Identiv Inc (INVE) 2016 Q4 法說會逐字稿

Welcome to the Q4 and Fiscal Year 2016 Identiv Earnings Call. My name is Victoria, and I will be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

On the call with me today are Steven Humphreys, CEO of Identiv; and Sandra Wallach, CFO. In a moment, you will hear remarks from both of them, and then we will take questions from sell side analysts.

Before we begin, please note that during this call, we will be making references to non-GAAP measures 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. And these statements 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 of today.

I will now turn the call over to Steven Humphreys for his comments. Steven, you may begin.

Thanks, Victoria. I'd like to welcome you all to our fourth quarter and full year 2016 business update. But first, I'd like to say a special welcome to Sandra Wallach, whom you'll be hearing from in a few minutes. This is Sandra's first financial results report as our CFO, following Steve Finney, who's been very ably supporting the company as our interim CFO. So special thanks to Steve for his support, and welcome to Sandra.

Turning to the business. Throughout 2016, our conversations were mostly about our health as a company rather than the market opportunity or the exceptional position of Identiv and the strength of our products. Today, we're announcing results that include two consecutive quarters of solidly positive adjusted EBITDA totaling about $2.8 million in positive EBITDA in the second half of 2016. We're also showing solid, pure year-over-year double-digit growth in the fourth quarter of 2016. Additionally, in the first two months of 2017, we announced the refinancing of debt that had been a 2017 obligation, and now we have a three and a half year term loan with strategic banking partners who are aligned with our direction and whom I'll talk about later.

Now most importantly, above all of this, we publicly announced a range of product announcements already in the first two months of the year, all of which directly drive our growth in 2017 and beyond. Now I'll go into more details, but the perspective to understand about Identiv is this, with all the nonoperational challenges of 2016 and the operating realities of restructuring and refocusing a company, we executed to plan every quarter and moved our business to adjusted EBITDA positive and a clear strong growth. We're going into the rest of 2017 with no meaningful non-business distractions. So as I speak later about growth opportunities and acceleration, this is coming from a team that's executed very well under fire and now has an open field and a great market position to grab one of the best market opportunities we've seen in this industry over many years.

So taking this down to specifics. As you can see here, we've built strength into all of our key financial metrics. On the cash side through all the business complexities of 2016, we've held cash steady since early in the year at over $9 million, even while driving the growth today and into the future. We've stabilized the business and rebuilt the core while holding the one metric that businesses can always be measured by, which is their cash balance.

On the operating expense side, we've stabilized at a very healthy level, while still launching major product releases and also doing a major overhaul of the U.S. channel in 2016. You'll see all of these driving into our growth in 2017. The base we built is now the base that we can grow on going forward without adding to our OpEx base.

Now the result of the growth and operating expense control, of course, is EBITDA expansion. And as you can see, we've turned around the EBITDA, which is great. But more importantly, we've already started to deliver on our midterm target model structure for EBITDA. We've put together back-to-back EBITDA quarters, and we expect we can continue that going forward.

On the bank financing side, I mentioned it briefly in my first comment. But here, we took a 2017 overhang, brought on new bank partners, an over three-year term loan facility, and that really is important from a capital structure perspective, but frankly, more important from a business perspective that there's no distraction, there's predictability, and also, we brought on partners who can contribute to the business. WTI has deep Silicon Valley technology roots and they're helping us tap into even some of the stealthy technologies that are leading edge and that are going to contribute our business, helping us minimize our own investment by having visibility into partners who are already investing in these categories.

Our other banking partner, East West Bank, has deep capital strength, but also has domestic strength in China, where they're one of only three U.S. banks certified to do banking business across China. Any company that doesn't have a China strategy is leaving something behind. On our own, we wouldn't be able to be executing a substantial China strategy other than what we already have with our distributors in that market. With our East West Bank partnership, we think we've got a leg up to be present there and leverage opportunities.

So that's all a very important solid base. But what's most important is on the right-hand side here, which is growth. And in this case, it's pure, unqualified, year-over-year growth. There's no adjustments for Other, there's no removal of other accounts and we expect it to be the same clean going forward growth basis, frankly also with some fairly advantageous comparables.

So looking at growth more closely, you can see where our enthusiasm comes from. Our physical access business with year-over-year growth of over 40% and the identity segment, particularly smart card readers, with over 30% year-over-year growth. Now the Credentials had a tough 2016 with Disney shutting down its product line. And because that business has longer sales cycles, its recovery is taking more time. But for 2017, we see a strongly positive picture. And we don't give segment guidance, but like all of our businesses, this is a segment we know very well. Our core RFID technology strength is a major competitive advantage and it will be contributing both to growth and adjusted EBITDA and to our technology platform strategy going forward. So the net effect, of course, is clear on the chart on the right. We've focused our resources and driven growth, so we're now delivering financial results that we expect to grow going forward.

Now before we go into the financial results, it's appropriate to look at some of the specific factors that drive our growth outlook because it's built on the groundwork that was laid in 2016. Now the most important perspective to understand here is that our growth plan is very specific. We don't build up a broad-brush market size or share calculation. We plan specific products, channels and customers, and with our unique features and competitive advantages, that's what drives our growth expectations.

Now anyone who's followed us knows most of these that are listed on the chart here and, in fact, most of them have already launched in the first months of this year. I'll just touch on these and go into more detail later. But going down quickly, the expanding federal government opportunity across our base and the once in a decade transition to FICAM is a major opportunity where we think we have very tangible advantages to take even more market share. Now as you may know, we received our full certification and U.S. government-approved product listing earlier this year for our FICAM product.

On the commercial product side, we launched our TS Card offering also earlier this year. We've already got prototype units of our MX 1 edge controllers, and our service bureau launch will deepen our customer channel relationships as well as increasing our already high levels of retention and current customer growth.

Our Cisco partnership continues to expand, especially with our ICPAM 3.0 release, another launch, which was just earlier this year. With our integrated with Cisco video, the VSM product with our Velocity platform coming in the next few weeks; and EAC certifications, which open up the Russian and former Soviet markets, coming in the next couple of months, you can see the business pace we're setting.

On the channel side, we did major strengthening in the U.S. in 2016, as I mentioned, and we launched 2017 with a renewed focus in Europe, Russia, Africa, the Middle East and Asia, which I'll go into more detail later. So we'll expand in all of these areas. But this perspective of accelerating execution connected to specific milestones is important to understand and to know that we've already built this progress in 2016. So as we execute into 2017 and beyond, we expect to do so while holding to stable expense levels. So with the non-business distractions behind us, we believe we're positioned for faster execution and growth as we've already shown in the first months of 2017.

So with that introduction, I'll turn it over to Sandra.

Thank you, Steve, for the introduction and for providing the context for our financial results for the fourth quarter and the full financial year of 2016. As we transition to the financial section of the presentation, revenues in the fourth quarter were $14.6 million, a 6% sequential decrease compared to $15.6 million in our seasonally adjusted strongest quarter three, and a 12% increase compared with $13.1 million in the comparable quarter of 2015. As for the full year, we recorded revenue within our guidance range of $56.2 million as compared with $60.8 million in 2015, an 8% decrease, and I'll walk you through those movements by segment.

Our Physical Access Control segment generated $6.8 million of revenue in the fourth quarter of 2016, down 6% sequentially from the $7.3 million in the third quarter and up 43% from the $4.8 million recorded in the comparable quarter of 2015. The decline sequentially is primarily a result of the timing of orders from customers in the key U.S. federal government sector, whose business had generally remained strong for us, as Steve noted. Indeed, on a full year basis, we saw revenue grow from $20 million in 2015 to $24.7 million in 2016, and we're continuing to focus on our strong Hirsch customer base and branded products, including our new FICAM solution in addition to further developing our commercial offerings through ICPAM to grow revenue in this segment in 2017.

Revenue from our identity products, primarily smart card readers, reader modules and chipsets, was $4 million in the fourth quarter. This represents a sequential increase of 13% from the 3.5 million of revenue in the third quarter of 2016, reflecting stronger sales primarily in the U.S. market and an increase of 34% over the $3 million recorded in quarter four of 2015.

For the full year, our identity segment revenues amounted to $12.9 million, up 8% from the $12 million achieved in 2015. These changes reflect stronger demand for these products in the U.S. markets.

Approximately 27% of our fourth quarter revenue worth $3.9 million was derived from sales in our Credentials segment, which comprise both Access Control credentials and our broader Internet of Things transponder products. This revenue performance reflects a sequential decrease of approximately 19% from the $4.8 million revenue achieved in the third quarter of 2016 and a 23% decline from the $5 million delivered in the fourth quarter of 2015. For the full year, Credentials revenue declined $9.3 million or 34% from $27.3 million in 2015 to $18 million in 2016. The change relative to 2015 is primarily due to sales of transponder products used in electronic game toy applications and other Internet of Secure Things applications to certain large U.S. customers that were not repeated in 2016.

As previously anticipated and disclosed, we have no revenue in our All Other segment for the fourth quarter of 2016. Revenue for the full year amounted to $0.6 million, down 63% from $1.5 million in the prior year. These changes are primarily due to the phasing out of our digital media product lines and the discontinuation of our CHIPDRIVE product line.

Now turning to our gross margins. Our total GAAP gross profit margin was 43% in the fourth quarter compared to 44% in the third quarter and 22% in the fourth quarter of 2015. On a non-GAAP basis, excluding certain noncash items, our total non-GAAP gross profit was 45% in the fourth quarter compared to 47% in the third quarter of 2016 and 25% in the fourth quarter of 2015. The sequential decrease in the quarter was driven primarily by sales mix and volume, while the comparatively lower margin in 2014 -- 2015 Q4 reflected inventory reserves recorded at that time associated with the excess transponder revenue inventory. Full year non-GAAP gross margin was 45% in 2016 versus 41% in 2015.

Now moving on to our operating expense, which is the next graphic on the webcast presentation. GAAP operating expenses totaled $6.4 million in fourth quarter 2016 compared to $7.1 million in the third quarter and $20.3 million in the comparable quarter of 2015. Adjusted on a consistent basis to exclude restructuring and severance and certain noncash charges normally excluded from our non-GAAP results such as stock-based comp, depreciation and amortization and impairment charges, our total non-GAAP operating expenses in the fourth quarter were $5.4 million as compared with $5.5 million in the prior quarter and $10 million in the fourth quarter of 2015. The sequential and comparative decreases are primarily due to the positive impact of the restructuring activities undertaken in the first quarter and unrelenting focus across the business, landing us in line with the company's previously announced target of less than $4 million per quarter -- or less than $6 million per quarter.

In prior quarters at this point, we have highlighted legal and professional fees related to noncore business activities, but I'm pleased to say that these are now very significantly reduced, and in the fourth quarter, are more than offset by insurance recoveries.

Our R&D expenses of $1.3 million in the fourth quarter and $1.2 million in the third quarter of 2016 represent 9% and 8% of total revenue respectively compared to $2 million or 15% of revenues in the fourth quarter of 2015. Full year spend was $5.6 million versus $8.1 million in 2015. As mentioned in previous quarters, this level of spending reflects that we're focusing on core business activities subsequent to our Q1 restructuring.

Sales and marketing expenses were $2.8 million or 19% of revenue in the fourth quarter, a decrease of $0.1 million sequentially and a $1.2 million decrease over the fourth quarter of 2015. For the full year, we incurred sales and marketing expenses of $12.3 million, a 32% reduction compared to the $18 million in 2015. As previously noted, our level of spending here is also a reduction -- a result of the reduction of headcount and delayering of management as part of our Q1 restructuring and the positive impact of other cost-savings initiatives over the past year.

G&A expenses in the fourth quarter were $1.3 million compared to $1.4 million in the third quarter and $4 million in the fourth quarter of 2015, reflecting the reduction in the noncore legal expenses in addition to the benefits of the restructuring.

We now turn to our full income statement. Per the earnings release, our GAAP net loss for the fourth quarter was $1.1 million compared to a loss of $0.7 million in the third quarter and a loss of $19.1 million in the fourth quarter of 2015. While our non-GAAP adjusted EBITDA gain was approximately $1.1 million in the fourth quarter of 2016, $1.7 million in the third quarter compared to the $6.7 million non-GAAP adjusted EBITDA loss in the fourth quarter of 2015. For the full year, our non-GAAP adjusted EBITDA loss was $2.1 million in 2016 as compared to a non-GAAP adjusted EBITDA loss of $17.7 million in 2015.

If we move to the next slide, we've provided a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. There are just a few items worthy of a comment at this point. Interest expense continues to be $0.5 million for the quarter, comparable with $0.5 million recorded in the third quarter of 2016 and $0.5 million in the fourth quarter of 2015.

Noncash stock-based comp was $0.6 million in the fourth quarter and $0.9 million in the third quarter compared with $1.0 million in quarter four of 2015, primarily due to the impact of the restructuring initiatives in Q1. And lastly, the restructuring charges recorded in the fourth quarter included nominal credits to facilities cost previously accrued under the quarter one 2016 restructuring plan. The restructuring charge in the third quarter of $0.2 million resulted from small adjustments to severance and facilities costs previously accrued under the quarter one restructuring plan as well. We do not expect to incur further charges in connection with the implementation of this plan.

So now if I could turn to the balance sheet. I'll be comparing our position as of December 31, 2016, to the position one quarter ago at September 30, 2016, as well as the last year ended December 31, 2015. As Steve mentioned, cash has now been consistent and stable around $9 million since the end of Quarter 1 2016. The $0.1 million net decrease from Q3 to Q4 is comprised of an increase of $400,000 from the net loss, excluding noncash items, offset by a reduction of $0.3 million net change in operating assets and liabilities. In addition, there was a minor usage of cash in investing and financing activities and small effects of FX on cash.

Now comparing December 2015 to our reported cash of $9.1 million at December 2016, it was down approximately $7.6 million from the $16.7 million at the end of December 2015.

Our last slide is the full balance sheet as per the table in the earnings release. We define working capital simply as accounts receivable plus inventory less accounts payable. This subtotal was $15.0 million at December of 2016 as compared with $14.9 million at September of 2016 and $16.4 million at December of 2015, with the reduction mainly driven by getting our inventory levels down.

With respect to accounts receivable, our days sales outstanding increased to 55 days in the fourth quarter of 2016 from 49 days at the end of the third quarter of 2016. This was driven by a higher percentage of the quarterly revenue build in the last month of the quarter versus the prior quarter.

Inventories net of reserves decreased to 11.6 million from -- at December of 2016 from 12.1 million at September 2016 and 14.7 million at December of 2015.

Our adjusted inventory turnover was approximately 3.3x for the fourth quarter of 2016 compared to 2.8x for the quarter ended December 2015. Accounts payable decreased slightly by $0.3 million due to the timing of payments.

A couple of other noteworthy items on the balance sheet. Accrued expenses and liabilities are comprised of employee compensation, legal and professional fees, restructuring charges and other items amounting in total to $6.5 million as of December 2016. A decrease of $1.8 million over September 2016 was driven by the reduction of accrued legal fees resulting from insurance recoveries. These accrued liabilities, expenses and liabilities totaled $7.7 million at December 2015. In addition, our long-term payment obligation decreased from $4.9 million at December 2015 to $4.2 million at September 2016, and finally, $4 million at December 2016, reflecting the continuing quarterly payments made, partially offset by the accretion of interest.

Our long-term financial liabilities decreased from $17.7 million at December of 2015 to $8.3 million at September of 2016 when our Opus term loan was classified as current, to $9.8 million on December of 2016 as a result of completing our refinancing in which we classified the line of credit revolver portion of our debt, net of related debt issuance costs, to short term. The company is providing guidance for fiscal 2017 of revenue between $64 million and $68 million, representing solid double-digit percentage growth over the current year and positive adjusted EBITDA between $4 million and $7 million.

With that, I conclude the financial discussion and pass it back to Steve.

All right. Thanks, Sandra. As I briefly mentioned earlier, we've got clear drivers to our growth. I want to focus on a few of those and just go down the list that you see here on this slide. I won't spend time on FICAM right now. We'll get into some more detail on that, but the rest of these, I'd like to go into with some depth because they are all relevant and they are either already released or well underway.

So the first one, ICPAM Mx integration. This is really a bellwether moment for the company because it brings together the Cisco initiative with our Hirsch strength. And so that entire Cisco channel, which has been using edge controllers for deployment, now has access to the full range of enterprise-ready industrial-strength Hirsch devices. And, in fact, on a per-door basis, prices dropped because you can go to 8, 16, 32 doors with one panel instead of having the limited scalability of edge devices. So we're very excited by the Mx release, as I mentioned earlier, that happened in January this year. And now it's all about driving it through the channel and awareness throughout Cisco. But it really is a step function for the capabilities of the Cisco channel and the ICPAM platform.

Reciprocally, VSM integration is the Cisco video capability that we're integrating into the Hirsch Velocity platform. So now we'll have access to all of Cisco's video capabilities, which you see on the top right there in the image, into our Hirsch enterprise scale infrastructure across the Velocity platform. So we're really starting to bring together, but doing it in a step-by-step fashion, the Cisco channel and product positioning with our Hirsch and physical access business.

The next logical step in all of this is to take our enterprise-scale Hirsch controllers and bring them down to a PoE edge controller. Now this is something that isn't coming out until the middle of the year, but nonetheless is very important. It's a demonstration of our commitment to investment in our platforms, and in particular, in the hardware part of our platforms. And that is where we get a lot of our defensibility, scalability and, in fact, margin support by having the differentiated, very high-end platform. And over on the right, even though it's a few months away, you see the prototype units that we already have out there, so making progress on that front.

The government channel, of course, is something we've had strength in for a long time. But I just want to address what seems to be going on in the federal government in the current environment, which is, if anything, physical security is becoming a higher priority. We'll talk about this in FICAM and how it's being motivated over the FIPS 201 standard over the long term, but even in the near term. Most of the security breaches that you're seeing, whether it's Snowden or the recent CIA stuff, it's not cyber-thieves hacking into systems, it's people walking in the door and taking physical stuff. And so the physical security aspect is, if anything, more top of mind with the current administration than it has been in the past. So we see the government channel continuing to be important to us.

Internationally, as you know, we've had a long presence across Europe, Asia, the Middle East. But rather than talk about what I think will be the secular growth there, and there certainly will be, there's a couple of target events as well. EAC is the product certification for Russia and the former Soviet bloc. Now whatever your politics might be about good, bad or indifferent, it's a very broad and deep market, very capital rich, oriented towards physical security. The competition and alternatives for solutions are limited, and it also happens to be a very strong market for the Cisco channel.

So when we look at all that, accelerating our EAC certification across all of our products, but first and foremost, for the ones going through the Cisco channel is an obvious one. And so when I talk about growth internationally, it's not a broad-brush focused on the channel. We have had some very tangible interests already in specific areas that actions like this will enable, so I just wanted to highlight EAC. And that's one, again, that will be happening right into the second quarter. So most of what you hear us talk about is within a quarter or two, if not already done.

Moving to the TS Cards part. That launch came out also in January, so again, something that is already behind us in terms of execution from a product and technology perspective. And it really is a better, faster, cheaper solution than customers in the access card market have ever had. For less cost than the average prox card, they can have prox access, built into that capability is a high frequency, high-security capability. And so the way we're positioning it is customers can adopt the basic capabilities and then when they're ready, they can move up to a greater security, greater capabilities. They don't have to do a whole scale rip-out and replace, they don't have to convince all of their customer base and their employees inside to go to something that is more cumbersome. They can take it one step at a time and we can create frictionless experiences as they go.

Now the broad strategic category of access enablement is possibly the most exciting potential on this slide. We don't want to talk about it too much because tangible numbers and results within the near term is something we want to stay focused on. But we want to be clear that we are taking steps that we think put us at the forward edge of any emerging technologies and any access control experience, and we're doing it primarily by partnerships.

We have the benefit of being headquartered in the Silicon Valley, and so we have access to venture-backed companies that don't have access to customers. And so they're very happy partnering with us to demonstrate and build out their capabilities, and then we can be the channel for them as they go to market, and then also as we find things that are going to market, effectively, we can decide how we go to -- how we take those things fully into our product portfolio. You'll see us doing activities in mobile, wireless locks, Bluetooth.

A good example of this, machine learning. We're using in the Carnegie Mellon open platform for very high-end machine learning, something we don't have to invest in, but allows us to be at the very cutting edge of capabilities. We won't be talking about a lot of futures here, but he will be demonstrating at ISC West, doing some sneak peeks at where we're going with some of this.

Then on the transponders side, I think it's very important that we're leveraging our core RFID and security expertise across the transponder and smart card readers products, where we've established strength across high frequency, UHF and active sensors. Now one of the most visible examples of this was launched in January, a demo site for smart label. This gives clear demonstrations and use cases of sensor-enabled physical assets that we've talked about for quite a while actually, but they're really coming to fruition and being realized now. And if you haven't looked at it, it was in our press release. But if you haven't looked at it yet, go to smartlabeldemo.com and you'll see some great realization of exactly what we're talking about and our products, bringing them to life.

Then in our smart card reader base business, we're seeing record chip sales and some of the sector trends that contributed to 30% growth I mentioned earlier. Now this sounds like a lot for a small company, but we've already demonstrated our ability to deliver. So just to look real quickly at our pace in the first couple of months of January and February, you can see here our FICAM's full APL approval, which we received February 21 -- sorry, February 1 this year; our uTrust Sense temperature tracker demo platform that I talked about just a minute ago; our ICPAM 3.0 was launched on January 23; and the TS Cards launched January 31. So this is really indicative of the pace that we've got going into the year. It's also indicative that we're knocking off the metrics and deliverables that we need in order to deliver 2017 very early in the year and then we can be building into an even faster growth into 2018.

So I'd like to focus just for a minute on FICAM itself because we've talked about that a lot, and it's core to our numbers and depending on rate of adoption and ability to spread penetration, it could even be some upside. As anyone who's followed our company knows, FICAM is Federal Identity, Credential, and Access Management initiative. It drives FIPS 201 compliance across all of the government buildings.

One of the things that happened last year is there was an OMB guideline that ties the compensation of agency CIOs specifically to whether there's a breach and if they have not yet deployed FIPS 201 compliance system. So they haven't deployed a FIPS 201-compliant system and there's a breach, for example those managers at the CIA right now, they can have their bonuses docked, they can have their pay cut, they can even be terminated. So putting some teeth in this.

The second thing that I'd like to point out is our solution over on the right that you see there is much leaner and more efficient than other solutions. If you look at the platform from one of our competitors, you would see another piece of hardware adding almost $1,000 a door, and more importantly, it makes the transactions even slower. One of the challenges of FICAM that hasn't deployed quickly enough is because the transactions have taken a couple of seconds in order to go through. Now we've cut that time down much by the fact of our architecture that you see here, without as much hardware to go through.

Just as important, and perhaps more important, is the price point that, that lets us get to. So in addition to being an easier to deploy and faster solution, we're at around $1,200 a door to deploy. And this is public information you can look up on the APL list for the federal government, the closest competitor is around $2,400 a door, and that's an upgrade price, not a replace price.

So you can see we're half the price, the performance is better and the deployment is easier. So we are confident we're going to be riding with the FICAM wave. We also think we have an opportunity to grab more market share there because other competitors are, in fact, even more expensive than the position that we've established in FICAM.

So how can we do this? When we talk both about cost and performance and also all the rapid releases and technology leadership that I'm talking about, a lot of it is hard work. In fact, at the core of it is hard work, and I think it's very important that I keep thanking our team that has ridden through very challenging times, remained enthusiastic and at the cutting edge and really driving accelerating forward, so a great thanks to our amazing people.

But it's also because architecturally, we have the entire solution across the platform that augments our deep technology expertise. So we have the cards, the readers, the devices, the entire platform and the software, of course that manages it all. So as this environment moves, and it may indeed go to a wireless and much more hardware-light environment over the years, we have the management platform and the leading technology in each sector that can command it. So we sell our devices as individual components. They're competitive at the OEM level, and we provide it at platform level where FICAM, which you can see is cheaper and more efficient than anything else out there, is a realization of the opportunities created by our platform.

I'll just spend 10 seconds on this because the outside view is important as much as our inside view. The awards are really reflecting our strengths, the speed of execution and everything else that we have going on. In and both the government and commercial markets, we're getting that recognition at an accelerating pace.

So the question is having all this growth capability, having the platform built, how do we leverage it across our company? And one of those, of course, is marketing. We are getting out as we did through 2016, we're continuing and even accelerating with worldwide events and particularly, you'll see here some of these events are leveraging partners, Cisco Live Berlin, the OtterBox event, a number of others you see, Cisco Live events, but there's also a number of regional events and more that we're now bringing on. As we're becoming the central trusted provider in this category, partners want to leverage their presence with us and that also then leverages all the investments we're doing and it also means, of course, we get to do it for less of an investment ourselves.

The other aspect of how we leverage it is the fact that we've always had an international presence that's very strong. We've got great balance across our businesses. And then in particular, when you look at our international presence, it's well balanced across Europe, the Middle East, Africa and Russia as well as Asia Pacific. So as we bring products to market, as we invest in our technologies, we can roll them out internationally and worldwide without investing further in channel or infrastructure. So when we talk about the growth potential of what we've built and where we stand in our operating expense, resource allocation, we really do believe we can have substantial growth on top of the platform we've already built.

Now this sounds like a lot of execution and it is, but I'd just like to turn to our target business model because we're already executing with the business pace we've established. From a financial perspective, this is reflected in what you can see here. And you can see in our actuals, especially in the most recent half of 2016 and our guidance, it's consistent with where we already were in the second half of 2016. You can also see, we're effectively at our midterm target model. Now this is also part of our culture. We don't want to make promises about the uncertain future. We'd rather take the time to get there and then talk about where we are and where we're going. So you can see the consistency across our results, our guidance and our midterm target model. I'll also add that just as we built 2017, we have specific steps that gets us to our long-term targets, but that will be for later discussion.

So I won't reiterate these growth drivers here. Hopefully, you've seen that many of them are already in place and our pace of execution clearly has us on track, while positioning us for some even more exciting upsides. So our intense business focus is going to be on our business, competitors, partners and most of all, our customers. But also, we'll be continuing to update our investor community and, as always, look forward to seeing you at our investor events throughout the year, recognizing, of course, that our first priority always is to build the business and serve our customers. And that will deliver the results that the investors are looking for.

So we've gone on a little bit long in this update, but I thought it would be worthwhile because we really have now demonstrated the platform we've built and the question really is the growth trajectory were on because the health of the business model, hopefully, has been demonstrated to everybody.

So with that, I'll stop and open it for questions. Victoria, back to you.

Thank you. (Operator Instructions) And our first question comes from Mike Latimore from Northland Capital. Please go ahead.

Yes, a very nice quarter and outlook, [very nice]. Steve just on the FICAM comments you just made, you talked about $1,200 per door. I guess, if you were to upgrade the doors you're already on within the federal government, what is the sort of addressable market there for you? And then second, you mentioned the competitive pricing at $2,400, is an upgrade price. But I guess, what would be a replacement price from what you're seeing?

So let me take the first one first. And I want to caveat this, which is the federal government will deploy at the rate that it will deploy, so I don't want to get ahead of ourselves. But we are in about 200,000 actively used doors. We've actually sold into more than that number, but those are the active doors that we're using. And so at $1,000 a door, you can do the math on what the potential for that is. Now will they all convert and over what period of time? We don't know, but that's a -- that's why this is such a meaningful opportunity.

Then on your question of $2,400, I'd actually direct you to the government website. We're trying to be conservative and make sure we do the most generous comparable we can because you would see something north of $3,000 if you really looked at pure apples-to-apples same number of doors, same platform. Because as I said, they've got an extra $1,000 piece of hardware for every door, so you just put on the math and then you put on some of the fact that they don't have the vertical integration and they don't have some of the other parts of the solution they're sourcing, and that's where it gets to be a lot more expensive.

Okay, got it. And then just as you look to the year -- to the revenue growth for the year, I mean, do you expect all your segments to grow this year? Or would, say, two out of three kind of get you to where you need to go?

So the answer is yes to both. We expect all the sectors' segments to grow this year. In fact, within that range that we've guided, two out of three can get us there.

Okay, got it. And then just with the -- as related to Cisco, obviously, you talked about a number of integrations and products related to Cisco as well as the certification. Those are important drivers. I mean, can you help me understand how important are those dynamics versus just Cisco end of life-ing its own product here? That end of life-ing, is that kind of a good driver or is a lot of it more really the new product certification?

It is. It's both. So end-of-life, of course, will drive current Cisco installations where it accelerates their move over to newer and supported hardware. Things like EAC certification and Mx opens up new markets, and so those are Cisco customers, they've got tens of thousands of customers that might not have included access control in their Cisco purchase orders, and now they can. So it's new customers that are enabled by those. And frankly, things are moving at a quick enough pace that I couldn't tell you which one is more important. I'd just say they're both good growth and good opportunities.

Got it. And then just last on the strength in the reader -- with the reader products, you said, I think, that was heavily U.S.-centric there. Can you talk just a little bit about what you think is driving that? Is it a technology change? Or is it just more focused on your part or more channels? So what's driving the strength there?

A couple of things. One is certainly the focus on it. The second is the federal government, U.S. federal government with their cat cards are starting to apply more rigor on how BYOD, bring your own device, is managed and other things that they've had as "requirements" but they haven't been enforcing. And then there's also been some positive, competitive events. One of our large competitors, ACS, was acquired by a Chinese company. And that's taken some of their focus away as well. So I think it's been across the board.

I do think there will be -- the biggest growth driver will be related to the federal government, but we're also seeing some international growth picking up as well.

Our next question comes from Saliq Khan from Imperial Capital. Please go ahead.

A few questions on my end. The first one being is as (inaudible) you and I have spoken fairly recently, but what I wanted to understand was how much of the 2017 plans were planned ahead of Sandra being a big part of the organization? And what changes were made as a result of her and her views on the business strategy?

Good question. So it was all, as you would expect, done before Sandra came on because she came on this year and we start our planning the middle of the year prior. So by the time late November comes around 2016, 2017 is planned and structured. And I'll let her answer if anything has changed since she came on.

In the last two and a half weeks, I'm very excited to be here. I think there's -- it's a tremendous time to be joining the company. And I'm still forming my opinions about the plans, but I'm comfortable with the guidance based on everything I've learned so far.

And Steve, I know we've talked about this in the past, but could you kind of go over, given your current views and success that you've had in the recent quarters, how are you optimizing the multichannel approach that you have? And what are you doing to motivate the targeted channel partners and sell the underserved segments that you have?

Yes, actually, great question. Everybody likes to talk about technology and products and all, but channel is the real driver here. And the answer is how does the channel make money? That's really what they care about. Are they going to be able to sell more and make more margin on it? And because we have these full platform solutions, we can give them an opportunity to do discounts in some areas and make it up in other areas wherever a customer might be more sensitive or less sensitive.

So it's all about helping the channel make more money. Those events that you saw there too, the trade shows and events, that helps the channels as well. We have partners in our booths quite often. And so even if it's a Cisco event, we can have channel partners participating in that event, and we get leverage out of it.

So it's mainly about helping them make money and a lot of these things -- the product launches and the price positions we're taking are helping them. And frankly, just getting the Hirsch brand back out there and getting it credible and solid and committed again, that created an uptick as well. And them having confidence in our long-term durability and strength as a partner because their businesses are depending on our business.

Got it. One of the things you just mentioned was the trade shows and events. So if I take a look at the open house that you had done last year, I think roughly around November or so. At your Arlington office, with the government customers, with the prospects that you have over there as well, you have another such event that's coming up next week, so how do you quantify the ROI of this event? And what are you doing to make sure that you improve this event from the one that you had back in November?

Yes, good question as well. We -- I can't share with you the metrics but, of course, we track who was there and what goes into the pipeline. And we are expanding our share in the market. I think, I mean, it's related to the events we're having. The events are really enabled by the fact of the strength of our FICAM solution is it's very easy to deploy. So when the agency CIOs and their staff are coming in, they can see that they can deploy this thing very cost-effectively. They're not going to get taken to cleaners from a budget perspective, and then suddenly, it becomes a bonus versus a burden.

So this next one is oversubscribed again and, in fact, we're queuing up another one because there's so much demand in the area. And also, we're doing on-site events. One of the programs we have is making it very easy -- a lot of these agencies have their own demo centers where they bring in the equipment, they test it all there and make it very easy to set up and configure and then use our systems there as a center of excellence.

Just based on that, and this will be my last question. When you talk about the government customers and you talk about FICAM and the success that you saw there, specifically, within the government customers, how are you targeting the various segments within it? So where are you seeing the most success out of DOD, U.S. Navy, some of the other government organizations that are out there? So what is that differentiated targeted approach that you have as you look at the various segments within the government organization?

So I don't want to call out specific agencies because that starts to cite winners and losers and also that -- we don't want to get into a customer position with them that way. But there definitely are in the federal government, there are agencies that are more thought leaders, more adoption leaders, also somewhat more sensitive use cases.

So the U.S. Marshals have always been at the -- fairly ahead of the curve in terms of what gets deployed. FBI, IRS, agencies like that with multiple offices around the country and very complicated infrastructures, I talked before about how the IRS has to bring on over 100,000 seasonal employees. And the FBI, of course, has field offices that have to be secured at a very high level at all times.

So there's a lot of them that are thought leaders. And by not naming some, it's not leaving any of them out. We've got some demo sites going into some other agencies that are clearly agencies that other agencies come to and talk to. So I think that's more the way it is. There's both a formal and an informal structure of which agencies have more of the thought leadership in terms of security infrastructure.

And our last question comes from Mark Drucker from B. Riley. Please go ahead.

Steve, when do you expect to begin generating cash?

We're -- I think, in the next couple of quarters, we will clearly be cash positive. Exactly when that -- the issue is we've got growth in second and third quarter. Third quarter is seasonally our highest quarter and because we have a hardware component of our business, it can absorb cash. So I can't tell you exactly which quarter it's going to hit in because of the trade off between growth and cash utilization and cash generation, but somewhere in that time frame.

One more from me. Regarding your APL certification, is this some major break to you? Were you concerned that you're going to receive this? And how would your business fare had you not?

Yes, fair question. It is very important because to fully get into bids and have full visibility, it's important to be on the APL. In fact, we have been doing FICAM-related sales in advance of that because as long as [you're] started the certification process, agencies can acquire your products. And so it wasn't stopping early sales. And so it's just normal cycle. But it is a big deal because now, we can talk about what we always knew -- for example, when I talk about being half the price. Before you're on the APL, it's hard to talk about that because your prices aren't visible. Once you are, they are, and then it becomes a very -- much more open playing field.

Anything else, Mark? Okay, no. Sorry, Victoria, go ahead.

I'm showing no further questions at this time.

All right. Well, thank you all for joining us. And Victoria, thank you for your help on this, and we look forward to seeing you all at other investor events going forward. And certainly, on our next earnings discussion, which will be in May. Thanks again, have a good day.

Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.