Identiv Inc (INVE) 2016 Q1 法說會逐字稿

Welcome to the Q1 2016 Identiv Earnings Call. My name is Adrianne, and I will be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded.

With the call with me today are Steven Humphreys, CEO of Identiv; and Steve Finney, CFO. In a moment, you'll hear remarks from both of them, and then we'll take questions from sell side analysts.

Before we begin, please note that during this call, we'll be making references to non-GAAP measures or projections, including the non-GAAP gross margins, operating expenses and adjusted EBITDA. A complete reconciliation between each of these non-GAAP measures and the most direct comparable financial measures can be found in today's press release, which is available on identiv.com.

In addition, during our call today, we'll 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 documents filed from time to time with the SEC, including the annual report on Form 10-K for fiscal year 2015. Identiv assumes no obligation to update these forward-looking statements, which speak as of today.

I'll now turn the call over to Steven Humphreys for his comments. Steven?

Thanks, Adrianne, and thank you all for joining us. As reflected on our earnings release, we've made a lot of progress focusing, solidifying and positioning our business for growth after a challenging 2015 on many fronts. As we go into today, we've made this progress across all areas, our operational business, restructuring and legal and compliance.

So I'd like to do a short introduction, framing the highlights in each of these areas and turn it over to Steve Finney to go into the financials in more detail, and then I'll get into a fairly detailed business discussion, expanding on the strategy and execution plan as we laid it out in our last investor update.

So looking at the Q1 highlights, again, as we noted in our earnings release, revenues came in on target despite major organization realignment and expense reductions taken right in the midst of the quarter. This reflects the strength of our team, our Hirsch Physical Access business, our smart card reader business, our Cisco relationship and our international sales strengths. Hitting our targets also despite normal sales deal timing puts and takes and even absorbing U.S. transponder customer changes is a tribute to the resilience of the business position we're building. We also saw above-plan gross margins due to the physical access focus that we're driving.

Now we did incur restructuring charges and expenses to implement a pretty far-reaching operational streamlining as we announced previously. These benefits will be realized in the run rate over the next couple of quarters and carrying over into subsequent years as more efficient and effective organization.

At the organizational level, our customer activity, our product releases have been accelerating consistent with our plan, again, in the context of a lot of internal dynamics and customer dynamics. Now net of all these and other actions I'll outline later is that our core strategy has really been demonstrated and has positioned us to execute 2016 as planned and as described before.

So drilling down into some more specifics, looking at some of the highlights at a deeper level. The headcount reductions we took, very difficult, but they've been completed across all personnel actions. And in fact, we're running about 5% under our headcount plan, which we think is a prudent approach as we build our business.

The business itself has been streamlined. Our organization is aligned around our physical access and transponder focus. We've closed, downsized or partnered and outsourced facilities across Germany, Japan, Australia and California. And I'll point out that in fact, that hasn't had an impact on business in some areas, notably Japan. We've seen a very strong reaction in a positive way in terms of business. Our product and development teams have been focused, and our core products have accelerated. I'll go into substantially more detail on these. But to highlight a few, our Secure Network Interface Board, our federal [IC cam] (sic - ICAM), our low-cost access readers and others are in the pipeline and moving out quickly.

And we've also been connecting vigorously with our customers across our entire organization. Our government, Cisco physical access partnership, German transponder customers, Japanese and U.S. smart card customers both at the commercial and government level have been beneficiaries of personal visits and connections across our entire leadership team. And again, that's helped, I think, with strengthening the business base and the growth that we're already seeing.

We also had a major presence and a successful relaunch of the Hirsch brand at ISC West, the major physical access trade show, again, which I'll go into more detail later about. And then many other organizations across -- activities across the organization at the company-wide, team and product level.

So in summary, all the major actions to achieve focus, growth, profit and growing market share have been completed. Financially, there are restructuring charges in the quarter and in fact, above anticipated level, but that's due to reductions being taken that were greater than the additional plan. So those benefits will also accrue in our OpEx in subsequent periods. We also believe that our non-operating legal expenses are falling increasingly within insurance coverage ranges. So hopefully, that will reduce our cash and expense impact going forward from this category.

So in addition to the business progress, we've also been working hard on regulatory and compliance issues. So we're now on track for full compliance this week. We regained our timely filer status last month, as we also announced. We're now today doing our first quarter '16 earnings on schedule, and we have our shareholder meeting for 2015 and '16 coming tomorrow morning. As a result, all outstanding compliance actions will have been completed this week for the first time in many months with the holding of that successful AGM tomorrow.

So on that note, I'd like to turn it over to Steve Finney for a financial review, after which we'll return to the business discussion. Steve?

Thank you very much, Steve.

Turning now to our financial results for the first quarter. Revenues in the seasonally weakest first quarter were $12.5 million as Steve said, as compared with $13.1 million in the prior quarter, an approximate 5% sequential decrease and compared to revenues of $14.9 million in the comparable quarter of 2015, a decrease of 16%. As usual, I'll talk to this by segment.

Our physical access segment represents approximately 41% of first quarter revenue, having generated $5.1 million. That's up 8% sequentially from $4.8 million in the fourth quarter of 2015 and also up 9% from the $4.7 million recorded in the comparable quarter of 2015. The increase sequentially and year-over-year is primarily a result of higher sales of physical access control solutions, including an increase in professional services engagements in the U.S. primarily related to end customers in the U.S. federal government sector.

As mentioned in previous releases and by Steve already today, we'll continue to focus on our strong and valued Hirsch customer base, and branded products continue to grow revenue in this segment in 2016.

Revenue from our identity products, including smart card readers and reader modules, was $2.5 million in the first quarter of 2016, a sequential decrease of 16% from the $3 million revenue in the fourth quarter of 2015 and a slight decrease of 3% compared to the first quarter of 2015 revenues of $2.6 million. Increases in smart card reader sales in the U.S. were more than offset by relatively weaker sales of reader products in some of the international markets. But overall, this business is above plan in the first quarter and has good backlog in the current quarter.

Approximately 36% of our first quarter 2016 revenue or $4.4 million was derived from sales in our Credentials segment, which comprises both our access control credentials and our broader Internet of Things transponder products. This weak revenue performance represents a sequential decrease of approximately 11% from the $5 million revenue achieved in the fourth quarter of 2015 and a 38% decline from the $7.2 million delivered in the first quarter of 2015. The changes are primarily due to lower sales of transponder products used in electronic game/toy applications and other Internet of Secure Things applications, certain large customers in the U.S. that were not repeated in the first quarter 2016, but partially offset by an increase of sales of access cards in the U.S.

Revenue in the quarter for our all other segment, which has historically represented sales of our digital media and CHIPDRIVE products, was $0.4 million, not significantly different from either fourth quarter revenues of $0.3 million or the $0.5 million generated in the comparable quarter of 2015. As noted on our last call, the restructuring of our European operations in Q4 2015 included notice that we would cease the sale of our CHIPDRIVE product line. And though we have had some last-buy revenue in Q1, this is expected to be negligible going forward. As we also continue to phase out our digital media product lines, we should have very little revenue in our all other segment going forward.

Now turning to gross margins. Our non-GAAP gross profit margin, which excludes certain noncash items, was 45% in the first quarter of 2016 compared to 25% in the fourth quarter and 43% in the first quarter of 2015. The increase in the quarter sequentially is primarily a result of inventory reserves recorded in Q4 of 2015 associated with excess inventory, particularly in the transponder area. There's a positive product mix impact both sequentially and comparatively due to the higher proportion of physical access control systems and access card sales with higher margins and less sales of the lower-margin transponder products.

Moving on to our operating expenses. Our non-GAAP operating expenses in the first quarter were $9.4 million as compared with $9.9 million in the prior quarter and $8.4 million in the comparable quarter of 2015. The increase of $1 million in Q1 2016 to the comparable period of the prior year is primarily due to the legal and other professional fees related to noncore business activities incurred in the quarter, which amounted to $1.8 million. The slight increase in the quarter compared to the previous quarter, again, is due to the increase of those noncore professional fees. Excluding those expenses, our operating expenses would have been down sequentially and comparably by approximately 13% and 10%.

Our R&D expenses were down 12% from $2 million in the fourth quarter to $1.8 million in the first quarter of 2016, and that's in line with the comparable period of the prior year. The sequential decrease of approximately $0.2 million is primarily due to the shift in our strategic direction and reduction of R&D resources under the restructuring plan to focus on the activities anticipated to generate near-term revenue opportunities.

Sales and marketing expenses were $3.7 million or 30% of revenue in the first quarter. That's a decrease of $0.3 million sequentially and $0.5 million from the first quarter 2015. The changes, again, primarily reflect the reduction of headcount due to our restructuring and the positive impact of other cost-saving initiatives taken over the recent periods.

G&A expenses include the previously mentioned legal and professional fees related to noncore business activities and including them were $3.9 million in the first quarter compared to $3.7 million in the fourth quarter 2015 and $2.1 million in the first quarter 2015. And excluding those, our noncore professional costs G&A would have been $2.1 million in the current quarter compared to $2.5 million in the prior quarter, approximately 17% and 19%, respectively, of revenues.

The non-GAAP operating expenses I just discussed exclude charges for restructuring activities in addition to other items normally excluded from our non-GAAP results, such as stock-based compensation, depreciation, amortization and interest expense. I'll touch on those in a moment, but do note that our earnings release, as always, includes a full reconciliation of GAAP to non-GAAP information.

Our adjusted EBITDA loss for the quarter was approximately $3.8 million compared to an adjusted EBITDA loss of $6.6 million in the fourth quarter of 2015. That adjusted EBITDA loss, excluding legal and other professional fees related to noncore business activities, would have been $2 million in the first quarter. That's driven predominantly by the seasonally lower revenue in the first quarter and the fact that the cost base does not yet fully reflect the benefits of the restructuring previously announced.

Indeed, those restructuring charges recorded in the first quarter of 2016 were $2.7 million, primarily comprising severance costs, but also including $0.4 million in noncash costs. The charges relate, as we've noted, to implementation of a worldwide restructuring plan designed to refocus resources on core business segments and consolidate operations in several worldwide locations, reducing our cost structure and to align with current revenue levels. In the comparative period, we recorded $0.9 million in restructuring in our European operations. And just to give you a note on headcount, at the end of the year, we had 305 employees. At the end of March, we have 251.

Touching on a few other items in the income statement. The interest expense was approximately $770,000 for the quarter. That increased from $541,000 in the fourth quarter 2015 primarily due to the write-down of unamortized debt issuance costs relating to the modification of our revolving loan facility in Q1. Noncash stock-based compensation of $0.9 million in the quarter was comparable to the fourth quarter of 2015, and no new grants have been made during the quarter.

Now turning to the balance sheet. I'll be comparing our position at March 2016 to December 2015. Firstly, we'll focus on the cash. Our reported cash at March 31 was $9 million as compared to $16.7 million at December 31. That's a decrease of approximately $7.7 million though in line with our expectations for the quarter. The cash outflow is driven by our operating loss with changes in operating assets and liabilities absorbing almost a further million. Within that, a decrease in our accrued expenses and other liabilities of $2.1 million was largely offset by an increase of $1.1 million in accounts payable.

We define working capital as accounts receivable plus inventory less accounts payable, and that was $18.6 million at March 31 as compared to $16.4 million at December 31. We also had $0.2 million in capital expenditure in the quarter. No cash flow from financing activities.

Just to address a couple of notable balance sheet asset metrics. In regard to our accounts receivable, our days sales outstanding increased in the first quarter from 54 days at the end of 2015 to 61 days due to slower collections. We're very much focused on improving that in the current quarter. Inventories net of reserves, as noted previously, increased slightly to $15.2 million at March 31 from $14.7 million at December 31.

Our adjusted stock turnover was approximately 2.3 for the first quarter of 2016 as compared to 2.8 for the quarter ended December 31. As has been disclosed previously, we built up significant inventory, particularly transponder in our Credentials segment, to satisfy both current backlog and in anticipation of customer orders later in the year and early 2017.

Some of the other noteworthy line items in the balance sheet. Other accrued expenses and liabilities increased from $5.8 million at December 31 to $8 million at March 31, 2016, primarily related to an increase in our restructuring accruals and accruals related to legal and other professional fees associated with noncore business activities. Our long-term payment obligation decreased from $4.9 million to $4.7 million, reflecting the continuing quarterly payments made, partially offset by the accretion of interest. And our long-term financial liability decreased from $17.7 million to $8.2 million as a result of reclassifying the term loan with Opus and the related debt issuance costs to short term in quarter one 2016. The $10 million term loan matures on March 31, 2017, and amounts due on the revolver mature in November 2017.

As Steve's already noted, the company is confirming revenue guidance for fiscal year 2016 that was given in our earnings release a couple of months ago of between $56 million and $60 million, reflecting the trends in the business we've experienced last year and year-to-date as adjusted for revenue decline associated with the restructuring activities.

That concludes the financial discussion. I'll pass the call back to you, Steve.

Thanks, Steve. So picking up where we left off from the business introduction. So far this year we've made solid progress while managing our challenges.

On the progress front, revenues especially in the physical access control systems, smart card readers and cards have been very strong. The sales organization, in particular, has delivered very well and proven itself as a core competitive advantage for us to build on. Our PACS position also strengthened within the federal government, which is a core leverage point for us, and we had significant PACS product progress. Also, as Steve mentioned and I mentioned earlier, our smart card reader sales have been performing above plan, which is an area we expect to continue to invest in and to grow.

We have had our challenges as well, though. In the U.S. transponder business, we've been dealing with a large customer potentially announcing a repositioning and out-boarding of one of their product lines which we've sold into. But we've managed the revenues in the first quarter despite some of the pressures in the transponder sales in the U.S., and we believe we'll continue to do so.

Now of course, the business refocus and organizational changes, while accelerating our product and market execution, is a challenge that the team meets every day, and it takes a toll. So we have to keep our team building and thriving for the long run, but we also have to recognize that we're putting a lot of pressure on the organization to perform while also realigning the direction of that organization.

So taking a closer look at our progress. The government customers, in particular, are really embracing a rededication to Hirsch and our physical access control systems. I already mentioned the strong showing at ISC West where we shared a 40 by 40 booth, half with Cisco, and we had a great Hirsch presence, warmly received by many in the industry, our partners, our customers, our channel and frankly, even some of our competitors. The smart card reader business is performing above plan in the U.S. and Europe with solid margins, broadening OEM presence in printers and keyboards and other pivot points in access infrastructure.

In the news, we've been active, launching our comprehensive UHF tag products and services for the IoT market, announcing an industry-leading Tag on Metal label for libraries in the U.S. and internationally, showcasing our smart card readers and IoT solutions at the Smart Card Alliance Payments Summit. We also announced an India regional channel and integration partnership with IDCUBE and quite a few more and many more to come.

Also, as mentioned, we released our Secure Network Interface Board, which is core to the government federal IT -- ICAM program deployment. And this is the culmination of nearly a two-year development process. So we're taking things we've been working on for a long time, bringing them to fruition and bringing it to market, which is really important for our organization and our industry to see us moving forward at an accelerated pace.

Similarly, we released our Identiv Connected Physical Access Manager version 2.2, on schedule with very high stability and very high quality. Also, Cisco announced the end of life of the Cisco PACS gateway, and this is the hardware platform that Cisco had been delivering for its physical access services, which we're now fulfilling. So this now drives all of Cisco's PACS pipeline to Identiv's ICPAM, and it also accelerates the natural migration from the gateway platform to our ICPAM platform, so really solidifying, strengthening and broadening and accelerating the Cisco partnership.

Now before going into our core strategy for 2016 and beyond, which I'm going to be building up in a fair amount of detail at the product line level, I'd like to take a minute to put our business specifics in a market context. We often focus on the world and the activities of our one company, but our goal is to build a platform to grab increasing share of our market. And just to calibrate, this is a $30 billion equipment market, $120 billion total equipment and services market and the very focused access control market segment that we're directly in is over $4 billion and growing at 10% a year. So it's a very rich, robust and strong market which we can grow with as well as grabbing share in.

Additionally, it's highly fragmented. Even the major players are less than 5% shareholders. For example, HID, which is a well-known player and it's shown here under its parent, ASSA ABLOY, has about 2.5% of the market. So the fragmented market opportunity really represents a chance for us to take share with our complete solutions and establish a truly leading platform for physical IoT. And sometimes, when you hear a small company saying: We're going to accomplish leadership, you have to question how credible that claim is. In a fragmented market like this when leaders have 2.5% share, we have an opportunity truly to establish leadership with our differentiated position.

So this represents a growth opportunity for the Identiv access platform, which is supported by a sizable market, a growing market and a structure in the market that creates an opportunity for companies like ours to go after it. So as we go into more detailed discussions of our platform and products, I just wanted to clarify that it's a much larger share of this market and expanding the market overall which is the prize we're determined to win and that's what we're structuring to go after.

So how do we win? We win with the most complete product portfolio and with best-in-class in each component of that product portfolio. And as we go through some details here, hopefully I can demonstrate to you why we think we have a claim to that assertion. We do have a complete solution set across platform software, panels, access readers, credentials and OEM-ready modules. Our Velocity Hirsch product and Mx panels, of course, are best-in-class. Our ICPAM Cisco-related platform, as I've talked about, is already gaining great traction and demonstrating an ability to keep delivering additional versions and additional capabilities on a rapid basis. Our federal ICAM solution, which is our Hirsch federal high-security platform, has also been demonstrated multiple times and we think is going to have a leading position across the federal government. Our Touch Secure readers and our third-party readers are part of an integrated solution, which I'll go into in a little detail a little bit later; our credentials and our smart card readers, of course.

With this complete product portfolio and strength across each segment of the product portfolio, we're then using that sales organization I mentioned to drive a wedge and widen the customers served, the integrators, dealers and VARs; the federal customers; distribution partners like Cisco and Johnson Controls and other channel and platform partners; and of course, international growth where we think there's huge opportunity in addition to our core strength in the domestic market. All of these are things we're going to leverage as we bring out the most powerful, proven access platform in the industry.

So when we say platform, we're leading the industry's progress towards total access where you can get ubiquitous access to all the resources in the organization you're trying to reach with one form of control platform. There are two main paths to total access from today's infrastructure. On the top right is a greenfield infrastructure where you're starting fairly fresh and bringing all new technology. We serve very well with our full range of solutions, everything from our Hirsch platforms to ICPAM to our TS readers and our advanced credentials.

On the bottom right is the predominant part of the market, the real world, very complex, but a huge opportunity. We have advantages in both of these areas. I'm going to focus for a moment on the bottom right as the larger market opportunity that we're really focusing on even as we leverage the Cisco channel and others to go after more of those greenfield opportunities.

So when you look at empowering and extending the existing access systems, if you look on the right, you have a very complex environment of cards, fobs, credentials, different protocols, different interfaces. Moving a little bit -- sorry, that was on the left. Moving a little bit over, the readers with varying interfaces, biometrics, pins, protocols, all of those connected into this simple technology called the door. Then on the other side of that, you've got the whole power structure, the control panels, the network and the infrastructure and the software platforms. All of this, of course, is what comes into play when you walk up to the door and expect it to open and on the other side, when your organization with all of its security protocols expects that you are the right person getting through the right door in the right time for the right purpose.

We solve all of these solutions. Our Identiv platform provides the most complete, flexible, cost effective and open path. Now you can see the problems and the opportunity here, and it's easy to make statements like complete, flexible or cost-effective. But I'd like to take you quickly through each major component of our solution to demonstrate the real advantage that we have in each. And so when we talk about grabbing market share and actually solving this problem positioning a platform for the Internet of Things, you can see that we have a basis for that claim.

So going portion by portion through our platform. Of course, our flagship is our Hirsch Velocity, and the advantage there, very well known. It's recognized as best-in-class in terms of reliability and lifetime endurance across commercial and government installations. Our professional services organization that bring into market with our partners have -- bring advice and equipment integration so that we can solve whatever needs the customer has. We have subject matter expertise that know exactly in the industry and the type of technology that you already have implemented, we can make our systems work with you. And our platform is a platform of very complete solutions, integrating everything from visitor control to door management to gates to other forms of surveillance and managing infrastructure.

We also have very wide feature set. This is a platform that's been evolving for almost two decades. So if you need it, we'd probably already implemented it. And then our customer support is really what has kept our customers with us throughout the years where we have a leave no customer behind approach. We will take every call as it comes in and we'll reply to it. Now we have a commercial imperative, and so we try to drive our customers towards the dealer channel, towards getting certified, in fact, towards buying more training and information flow from us. But we won't leave a customer stranded, and that's paying dividends as the complicated situations that customers are facing are solved by Hirsch Velocity.

Then on the Identiv Connected Physical Access Manager, again, the advantages are very clear. We go to market with a bundled solution that has a complete set with readers, cards, panels and software and this enables the Cisco channel, in particular, to do rapid deployments, rapid integrations and rapid installations. We also leverage the fact that Cisco brings with it a broad range of integrations on the video side, but also on the IP interoperability and collaboration systems platform that Cisco has, which enables integration of virtually every digital device and digital information and sensor flow that you can imagine. So we're getting the best of both worlds of physical access control and broad integration with the digital infrastructure across the whole organization.

We then bring our professional services as we do with our Hirsch platforms, our subject matter experts. And then as I said earlier, with 2.2 we've now really demonstrated with 3 substantial releases in a very short period of time across this platform and we're driving towards 3.0 already. But the Java platform we built on and the team we built is proven rapid development, very high-quality responsiveness to customer expectations as soon as they arrive.

Then turning to the readers. This is something many of you are familiar with, our Touch Secure reader family. The value proposition here is very straight forward, bring whatever credential you have and our readers will deal with that complexity for you. So could be basic prox and HF capabilities, could be smart cards, could be very high-end identity cards, could be some of the very complex encryption cards that the government and other high-security entities are deploying our readers at the front end that make it both relatively transparent for the user and also because we have preprocessing intelligence in those readers, you get a faster and smoother user experience right at the front of the door with the reader.

Then onto credentials. We, of course, as you know have a very proven robust and high-security issuance portal. So we can do everything from, again, basic prox cards because that remains 70% to 80% of the card market out there, all the way up to the very highest of high-security identities, whether it's across cards, fobs, wristbands, you name it, we can do it.

So this has been a fairly quick run through but nonetheless an important, touching on each of the points here because when we talk about the complete platform, what we're providing to customers is a seamless solution so they don't have to think about it. On the other hand, if they want any piece of this platform, we're happy to let them adopt one step at a time. We're competitive in each of these categories. If they simply want to take our readers or simply take our panels or even simply take our cards, we'll take that as a starting point and then we'll win their business with our technology, our integration and our service going forward. And that's why we think that we've got a tactical advantage in execution and then a strategic advantage in building the entire platform that we think we can build on top. So by leading the movement towards openness, we think we open it up to customers because it reduces their risk, but we also don't undermine our own advantage. We don't have to lock customers in because we can give them a superior solution without having to get them stuck in order to get them to stick with us.

So our vision is unchanged. When you look at this platform and you look at how the products all add up, it was important for you to see the components, but the vision is really unchanged. We are building this platform for the Internet of Physical Things. Our physical access business, our transponder technology, built up with competitive advantages in each product line and each component of the platform is really our core strategy.

And where this all builds, of course, is something that any of you who've followed us in our investor presentations before have seen, the platform for the secure Internet of Everything. I just wanted to take a few minutes in this conversation to build up what that platform means and why we think we have an advantage in it. And then as the platform goes from the perimeter to total access to access enablement and ultimately access intelligence about who should be doing what, where and at what time and in what mode, that's when the opportunity really becomes substantial and all of this is enabled by the platform we're deploying now.

So when you look at a vision like this, it's important to have both tactical and strategic execution. And our business model, which you've seen demonstrated in our revenues this quarter, is really built up on three components, our base growth, where we stabilize and we're driving our organic growth; then on top of that, growth initiatives, some of which I've talked about in some of the product releases today; and then beyond that, the base for true breakout, which as the Internet of Things and as total access becomes a reality, we're going to be positioned with the platform to deliver on that; meanwhile, being very conservative in terms of expectations and in terms of investment. So we're always living based on our tactic of deliverables, but being positioned for our strategic opportunity.

But what's important is this isn't a grand vision that's simply pointing at something large. This is execution, and it's execution based because execution is where the battle is won. We think we've got a clear market defined. We have competitive products in each aspect of the solution. We have a platform that adds up to a position in the marketplace that we think is truly valuable.

When you break it down also in terms of execution, we have a balanced approach in terms of our markets and our geographic dispersion. Steve already talked about it in his numbers. But here graphically, I think, is worth touching on because again, the vision is great, but the execution and the numbers are what really prove it. And as you can see, we've got our U.S. strength, but we also have international holding a very strong part of that and in international, a good balance across Europe and Asia. And similarly with our markets, we have our physical access market and our transponder market well balanced, but frankly, some more strength in the physical access market, which is where we know the margin and the ultimate vision is for the business and the opportunity in the market.

So turning to our outlook and guidance, and again apologies, this has been a slightly long exposition to get to this point. But I wanted to have that -- the guidance demonstrated on a lot of solid facts. We are reiterating our guidance for the year. We expect to be in the $56 million to $60 million range, and we expect going into 2017 for that growth rate to be in the 15% to 20% range over the year prior quarter with positive EBITDA and accelerating growth. I showed you a couple of slides back tactically how we built up that growth expectation and where it comes from. There will always be news coming out, such as there was with one of our transponder customers recently. But we think we're building a base and have already built a base whereby we can manage those news as they come and still build our business growth profile, so our guidance is unchanged.

The strategy, as I've talked about earlier already, is built on our base, our base growth and our growth initiatives and ultimately, IoT. So I won't go into that in more detail. But sometimes, you'll see us repeating slides from prior presentations because continuity, both representations and of achievement, is important to us. So the bottom part of the slide is exactly unchanged from the last time you saw it in our last investor update.

So in summary, our 2016 outlook has been substantiated in our first quarter. We had a lot going on in that quarter, and certainly we had expenses associated with our restructuring and the activities to deliver the business and build the business. We think those will accrue to efficient expense base going forward both through the second half of 2016 and accelerating into 2017.

So we'll also continue to have our investor and industry updates on the mission. Today is, of course, quarterly results announcement. We'll have our Annual General Meeting tomorrow. We'll be speaking at the B. Riley conference later this month. We'll also be out at one of the major industry events out in September and Imperial Capital later in the year and adding more events to this as the year progresses, but just wanted to give you a quick snapshot of where we'll be out there.

So with that, I think we can open it to questions and look forward to discussing all of this further with you.

(Operator Instructions) And our first question comes from Saliq Khan from Imperial Capital. Please go ahead.

Great, thank you. Hi, Steve. Looks like you and your team have clearly been very, very busy over the last quarter or two. The one question I did have for you was while your organizational and the restructuring efforts that you've put in place since you've been the CEO? And clearly, the headcount reductions helped as well in reducing the overall OpEx. How are you preparing for the potential of your -- this transponder customer that you talked about earlier? How are you preparing for that customer reducing the overall orders? And does this impact your overall full year guidance?

Yes, thanks for the question, Saliq. And as I've said, we are reiterating our guidance. We don't believe in building a business built on individual customers. And so as we built the plan, we did have some numbers in there for some substantial customers, but no numbers that we couldn't compensate for. It'll mean obviously when you get pressure in one area, it gives you less flexibility if you end up with pressure in a couple of other areas. So they certainly create some more risk in the ability to execute with certainty. But currently, we think we can deliver around them.

Thank you.

And the next question comes from Mike Latimore. Please go ahead.

Yes, thanks a lot. On the physical access opportunity, I mean, what do you see as maybe the top one or two drivers for that business this year? Is it new federal government agency coming on board or a major upgrade to the current government -- current customer, or is it Cisco pulling through, pushing through? What are the -- what's the, like, one or two big drivers for physical access kind of second half of the year, let's say?

Okay. If you'll permit me, Michael, I'll give you three, because 1 is current federal government customers. I mentioned FICAM and SNIB3 programs that they have mandated and budget for and we have orders on the books for that are going to drive accelerated growth there.

The second is because that solution, our FICAM solution, is literally half the cost and almost twice the speed of the competitive solutions, we've been out talking to other agencies who are not currently Hirsch customers, and we think we're going to bring some of those on as well.

And then in the commercial space, as I mentioned, the Cisco partnership, both for the ICPAM platform and then later in the year we're doing an integration of our Hirsch Mx panels into the ICPAM platform. And so you're going to get a hybrid of some of the Hirsch capabilities with the ICPAM software going through the Cisco channel, and we think both the growth we're seeing already and that capability added on top of it will accelerate it even further. So there's at least three specific touch points that are driving growth. I could go into four, five others, but I'll stop at that unless you want more.

Okay. And then just curious on the Cisco partnership, Cisco obviously has a broader Internet of Things strategy. The opportunity that you're seeing through Cisco or with Cisco, are they -- do they typically -- are they typically we just want the specific ICPAM product? Or is it -- that's part of a broader Internet of Things deployment that Cisco is doing?

Yes, it's definitely part of a broader Internet of Things deployment. In fact, this is one of the validation points when we talk about the physical environment and we talk about it in IoT. Cisco completely agrees with that assessment. Their salespeople who are -- their comps on IoT, sales of ICPAM is counted towards their IoT target comp. So they agree that this is part of the IoT strategy. And then as I mentioned, they've got their video integration there, and they've got their whole IP infrastructure integration. So for farther down the line, we're actually looking at integrating some of our physical access capabilities into some of their industrial control IoT platforms so you could have the best of both worlds. That's road map stuff, that's 2017 stuff, but right now they definitely see sales of our ICPAM platform as part of their IoT strategy.

And I guess just last question would be you mentioned the first quarter was a seasonally weak quarter. I mean, how would you characterize the second quarter? Or what would be the seasonally strongest quarter of the year given the current product mix?

Seasonally strongest quarter of the year is almost always third quarter driven by a number of things, the government purchase cycle being one and also product release cycles. So typically, you'll have a lower first and second quarter, fairly on par with one another, then third quarter has typically some sequential growth and then fourth quarter is comparable to third quarter.

Okay. Thanks a lot. Good luck.

(Operator Instructions) We have no more questions at this time. I'll turn the call back over to Steve Humphreys for final comments.

All right. Thank you very much, and thank you all for joining us today. As I mentioned, we'll be presenting at the B. Riley conference a little bit later this month, for anyone who cares to join us there. And otherwise, we look forward to keeping you updated at our investor updates as we go forward and certainly our next quarterly results as well. Thanks, again. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.