Identiv Inc (INVE) 2019 Q1 法說會逐字稿

Good afternoon and welcome to Identiv's Q1 2019 earnings call.

My name is Danisha, and I will be your operator for 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 make references to non-GAAP measures or projections including adjusted EBITDA.

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

Any statement that refers to expectations, projections or other characteristics of future events, including [final] projections and future market conditions, is a forward-looking statement.

Actual results may differ materially from those expressed in the forward-looking statements.

For more information, please refer to the risk factors discussed in documents [filled] from time to time from the SEC, including the company's latest annual report Form 10-K.

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

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

Sir, please proceed.

All right, thanks, operator, and thank you all for joining us today.

As you've seen, the first quarter of 2019 continued the momentum of growth and development of the business from the fast pace of 2018.

We started out 2019 fast, also.

In the very first week in January, we welcomed the Freedom, Liberty and Enterphone MESH product lines to Identiv.

These products round out our technology platform following the successful acquisitions of Thursby Software Systems and 3VR Video Analytics in 2018.

We think these 3 acquisitions complete the core components of our platform, bringing us much closer to our vision of cloud-based, software-centric and mobile-enabled digital access, immediately accelerating our growth and penetration of current customers as well as adding the multi-tenant market a range of products that fit the distribution channel and a perfect fit with the IT channel buyer, which is where some of the fastest growth is happening.

Looking at some of our key metrics, we delivered 18% year-over-year revenue growth, continuing to gain market share in our industry, which is growing at less than half our pace.

This underlines the intersection of both positive industry trends and our customers' increasing desire to secure critical information and infrastructure, address mobility and BYOD and to do it with Identiv's integrated and IT-centric solutions.

Both of our segments experienced strong double-digit growth.

Premises was up 25% and identity up 13% year-over-year.

Premises, which now includes our Freedom and Liberty platforms, also grew 5% sequentially.

Now typically we've got a seasonal decline in the first quarter, and we've broken that trend this quarter.

Both the sequential growth and the even stronger year-over-year growth were due to continued traction we're gaining across all of our verticals.

On the identity side, we grew year-over-year 13%, helped by another major delivery of our Thursby R2S product to the Navy Reserve.

Now I'll touch on this more later, but this is another proof point of the strong mobility position of Thursby Software, especially in the DoD.

Also in the identity segment, we delivered over 200,000 dual-interface high-technology credentials serving a government mandate for personnel authentication in Europe.

This contributes more than $1.5 million to our 2019 backlog, showing our business momentum is growing internationally as well as in the U.S.

Another demonstration of our business's predictability and resiliency came through in the first quarter.

It seems like a long time ago, but you all might remember we had 2 federal government shutdowns in the first quarter.

With our federal government business, we had plenty of people worried about the impact, but we gave reassurances that our solutions are too mission critical to be deferred, and that proved out and the federal market continued to contribute to our solid results.

Now one of the other key trends in our business has been the fast growth of our software and services revenue.

This was up 68% year-over-year.

This area of our business leverages our comprehensive IoT platforms to generate recurring revenue streams, making us much stickier with our customers.

Software and services revenue as a percent of total revenue was up about 400 basis points to 14% from only 10% in the prior year.

As we continue to monetize the data generated by our platforms, we think our software and services revenue will continue increasing, driving growth and margin expansion.

So putting all this together, of course, we hit our 11th consecutive quarter of positive EBITDA.

We believe we've really built a strong foundation to drive continued leverage, and the results are really showing it.

So the first quarter was another great example that we're executing on our growth strategy to build a fully scaled platform to drive profitable growth moving forward.

We continued to gain momentum in our organic business and significantly enhanced those revenue streams with terrific traction in our inorganic businesses, further showing our acquisition leverage and growing scale.

So with that high-level overview, I'll go into some of our recent events and operational highlights for the quarter before turning it over to Sandra.

Last month our industry held its major trade shows of the year, both ISC West and RFID LIVE.

And it's a little hard to see in the images on a small slide like this, but we had really heavy traffic in our booths, much higher than last year.

Of course, we also had a much larger display to present this year than last year, given the inclusion of Thursby, Freedom, Enterphone and our new product launches.

And actually, that's the main point.

We've built a much stronger foothold in our markets, which I'm glad some of you actually had a chance to experience first-hand what we experience every day in these trade shows and our markets.

If you stopped by our booth, you really saw the buzz and the interest across the board for our product range.

And we've really built a uniquely complete platform, because our customers are hungry for our flexibility, completeness, and our technology forward solution.

Again, I'll talk about this later in more detail as we look at the year ahead and beyond, because customers really are experiencing our full solution, and their reactions to that is really the key indicator of the strength of our business's position.

Now some other highlights are the multiple product launches we rolled out during the quarter.

Earlier in Q1, we collaborated with NXP for our ultra-low-cost RFID tag, which is ideal for enabling customer engagement across applications, from logistics and supply chain to pharmaceuticals, beauty, healthcare, spirits and wearables.

And we're clearly at the forefront of this NFC adoption wave, building on the momentum with this new product.

We also launched a whole new line of RFID tags for anti-counterfeiting, document authentication, supply chain traceability, data access and customer engagement.

This line of tags, also using the key chip technology in partnership with NXP, shows how we're bringing to market highly advanced NFC products to enable IoT platforms and applications.

The fact that we were the first to complete NFC form certification here again shows we continue to lead, especially in the advanced applications in the RFID industry.

In other news, we recently completed a major security platform update for our enterprise customers and IT channel.

The launch of ICPAM 3.3 strengthens our robust product portfolio and will benefit our customers by delivering new capabilities, scalability, performance and particularly reliability.

Another solid foundation of our growth base, as I mentioned earlier, is our federal business, so I want to close the business introduction with a couple of indicators here.

One was a multiyear award to one of our partners for FICAM deployments at over 500 sites worldwide.

This is a good indicator of the increasing commitment to FICAM, and it's really an endorsement of our Velocity software as the go-to solution for federal installations, particularly where FICAM's required.

Another federal government indicator is in the adoption of our mobile access platform.

We're tracking downloads of our Thursby Sub Rosa app, where individual service people download the app and then use our system for their secure email and Web access.

Here we've seen accelerating adoption.

Basically, downloads and shipments in February were about double that of January; March was about double February; and April was again double of March.

So this really reflects the positive reception the app's been getting, with service people referring others to it after they get it, driving this sort of accelerating growth.

Now the Air Force bought the apps for 30,000 users, so the growth won't go on forever.

But this rate of adoption gives you a sense of the underlying demand, and that clearly puts us in a good position to advocate for wider adoption.

And when you think about it, there's nothing more compelling to the officers and decision-makers in the Pentagon than a solution that individual service people love, and these kind of trends really show how much they appreciate Sub Rosa.

We can talk all day long about the technology and the benefits and everything else, but what the officers in the Pentagon really look for is when service people see benefits, refer it to others and start to deploy it more broadly.

That's something they respond to, and that's why we have pretty good hope that we can deploy this across the entire Defense Department, which is certainly our aspiration.

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

And then later on the call, I'll jump back in to touch on some of our growth drivers for 2019 and outlook for the remainder of the year.

Sandra?

Thanks, Steve, for providing the context for our financial results for the first quarter of 2019.

Before we dive into our Q1 financials, here are a few key metrics that we think are important in analyzing the broader trended performance of our business.

The first one is revenue growth as represented by our trailing 12 months ending March 31, 2019, which is up 28% compared to the prior period.

Our standalone software and services business has increasingly become a bigger component of our revenues, enabling us not only to expand on our growth, but also become more consistent in our results and drive higher margins as well.

Standalone software and services on an absolute dollar basis have actually doubled year-over-year, disproportionately contributing to our overall revenue growth.

Non-GAAP gross margins have continued to increase with our trailing 12 months at 45%, up 416 basis points year-over-year as we drive stronger sales of our higher-margin, value-added offerings while not being pressured by commodity-type prices.

In addition, our non-GAAP adjusted EBITDA margin increased to 8% compared to 4% in the comparable trailing 12 months ending March 31, 2018, as we continue to combine our strong growth while maintaining our expenses and ensuring we have the appropriate cost structure to scale, even while we integrate recent acquisitions.

Finally, on the right you'll see that we maintain a stable and balanced revenue mix, both from a segment and a geographic perspective.

Our revenue in the first quarter was $19.5 million, an 18% increase from the first quarter of 2018 and an 8% sequential decrease compared with the fourth quarter of 2018.

This sequential decrease on a consolidated basis is in line with our historical seasonality.

Our premises segment generated 48% of our total first quarter revenue or $9.3 million, an increase of 24% from the first quarter of 2018 and an increase of 5% from the fourth quarter of 2018.

The increases were primarily driven by sales of Freedom, Liberty and Enterphone MESH products and services following the acquisition of Viscount assets in January of 2019, additional sales of video technology and analytic software products and services as well as higher sales of our physical access control systems, solutions and software.

Revenue from our identity products, which includes sales of physical access credentials, smartcard readers, reader modules and transponder products, was $10.2 million in the first quarter of 2019 or 52% of our total revenue.

This represents an increase of 13% from the first quarter of 2018 and a decrease of 18% from the fourth quarter of 2018.

The increase versus first quarter 2018 was primarily driven by sales of mobile security solution products following the acquisition of Thursby Software Systems in November, higher sales of smartcard readers, offset by lower sales in select access card product sales as we continue to shift our focus to the higher value-add card products.

Now turning to our gross margin, our GAAP gross margin was 45% in the first quarter of 2019 compared with 48% in the fourth quarter of 2018 and 39% in the first quarter of 2018.

Total company revenues and gross margins were impacted by normal fluctuations in product mix and our ongoing assessment of our inventory levels and current demand forecasts.

The first quarter of 2019 was also positively impacted by a large bulk order of Thursby readers to the U.S. Navy Reserve, which is another one of the early adopters that Steve mentioned in the Department of Defense, and this accounted for less than 10% of our first quarter 2019 revenues on a consolidated basis.

By segment, our GAAP gross profit margins continue to be strong and stable, premises at 47% for Q1 of 2019 and identity at 42%.

On a non-GAAP basis excluding certain noncash items, our gross profit margin was 46% in the first quarter of 2019 compared with 49% in the fourth quarter of 2018 and 41% in the comparable quarter of 2018.

Now we look at our full income statement for the earnings release.

Our GAAP net loss attributable to Identiv for the first quarter of 2019 was $0.8 million compared with a net income of $0.6 million in the fourth quarter of 2018 and then that loss of $2.3 million in the first quarter of 2018.

We are booking the cumulative dividends on the Series B preferred stock quarterly on a go-forward basis, which impacts the net loss attributable to common stockholders, bringing it to a net loss of $1.1 million or $0.06 per share, compared with a Quarter 1 2018 loss of $0.15 per share.

We've also included a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release.

Just a few items worth noting.

Interest expense remains flat at $0.3 million for the first quarter and the fourth quarter of 2018 compared with $0.5 million for the first quarter of 2018.

Depreciation and amortization increased approximately to $0.9 million for the first quarter of 2019 compared with $0.8 million in the fourth quarter of 2018 and $0.7 million for the first quarter of 2018.

The increases were primarily related to the amortization of acquired intangibles associated with the acquisition of Viscount assets and Thursby.

Now moving to our operating expenses, which is the next graphic, for the first quarter of 2019 per our earnings release, our total GAAP operating expenses were $9.1 million, flat with the fourth quarter of 2018 and increased versus $8.3 million in the first quarter of 2018.

The increase over the comparable quarter 2018 was primarily driven by additional headcount and other related costs associated with the acquisitions of Thursby Software in the fourth quarter of 2018 and Viscount assets in the first quarter of 2019.

Our non-GAAP operating expenses, adjusted to exclude restructuring and severance and certain noncash items normally excluded from our non-GAAP results such as stock-based compensation and depreciation and amortization as well as additional non-GAAP items including acquisition-related transaction costs for the first quarter of 2019, were $7.9 million as compared with $6.6 million in the first quarter of 2018 and $7.4 million in the fourth quarter of 2018.

On a non-GAAP basis across all of our functions, the small increases quarter-over-quarter were primarily due to the additional headcount and related costs associated with the acquisition of Thursby Software in the fourth quarter of 2018 and Viscount in the first quarter of 2019.

Bringing all the pieces back together, given our strong growth profile and ongoing cost controls, our non-GAAP adjusted EBITDA gain was approximately $1.2 million in the first quarter of 2019 compared to $3.1 million in the fourth quarter of 2018 and $0.2 million in the comparable quarter 2018.

Now if I could turn to the balance sheet, we will be comparing our position at March 2019 to the position 1 quarter ago at December 2018 and prior quarter, March 2018.

Cash at March 2019 was $8.9 million compared with $10.9 million at December of 2018.

There were 2 major drivers.

First, we generated positive cash from operations of $1.5 million, and under investing and financing activities, we used $1.3 million net cash for the acquisition of Viscount assets.

And there was a net usage in the financing activities in the first quarter of approximately $2 million, primarily comprised of repayment of notes of $2 million from the 3VR acquisition and tax payments related to RSU releases of $0.2 million, offset by net borrowings under our line of credit of $0.3 million.

And lastly, there was a small $0.1 million impact of foreign currency fluctuation.

Overall, the cumulative impact of our actions resulted in a net usage of cash of $2.0 million.

We also held additional capacity unused under our line of credit at the end of the quarter.

In our 10-Q filings we will be providing a full reconciliation of the quarter-end cash flows.

In addition, for completeness we have included the full reconciliation of non-GAAP adjusted results to GAAP and the full balance sheet per the earnings release in the appendix.

In the context of our target business model where we measure ourselves quarterly to assess our progress, we've delivered what we set out to do: growth and achieved non-GAAP adjusted EBITDA profitability for 11 quarters in a row.

We've removed our prior midterm target model and now solely focus on what was our long-term target model, which we now refer to as simply our target model.

Quarter 1 of 2019 accomplished the non-GAAP gross margin attributes of our target model, while non-GAAP operating expenses were lagging as we worked to integrate the 2 recent acquisitions through our optimal cost structure to scale.

As we go into the second quarter of 2019, we expect to exhibit many of our target metrics within select quarters of 2019, closing the gap to positive earnings per share on an annual basis.

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

Thanks, Sandra.

So from Sandra's comments, you all can see the financial strengths of the business and the progress we're making along all metrics.

Gross margins that are higher than industry comparables and growth rates that are also more than twice the industry's, whether you compare us to Johnson Controls, Tyco, NAVCO, or virtually any of our competitors and comparables in the marketplace.

Now the reason is graphically visible at customer and industry events like ISC West, which I mentioned in the introduction, but I want to go into the implications in some detail here.

This image you see is our booth from ISC West, and it shows several things that are important to our business.

First, the entire solution builds on great brands and great technology -- Hirsch, 3VR, Thursby, Freedom, Enterphone, Identiv itself.

Second, we've integrated solutions across all these capabilities.

And third, probably most importantly, the crowds themselves -- the energy and the interest that we got at these events really speaks louder than any of the data or metrics I can throw out there.

But our message is clear.

When I was doing the booth prep for our trade show that we talked about, every single attendee at ISC West, or another trade show like RFID Journal that I mentioned, every attendee is a customer for at least 1 of our products, and the vast majority are customers for nearly all of our products.

So you think about it: every security leader for an organization these days needs video, access, data security, mobility security.

And then the more progressive ones are expanding to real-time location security, tracking of every person and device that moves throughout their organization.

They're doing this for security and then they're extending the solutions into convenience and productivity.

Now some are acquiring purely conventional physical security infrastructure, and others are starting to integrate it with all of the IT infrastructure, deploying IoT devices, mobile, Web and cloud as well as on-prem dedicated equipment.

Everyone's optimizing their specific needs and trying to build for the future they see.

Now there's not one size that fits all, but there is one partner who has excellent point solutions across access, video, analytics, access readers, identity cards, RFID, mobile security and can support adoption across conventional architecture as well as early adopters of the full vision of IoT-centric software-defined architecture, and that's Identiv.

Now the proof really is in events like this, where our message was loved by everyone there.

It really is the challenge and the opportunity that virtually every customer in our industry has.

They've got tight budgets, and security is a critical responsibility to take on.

But with our solution, they get extremely cost-effective systems, very high security and they start moving from a cost center into actual value-added business.

Now this is the transformation of the industry that we're leading.

Everyone knows it's happening, but most of our competitors are either too entrenched in their legacy infrastructure, too small within their giant parent companies to drive change or just too comfortable with the status quo.

Meanwhile, our customers are living the transformation every day and thirsty for the solutions we've got.

Now I can talk a lot more about this because it's the opportunity we've always seen, and it's the need of customers we care about and work with every day.

As we already have, we'll keep updating our investor base on the progress in our industry, our customers and our company and products.

The point here, though, is that we're now there with the overall platform, a clear vision for our customers and it shows at events like ISC West.

Our mission is to execute on driving the industry transformation as it accelerates and pervades our $140 billion industry.

Now before I leave this point, one other aspect for investors to consider.

Our industry is attracting new entrants, startups and the venture capital that comes along with it.

Proxy, OpenPath, UniKey, Verkada and others have raised tens of millions of dollars of capital at major valuations over just the past few months.

This is because there is a major transformation happening, and it is a massive market.

Now being based in Silicon Valley where a lot of these startups are and being an innovator in the industry, we have close relationships with nearly all of them.

We're staying close and even working with them -- some of them -- to provide technology and channel.

Our strategy is to be both a mainstream scale leader in the industry and to be at the technology forefront, with our customer base benefiting from our credibility as well as best-in-class technical solutions.

This is another aspect of the industry's development we'll keep updating, and I'm happy to talk about in the Q&A or in other events that we have, certainly.

So looking at the takeaway from all this, the first quarter was another strong quarter where we drove double-digit revenue growth, outpacing the rest of the industry and continuing to take market share.

Both our premises and identity segments continue to grow fast.

We're really pleased to see the growing contribution from our software and services revenue.

We're planting our fast progress towards our target model.

And it quantifies the progress towards our vision of a software-defined IoT platform company with deep customer relationships and a strong and patent-protected technology portfolio.

This is also the foundation for our strategy of expanding our specific solutions in key industry verticals, particularly federal government, infrastructure, healthcare, banking and retail.

Our markets themselves are at an inflection point, and we think our key differentiators of our platform, our technology, our distribution channel and our vertical market insights really have us well positioned to capitalize as these markets take off, both short term and longer term.

In addition to our sustained growth because of our disciplined cost management, we've got further operating leverage and margin expansion.

Now complementing this more predictable operating performance has been the continued improvements we've made to our balance sheet, ensuring both stability in the future and support for higher levels of growth.

As Sandra mentioned, for example, we paid off the 3VR seller's note and reduced our financial liabilities as a result.

So we started 2019, all of our business platform is in place, the market is exactly where we expected it to be to support even stronger growth as we go forward.

We'll continue to execute on our growth opportunities to drive more leverage in the business, expand our product leadership and drive the progression of returns and the trends you already can see here and throughout this conversation.

So with that, I'll turn it over to the operator to open up the call for questions.

Operator?

(Operator Instructions) We will go ahead and take our first question from Mike Latimore.

Congratulations on the great start here.

On the, I guess just on the gross margin -- you may have given this, Sandra -- but do you have gross margin by the 2 segments here?

Yes, from a GAAP gross margin perspective, premises was 47% for Q1 of '19, and identity was 42% on a GAAP basis.

Got it, okay, great.

And then on the 500 sites in the federal government, roughly how many doors per site would that be?

It varies dramatically.

It's anywhere from a couple of dozen to a couple of hundred.

Per site?

Yes, per site.

Okay, got it, great.

And then I guess just the implication of your comments, Steve, about having sort of most of the components you need, should we just interpret that to mean that you're unlikely to do another acquisition this calendar year?

A calendar year is a long time, but in terms of that near term, we are certainly focused on consolidating, integrating of platforms, getting leverage out of it all, leveraging the channel, making sure the dealers have full understanding of the full product line.

And so certainly for the next several months, that's our intention.

Okay, got it.

And the very last one, the extent that a lot of, or increasingly the IT decision-maker is making the kind of physical access decisions, security decision -- does that change any of your channel strategies, or does that sort of fit into what you already have with it?

It fits into what we have, largely because we've developed the IT dealer channel, which is different from the physical security dealer channel, but especially with our Cisco partnership that started almost 3 years ago now.

That got us into the IT channel, and it really is starting to expand.

We've been talking about it in the industry for several years, but I'd say in the last few months, I've seen a couple of times a greater percentage of IT CIOs that are really leading the discussion, including physical access.

(Operator Instructions) We will go ahead take our next question from Nehal Chokshi.

Yes, congratulations on another solid quarter, especially that strong gross margin, the margin expansion.

I'm going to have some questions around it.

Before I get there, could you talk about the organic year-over-year growth, i.e., excluding Thursby and the Viscount acquisitions?

So we've had strong contribution from all of our products for the 18% quarter-over-quarter and the 28% trailing 12 months.

We don't break out specifically organic and inorganic, but we've been really pleased by both the very strong organic movement, as Steve mentioned, with the federal government and the speed by which Viscount and that team got off the ground and started contributing.

And I'll just add to that because there's certainly a financial perspective on that and (inaudible).

But from a business perspective, it really gets to be hard to differentiate.

For example, we have a big drive into distribution, which we had a nascent position in with our TS readers and from our smartcard readers.

But now, with Enterphone and some of the Viscount products, Liberty in particular, they're really perfect for distribution.

We have a dedicated distribution sales manager who we brought on, actually, with the profile of driving the Viscount product line, but she is driving all of our product lines through distribution.

And so it really starts to morph together in a way that's not meaningful to split it apart.

Yes, understood.

And so for the third quarter in a row, I'd say at least 500 basis points of year-over-year gross margin expansion, which is fantastic.

Is all that due to growth in software and services, or are there other factors at play here?

Yes, so the other factors -- obviously, the increase in software and services standalone contributes to it -- but we disclosed in Q4, and we had another one in Q1, we had a large order that we fulfilled for the Air Force in Q4 for about $2.4 million.

That one was actually a greater than 10% concentration customer.

And as we've talked before, those margins run in the 60% to 70-plus percent range, so they are higher.

And we had another -- smaller, but still large -- order in Q1 for the Navy Reserve.

So that is driving up some of our gross margins for the last 2 quarters.

We've always acknowledged that that business can be lumpy but very profitable.

And we are also seeing some pickup in some of our higher value-added cards as well as software and services.

So I think a lot of what we're doing is driving the margin expansion.

But really, those 2 large Thursby orders really accentuated it.

And I think I'd add just from a supply chain and business operations perspective, as we're becoming a clear, consistent grower, our suppliers become much more flexible in terms of price negotiations because they know they want to have us as a customer, and we're going to be growing in terms of volume and demand from them.

So we can drive down COGS at the same time.

So we've got some benefit going across the board, and I think that's why you've seen it sustained for a little while.

And as I mentioned in my quote in the press release, too, we're fortunate -- knock on wood that it continues, but we think it will -- to be in markets that are not seeing a lot of the price pressure either.

So we've got a decent stability on our price side and some progress on the COGS side as well as mix.

Great, okay.

So the guidance implies that the margin expansion, this massive margin expansion that you've been seeing, isn't going to continue, but I think -- if I'm -- you probably attribute that to the large orders from Thursby from Q4 and Q1, so you have hinted that there might be potential to sustain some of that 500-basis-point year-over-year expansion, but certainly not at that rate.

Would that be a fair way to characterize?

Yes, I think particularly when you think about our scale.

The challenge, of course, is in any given quarter, we can have mix move even as we're growing, and a small mix shift can affect margins, give or take, in a quarter.

So we don't want to set expectations when at our scale, we aren't certain we can buffer those expectations.

We certainly hope it will continue to expand, but we need to plan for a more measured progression.

(Operator Instructions) We'll go ahead and take our next question from Andrew Uerkwitz.

I just really have 1 question here.

You made 3 acquisitions in the last 12 months.

There's integration that you're going through.

One, how long do you think it will take, or how much time do we need to see that full integration play out?

And then where will we see the biggest benefits?

Will it be margin, increased sales?

Could you just talk a little bit about that for us?

Thank you.

Yes, I think you're already seeing it play out, partly because the first of the 3 acquisitions was over a year ago now in February of last year with 3VR.

And it -- you're seeing it on the margin line with the mix and with the contribution, both the 3VR and the Thursby.

And you're seeing it on the top line.

I mentioned some of the channel leverage we're getting through distribution with the Enterphone, MESH and Freedom product lines as well.

So I think you're starting to see it throughout.

And as Sandra mentioned in her comments, there's still some more in terms of OpEx synergies.

We've taken some, but there's always more efficiency you can get.

And then as our sales force gets better at selling the entire product line, we get more sales force leverage out of that as well.

So I think you're already starting to see it, but there's certainly more to move through the business opportunity.

Did you want to add anything to that?

No, I think we can really manage getting the sort of back office integration.

The real kicker here is how quickly we can get these to really start to drive a very different trajectory on the top line, and that's where we think the biggest opportunity is.

And it is taking some time, but I will tell you that, again, the team has really embraced the Thursby product, and they have certainly run with the Viscount products as well.

So I think we feel good that we're getting the traction that we need.

And we will go ahead and take our next question from William Gibson.

I'm assuming the sequential increase in selling and marketing expenses was related to the 2 trade shows.

Is that correct, and does that come down in the second quarter?

So actually, a lot of the trade show expenses for ISC West and for RFID LIVE end up in the second quarter in April.

That's historically when we've seen a tick up.

So sales and marketing did go up.

That's primarily because of 2 things: number 1, the acquisition of Viscount and bringing over key resources like Scott Sieracki; and 2, we've been purposely filling some very strategic roles, as Steve mentioned, with an Enterphone sales leader who also is very focused on distribution for all of our products.

So we've been making some pretty purposeful investments in customer-facing resources in the first quarter.

Okay, and so that's a good base going forward with the shows in the second quarter?

Yes.

Okay.

And sticking with the shows, you mentioned a lot of people, and it sounds like more interest this time around.

What's sort of the timeline, Steve, of turning them into orders?

Good question.

Some have already come through, and then it can be anything from a few months if there's something that they already had in the pipeline.

And we had some government customers who were new agencies to us that came through, and that can be a year.

So it's of that time frame, a couple of months to 12 months.

Okay, thank you.

And you also just briefly mentioned working with some of the startups that had gotten financing.

Is that potentially bringing in technology from them and giving them a channel, or how does that work?

So far, actually, the most engaged activity has been we're actually -- one of the startups is using our technology, reader technology, inside their platforms.

And then in other cases, we will be integrating some of the startups' technologies into our platforms and providing some channel for an integrated solution.

Oh, okay, so it could go either way.

Yes, exactly.

Yes, thank you.

And related to the preferred stock dividend accretion, is that taking stock on that, or is that going to be a cash payment?

Or do we keep seeing that dividend rise?

So we'll see the accretion of the stock dividend, preferred dividend, in stock.

That will go, if it's still out there, until Year 10.

At Year 10, it's at the company's discretion to convert it to cash so that we have a definitive tail on the dilution of the stock through that accretion.

(Operator Instructions) We'll take our next question from Jaeson Schmidt.

I know you outlined in the release some of the wins in the RFID segment.

But just curious, if we look at this year, what end markets are you most excited about seeing some growth from?

So I've actually got our business head for that business, Manfred Mueller, here, and he can give it to you straight from the horse's mouth.

So there is a couple of markets that are extremely exciting right now.

One is in the pharmaceutical medical space, where we have had an increased amount of tenders out there where we have received an increased amount of orders very recently.

And it's predominantly brand authenticity and it's enhanced inventory management.

That's the major applications there.

Why is it, why do we love pharmaceuticals and medical that much?

Not because of the sales cycle, which are extremely long.

That also kind of goes along with the other question that we just had.

9 to 12 months is nothing in that area.

But the loyalty of any of those customers is going to be incredible.

It's going to be years and years that you are usually locked in by that because you also go through a lot of, let's say, audits and dedicated certifications.

So that certainly is one area which is very exciting.

Another one that I'm very excited about now is transits, transportation, not because it is such an exciting market; it's just the volumes that are really making a big, big difference there, and that's also related to one of the major orders that we got this year.

It was part of the operational highlights there.

So that helps to fill the factory, and it makes -- it moves the needle significantly.

So that's 2 of the major highlights there that I would like to name here.

Okay, that's helpful.

And I know there is lots of moving parts with the acquisitions you made last year, but big picture, when we think of seasonality for '19, anything out of the ordinary or different from sort of historical trends we should be thinking about?

Yes, good question, and the answer is no.

If anything, we're seeing the seasonality smooth out a bit.

We've always had a large third quarter due to the federal government year end.

But typically, we've had, for example, first quarter sequential decline across the board, including premises, that as we noted here, we actually had a growth in premises, fourth quarter to first quarter.

That's the first time that's happened that I can remember.

So we're seeing aggregate growth rates that are offsetting some of the seasonality.

But that said, we expect our third quarter to be our strongest quarter, and we certainly expect our third and fourth quarters to be the 2 strongest quarters in the year.

But it's becoming less pronounced than it has been in the past.

And it looks like we have 1 final questions, and it comes from Jeff Kessler.

A couple of questions.

Number 1, are you seeing, with the amount of new access and card systems that are out there that are trying to put identity closer to the door as well as inside, basically, based on entitlements, what are you folks seeing in terms of your demand from these new verticals you're talking about for essentially ID at the door?

Is this something that can be done on the Web, on network, or does it have to still be Ethernet wired?

And if you could just speak to that.

Yes, it's -- there's a lot of dynamics in there, as you know.

So certainly the predominant mode is going to be at the door and the conventional infrastructure.

However, there's a couple of caveats on that.

We demonstrated at ISC the Viscount mobile access, whereby you can come and wave at the reader, and it can either do a direct Bluetooth communication with the reader, or it can do a Web geofencing that, frankly, doesn't even use the reader at all.

It simply indicates by location where you are and if you're authorized to open that door, it's actually going through the wide area network to the cloud to the panel and opening the door from the inside out.

But that's early adoption and not a lot of folks using it, but it's important to have it.

And then the third use case is if you're a cloud use case -- and again, we were demonstrating it at the booth -- a reader that only has an Ethernet port connected into it and a panel that's just POE Ethernet port and can be accessed with a mobile app either directly at the door or simply hitting through the mobile app -- open this door -- and it does it.

And that, of course, is just communicating to the controller and popping the relay.

So I think you're going to see all 3 modes.

That's why I kind of asked the question, so that effectively, you have a multiplicity of ways of going about this, and you're not just stuck with Ethernet at this point?

That's exactly right.

And the interesting thing, the reason we really wanted to get it out there and pilot it and demo it is the thing people always worry about is latency, if I'm doing what I just described, connecting it through geofencing and up to the cloud and around.

But we were getting 200- to 300-millisecond response times, so you'd wave at it, and yes, it was going to the cloud and AWS, but you couldn't tell the difference.

It was just as if it was a door reader that you tapped and beeped.

Okay.

A follow-up that is you mentioned earlier several of the industry's vertical markets that you are looking at are reaching critical mass, not just in terms of their revenue, but in terms of their ability to understand what a network situation is and how it can be used among the various divisions of those verticals as opposed to everything still being in a silo.

You talked about RFID and traffic as being 2 areas that are hot, but I'm wondering in a more general sense, what vertical markets have reached this area of, say, critical mass that allow you to go in and prove your value proposition to them more easily than you could have 3 or 4 years ago?

Yes, so it's a good question, and there's actually a couple of them.

Certainly retail is far along, both because they've had it on the supply chain side, but they're now using it for heat mapping as they move around stores and for improving the customer experience as well as security.

And they're in such a fight for their lives with Amazon that they're fighting for any advantage and any improved experience as well as loss prevention to reduce shrinkage.

So retail is an early adopter of the full range of solutions we've got.

Another one that's a lot slower but gets the whole value is healthcare because of the same thing.

They have to track high-value assets around, whether they're consumables or equipment, but they also have to track people with very high certainty and lots of people coming in and out.

Sometimes they're doctors, sometimes they're patients, sometimes in the case of emergency rooms, they can be, frankly, potentially criminals, so gunshot wounds and other things, and they're all mixed together.

So healthcare is piloting almost everything.

They're just slower to adopt and deploy.

And then the interesting thing is that more general tech enterprises are adopting a lot of the platform, mostly in pilots right now as well.

But they're really seeing the benefit of tracking everybody as they move around.

A lot of them have open campuses and they want to secure them.

But they also want to take it to the next level of when a product is getting launched, what do I see about the personnel movements between product and engineering and marketing, and how are my teams working?

So they're taking it from security into operational improvement and interaction.

So there's a lot going on there, but I would say retail is probably farthest along in terms of actually adopting and deploying, and the others are piloting.

Okay, finally, while it appears that the education market -- and I know you folks have been focused and have had success with large installations -- over the last couple of days, I've been visiting around with a couple of your competitors, one very large and one very, a smaller one your size out in Long Island, all talking about how wonderful the education market is for them or could be for them.

And I'm looking at whether or not you are -- how far do you think you are in integrating or getting involved in both the inside the dorm, inside the commercial building, versus just, versus campus ID itself?

Are there areas in education that you feel you might be able to play a role, or are you going to leave that to other companies and focus on government and the vertical markets that you've just talked about?

Yes, so it's good clarification.

So we capture it all under SLED -- state, local and education -- as a market.

So when I talk about government, I actually include education for the most part.

And we're in a number of major community colleges, for example: Santa Monica Community College, Houston Community College, some of the others as well as school districts.

And what we're finding a lot of adoption happening is with the wireless infrastructure.

So wireless locks, the ability to do lockdown across the campus and across the buildings as well as selective unlock -- all of that.

And we are very active in that space.

Perhaps we should focus on it more and emphasize it more, but we've been in it for so long that we don't always emphasize it and separate it from our state and local government initiatives.

But schools are certainly very important as an infrastructure that needs security and needs flexible security.

And do you think that while you've been in it a long time, that area, do you consider that an area that's reached critical mass for you at this point?

It's so big, frankly, it's hard to say that it's -- it certainly meets critical mass in terms of virtually all of our regional managers have several educational institutions in their regions, and so they all know them well, and we've typically got multiple products of ours going in.

And especially with our Velocity 3.7, which we launched in the first quarter, that has very smooth wireless lock integration with it, particularly for the Schlage locks.

So it is at critical mass; it's nowhere near saturation.

There's a long way to go in education.

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@gatewayir.com.

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

Please go ahead, sir.

Okay, thank you, and then thank you all for joining us.

As always, we'll keep informing the investor community as we go forward.

Next week we'll be in New York at the Oppenheimer Emerging Growth Conference and the Houlihan Lokey Industrials Conference.

And then in June, of course, we'll be at the LD Micro Invitational in Southern California.

So we look forward to driving the business forward and to continuing to keep you all informed as we make progress.

Thanks again and have a great evening.

Thank you for joining us today.

You may now disconnect.