response to the activities, and early indications were that we were going to be able to recover some of the -- that legacy business.

That did not occur.

And what we saw was some of those deals pushing forward, and, frankly, some of the legacy deals under pricing pressure we lost.

But again, we know that this legacy part of our business is on a decline and we've known that for some time, and that's why we implemented the new product in R&D going back to Q2 of last year, to begin to change the direction with new products like uTrust Sense and our touch secure reader line, which are very aligned, obviously, with IOT.

And that's where you saw relationships with Verizon and Cisco being formed.

Jason, you also alluded to Verizon materializing at a slower rate than you anticipated.

Is that part of the change in the revenue outlook or is it more related to the desktop reader business and Europe specifically, because it sounds like it's not just a Q1, potentially, but potentially a Q2 phenomenon as well?

Thanks.

On the Verizon activity and partnership, they are chasing much larger deals.

And so, we are finding that they're boom-to-bust type transactions for us.

So they are very hard to predict.

We have invested, as you know, since the end of Q2 heavily in that relationship also.

And there are some good things happening there, some really good things happening there.

So we are not ready to talk about those just yet.

I also don't want to give forward guidance on them.

But we now have a lot more color around what's happening with their particular transactions.

We've also been cautious not to guide on any of the specific relationships, but because Cisco and Verizon are so -- particularly Cisco, and both of these are so important to us, we will give you as much color as we can about those relationships.

Last question for me and then I'll jump back in the queue, on the credentials business, huge seasonality jump in Q2 last year.

That was sustained through midyear, I think that's sort of aligned with product cycle ramps and new product introductions.

Is that the same sort of outlook we would expect if identity remains pressured in Q2 and premises is growing but at a seasonal type of run rate?

Is that where the revenue growth comes from in Q2, mostly credentials and premises again?

Can you speak to that in a little more detail?

Thanks.

Sure.

The short answer is yes.

We've seen a very good shift towards the credential activity.

As I mentioned, 12 months ago we didn't have many of the projects that we now have.

Many people are aware of the one large toy vendor that we've done a lot of work with.

That continues to be a very, very good relationship for us.

And like other -- and we've gone and secured a few other brand names of similar ilk in different segments.

And they're new and they are just beginning, so the growth will come in that area.

That challenge in credentials has always been margin.

And what we've been doing is building a lot more technology that is connecting these devices, and that's begun to make us unique.

A number of the patents and things that I talked about are focused on process and security and manufacturing, and it relates to how do we begin to secure more of these credentials that are being embedded into everything from shoes and handbags and pharmaceuticals through to, obviously, toys.

Now specifically, we are always going to be subject to what the end customer -- our customer wants to do in their product cycles.

A number of them have their own seasonality.

Christmas is a big period for them, as you know, and therefore pre-buys, pre-manufacturing mostly happens well and truly prior to Christmas.

So we do expect and have begun to ramp up our inventory to be able to deal with that.

I believe it's in some of our numbers, but you take it from me; we have begun to stock up in a lot of our raw parts as we see some really nice things happening there.

Thanks.

Actually, one last quick one for Brian.

What's the FX headwind looking like mid-quarter, now that you've had the lessons learned of Q1?

Similar type of --

Lesson learned from Q1 certainly where we are, but yes.

I would anticipate that we will have comparable impact from a quarter-over-quarter basis.

We are looking at alternatives from a hedging perspective, what we can do with that.

About 50% of our business in EMEA -- and that's just an approximation, so let's not all go start to do some calculations on our business -- but is denominated in foreign currency.

So we are really taking a strong look at how we can minimize the impact on the topline.

The other aspect of it, though, is there's also the operating expenses that are paid in those currencies.

So we are getting some relief from the operating expense side, based on using some of our US dollars to pay those.

Understood, thanks.

I'll pass it on.

Saliq Khan, Imperial Capital.

I wasn't going to do this to you, but I will start with the follow-up on what the last question was regarding the FX headwinds.

Outside of the currency headwinds that we are seeing, are there any longer-term issues that you guys are finding in EMEA?

I'll take that first from a sales market and operations perspective, and then I'll get Brian to give you some -- any fiscal color.

The short answer is yes.

Europe, for me, is a worry.

We took some really heavy preemptive measures in Q1, which included a reduction in force, the appointment of a new European sales manager, and appointment of a new international sales manager as we had begun to dig into the pipeline and forecast.

When I look at our forward pipeline, we now have some very good systems in place and very confident about our North American pipeline.

Things are looking very, very good, very happy with the projects, very happy with the process.

International has continued to struggle, and bluntly, Saliq, we invested most of our time last year solidifying the US because that was where we saw the growth in the partnerships and the higher margin product.

As you may recall, we also shut down one of our German factories and consolidated it with Singapore.

And with all of these things going on in Europe and a generally weak Europe, it has given me some concern about our -- the long -- I should say the medium- to short-term outlook for our European numbers.

Therefore, what we've done in our revised guidance is begin to weight this new outlook against that.

And that's why you saw us revise our numbers.

The US numbers, still solid.

Our European numbers, we are -- we still see the deals, but more work to be done to really vet them out and re-attest to the timing of when the sales and revenue will come through there.

I'm not sure if you wanted additional color on the FX impact, but I think what Jason communicated is really more pertinent with regards to the international business on a whole.

I'm not happy that I have a comparable basis from an FX standpoint from a declining euro, but more fundamental is where we are at in the business, where we are at in the sales organization internationally, where we are with the product offering, and making sure that we are shoring up other aspects of the business in the premises segments, the everyday items.

Those are why we focused our growth strategy and executing on that.

We will continue to focus in the international area.

The rebuilding of the sales force is something that Jason has mentioned a couple times now.

So we are not giving up on it.

It's just a matter of where we put our focus and where we put our energy.

On the heels of my question, your response to that as well, does this essentially mean because you're putting a lot more emphasis and time on the North American pipeline and the efforts to shore up that business, could it possibly offset -- and I'm not even talking about this year, but as we look out to the following year, could North America potentially offset a decline in the international business?

Most of it, if not all of it?

That's a great question, and apparently this will be one of those forward-looking statements, but yes.

We've seen some great growth in our premises, some great growth in our everyday items.

A lot of those projects come from the Americas part of our business.

And so, as we continue to do the projects at Identiv Labs, as we continue to focus on our government customers, I have an expectation that the partnerships we have that are oriented in the US will stimulate growth predominantly in the US.

From the sales and operations side of this, it's clear that when we spend $1.00 of OpEx on sales in the US, we are getting a good return for it.

When we spend the same $1.00 in Europe, we are getting less of a return for it at the moment.

Therefore, the strategy that we have adopted has been to partner very heavily with Cisco and Verizon and leverage their bandwidth and their infrastructures and take less of the margin on our high-margin products, but we are not spending the dollar that we would have otherwise spent in Europe to get the transaction or access to the market.

So you will see us invest more heavily -- in fact, we created a brand-new team to focus just on Cisco, as an example, and they've already begun to have very good dialogue and outreach not just in Europe, but also in Asia.

So leverage is the name of the game for -- as the way -- as a company our size hedges its bets.

The other side of this has been we do see good pockets of growth in different international markets, so we are focusing very carefully in those areas.

So it's still to be determined.

And the last part of your question was, can the US make up for any decline in Europe?

I'm hoping it doesn't have to.

But if it does, I'm really pleased to say I gave you some hints about wearables and other businesses that we -- projects that we are working on.

Some of these projects are of the size of previous projects that we've had with our particular toy vendors and the like.

And while we don't include them in our forecast, at least at the maximum potential, they are very real.

We have secured some orders, and if those projects continue and go to -- and they fully deploy, we will see the possibility that the US could easily account for any downside in Europe.

But again, we are not counting on that.

As you know, we have plan A, plan B, plan C. The Company has always been one that's going through a turnaround and a transition, and we don't count on any one egg.

I'm just personally disappointed when two or three of those plans don't come together and we have a revenue result in Q1 the way we did.

You're kind of shifting away from the European strategy.

The questions I had for you regarding the all other segment, this is an area where you guys are competing heavily with the Chinese market where the margins tend to be, I believe, in the low 30s.

How has the progression of that market and your penetration been going over the last quarter?

So in our other segment, we have a couple of products that we lumped into that.

One of them is one of our European-specific market products, where we have approximately 20,000 customers in a time and attendance product.

It is a good margin product in a very specific market.

It does have some competitors.

It is a product that we have minimal investment in, but we like it and we are on it and we are actually looking at how can we leverage that customer base.

So, that's why we still keep that.

The other area is in our digital media area and that was our legacy product line where we have no focus.

So as a result of that, and really some conscious actions on our part to not divert engineering and R&D to, that product has been discontinued and is, frankly, twilighting.

So those areas we are very aware of.

And we are -- they are not our areas of focus.

We don't see getting a very strong shareholder return from further investment there.

Last question I had for you, then I'll hop back into queue, is there's been a lot of focus from your team to go ahead and bring on board newer technologies, spend a lot more time and money on R&D as well.

As you're looking out over the next 12 to 18 months, what technologies and what solutions do you think you still need that you don't have currently?

Or what types, at least?

Give us a hint on that.

I can't give you any real specifics, but I can tell you a couple things.

We have a process going on at the moment with our CTO office, and our CTO is a brilliant guy.

Hopefully he's not listening because I don't want his head to get too big, but he and his team have been looking at a number of areas that will augment what we already have and will directly contribute to our partnerships with organizations like Cisco and Verizon, very specifically targeted at technologies in the IOT space.

We have a lot of inventions that have not fully come out the other side of our lab yet.

As you've seen from our numbers, we have heavily invested in R&D and we've reduced G&A to pay for that.

So I think you're going to see us with more things in how do you make your home and your buildings more intelligent, how do you integrate consumable sensors with those environments, and then how do you provide analytics, security, and privacy with all of that information.

So it is definitely an evolving market and I feel really good about the two partnerships that we've formed, because as a trio, we are very, very strong.

I'm glad you actually made that last comment about making buildings and homes a lot more intelligent and focusing a little bit on security.

I believe you and I talked about this before is that everyone is focused on the Internet of Things, but very few people are really focused on the Internet of Secure Things.

So it's refreshing to see that you guys are making headway in that as well.

More work to be done.

The Company is still -- as you can see, it has its ups and downs, but it's -- fundamentally, the operations are there, we have cash in bank, we have some really creative people building things, and we have partnerships now to execute.

Great.

Thank you, guys.

I appreciate it.

Mike Lattimore, Northland Capital.

Great, thank you.

Jason, on the new opportunities with your everyday items, I think you said that you've secured some orders there, but that you did not include those in guidance.

Is that what you said?

Yes, the bit that we know about with those orders is included in guidance.

For example, where there are pilots or we have some paid R&D projects, we do include that revenue.

What we haven't included in our forecast is any substantial upside to that.

I'll give you an example.

We work with a particular vendor, we build some prototypes, we make $300,000, $400,000 from that activity, they go to pilot, they go through their pilots, and then they place an order for 20 million, 30 million, 40 million units.

That 20 million, 30 million, 40 million units is the transformative piece.

We don't currently predict that in our forecasting.

It would make the numbers so lumpy that, frankly, you guys would kill me every quarter if I don't get it right.

Okay.

Got it.

And then, so your confidence on the everyday items thing largely derives from your current main customer there, it sounds like, for the year.

That plus what we do know from other -- some other projects that we've already secured.

We've secured a customer in the wearables category and a customer in a consumable category, so we've got good predictability now in those.

And it's now subject to some of their own seasonality.

And frankly, [I like] getting some historical data behind us so we can get better at our own predictability around their trends.

Okay.

And then, what percent of revenue was international this quarter?

Just looking that up to give you a precise number.

In the quarter, we had about 67% of our revenue was in the Americas, and that's a shift year over year of about 18%.

Got it, okay.

And then, just on Cisco, it sounds like you'll get a kind of contractual payment in the second quarter and then more production revenue in the third quarter.

Is that the way to think about that?

That's exactly how to think of it.

Got it.

And then, the sort of confidence in the premises business, can you just elaborate a little bit on that?

What drove the strength this quarter?

What are a couple of the key projects that you are working on for the next couple quarters on premises?

The strength has really come from -- we did a lot of work in 2014 to rebuild the business and form some new alliances.

We linked a lot of our IOT sensor technology and some of the legacy physical access and then converted it all to connected devices.

That was one of the big things that helped us with Cisco, as an example.

Getting our products onto the US government approved products list in the quarter was also another major achievement.

And with that, we saw re-commitments from customers that two years prior had told us they were going to leave the company.

And we've now seen a very, very strong reliance as we began to invest in their strategy and become FICAM compliant and really help them with some of their new and future business problems.

It really is -- I am extremely excited about what we are now seeing there.

We have commitments now going out over the next five years with a number of the agencies, and my commitment to them is we will continue to invest and invest in the R&D to make their missions successful.

Great, thanks.

Thank you.

We have no further questions at this time.

Now I'd like to turn the call back over to Jason Hart for closing comments.

Thank you very much.

As you've all heard, it's been a humble result for Q1, but certainly an extremely positive result in terms of partnerships.

So, again, we will look forward to speaking to everyone next quarter and we will have some good results to discuss.

Thanks very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.