Identiv Inc (INVE) 2018 Q2 法說會逐字稿

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  • Operator

  • Good afternoon.

  • Welcome to Identiv's Q2 2018 Earnings Call.

  • My name is Savis, and I will be your operator this afternoon.

  • Joining us for today's presentation are the company's CEO, Steve Humphreys, and CFO, Sandra Wallach.

  • Following management's remarks, we will open the call for questions.

  • Before we begin, please note that during this call, management may be making references to non-GAAP measures or projections including adjusted EBITDA.

  • In addition, during the call management will be making forward-looking statements.

  • Any statement that refers to expectations, projections or other characteristics of future events, including 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 company's latest annual report on Form 10-K.

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

  • I will now turn the call over to CEO Steve Humphreys for his comments.

  • Steve, please proceed.

  • Steven Humphreys - CEO & Director

  • All right, thank you, operator, and thank you all for joining us this evening.

  • The second quarter was another big milestone of growth and business progress for us.

  • Our second quarter grew 37% over the last year, the fastest growth we've had in more than 6 years.

  • This followed our 13% year-over-year growth in the fourth quarter of last year, 23% growth in the first quarter of this year and now 37% growth.

  • For the first 6 months of the year, we grew 30% compared to the first 6 months last year.

  • We'll be commenting in more detail on what's driving our accelerating growth rates, but the numbers really do speak for themselves.

  • Most importantly, this is driven by organic growth in the high teens to low 20% range, with inorganic growth adding to it.

  • But in both the recent quarter and the first half, more than half our growth was organic.

  • We also feel good about the execution that's delivering these results.

  • Our markets are growing in the high single digits to low double digits, so it's clear that we're growing faster than the markets and taking share.

  • We had other important milestones this quarter, both businesswise and financially.

  • On the business side, we shipped our first several thousand units of our new iAuthenticate mobile smart card readers for the iPhone and iPad.

  • These went into mostly Defense Department customers, showing our increasing strength in the federal government market as well as the mobility space.

  • We also launched our new mini-tokens for mobile strong authentication, and this quarter our USB Type C tokens are coming out.

  • So it's really a strong mobility position we're building.

  • We also shipped over 50,000 units of our brand-new triple interface cards.

  • Now last quarter I mentioned these were coming, a capability combining UHF, HF and Lucy Fato, RFID all into one device.

  • We brought them out as scheduled and even got the first volume shipments to customers.

  • Now remember, these put together the long-range capabilities of UHF with the data-intensive application capabilities of high-frequency devices and the very widely used low-frequency physical security infrastructure.

  • We think this combination really creates a whole new category of solution and it's now launched and being adopted.

  • In our core FICAM-enabling federal market, we're seeing more tangible movement than ever.

  • We saw several large blanket purchase agreement RFQs come out, specifying Hirsch systems as their FICAM solution.

  • And just as important, some of you might recall that adding a greater services component to our solutions is a strategic goal of ours, particularly in the federal government.

  • In the second quarter, our Identiv Global Services launched one of our first broad services implementations for a federal customer.

  • The important thing here that a facility who had generated a couple of hundred thousand dollars of equipment revenues generated almost twice as much revenue of combined systems and services.

  • So we've now demonstrated our opportunity with a very satisfied customer.

  • This makes us confident that our revenue and margin opportunity per FICAM-enabled facility will be a good deal more than before.

  • Now as we all know, the pace of government deployments is always a long process, so the best way to have faster growth is to increase the value of each deployment rather than trying to increase the rate of the deployments themselves, and we've really now demonstrated our ability to do this.

  • I could go on with our other business milestones, but let me just mention a few financial bellwethers, then turn it over to Sandra to go into the full financial results.

  • Then I'll come back and go into more of those details.

  • The first financial milestone is that we paid off the last portion of our high-insurance-rate term debt.

  • This is the first time since 2012 that the company's been entirely tem debt free.

  • The second milestone, of course, is our 8 quarters of positive adjusted EBITDA.

  • And third and most important, as you can see in our financial results, a clear path to net income profitability.

  • So sustained and increasing organic growth augmented by inorganic growth, much lower debt expense, continued operating discipline, business execution fundamentals and our proven market opportunities give us confidence in the business results going forward.

  • They all came together this quarter, and we think they're in place to continue for the balance of the year and into 2019.

  • With that, I'll turn it over to Sandra.

  • Sandra Wallach - CFO & Secretary

  • Thanks, Steve, for providing the context for our financial results for the second quarter of 2018.

  • The revenue in the second quarter was $20.3 million, a 37% increase compared with $14.8 million in second quarter 2017 and a 23% sequential increase compared with $16.5 million in the first quarter of 2018.

  • Our Premises segment generated 43% of our total revenue or $8.8 million in the second quarter of 2018, up sequentially 18% from the first quarter 2018 and up 53% from the comparable quarter of 2017.

  • These increases were primarily driven by higher Physical Access control solutions product sales, higher sales through our channel partners, higher software product sales as well as sales of video technology and analytics related to the 3VR acquisition.

  • Revenue from our Identity products, primarily smart card readers, reader modules and chipsets, was $3.2 million in the second quarter, representing a sequential increase of 13% from the first quarter of 2018 as a result of higher smart card reader sales in both EMEA and APAC, partially offset by lower smart card reader sales in the Americas.

  • Comparatively, Identity revenue decreased by 22% from Quarter 2 of 2017.

  • This represents higher sales of smart card readers in the prior year for a large bulk government project in the Asia-Pacific region, which this year was partially offset by higher smart card reader sales in the Americas.

  • Our second quarter revenue derived from the Credentials segment, which comprises both access control credentials and our broader Internet of Things transponder products, was $8.3 million.

  • This revenue performance represents a sequential increase of 33% from the first quarter 2018 and a comparative increase of 66% from the second quarter of 2017.

  • These changes were primarily due to higher access card product sales in the Americas region and higher RFID and NFC transponder sales in the Americas, EMEA and Asia-Pacific regions.

  • Now turning to our gross margin, our GAAP gross profit margin was 40% in the second quarter of 2018 compared with 39% in the first quarter of 2018 and 38% in the second quarter of 2017.

  • On a non-GAAP basis excluding certain noncash items, our gross profit margin was 42% in the second quarter compared with 41% in the first quarter of 2018 and 40% in the comparable second quarter of 2017.

  • Our sequential and comparative increases in both GAAP and non-GAAP margins were primarily a result of the higher proportion of high-margin sales of Physical Access control solution products.

  • We now look at our full income statement per the earnings release.

  • Our GAAP net loss for the second quarter 2018 was $2.7 million compared with a loss of $2.3 million in the first quarter of 2018 and a loss of $1.9 million in the second quarter of 2017.

  • The Quarter 2 results include the recording of a $1.4 million loss on the extinguishment of debt and $0.3 million in restructuring charges in connection with the 3VR Security acquisition.

  • On the next page we provide a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release.

  • There are a few additional noteworthy items at this point.

  • Interest expense was approximately $0.5 million in the first and second quarter of 2018 and $0.7 million for the second quarter of 2017.

  • Noncash stock-based compensation was approximately $0.6 million in the first and second quarter of 2018 and $0.7 million for the second quarter of 2017.

  • On the next page we now look at our operating expense, which is the next graphic in the webcast.

  • For the second quarter of 2018 per our earnings release, our total GAAP operating expenses were $9.2 million compared with $8.3 million in the first quarter of 2018 and $6.9 million in the comparable quarter 2017.

  • The sequential and comparative increases were primarily due to additional headcount and other related costs associated with the acquisition of 3VR, including acquisition-related transaction costs and restructuring charges.

  • Our non-GAAP operating expenses, adjusted to exclude restructuring and severance costs and certain noncash charges, normally excluded from our non-GAAP results -- that's just stock-based compensation, depreciation and amortization and loss on extinguishment of debt as well as on the non-GAAP items consisting of acquisition-related transaction costs in the second quarter were $7.8 million as compared with $6.6 million in the prior quarter and $5.8 million in the second quarter 2017.

  • On a non-GAAP basis, our R&D expenses for the second quarter were $1.6 million compared with $1.5 million in the first quarter and $1.3 million in the second quarter of 2017, representing 8%, 9% and 9% of total revenue, respectively.

  • Sales and marketing expenses were $3.8 million in the second quarter compared with $3.4 million in the first quarter and $2.9 million in the second quarter of 2017.

  • The sequential and comparative increases were primarily due to the additional headcount and other related costs associated with the acquisition of 3VR.

  • In addition, our non-GAAP G& expenses for the second quarter were $2.4 million compared with $1.7 million in the first quarter 2018 and second quarter of 2017.

  • These increases were primarily due to higher legal fees incurred in the second quarter of 2018 compared to prior periods and the impact of additional headcount and other related costs associated with the acquisition of 3VR.

  • On the next page where we bring all the pieces back together, given our strong growth profile and ongoing cost controls and aggressive integration of 3VR infrastructure, our non-GAAP adjusted EBITDA gain was approximately $0.7 million in the second quarter compared with $0.2 million in the first quarter of 2017 and $0.2 million in the comparable quarter of 2017.

  • We believe that our business model is positioned to continue to generate positive and profitable growth.

  • On the next page as I turn to the full balance sheet, we'll be again comparing our position at June 2018 to the position 1 quarter ago at March 2018.

  • Cash at the end of June was $17.9 million compared to $16.7 million at March 2018.

  • The $1.8 million net increase in cash for the quarter was primarily comprised of an increase of $0.3 million driven by our net loss excluding noncash items, a $3.3 million net usage from operating assets and liabilities, $0.2 million net cash usage from capital expenditures and net cash generated from financing activities totaling $4.9 million, comprised primarily of $7.9 million in proceeds from the issuance of Series B preferred stock, $2.6 million net borrowings under our revolving credit facility, partially offset by the payoff of the balance remaining outstanding under our term loan of $5.2 million, including interest commitment and tax payments of $0.1 million related to RSU releases.

  • And last, $0.4 million impact of foreign currency fluctuation on our cash flows.

  • With respect to some of the key accounts that we've highlighted, accounts receivable, our balance increased by $1.5 million to $14 million, with our day sales outstanding increasing from 59 days at the end of the first quarter 2018 to 67 days at the end of the second quarter.

  • Inventories net of reserves increased from $11.6 million at March 2018 to $12.8 million at June 2018.

  • Our adjusted inventory turnover at June 2018 remained at approximately 4.1 compared with March 2018.

  • Other assets as presented decreased to $0.8 million, driven primarily by ongoing depreciation and amortization of assets.

  • Accounts payable balance at June 2018 was $7.2 million, an increase of $0.2 million from March 2018 due to higher volumes of current to 180 days due payables, partially offset by the reduction in volume of over 180 days payables.

  • Financial liabilities at $15.6 million at June quarter end reflect our East-West bank current financial liabilities plus the $2 million note related to the 3VR acquisition.

  • As of June 2018, we no longer have long-term financial liabilities as a result of the paydown of the WTI term loan.

  • Our other liabilities decreased in Q2 by $1.3 million.

  • This category includes the current and noncurrent portion of payment obligations, deferred revenue, accrued compensation and other accrued expenses.

  • This change was primarily driven by $0.7 million share holdback reduction related to the 3VR acquisition.

  • In addition, our long-term payment obligation decreased from $2.7 million to $2.4 million at June 2018, reflecting the continued quarter payments made, offset partially by the accretion of interest.

  • On the last page in the context of our target business model where we measure ourselves with you quarterly to assess our progress, we continue to deliver what we set out to do: grow and achieve non-GAAP adjusted EBITDA profitability for 8 quarters in a row, significantly closing the gap to net income profitability.

  • Today we are reconfirming 2018 guidance for the consolidated results of the company.

  • We expect 2018 revenues to be in the range of $74 million to $78 million with the non-GAAP adjusted EBITDA range of $4 million to $6 million.

  • For completeness, we have included the full reconciliation of non-GAAP adjustments to GAAP and the full balance sheet per the earnings release in the appendix.

  • With that, I will include the financial portion and turn it back to Steve.

  • Steven Humphreys - CEO & Director

  • All right, thanks, Sandra.

  • The numbers really do speak for themselves, so let me just give some insights into the business activities that are driving them and why we think we're in a position to continue to deliver such good progress.

  • Looking segment by segment, I already highlighted in the opening the launch and initial volume shipments of our iAuthenticate iOS mobility reader, our mini-token for mobile security, and now this quarter, our USB Type C token, all in the Identity segment.

  • Together, this is a wide suite of solutions for mobile security, particularly for the Defense Department and other security-sensitive federal government customers.

  • Also in our Identity segment, our embedded readers and keyboards continue to be the default solution for desktops from Dell, HP and others.

  • So just as a reminder, adding up embedded keyboard readers and PC-connected and mobile readers, we have over 25 million smart card readers out in the field that we've shipped over the years.

  • This position and these trends all give us confidence that our Identity segment is on track to deliver the double-digit growth we expect for this year and into 2019.

  • And in the Credentials segment, we had really encouraging growth of more than 60%, driven by a combination of transponders and access cards.

  • Looking first at transponders, this is where authenticity and consumer engagement and library are the use cases that really continue to drive a lot of the growth.

  • Going forward, our already demonstrated lead in progressive UHF applications is expanding even further as we implement additional company and technical capabilities later this year, but we do it with very little cash impacts through financing of the equipment that will be deploying these new capabilities and new capacity.

  • Now transponders are one of our most promising growth drivers, both in term of growth rate and visibility.

  • This is because the growth is coming, really, from 3 distinct but related areas.

  • The first, of course, is our current customers with their current product lines we're already shipping into.

  • As those lines grow, our volumes continue to grow with them.

  • And we get great visibility there because we have forward forecasting of what they're going to need into their supply chains.

  • The second, of course, is those same customers when they expand into more of their product lines, so more devices that they may be shipping in different product lines.

  • That then gives us an additional growth path on top of the base product line they started with.

  • And the third one, of course, is new customers and use cases.

  • And really, in this category, this is the richest pipeline across more customer opportunities than I've ever seen in our business.

  • Let me just give you a couple of examples to give you some sense of what kinds of applications we're seeing.

  • So one of them is a major global retailer that's automating their preparation of online orders for in-store pickup.

  • So what they're doing is they've got a full robotic system that's going into their warehouse, and our UHF devices are enabling the robots to find the right products in the right bins.

  • Now think about it.

  • If you have a warehouse system and an order comes in, if that robot is just going to find that artichoke or that set of headphones by going dead reckoning to the right box, that box has to be in the right place at the right time at all times.

  • With our UHF devices, they can move the boxes around, and the robot will go find it.

  • If it has a replenishment problem, the UHF device can be disabled and the robot won't go to that empty bin.

  • So this means the whole warehouse doesn't have to be 100% percent because the bins themselves are intelligent and communicate with the picking robots.

  • So you can really see here we're driving cost and quality capabilities in a use case that's going to scale into several million units.

  • Another example.

  • Some of you may be familiar with vaping devices, and obviously, as they go into more valuable products as they're deploying -- when they go from tobacco to marijuana, for example --authenticity becomes very important, and the value of the pod becomes very important.

  • We're moving in with some of the leading vaping devices with our RFID devices to ensure that it's the right product with the right dispenser and it's the right content there.

  • As you can imagine, for a very high-value product like this, it's very important that there not be clones and that the content be right, because you actually don't want any of the health or experience issues to happen from the wrong device.

  • So we see this as another great use case for authenticity.

  • But authenticity is really core to the quality and business model of the dispensing products.

  • So we could go on and on in different use cases, but that gives you just a couple of examples that we're confident both cases will be in the several millions of units and potentially tens of millions of units.

  • The common theme is here, these are growth areas and they're core to the business models of the companies deploying them, and they're really providing both revenue and cost reduction as well as quality of experience.

  • So we're in an upswing now in the economic cycle, of course, but for the longer term, we actually see many of these applications as being very resistant to recession because they actually cut costs, increase revenues and sustain margins.

  • So we think we're in a very good position as the economy is growing.

  • But even as the economy flattens, which it will at some point, we think we're going to be in a strong growth position continuing.

  • Looking at the access card portion of our Credentials business, as you heard from Sandra, we had very strong growth but at lower margins.

  • So as we go forward, our focus is more heavily on the transponders portion of Credentials where there is a higher sustained growth opportunity and higher margins, so more solid contribution to our profitability which is, of course, the core goal of our business direction.

  • Turning now to the Physical Security business, also known as our Premises segment, here we also had over 50% year-over-year growth.

  • I've already commented on the federal government, both the FICAM and our strategy to increase revenues per system with our Identiv Global Services business.

  • These were both demonstrated in the second quarter and continuing into the third quarter and the balance of the year.

  • We're seeing RFPs that are specifying our Hirsch systems and FICAM platform as well as having our high-end services for technical design configuration and analysis built into the overall solution.

  • On the product side, also in the Premises segment, the ISC West trade show, which seems like a long time ago, was also in the second quarter this year, in April.

  • And some of you were actually at that show and saw the plethora of product launches that we had there: wireless locks, integrated visitor management, a brand-new version of Velocity, our 3VR video platform integrated with Locality, a real-time location system.

  • Really, the product launches are the core of what we think will be the growth going forward in our Physical segment as well as our customer base.

  • So that's actually a very good segue into 3VR, which is also executing well, particularly due to the deep and wide install base of the customers within the targeted verticals of banking, retail and healthcare as well as cross-selling opportunities with our Physical Access business.

  • So 3 areas to highlight.

  • First is in banking.

  • Now some of you know with 3VR, we're deployed across 170 banks and financial institutions.

  • So the banking vertical is very deep and broad, and it's a very powerful position, both to deploy more services and applications and to expand across the financial services industry.

  • Secondary to highlight is really the analytics platform itself.

  • More and more of the world realizes that there's far too much data being generated, particularly in the video and access security space, and analytics is the only way to manage the flow of data and really make it manageable.

  • Both because our 3VR platform was designed from the ground up to be an analytics platform and because we have deep integration and insights across access control, which is the other core driver of events for analytics, we really have a competitive lead and a competitive advantage.

  • Now since we have such a strong platform, we're finding all sorts of novel use cases for analytics.

  • Let me just give you an example here, because it's easy to think, okay, it's video, it's surveillance.

  • You basically see some of the events that go along with it.

  • But recently, in a pilot with a shopping mall in Europe, we had a tremendous use case.

  • Someone walked, and in Europe, you have the right to be forgotten.

  • They came into the physical security operations center and said, "I want you to erase my image from all of your cameras.

  • You can't be tracking e around." We were in pilot with this mall, and we were able to find him with our thumbnails, and within 30 minutes we were able to affirmatively erase all of the thumbnails that we had with that person's image in it.

  • The physical security manager told us that when they had tried to do that with their prior systems, it took them over 2 days.

  • So whereas video and surveillance and security is part of the benefit we provide, our analytics strength means we can start to address areas like the right to be forgotten and privacy as well as security.

  • So there's a number of applications.

  • And again, if we want to go into more in Q&, we can.

  • But I just wanted to give you some of the segment=specific opportunities that we're seeing.

  • Now I'd also like to turn to some industry and market events that have played very much in our favor.

  • We often talk internally about what we're doing from a customer and product perspective, but we are in markets now that are very dynamic and that external factors affect, and a couple of them have actually been moving very much in our favor.

  • The first is the McCain National Defense Authorization Act, the NDAA, which was just passed last week by both Houses of Congress.

  • Now the headline around this Act was that the strongest Chinese prohibiting measurements were actually omitted, the ones around Huawei and ZTE.

  • But inside the bill, the prohibitions that are extremely relevant to the physical security industry across access control and video stayed in there.

  • And it mandates that government agencies are going to be required not to just stop buying systems from the 2 largest Chinese video providers, Hikvision and Dahua, but within the next year to develop plans to uninstall them so that any of their devices previously bought have to be removed.

  • Now in federal government legislation, of course, things always take a long time, but this really got some teeth in it, in that it says, "Yes, you don't have to do this for a year" but it says, "When that time comes, you're going to have to uninstall whatever you bought." So immediately today, contracting officers know this is coming down the pike.

  • So if you install a Hikvision or Dahua system next week, you know you're going to have to pull it out.

  • And if you install it in a couple of months, people are going to be asking why you spent that money and then had to get rid of it.

  • So this last part really is a big opportunity for us because Hikvision and Dahua are the leading Chinese providers of video surveillance equipment and they have some access products, and a number of both American and European competitors of ours OEM from them.

  • And the bill makes it very clear that affiliates as well as these companies themselves -- anyone OEMing their equipment -- that will have to be uninstalled as well.

  • So we remain as one of the few trusted advisers, purely American company.

  • Our products, especially in the video space, are manufactured in Wisconsin and Arizona.

  • And we can go to them and say, "We'll do site surveys for you.

  • We'll find all this equipment and we'll build you a migration plan, and you can move out and safe." And in fact, even a number of our major competitors, not being Chinese perhaps, but also are non-American.

  • So you might remember Milestone is owned by Canada and Japan.

  • Genetec is up in Canada.

  • So all these companies are really somewhere outside of the U.S., and the Chinese prohibition is the strongest one, but federal customers are really going to be turning to, "Okay, who can be my trusted adviser here?" And just the position we've been building with our Identiv Global Services, in addition to our Hirsch products, is really strengthened by the fact that yet again, "We are a clean, solid partner for you for deploying going forward.

  • And when problems like this come up, we're the ones you can turn to." So something from the outside looking in that I just wanted to highlight.

  • So I'll stop there and just summarize for a moment and open it for questions.

  • But if you look at the current progress we have, the very positive market trends in the markets we're in the midst of, our own strong position across products, verticals and services and some of the events in the industry that really are going in favor of the position we've carved out, I think you can see why we think this quarter was very positively successful and those trends, we think, will carry into the quarters through the rest of this year and into 2019.

  • So with that, I'll open it for questions.

  • Operator?

  • Operator

  • [Operator Instructions.] Our first question comes from William Gibson with Roth Capital Partners.

  • William Tennent Gibson - MD & Senior Research Analyst

  • That was certainly a powerful quarter.

  • Does that kind of strength on the repeatability of the multi-interface cards and transponders continue in this current quarter?

  • Steven Humphreys - CEO & Director

  • Yes, I certainly think it does, Bill.

  • And this is Steve, by the way.

  • Now, that was 50,000 units, so dollar-wise, not the major driver of the business.

  • But going forward, absolutely.

  • It's a great use case.

  • In this case, it's a large utility that wanted to know where all of the people are in case they need to evacuate the building.

  • Rather than putting the expensive Bluetooth beacon trackers or something on them, they realized that UHF readers and capabilities inside the same identity cards they've got can be used to track people around facilities.

  • So real-time location services -- there's a lot of interesting use cases that are definitely going to be driving it going forward.

  • William Tennent Gibson - MD & Senior Research Analyst

  • And in regards to 3VR, are we done with the restructuring expenses?

  • Steven Humphreys - CEO & Director

  • In terms of either actual changes in the organization or anything, yes.

  • In terms of rolling through the P&L, some of that was going on at the beginning of the quarter, so we do think that the run rate operating expense level will be continuing a little bit downward.

  • Sandra, do you want to add to that?

  • Sandra Wallach - CFO & Secretary

  • No, I think we may have some very small items, but the majority of the one-time charges occurred in the second quarter, and we're just continuing to look at every piece of our operating expense to continue to lower the costs going forward for the second half.

  • William Tennent Gibson - MD & Senior Research Analyst

  • Okay, and are they on target to meet their earn-out?

  • Sandra Wallach - CFO & Secretary

  • So no, they're not on target to meet their earn-out.

  • Their earn-out was $24.1 million.

  • They are absolutely on target to make what we mentioned when we set guidance, which was to add roughly $10 million to $11 million of top line for the year.

  • Operator

  • [Operator Instructions.] Our next question comes from Mike Latimore with Northland Capital Markets.

  • Michael James Latimore - MD & Senior Research Analyst

  • Wow, great results there.

  • Excellent to see.

  • You guys issued a -- you should hire a lobbyist to get a few more of these bills passed.

  • That sounds pretty interesting.

  • Steven Humphreys - CEO & Director

  • The best thing is, we didn't spend a dime on hit.

  • Hikvision is reported to have spent like $150,000 trying to stop it.

  • Michael James Latimore - MD & Senior Research Analyst

  • That's interesting.

  • So I guess on the Identity part of the business, you were down year-over-year in the first half, and you expect to get to double-digit growth by year end.

  • So can you talk a little bit about what would drive the rebound in that business in the second half of the year?

  • Steven Humphreys - CEO & Director

  • Yes, you bet.

  • It was up sequentially second quarter over first quarter, and also second quarter last year had a big transaction from an Australian governmental entity, so the underlying growth we're seeing is very solid.

  • U.S. federal government as well as commercial as well as our offline payment readers, it's across the board certainly solid.

  • And then there's also some upsides in gaming and other categories.

  • Michael James Latimore - MD & Senior Research Analyst

  • And then did you basically say that the operating expense should be down just a little bit in the third quarter relative to the second quarter?

  • Steven Humphreys - CEO & Director

  • Go ahead.

  • Sandra Wallach - CFO & Secretary

  • Yes.

  • So we had, if there were...

  • Steven Humphreys - CEO & Director

  • Company management never want to say they're going to be bringing it up, but basically, there are some actions we had already taken, and they're just going to flow through the P&L.

  • So nothing major event-wise ahead, but expenses just naturally will be on a downward trend there.

  • Michael James Latimore - MD & Senior Research Analyst

  • And then I guess just last question is -- I mean you reiterated guidance for the year.

  • I guess if you hit the midpoint of your guidance, it almost implies that a third or fourth quarter would be lower than the second quarter.

  • And I guess, is that -- that would be different than normal historic patterns.

  • Would that be reasonable.

  • Steven Humphreys - CEO & Director

  • That would -- no, yes, that would be different than historic patterns.

  • And no, we aren't expecting sequentially down quarters.

  • Now that said, we always talked about in other quarters that sometimes there's business that's fallen out by a couple of days, literally, and orders fell out of the quarter.

  • We did have a couple of quarters that fell into this quarter that customers really wanted the product shipped, and so it was certainly strong a little bit beyond its standalone base, but plenty of strength going through all the businesses going forward.

  • Operator

  • [Operator Instructions.] Our next question comes from Jack Vander Aarde with Maxim Group.

  • Jack Vander Aarde - Equity Research Associate

  • Great quarter, by the way.

  • So I had a question.

  • I missed the last -- the answer from the last question about Identity revenue.

  • It's still on track to be up double digits for the year, but is there any color you Christopher Olin provide on perhaps allocating the remaining Identity revenue between Q33 and Q4?

  • Is Q4 maybe going to be more lumpy, or Q3?

  • If you could just provide color on that, that would be helpful.

  • Steven Humphreys - CEO & Director

  • Well, usually both good quarters in our markets.

  • The federal government certainly drives some year-end buying in the third quarter, so that's always our strongest.

  • But with the pipeline that we see, we expect strength in both quarters, with the third probably a little bit stronger.

  • Jack Vander Aarde - Equity Research Associate

  • And as for the transponder new applications you discussed, those sound like a definite needle-mover.

  • In response to the -- in reference to the new vaping technology that you quoted could be a tens of millions unit volume type opportunity, was any of that captured in Q2's or this June Q's revenue?

  • And will it be captured in the back half of '18?

  • Steven Humphreys - CEO & Director

  • It will be captured in the back half of '18.

  • It was small part of the Q2 revenue.

  • It is, though, characteristic of a very common use case that we've gotten there, actually even much, much larger consumer products companies that are driving larger volumes.

  • So this whole idea of ensuring that some sort of disposable or consumable or reusable is matched properly and is authentic is something that we're -- we see in healthcare, for example, when you've got consumables and it's got to match with the equipment, but it is being used.

  • Consumable products like vaping, and then everything from garments to toys, we're seeing it happen.

  • So just to be clear, it's a very broad use case.

  • Jack Vander Aarde - Equity Research Associate

  • And then in terms of Premises, I don't believe you -- this is the first quarter of 3VR fully generating revenue.

  • You commented on some updates with 3VR, but can you give a sense of 3VR's revenue for the June Q?

  • Or if you can't give it explicitly, in terms of was it on track with your initial expectations heading into the quarter?

  • And is it still on track to hit that $10 million to $11 million range that you've provided earlier?

  • Steven Humphreys - CEO & Director

  • Yes.

  • And Sandra mentioned when the question was asked about the earn-out in terms of their core business and the guidance we've given, they're absolutely on track.

  • Did you want to...

  • Sandra Wallach - CFO & Secretary

  • No.

  • Steven Humphreys - CEO & Director

  • No further about that?

  • Yes.

  • Yes, then I think that's the way we'll continue to address it.

  • But they've, especially the technology integration and the combined platform and the cross-selling opportunity -- I say especially, and now I'm starting to say 3 or 4 different items -- and the vertical strength have all been very encouraging in, as we brought the businesses together and we've been finding upside.

  • Jack Vander Aarde - Equity Research Associate

  • Okay.

  • And then I guess still on the Premises segment, how -- can you provide, or did you provide a percentage of total Premises revenue for the Cisco channel?

  • I think it's been around 10% or north of 10% in the past.

  • I was just wondering where that is directionally trending.

  • Sandra Wallach - CFO & Secretary

  • Yes, so if I look at our traditional Physical Access, so I'm sort of carving out the video piece of it to be comparable to prior periods, we are still -- the Cisco channel is still in excess of 10% of our Physical Access sales.

  • Jack Vander Aarde - Equity Research Associate

  • Okay, and is that increasing or is it maintaining at that north of 10%?

  • Sandra Wallach - CFO & Secretary

  • It's maintaining solidly north of 10%.

  • Jack Vander Aarde - Equity Research Associate

  • And then lastly, in terms of the RFPs from the government customers that are speccing in Identiv systems as the solution of choice, is there any sense of a -- incremental new RFPs that you could, relative to last quarter, that you could provide, and relative to June of last year?

  • How many new RFPs have been added?

  • Steven Humphreys - CEO & Director

  • It's hard to characterize it in terms of number of RFPs because there's about a half dozen government purchase vehicles that can effect this, everything from a BPA, a blanket purchase agreement, an IDIQ, a full RFQ or direct purchase.

  • And they can range anything from a few hundred thousand dollars to tens of millions.

  • So it's hard to characterize it that way.

  • What I would say is -- and government contracts are published on government websites, so you can see them when they go out there.

  • We don't name our direct customers or end customers there, but it is -- the information's easy enough to get.

  • But what you would see is there were a number of kind of $1 million to sub-$10 million programs out there.

  • Now there are several sub-$10 million programs and a few multi-tens of millions of dollar programs out there.

  • So that's how we characterize it.

  • And as I said in my earlier comments, too, timing with the government is always tortuous, so what we're trying to do is make sure we make more money out of each deal.

  • And then when the timing comes through, if it does come through faster, then that's great.

  • That's upside for us.

  • Operator

  • Our next question comes from Michael Latimore with Northland Capital Markets.

  • Michael James Latimore - MD & Senior Research Analyst

  • I may have missed this, but did you give gross margin by segment?

  • Sandra Wallach - CFO & Secretary

  • No, we did not, but I can give you those numbers.

  • Steven Humphreys - CEO & Director

  • We're just pulling it up here now, Mike.

  • Just bear with us for a SEC.

  • Sandra Wallach - CFO & Secretary

  • Okay, GAAP gross margins for Premises were 55% for the second quarter of this year versus 53% comparable quarter prior year.

  • Identity was 35% versus 32% comparable quarter 2017.

  • And Credentials were 27% compared to 26% comparable quarter 2017.

  • So each of our segments is up just slightly, driving the 2-point increase from 38% in Quarter 1 of '17 to 40% in Quarter 2 of 2018.

  • Michael James Latimore - MD & Senior Research Analyst

  • Okay.

  • And then, obviously, the third quarter here is where you have the federal government fiscal year ends.

  • Any kind of just general color on the indications you're getting from the government?

  • How does it feel sort of this year, heading into this quarter, relative to the prior third quarters?

  • Steven Humphreys - CEO & Director

  • It feels normal, I should say, which is strong.

  • The third quarter in the federal government, they've always got funds to use at the end.

  • You might remember they had this bizarre continuing resolution going on in January and February and into March and then they settled on a budget which was for the full year, but the full year ending the end of September.

  • So they now have funds that, instead of having 12 months to use, knowing exactly what those funds are, they've had 5 or 6 months to use them.

  • So there's some good fiscal year-end activity going on.

  • That said, they're going to use their appropriate contract vehicles, and it will all go at the measured government pace, but we do expect some decent activity for fiscal year-end for the government.

  • Operator

  • At this time, this concludes the company's question-and-answer session.

  • If your question was not taken, you may contact Identiv's Investor Relations team at inve@liolios.com.

  • I'd now like to turn the call back over to Mr. Humphreys for his closing remarks.

  • Please proceed.

  • Steven Humphreys - CEO & Director

  • All right, thanks again, operator, and thank you all for joining us this evening.

  • We'll certainly continue driving forward our business and drive forwards communication with you all in ongoing events.

  • Early in September we'll have the Liolios Conference in San Francisco, and there's an industry event, if anyone come by, we'll be -- have a strong presence at ASIS in Las Vegas at the end of September.

  • So we look forward to continuing to update you on our business progress, and thank you again for joining us.

  • Operator

  • Thank you for joining us today.

  • You may now disconnect.