Identiv Inc (INVE) 2019 Q4 法說會逐字稿

Good afternoon.

Welcome to Identiv's Presentation of Fourth Quarter and Fiscal Year 2019 Earnings Call.

My name is Anastasia, 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 and free cash flow.

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.

Sir, please proceed.

Thanks, operator, and thank you all for joining us today.

As you'll have seen, today, we published our fourth quarter and full year 2019 results as well as reaffirmed our outlook for 2020.

Now I'll go into those details in a minute.

But given the environment we're in globally, I'd like to put some context around our business comments.

The main perspective I'll take us through today is that the fundamentals of our business are looking strong.

We actually weathered pretty well the supply chain challenges from the early onset of the virus in China, and even in some respects, our products benefit from lots of people working from home.

So we're driving our business forward.

Our Board's independent directors are indeed continuing their process to engage outside advisers to assess strategic alternatives, and we're on all the paths that we discussed a little over a month ago.

In parallel, we're being proactive about enabling our people to work from home, we're tracking the location by location responses that are best as well as what's being required as governments respond.

As an organization, we're already a dispersed company, with a range of our activities across the U.S., Canada, Europe, India and Southeast Asia.

This means we're used to working remotely, we've got the infrastructure in place and our processes and people are very familiar with it.

So this is a tough period we're all in.

But we think we're relatively well positioned to weather the impact and we're doing everything to, first and foremost, take care of our people, our customers and our partners and, therefore, to serve our investors.

If we make the right moves proactively, we'll get through this and should be able to strengthen our competitive and market position as we come out of the churn.

There are some opportunities to get ahead competitively, while others are hunkered down, some of which I'll comment on in a bit.

As this all passes, the companies that took care, but also worked hard to get ahead and be better positioned as business returns to normal, will be long-term winners.

We plan to be one of those.

So hopefully, that gives you some context of how we're managing through the COVID-19 issues and the business and government effects that are happening.

I'll have some other tactical comments later about some of the business effects like canceled trade shows, but we wanted to start with that overall perspective; that we're managing proactively and expect to be in an even stronger competitive position as we all get through this.

I don't want that topic to overshadow the realities of the strengths of our business.

We just have to discuss it as part of our business environment.

So let's get into our results now.

Give you all a perspective on the business in progress and our outlook.

While we're being proactive about the environment, we're driving our business forward, and I'll center most of my comments on that.

So looking at our 2019 full year and Q4.

They're very consistent with the preliminary results we reported on January 30, mostly in line with or slightly above the preliminary figures.

As we already reported and discussed, we had a slower fourth quarter than we expected.

But even with that, our overall business grew 7%, supported by a 20% growth in our Premises business for the full year and a 62% growth in our RFID business in the fourth quarter.

The strategic metrics of software and services revenues and recurring revenues also grew solidly.

Software and services grew 27% for the full year, and recurring revenues grew to 10% of total revenues in the fourth quarter.

We also drove leverage in our business model, growing EBITDA by 20% year-over-year, almost 3x the rate of our revenue expansion.

Now in our prior discussion, we focused on 4 factors that impacted our business: Federal government contracts closing outside the quarter, a large Mexican customer whose revenues we reserved, behind planned hiring of salespeople and the launch of our SaaS products.

So I'd like to update our progress against each of these challenges and highlight trends that are helping our growth start off strong in 2020.

First, we strengthened our federal business, adding key federal salespeople for our Premises as well as our Thursby business and a federal program manager to support our existing federal customers.

These people are all new since our discussion on January 30, building the base for a wider pipeline of new customers as well as expanding opportunities with our current customers.

This applies both to our Hirsch, 3VR and Freedom products in federal access control as well as our Thursby business, of course.

Now in both these areas, sales additions complement our segment-leading products.

So second, we've effectively eliminated our exposure to financial inconsistency in the Latin American market.

We continue to have success there, but we've implemented strict early payment requirements and factored into our projections enough allowance to forego revenues if payments aren't certain.

Third, we brought on new sales people for strategic accounts, the Northwest region, the Central region as well as Thursby and added an inside sales manager to our U.S. RFID business.

Now in our business, sales engineers are pivotal to expanding sales and building customer channel credibility.

So we've hired a new SE manager as well as SEs in Texas, the Northwest and the Southwest.

Fourth, we've gotten our SaaS sales underway.

Our Velocity Cirrus, Freedom Cloud and subscription-based in-app purchases of our PDF signing utility are a focus for most of our salespeople.

So as you can tell, we've been busy the past 5 weeks since our last conference call.

We focused on these areas and made progress in all of them.

So to be clear, there's more work to be done in each.

The substantial growth in both software and services and recurring revenues are certainly highlights for the year.

As we've discussed, transitioning to more of a recurring revenue model is challenging in the short-term as customers evaluate which services are best for their businesses.

As a result, the length of the sales cycle can increase, and revenues are spread over a longer period of time.

With that said, this is a more stable, sticky and predictable model, of course.

And we expect our expanded sales force to allow us to drive conventional on-premises sales, while building our RMR in parallel.

In addition to our SaaS products, in the fourth quarter, we also launched mobile apps for PDF signing for our Thursby platform and refreshed mobile apps for Freedom and Sub Rosa.

All of these, plus releases we've launched in the current quarter, puts us in a terrific product position for 2020.

So with that, I'll turn it over to Sandra to go over our financial results for the quarter and the year, and then I'll return to talk more about our growth drivers and outlook for 2020.

Sandra?

Thanks, Steve, and thanks to many of you joining us again for our full earnings call.

Before we dive into our full financials, I'd like to share an update in the context of our release of preliminary unaudited results dated January 30, 2020.

For every metric that we reported on January 30, today, we are reporting slightly better results than the top end of our range, from revenue over range of $0.2 million through GAAP EPS beating by $0.01.

In addition, we are still reporting non-GAAP adjusted free cash flow of positive $0.1 million, with 2019 representing the first full year in over a decade, where we were able to generate non-GAAP free cash flow.

Now diving into the key metrics.

The first one is growth, which even factoring in the lower fourth quarter revenue, delivered our total year 2019 revenue growth rate at 7% year-over-year.

Additionally, without the 23% reduction in our Access Card business as we have continued on our strategy disclosed earlier to exit lower-margin third-party products, our consolidated growth was up 14% year-over-year.

Our stand-alone software and services business is steady at 13% of our revenues for the full year and the fourth quarter.

Our full year results were up 207 basis points over the prior year.

Recurring revenue accounted for 10% of total revenue in the fourth quarter and 9% of our full year 2019 results, reflecting a 117 basis point improvement over the full year 2018.

Our fourth quarter 2019 GAAP and non-GAAP adjusted gross profit margins of 40% and 42%, respectively, versus the comparable period of Q4 2018 were negatively impacted in total and by segment, by mix within our segments.

Our Premises segment was negatively impacted by lower video analytics software sales, which have a significantly higher gross margin rate, and our Identity segment did not see a recurrence of a large deployment of Thursby Software solutions, which was in the fourth quarter of 2018 at 70%-plus gross margins.

Our GAAP and non-GAAP gross profit margins for the full year 2019 continued to increase over comparable periods based on our stronger sales of higher value-add solutions with our GAAP gross profit margins increasing from 43% to 44% for the full year 2019, and non-GAAP gross profit margins increasing from 44% to 45%, respectively.

This year, our non-GAAP adjusted EBITDA margin hit 8%, and our non-GAAP adjusted EBITDA on an absolute basis was $6.8 million, just below our original guidance coming into 2019 of $7 million to $9 million.

These results reflect a 20% increase from 2018 and 148% increase from the full year 2017.

Our GAAP net loss attributable to common stockholders was $2.1 million or a loss of $0.12 per share for the fourth quarter.

For the full year, our GAAP EPS reflects positive improvement of $0.23 per share.

Quarterly and year-to-date free cash flows show that we gave back $1 million of our positive progress September year-to-date, but we are still generating $0.1 million positive free cash flow for the total year 2019 versus a negative $6.5 million during 2018.

For your reference, we have included the full GAAP to non-GAAP reconciliation in the appendix here and in the press release filed earlier this afternoon.

On our next slide, our revenue in the fourth quarter was an 11% decrease compared to the fourth quarter of 2018, and an 18% sequential decrease compared with the third quarter of 2019.

Our Premises segment generated 46% of our total fourth quarter 2019 revenue, a decrease of 3% from the fourth quarter of 2018 and a decrease of 33% from the third quarter of 2019.

The comparative quarterly decrease was driven by unevenness of our large video analytics deployments to enterprise customers, offset by higher revenue in our traditional physical access product lines and new incremental revenue from the Viscount acquisition.

The sequential quarterly decrease was primarily attributable to lower physical access control solutions and was more pronounced than our normal seasonality with the business drivers that were discussed earlier.

Our Premises segment generated 50% of our full year revenue and an increase of 20% from 2018.

Revenue from our Identity segment in the fourth quarter was 54% of our total revenue.

This represents a decrease of 17% from the fourth quarter of 2018 and an increase of 2% from the third quarter of 2019.

The comparable quarterly decrease was primarily driven by the nonrecurring large deployment of Thursby software solutions in the fourth quarter of 2018, along with the reduction in revenue from our lower-margin Access Cards segment, partially offset by the return of transponders to growth in excess of 60% this quarter.

The sequential quarterly increase highlights the strength exiting the year in transponders with growth sequentially of approximately 29%, offset by the planned lower sales of Access Cards.

The Identity segment generated 50% of our full year 2019 revenue, a decrease of 3% from 2018.

Moving now to our operating expense management.

Underlying the non-GAAP OpEx as a percent of revenue movements by quarter is a relatively flat expense base, which we have managed through normal seasonality and acquisitions.

For the third and fourth quarter of 2019, per our earnings release, our total GAAP operating expenses were $9.3 million, which included an expense for the update of the fair value of the earnout liability associated with the Viscount acquisition of $0.2 million and $0.4 million, respectively.

Our fourth quarter 2019 GAAP operating expenses show an increase of $0.2 million as compared with the fourth quarter of 2018, which was prior to the acquisition and integration of both Thursby and Viscount and did not have a similar nonrecurring expense for the fair value of the earnout liability of $0.4 million.

Our non-GAAP operating expenses, adjusted to exclude restructuring and severance costs and certain noncash charges normally excluded from our non-GAAP results such as stock-based compensation, an increase in the fair value of the earnout liability and depreciation and amortization as well as additional non-GAAP items consisting of acquisition-related transaction costs, were $7.7 million in the fourth quarter of 2019 as compared with $7.9 million in the third quarter of 2019 and $7.4 million in the fourth quarter of 2018.

Now turning to the balance sheet.

We will be comparing our position at December 2019 to the position one quarter ago at September '19 and the prior year quarter ending December 2018.

The net activity for the fourth quarter was primarily comprised of a $0.4 million cash usage, driven by our net income, excluding noncash items; a $0.6 million cash usage from operating assets and liabilities with a de minimis amount of capital expenditures; our non-GAAP free cash flow generated was a negative $0.1 million.

The performance within the quarter highly influenced by the reduction in expected revenues late in Q4, which left a significant amount of inventory on our books.

Although this buildup of inventory was not planned, in fact, it has allowed us to manage the supply chain disruptions and uncertainty caused by COVID-19 with limited impact to date.

Under financing activities, we had $0.8 million net cash used, driven by $0.6 million decrease in net borrowings, offset by $0.2 million tax payments related to RSU releases.

For completeness, we have included the full balance sheet per the earnings release in the appendix.

And in our 10-K filings, we will be providing a full reconciliation of the year-to-date cash flows.

In the context of our target business model, although we came in short during the fourth quarter of 2019, during the year, we achieved many milestones, including achieving net income profitability for the second and third quarters for our stockholders ahead of expectations.

Today, we are reconfirming our full year 2020 guidance.

We believe that our business model is positioned to continue to accelerate towards the scale required to generate positive and profitable growth.

However, we are continuing to track the potential impact of COVID-19 and will provide an update if the situation persists well into the next quarter or worsens to impact other parts of our business.

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

Thanks, Sandra.

The numbers show the challenge that caught us in the fourth quarter, but also the underlying strength of the business.

Our multiyear trends have stayed strong, and the product launches and sales team building in the end of last year and the first couple of months of this year have us again in a strong position to grow revenues and expand EBITDA.

We usually see a seasonal trend in the fourth quarter of revenues 8% to 10% below the preceding fourth quarter.

But as a result of our actions, we expect to beat that trend in our current first quarter.

Now I already describe the actions taken to strengthen federal sales, the overall sales team, Thursby federal sales, RFID sales, SaaS products and mobility products.

We've continued progress in this quarter, putting us in a strong position for our key initiatives, expanding recurring revenues, driving positive cash flow and profitability and especially taking more share in our key markets of premises security and RFID by launching leading products and projects across our business.

Now I'd like to focus on RFID for a moment.

There are three forces that are very positive for us right now.

First, NFC is becoming a core solution for RFID devices.

We're well-known as the go-to-company for NFC solutions, including a close partnership with the leading provider of NFC chips, NXP.

So we're positioned as the leader in the right technology category.

Second, customers are adopting RFID solutions across a wide range of products.

Over the last couple of years, early adopter companies like Disney, Mattel, Nike and even blockchain providers adopted NFC-based RFID.

We're now clearly moving into the early majority.

And we're seeing more requests for design, quotes and RFPs than ever before from a wide range of companies and industries.

Now thirdly, we're the beneficiary of consolidation in our industry.

Smartrac has been one of our toughest competitors in the high-frequency NFC space, but most of their business has been in ultra-high frequency or UHF.

The technology used in the very low-priced retail tags you'll find in your clothes.

Now Smartrac was acquired a couple of months ago by Avery Dennison, a much larger company almost exclusively in the UHF space.

As a result, Avery's refocused Smartrac's team and production capacity heavily on UHF, reducing service and even abandoning some customers in the HF market.

Now we are benefiting from this trend, with both end customers and NFC chip providers turning to us as the most experienced and committed team to deliver HF and NFC solutions and to pick up the slack from Smartrac and Avery's focus away from HF and NFC and on to UHF.

In fact, because of this demand surge, we haven't needed to add direct sales people.

We have so much pipeline inquiries, we've taken part of our sales budget and applied it to more engineering and inside sales capabilities to manage the volume of opportunities we're seeing.

We want to continue to be the high service provider, especially while a competitor has gone a different direction, creating a market opportunity that we're hitting hard now to take advantage of.

Now this is a business that grew over 60% in the fourth quarter, and you'll continue to see strong growth this year.

So turning back to Premises now.

There are 3 keys to our growth: Sales, RMR and our uniquely complete product range.

On the sales side, I've mentioned the hires already, so I won't reiterate those.

But in addition to people, four technology trends are core to our growth and share gains: cloud, mobility, data security and credential security.

Our products reflect this: Velocity Cirrus, Freedom cloud, Velocity Web, Liberty, our touch secure access readers, our secured TS Cards, smart card readers, tokens and Sub Rosa mobile security.

Last quarter, we launched Velocity Cirrus, our Hirsch Velocity cloud-based access control system and our subscription-based PDF signing feature in Sub Rosa.

This quarter, we've launched our 3VR investigator video app.

And just today, we announced the launch of our Bluetooth readers and subscription-based mobile credentials, another key piece in our frictionless access platform.

Now anyone who wants to see where our vision is going should take a closer look at our mobile SID, Bluetooth reader and mobile credential product and especially the user experience.

So let me just walk you through the difference here a little bit.

To use your phone to get in a door, our biggest competitor, HID, makes you take out your phone, open an app and either tap a button or wiggle the phone to open the door.

With our mobile SID app and reader, you just leave the phone in your pocket and swipe your hand near the reader.

We've got a capacitive sensor that signals the reader to check for a nearby phone and credential and lets you in.

Now we can make it even more frictionless using your phone's location and geofencing to tell the system that you're nearby and want to go in the door even without Bluetooth directly to the door.

So we're taking a customer experience-first approach, which ties directly into our vision, higher security for the organization, with less friction and more convenience for the user.

And all priced and structured to move our customers towards a virtual infrastructure priced on a subscription basis.

This also creates a touch-free experience.

So as people are concerned about handling cards and touching readers, we've got another product well positioned to benefit in today's environment.

So I know that was a bit of a deep dive, but we're really excited the vision is coming together and specific examples usually help clarify why we see such growth opportunity and helps anyone thinking about it to visualize it.

It's also important to notice how fast the technology and products are progressing.

So there's a context around our more pragmatic activities like hiring, also cost controls, that we're really focused on growth, while also getting leverage in our business.

So let's turn now to efficiency.

This is core to our business model leverage and continuing to grow EBITDA faster even than revenues.

In addition to building up our teams to drive more sales in Premises and more engineering production capacity in RFID and continuing to launch great products, we've also been taking cost alignment and reduction actions.

As we went through on our call last month, we've already implemented measures to reduce overhead and to make sure our business is operating as efficiently as possible.

Now there's more work to do.

But as we said before, we expect this to result in about $4 million in savings on an annual basis compared to our original guidance, taking full effect as we go into the second half of the year.

So you can see how we've taken fast action to be positioned for growth, first and foremost, while also reducing overall expenses to allow the business to generate positive cash and earnings on our current revenue outlook for 2020.

Now two more things I'd like to comment on, one of which is from our prior call.

That's the strategic alternative assessment, which the independent directors are engaging in.

As I mentioned earlier, we said at the outset, we wouldn't be providing specific updates, but the independent directors are, of course, actively engaging with outside advisers as expected.

The second factor I'd like to come back to are some of the tactical effects of the changed business environment we're all operating in, at least for the next few months.

Like everyone in business, earlier this quarter, we had challenges from supply chain disruptions as the virus first affected China.

And as I mentioned earlier, with some intensive efforts by our supply chain team, we actually managed to keep our business progressing well.

It hasn't been easy since China is the only source, for example, for some of our antennas needed for our RFID transponders, but it seems like we've navigated through it well.

It might take a little bit of time to stabilize the supply chain, but the path forward seems clear, largely from a supply chain perspective in Southeast Asia.

I also already commented on some of the general demand-side challenges, so I'll just mention some specifics.

The main impact so far has been some trade shows canceled, including LogiMAT, ISC West, the NFC Forum, and we're sure more are going to come, especially now.

Now these are usually good business builders, so not having them means we have to build the pipeline in other ways.

And we're doing that.

So for example, in the time slot of ISC West, which was scheduled for next week, we're setting up the demos and press discussions that we already had planned, but doing them in our headquarters and engaging customers in media virtually.

It's actually pretty efficient and we might learn a few things that can make our marketing more effective even under normal times.

As for our internal operations, except for manufacturing, most of our work can be done remotely in terms of engineering, product management, marketing, tech support and functions like those.

So like every business, we're watching the situation and the health and safety of our people, our customers and our partners will always come first.

But we believe we have the contingency plans and operating continuity plans already in place.

Now while the increase in remote working might temporarily slow down some aspects of the business, it may also benefit others.

You never want to profit from a crisis, but the fact is, both our Thursby mobile apps and our smart card readers and tokens are central to secure remote working.

Now this was actually fairly solidly confirmed when a bank in Switzerland that had directed its employees to work from home, ordered several thousand tokens all at once.

All the employees needed a secure method to access the bank's VPN remotely, and token-based 2-factor authentication is one of the best combinations of ease-of-use and security.

The bank was already a customer for their executives and key people, but now, they need everyone to have the same secure access, and we were able to deploy it quickly and seamlessly to help the customer.

Similarly, with Thursby, if military service people and reservists want to work remotely, our app is the most widely used bring-your-own-device solution for them.

So if there's a policy decision to work in a more dispersed mode, our products are a great solution, and of course, we're proactively offering that.

To further help customers facing challenge in their working conditions, we're launching some promotions to offer our remote access products at discounts to help organizations enable their people to work securely from their homes or other remote locations.

So hopefully, this will all be transient.

But it also might motivate more remote working, which could at least partly remain even post crisis, and this would actually expand the available market for some of our products.

So despite the slowdown we encountered at the end of the fourth quarter, we were still able to deliver overall positive results for fiscal 2019 due to our highly defensible position and the resiliency of our business.

We've taken some fast actions to address our challenges and to be stronger going into 2020.

Now the uncertainty of COVID-19 certainly is an issue which we'll continue to be very open about, but it's something that's affecting the world more severely than our particular business.

And because our products serve some of the needs that are being created, we could have some resilience even in this situation.

To be clear, though, if it becomes more pervasive and impacts all aspects of life and business, no business is completely immune to the effects.

So from a business, long-term demand and competitive perspective, we see plenty of room for optimism.

We enter 2020 with strong backlog, a focus on recurring revenue launches and sales expansion, great new products, specific trend strengths in our RFID business and our interests solidly aligned with our shareholders.

So with that context, operator, could you please open the line for our question session?

(Operator Instructions) Our first question comes from Mike Latimore with Northland Capital Management.

I guess, on the kind of the potential for government agencies to do more work at home, I guess, can you give a little more color on what you're hearing or seeing?

Any particular agencies that have gone kind of full steam ahead in that regard?

And obviously, that would probably benefit your Thursby opportunity.

Sure.

Some of the military bases in Germany, for example, I have one of them -- Rheinland-Pfalz has actually gone on to full lockdown, and so we're talking with them about giving mobility access for some of their personnel.

And then in terms of the domestic federal government, the SEC, of course, has been the first one to go through that gate.

And so basically, as each of them announced different policies, we're just reaching out to them to see if we can enable their remote access and especially through mobility.

And the growth in the transponder business, it sounds like you're expecting continued strong growth this year in that category.

I guess, one, that's one question.

And two, like, what verticals or use cases do you think are healthiest this year?

Yes, we're definitely seeing a lot of activity there.

And that's also why we were pretty happy that we worked our way through the supply chain issues with some of the antenna supply and all because the volumes are going up pretty fast.

So libraries are certainly one vertical that's coming through strongly.

Some consumer devices are launching some activities, reusable -- reusables that have to have authenticity with something like, in some cases, a major appliance or, in some cases, a printer or other business device, is a use case.

And then health care, some of the consumables in some of the testing equipment that we use for assay validity and things like that.

Got it.

Got it.

And then on -- just on the OpEx side on G&A costs.

Did you say there was a couple of onetime benefits in the fourth quarter?

Or what would be a good kind of baseline for G&A?

Yes.

So what's embedded in the GAAP results for Q4 and Q3 was the additional recording of the fair value of the earnout liability related to the Viscount acquisition.

So in Q3, there was $200,000 on a GAAP basis that's not recurring, and in Q4, there's $400,000 that's not recurring on a GAAP basis.

On a non-GAAP basis, G&A is running -- just to answer that question.

G&A is running about $1.7 million a quarter coming out of Q4.

Okay.

Great.

And just last one.

How are you thinking about kind of gross margins for the year?

So I think we're confident that we're going to be hitting our target range for the year.

I think our challenge is going to be, in Q4, our gross margins were driven down sort of in a short period of time because the transit transponder and some of the business issues that we have on the Premises side.

I think we're going to see some continued pressure in Q1.

But as things come back and the additional sales people ramp up on the Premises side to really drive the expansion of that business, I think we'll see it even out over the year.

But I think we're going to see some early downward pressure for mix.

Our next question comes from Jeff Kessler with Imperial Capital.

First question is the 50% increase in the backlog at year-end, which was up sequentially from the third quarter.

Can you give some idea of what is in the mix?

And can you give some idea of, let's call it, what the margin in that mix is and give us an idea of perhaps timing, which I'm sure is going to be a tough one.

But what is -- again, what is going to be driving -- what drives that backlog?

And is it the type of thing that is going to help margins, particularly as we get toward the second half of the year and you begin to start looking at guidance for the latter part of the year?

Yes, sure, Jeff.

The backlog, as always the case, is largely driven by our transponder business.

That's where we have typically long lead times and most of the backlog.

Whereas, in our Premises business, we have pretty short turnaround time.

So when we get an order in, we tend to get the order and ship and go.

So that's the backlog.

Then mix and gross margin would reflect heavily the transponder business, which is gross margins in the mid-30s.

Now that said, the backlog also includes some of our software and services, our multi-year contracts, some of our agreements on 3VR, and so that offset some of the transponder margin mix.

So it's higher than you would see for transponders overall, but it is predominantly transponders.

Okay.

The second thing is, can you discuss effectively, operationally, what are you doing to build up the recurring revenue part of the business?

Not just that you've gotten people in there.

Now are you hiring people who are, when you say you're doing a lot of hiring, are you hiring people who have experience in that -- in the ability to make that type of sale and to basically stay on top of the customer for a longer period of time?

Yes, good question.

So yes, we specifically have identified what we're characterizing as strategic sales people that we're bringing on.

I mentioned one we just hired, in fact, and she's got a lot of recurring revenue experience.

And similarly, we're skewing our new hires in that direction.

We're recruiting in Europe right now with a similar profile.

So I think you're alluding to the fact that people who can sell recurring revenues are often different from those who've gotten very comfortable with selling a big box and an on-prem.

That said, we're also incenting our core RSMs and dealers to go sell recurring revenue as well.

The dealer channel is pretty enthusiastic about recurring revenues.

So we think the dealer channel will work pretty well, but we're also overlaying with salespeople who are focused on it.

Have you seen any -- NFC has begun to be used increasingly in hotels, and let's just say, places that you stay, other gathering places.

Have you seen pressure from there?

And if you could just go over once again where you're seeing some of the uptake, I mean, on the NFC side that would offset what -- well, it's clearly going to be a downturn in the hotel business.

So yes, we don't do very much in the hotel business.

But NFC for using a cyber credential for physical access is definitely a use case that we've got a number of prospects in the pipeline for.

And then not NFC, but Bluetooth, we just launched the Bluetooth reader, and that includes mobile credentials on a subscription basis, which would do the same thing, get access, but through Bluetooth.

So I think you're going to see more NFC and Bluetooth for physical access.

Yes, it's had false starts in the past, especially Bluetooth has.

But the use case that we've got where you don't have to take your phone out and where you can just get your hand close to the readers, you're not actually touching anything, we think, actually finally starts to deliver a benefit.

And then also the costs on the mobile credentials are finally getting in a range that people can compare -- comparing positively with cards.

So I think you're going to see growth at both areas, NFC and Bluetooth.

Okay.

One final question and that is on two of your acquisitions, which had very strong starts after you acquired them and then have settled out a little bit, particularly, I'm thinking of both 3VR and Thursby.

I'm wondering if you could make any comments on, is the Thursby business going to settle out at a -- is it going to remain lumpy?

Is there a way to essentially ease that out in terms of more recurring revenue?

Or is this a stable revenue stream?

And the same, I guess, the same question for 3VR.

Sure.

So just on the Thursby side first.

The first answer is sales themselves.

And we just brought on a really good federal sales guy, Jason Evans.

I was out with him at the AFCEA WEST show in San Diego, which is the big Navy show, last week.

And that's the first thing, is really building a pipeline with the dedicated sales guy.

He's based in the D.C. area and has a very good contact list across, certainly, the Pentagon, but also the civilian agencies.

And then the other part is we launched the PDF signing add-on as a subscription price.

That said, the federal government is not always happy doing subscription pricing.

And so we can get individuals on the subscription side.

I think the federal government sales are continuing -- are going to continue to be build a good pipeline of prospects and sell them in chunks, but have enough going through that build steadily.

But then the good thing is you've got a bunch of apps in people's hands, and then you can start doing the upsells on a subscription basis.

So that's the Thursby approach, and we do see the pipeline broadening out quite a bit there.

3VR, similarly, I think, with the investigator app that we just launched, so we have our video investigator capability on mobility devices, you can start to price that.

We haven't launched it yet on a subscription price basis, but we will.

And then you can start to add different features again for different upsells.

So I think you're going to see both growing.

And then also on 3VR, we also realized we need some dedicated sales focused on that.

So similarly, the strategic salespeople who will have a recurring revenue focus will also have a 3VR as well as the Freedom Access system focus.

(Operator Instructions) Our next question comes from Jaeson Schmidt with Lake Street.

Steve, just want to follow-up on one of your comments in the prepared remarks.

You mentioned that you traditionally see an 8% to 10% sequential decline in Q1.

Did I hear correct that you expect to be better than that, though, this year?

Absolutely, yes.

Just -- and I think what we're saying is that instead of the numbers dropping by 10%, we'll see some rebound.

I don't think we're going to necessarily be able to commit that we're going to beat Q4.

Okay.

No, understood.

That's helpful.

And just following up on that, are you thinking about seasonality this year, just given the current macro backdrop, any differently?

Or should we think -- how should we think about the cadence of the ramp to your 2020 guidance?

No, I don't think we're thinking about seasonality any differently.

I mean, obviously, if there's some overwhelming effect that changes the economic trajectory, that can change things.

But in terms of seasonality, we've always -- fourth quarter is strong because of the number of dimensions in our business.

And so there's typically been that drop-off in first and then they grew sequentially.

And third quarter's often the strongest because the federal government buying cycle, and that's still the federal government year-end.

So we expect seasonality to be comparable barring any crazy macroeconomic things that change trends for all of us.

But we do expect consistent seasonality.

Okay.

And the last one for me, and I'll jump back in the queue.

Curious if you can provide an update on the traction you're seeing in the education and school market.

Sure.

It continues to be strong.

In fact, we're doing a pretty big integration of a couple of different sensor platforms for a major school district that includes gunshot detection, emergency calls, fire and others that is a really interesting use case that makes it basically a full disaster response platform for a school.

And then, of course, the wireless locks continue to be a really attractive component for schools because they tend to have such distributed facilities and disconnected facilities.

So schools are definitely a good and growing vertical for us.

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 conference back over to Mr. Humphreys for his closing remarks.

Okay.

Thanks, operator.

And thank you all for joining us.

We're going to keep you all updated as our business progresses, as always.

Though it might be a bit different in some cases.

For example, next week, the ROTH Conference, as some of you might be aware, is going to be held virtually, so we'll be doing our one-on-ones through video conferencing since the physical conference has actually been canceled.

But we'll keep information coming in building our business and hopefully even finding ways to help our customers through some of the changes in business practices and drive some additional business growth out of that.

So thank you all again for joining us, and have a good evening.

Thank you for joining us today.

You may now disconnect.