Identiv Inc (INVE) 2021 Q2 法說會逐字稿

Good afternoon. Welcome to Identiv's Presentation of its Second Quarter 2021 Earnings Call. My name is John, 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. In the second quarter, our momentum continued to grow, especially in our RFID business. Overall, our revenues grew 26% year-over-year, an acceleration in growth over the 22% we saw in the first quarter. Our Identity business continued to be the strongest growth driver, growing 27% overall, led by 39% growth in RFID. Our Premises business also grew strongly, up 23% year-over-year, and our core systems and software sales on-premises were up 29%. Our Federal government sales were even stronger, up 34% over last year's level.

Our other key growth and profitability metrics also made strong progress. We shipped over 41 million RFID units in Q2, a unit volume growth of 25% over Q2 2020, and our ASPs were 19% higher than last year. So you can see our growth is healthy because it's across both unit volumes and unit prices. Total backlog at the end of Q2 2021 grew 26% versus the end of Q2 2020, and our orders booked just in the first 3 weeks of this quarter are up 44% from the year prior.

We also showed even more leverage in our business model. Expenses in the second quarter were down 8% from Q2 2020, while revenues were up 26%, clearly showing expanding leverage from our operating expenses as we scale. This is even more leverage than we saw in Q1 when expenses were down 6%, with revenues up 22%.

Our core growth strategies of getting new customers with new design wins, moving customers through the production cycle, expanding new and more complicated designs and bringing second and third-generation designs to production all made progress in the second quarter. So here's some of the specifics of each of those growth drivers.

Starting with customer launches, expansions and ramp up. Several of our existing customers expanded the number of designs we've done for them and now have committed to volume orders in the second half of this year on the new designs. One major mobile device provider moved their latest 2 designs through prototype tests and are now going into full production ramp in Q3 with committed production volumes through the rest of the year. Also in Q2, they introduced their 2022 designs, which we're now working on supporting our 2022 outlook.

Our Eco Tags are also being evaluated by this customer, but another product group, and our tag on metal tags are being evaluated by a third product group. So let me give a couple of updates on other use cases that are progressing. Now these can take a year or more to reach production ramp. So we're going to report on milestones so investors can track progress even while they're pre revenue.

The first is our auto-injector project. We've completed the prototype designs, and these are now in qualification to the customer. They're working in parallel on IP and regulatory approval preparation, but getting the prototype design completed and signed off on is a huge milestone, keeping us on track for a mid-2022 ramp up. Volumes, of course, are still projected to reach over 100 million units.

The cannabis project also made major steps. Our design part is done. The next step is for the finished product provider to prove to the government regulator, they can scale fast. This means showing that they have a stable process, so they're getting the final equipment this month to demonstrate the required volumes. Our engineers know the equipment and software very well, so we've offered to help them with qualification, calibration and proof of scaling. So progress, but some time will still be needed. The government regulator involved really doesn't want to mandate this to every cannabis provider in their country and then have to issue waivers if there's not enough supply for the producers to comply. But good progress, and we've got very good visibility.

Now I won't go through all the major customers, but one big of updates on these since either of them can be transformational for our company. There are others in that category, for example, the second pharmacy chain for our prescription RFID devices is continuing their pilot and continues to be very happy with the results. And we can go into them in more detail in Q&A if anyone wants or any of the other major projects we're all aware of.

But now let me turn to the longer tail of customers that we haven't talked about so much. These are customers driving our base growth. Now they won't double our revenues like some of these others can, but that they add up and some of them could be the unplanned breakouts that also drive upside. Lastly, of course, it's critical for us to serve all use cases to entrench our leadership and keep our competitors.

So here are several, and we can go into more detail on any in the Q&A. Carestream is a company that has projects for medical test assay authenticity and use protocols, [Kemflo for water field] for authenticity and use, Dupont, also for water filters, Qorvo for Drug test kits, collectID for consumer engagement with sportswear, MSA for hard hats and construction set year, outlet technology and Akerna, both in the cannabis supply chain space, Tap Online for consumer engagement across a couple of dozen brands, including Coca-Cola, T-Mobile, Lipton Tea and others; [Heli Osaky] for sports tracking and performance, bullion works for blockchain-based gold bullion transactions in tracking, Mattel for Hot Wheels ID cars for a physical and virtual consumer experience.

Now I know I ran through these fast, but the point is to share tangible proof points of the breadth and pace of our design wins. The major projects can more than double the business, but it seems wide base of adopters that will drive our base 30% to 40% growth to the game change of customers than adding to that total. Now this is a sampling of the kinds of companies adopting our solutions in Q2 to integrate NFC based RFID into their products. Most of the use cases are just hundreds of thousands or low million unit volumes, but each of these, we can expand in 3 ways: the first is other use cases within the customer. The second is improved design and expanded features for next generations of their initial design. And the third, where it's allowed, we apply the same use case across the industry. And all 3 of these approaches can add up to meaningful growth in revenues as well as the obvious competitive lockout. So hopefully, this gives you a sense for the accelerating RFID momentum we drove in Q2.

There are other events, including some really strategic new hires, development of our developers kits and more, but we'll go into this later. Now in addition to our high-growth RFID segment, in Q2, our Premises segment hit the growth acceleration we expected, and we expect will continue into 2022. We saw momentum build strongly as shown by a couple of wins we announced, like the deployments at Ross stores and Banco Azteca Elektra in Mexico. The Elektra is deploying across another 400 stores, bringing their total with our systems to over 2,000 stores.

We also saw a rebound in demand from travel industry customers, including companies like Avis Budget Group and Royal Caribbean. The point is that even hard hit sectors like these are coming back fast, and they're investing in security and convenience because their customers and their business models are demanding it.

Now our third strategic focus is on revenue repeatability and predictability. In RFID, predictability is driven by customer retention and a focus on consumable products. In Q2, we kept our track record of 100% customer retention in RFID. We also kept to expand the use of consumables, as you heard, in appliances, syringes, drug tests and other use cases. In Premises, predictability is driven by software and recurring revenues. And in Q2, we grew software services and recurring revenues to 32% of our Premises revenues, up from 24% of revenues just last quarter.

So in Q2, our growth showed strength across RFID and Premises and not just revenue strength, but also the underlying design wins, supply chain continuity in what we all know are tough times for supply chains and gross margin expansion. Our product launches and key hires, design wins and technology launches support a strong 2021 and beyond. The areas of RFID leadership and growth, the federal market and recurring revenues and customer retention remain our focus, and these all make great progress in Q2.

So before getting into the next quarter and the rest of this year, I'll turn the call over to Sandra to get the financial highlights for the second quarter. Sandra?

Thanks. As Steve mentioned, our financial results reflect our continued strength exiting the second quarter with the delivery of sequential and comparable growth on the top line. Future backlog increases, improvement in consolidated gross margins and continued operating expense leverage. Those results paired with the investments in RFID capacity and capabilities in our supply chain, we believe, position the company to achieve its growth and profitability potential. We closed out the second quarter of 2021, with $24 million in revenue, up 8% on a sequential basis and up 26% year-over-year. The 26% growth generated Q2 over comparable quarter 2020 was driven by 39% growth in our RFID devices with over 41 million units shipped to customers in the second quarter and 23% growth in our premises business, powered by a 34% growth in our core federal business. Our recurring revenue was stable at 5% of second quarter revenue and 6% of total trailing 12-month revenue.

For the second quarter of 2021, our GAAP and non-GAAP adjusted gross profit margins were 37% and 38%, respectively, compared to 35% and 36% in the first quarter of 2021 and 40% and 42% in the second quarter of 2020. For the trailing 12-month period, our GAAP and non-GAAP adjusted gross profit margins were 37% and 38%, respectively. Gross profit margin changes resulted primarily from the mix across and within our segments, and we continue to expect margins to revert to historical levels within 2021. We exhibited leverage with GAAP operating expenses, which were down 8% versus Q2 2020.

Our non-GAAP adjusted EBITDA was 5% or $1.2 million compared with 2% in Q2 2020 and 2% in Q1 2021. For the trailing 12-month period, our non-GAAP adjusted EBITDA margin was 6%. Our Q2 GAAP net income attributable to common stockholders was $2.2 million or income of $0.09 per share. This compares with a loss of $3 million or a loss of $0.17 per share in Q2 2020 and a loss of $1.7 million or a loss of $0.09 per share in Q1 2021.

During Q2, we received full extinguishment of the PPP loan obligation and recorded the appropriate gain of $2.9 million. Adjusted for this nonrecurring gain, our EPS would have been a loss of $0.03 per share. We've provided in the appendix today, a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release.

Our next slide further analyzes trends by segment. Beginning with Identity, revenue from our identity products totaled $14.8 million or 62% of our total revenue in Q2 2021, which is an increase of 27% from Q2 2020 and an 8% increase compared to Q1 '21. The sequential increase was primarily driven by higher sales of RFID transponder products and access cards as compared to Q1 '21. The year-over-year increase was primarily driven by higher sales of RFID products as well as recovery in select verticals driving higher sales of access cards. Our Q2 21 identity segment GAAP margins were 24% compared to 25% in Q1 2021 as we continue to grow into our investments in capacity and lower than Q2 2020 at 31% due to the change in product mix with a higher proportion of lower-margin RFID transponder product sales.

Turning to the Premises segment. This segment accounted for $9.2 million or 38% of our total revenue in Q2, representing an increase of 23% from Q2 2020 and an increase of 8% compared to Q1 '21. The sequential change in revenue was due to the recovery of select commercial verticals like banking and retail, along with normal seasonality. The year-over-year increase in revenue from the Premises segment reflects a rebound in sales of Hirsch Velocity Software products to commercial customers, growth in sales to the Federal government and higher sales of video technology and analytics software products. GAAP margins for the Premises segment in the second quarter were 57% compared to 51% in Q1 and 55% in Q2 2020 due to the mix of products within the segment.

Now moving to operating expense management. Our GAAP operating expenses for the second quarter were $9.1 million, up $0.2 million compared with Q1 2021 and down $0.8 million compared with the second quarter of 2020. 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 interest expense, foreign currency loss, income tax, stock-based comp, depreciation and amortization and gain on extinguishment of debt totaled $8 million in the second quarter of 2021 or 33% of revenue. This compares to $7.6 million or 34% of total revenue in Q1 '21 and $7.6 million or 40% of total revenue in Q2 2020. Bringing all the pieces back together, our non-GAAP adjusted EBITDA was $1.2 million in the second quarter of 2021, a $0.7 million increase compared to Q2 2020 and a $0.8 million increase compared to Q1 '21.

Turning to the balance sheet. We exited Q2 '21 with $36.4 million in cash, a net increase of $24.9 million from Q1 '21 and a $23.3 million increase from Q2 2020. The key drivers of cash activity for the quarter were $0.7 million generated from net income adjusted for noncash items. A $3.2 million use of funds invested in working capital to build inventory and pay down the supply chain to buffer any potential disruptions, $0.5 million in capital expenditures, invested in our R&D facility in Munich and our Singapore manufacturing plant.

Under financing activities, we had $27.9 million net cash provided, driven by proceeds of $37.7 million received from the sale of our common stock in our public offering and $0.1 million of proceeds from the exercise of stock options, offset by a $6.8 million increase in net repayments under our EastWest Bank revolver, $2.8 million repayment of our last promissory note and $0.3 million used for tax payments related to RSU releases.

In our 10-Q filings, we will be providing a full reconciliation of the year-to-date cash flows. For completeness, we've included the full balance sheet for the earnings release in the appendix. As we have continued to monitor the second half of the year, we are increasing our guidance for the full year 2021 today, with revenue now between 100 and $106 million. We will keep sharing metrics as we continue on our growth journey.

Exiting Q2 2021, our Q3 backlog was $14.6 million, up 12% versus Q2 2020 and up 46% versus Q1 '21. Our total backlog for all future shipments was also up 26% versus Q2 2020 and up 10% versus Q1 '21, reflecting increasing visibility. Our total new orders book through the first 3 weeks of the quarter are $6.3 million, up 44% over the same period prior year. Normal seasonality is expected to continue with momentum building quarter-over-quarter. We delivered on our prior guidance of 20% to 25% revenue growth in the first half of '21 over the first half of 2020, with 24% growth.

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

Thanks, Sandra. As our results on our higher guidance show, we're growing faster than we expected at the beginning of 2021. Just as we beat our goals in the first half, we think we're in a strong position for the rest of the year with some opportunities that can be transformational in 2022. That is always we'll focus on our core business drivers of design wins, current customer volume growth and programs to drive growth. With the design wins in Q2, more in the pipeline for Q3 and our current customers all staying with us and some expanding designs and volumes. We've got solid visibility into the second half of the year and into 2022.

As a result, as Sandra said, we're raising our guidance for 2021. We started the year with $96 million at the beginning of the range, we then moved the lower end of the range up to $100 million. We're now moving the top of the range to $106 million. Demand actually could be higher, but we have to be realistic about the same supply situation that much bigger companies are also dealing with. So I'd like to focus on the higher end of the range and how we're thinking about that.

We all know about the tight supply chain every business is facing. Now I want to be very clear. We're meeting all of our customer demand and even some upside, which is letting us take share from competitors. That let us raise the bottom end of our guidance and now at the top end to $106 million. So we're confident of our ability to keep our supply chain solid despite the tough situations facing everyone. We're also confident on the demand side, both near-term and for 2022. We're not giving formal guidance today for 2022, but we do expect some of the specific transformational projects will ramp in mid-2022, driving much higher revenues in the second half of next year and really changing the profile of the overall business.

We also think the chip shortages we're all dealing with will mostly resolved by next year, at least in the chip categories relevant to our business. Remember this, of course, our RFID and NFC related chips, not necessarily the broader base of the chip categories across the industry. They might even start to hit the usual cyclical downturn right around the time that these large projects are starting to ramp for us in the middle of next year. We know everybody is over ordering right now to try to get to the front of the line. And anyone in the semiconductor industry has seen this before, and it could well result in at least some oversupply. For us, this time would be perfect. Our main breakout projects like the auto injector, other medical devices, cannabis scaling up, pressure sensors and others, moving much higher and more complicated supply volumes, right as we think there could be an oversupply or at least very good availability.

In the meantime, applications like prescriptions, mobile devices, the early phases of cannabis and the wide range of other use cases that I described earlier will drive strong sustained growth. Even if the chip shortages don't end, we'll be in a solid position. We'll place the orders to support growth because we have good visibility into what the demand levels will be. And if there's an oversupply mid next year, we could see very strong growth and higher margins as demand and supply are both moving in the right directions for our business in 2022.

So in that context, I want to get back to this year and our guidance. We're confident we'll meet our demand growth and the raised guidance range. We preorder supply in some areas we think could go over, so we're as ready as we can be. But it's still possible that some of the excess demand could come for products that we have in order to head. So we might not be able to drive shipments even higher right now. I want to be clear, we're not saying that we're constrained by supply like some companies. We're not.

Our business is growing and we're meeting demand for the base of that increased guidance. It's possible that customer requests that come in above our plans or for products that we haven't preordered for could be hard to fulfill. This keeps us in a relatively narrow range for our shippable revenue outlook. And if we get demand that's above what we expect, it will certainly go into backlog and set us up for an even stronger 2022, but we don't want to set excessive expectations for shipments in 2021. We know recovers to what we can see, but for some very new designs, we might not be able to fulfill upside opportunities on short notice.

Now I know there was a lot of detail, and I want to go into some of the growth drivers we're executing on in Q3 for the rest of the year and into 2022. But ultimately, it's reflected in our shippable revenue growth. So I want to put it all into context.

So turning now to our growth drivers, design wins for new customers and expansion of existing customers, which is always the core. We've got a solid system in place, it's proving to be a winning combination. So scaling the system and paralyzing our reach across the industry are the keys. To scale, we're adding people in key areas. These include project management and engineering to support more design wins. We're also adding in sales, marketing and business development to broaden our pipeline and reach to end users.

Now we have a high-profile as the innovator and industry leader, so we're able to attract the best. In terms of project managers and engineers, we're adding to our already best in the world technical teams. Now (inaudible) the great engineers join other great engineers, and we're seeing this effect. Our engineering center in Germany is turning into a huge competitive advantage with great people, equipment and exciting projects that all draw great talent. In the past few months, we've hired strong project managers, more engineers and added to our technical intern team there.

On the business development, sales and marketing side, because of our business success and our focus on the most interesting differentiated solutions, we're attracting some of the strongest players in the industry. This week, we announced the hiring of Amir Khoshniyati from Smartrac Avery Dennison. Amir is a leader of Smartrac's high end NFC Solutions business, and it's been tapped to run an expanded NFC group of an Avery. Instead, you saw the opportunity to drive the industry's next leader and join us.

Now there are others with similarly high profiles that we're in the process of bringing on too early to disclose right now, but the people side of our business is fast becoming recognized as the clear best-in-class. Now the natural complement to this great people presence is to build a developer and application community. This month, we're officially launching our NFC developers kit as well as launching our Identity RFID community. Now we had to onboard some of these key people and the expanded team of project managers and engineers before launching the developer's kit. A developer community has to be engaged with design shared, questions answered. We now have the people who are both visible in the industry and enthusiastic to help our developer community thrive.

Another update is that we've designed and started the build process of the multi device automated production system I mentioned last quarter. This will enable more analog sensors and components to be integrated. This drives up average prices and margins, strengthens customer retention and increases the rate of adoption of multi-sensor RFID subsystems, which is core to our strategy and margin expansion. So great industry-leading people, our RFID developers kit in community, multidevice automated production and our expanding pipeline of design wins are strategic drivers, we think, will give us upside over our baseline 2021 and especially our 2022 outlook.

Now I focused on RFID because that's our core growth driver. The Premises part of our business is also like for strong growth in the near term. In particular, Federal, State and local government sales look strong as do our recurring revenue products. With a focus on physical security in both the Federal government and at the State and local level, we're seeing great demand strength. Combined the need for improved physical security, expanding federal spending, fiscal health at the state level and infrastructure investments, and we see lots of drivers for growth and increasing market share. Specifically in the third quarter, we expect the federal government fiscal year-end to be especially strong for security overall, and especially for our highly secure platform as well as with our newly launched video telecom system.

So we're on track. We're extending our competitive leadership with continuing design wins with key industry hires for broader sales and business development reach and deeper engagement with trade association influencers and partners, community building through our developers kit as a competitive moat and a market that's expanding fast.

Now before wrapping up these comments, one other topic I'd like to touch on is Sandra's departure. Over the past 4 years, she's been a great partner in the financial structuring of the business as we turn it around and build a world-class company to win in our nearly unlimited market. She's moving on to other opportunities, and we wish her very well in this. In the meantime, she's continuing to be really supportive of the team and our business. In parallel, we've got a search well underway for a finance leader and business partner to support our growth to next levels. We're also fortunate to have a very strong finance and accounting team in place that will keep doing the terrific job supporting our growing business.

Lastly, we'll also be appointing an interim CFO in the next few days, who will bring us an extra level of strength and professionalism, making sure we don't miss a beat on our business progress, while we're finding the right long-term finance leader. So to wrap up, here's some growth indicators in just the last few weeks. As I mentioned earlier, we have over $6.3 million in new bookings in just the first 3 weeks of the third quarter, up 44% versus the same time last year. We have designs underway or one with over a dozen more RFID customers. We're launching cross-industry marketing programs to replicate solutions and medical devices, prescriptions, bicycles and personal transportation, controlled substances like alcohol and cannabis and others. Federal spending is clearly growing fast, and it's always strong in Q3 for their fiscal year-end, and our revenue predictability is strengthening from the expansion of consumable use cases, returning customers and recurring revenues.

We see the third quarter and the rest of 2021 continuing these trends, supporting our projection of higher growth for 2021 and likely even higher targets for 2022 as growth expands and some of the revenue multiplying projects fully ramp during the second half of next year.

So with that, I'll open to questions and discussions. But let me also mention, we again have Dr. Manfred Mueller with us, who runs the RFID business, of course. And this time, he's actually in the conference room with us since travel from Germany yet has opened up. So if there are RFID related questions, we can cover them in whatever depth we need.

So operator, please open the lines for the discussion.

Absolutely. Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions) It looks like your first question is coming from Craig Ellis from B. Riley FBR.

Congratulations on raising the high end of the revenue growth target this year to $106 million. Steve, I just wanted to ask a clarification related to that in your comments around supply and shipment capability. Was the point on shipment capability that the shipment capability exists to that $106 million level? Or was the point that it exists at some level beyond that. But if there are upside orders that come in between here and the end of the year, you may not be able to meet those upside orders just given the strength they have in the business already.

Yes. It depends on the mix, Craig. It's a very good question. That's why I pointed out, there's some new designs that we haven't got orders in parts in on order for because the design or just finished of that long ago. And if we get excess demand for that, that's something that the current lead times you're not going to be able to meet. But up to that $106 million, if it's the right products that we're ready for, which there could be demand for and some of the categories, we've got good visibility to, yes, we can. And certainly, in that range, well above the bottom of it and up to that $106 million range, we've got coverage. And let me also see if see if Manfred wants to add a little more color to that.

We have planned well ahead of the game already, and we feel pretty comfortable right now. So we are, in particular, when it comes to the IC and chip vendors, we are staying in very, very close touch with them, whether it's NXP, Infineon, ST, any of these guys. So from that point of view, that's for sure. So we've put in orders already like 5, 6 months ago. So from that point of view, we really try to plan ahead as much as we can. So from that point of view, there is always something that could happen, but we are pretty well prepared so far.

Got it. And then, Steve, I wanted to go back to the points that you made when you were talking about strategies and the base customer set and just get a little bit more color on the customers like Carestream and [CareFlow] and DuPont and Qorvo, et cetera, how big are those customers in aggregate and some of them are very large entities. And so what's the potential for those customers become much larger in either calendar 2020 beyond?

Yes. That's what I tried to say there, and I know I was talking pretty fast through a lot of things. I don't want to go in too deep with too many use cases because it will confuse people. But the point there was that any of them can be a few hundred thousand dollars to a few million dollars. They're not going to be $20 million that can really change the business, although if some of them conceivably could, if they turn to that unexpected breakout point. But the point is, that's where a lot of the growth is coming is in lots of $0.5 million to couple of $2 million customers. And you get a broad tail of those, and that's driving a lot of the core growth. Does that answer what you were getting at?

Yes. That gets at it, Steve. And then lastly, I'll just shift to the longer-term question that I had before hopping back in the queue. And that is nice to hear increased confidence that some of the large projects could get going around the mid '22 time frame. Can you talk about where you feel like you've got the greatest visibility with those and where you have the greatest confidence that 1 or more of those could begin to ramp?

We've got good confidence in most of them. It's always been a matter of timing and process. So I tried to give some color on cannabis, where they're getting machines in and if they can prove scalability, they've got a regulator who's ready to flip the switch and go, but also the regulator doesn't want a black eye for telling everybody go do this and then they don't have enough supply. So I could go into each of them that way. But as you can tell from helm that, that's not something that's going to not happen. It's going to happen and the question is timing. Similarly, with the auto-injectors I talked about last time, they got a team on it. They're investing on it. They're working on IP. The designs accepted. And same thing, it's -- I would be -- it's not going to not happen.

So I think all the ones that we've talked about in the past, and again, without taking all of our time re-going through all of them, are still on the path we expected and roughly on the timing we expected, which we always talked about that way. So which one would I handicap as the most likely to go forward? It's hard to say because I honestly think most of them will go forward, if not all of them. And which one will come in first? That's what's harder to say because a quarter here or a quarter there. I suspect cannabis will ramp up. Then the question is how fast it will ramp when the blood gates will get totally open. But as you know, on the pharmacy side, we've already got one in full production and another one in pilot. So they're already starting to ramp. So I think there's not one or 2 that I would handicap this first through to date, and there's certainly none that I would handicap is saying it's lower probability. Got it. That's helpful color. And Sandra, congratulations. Thanks for all the help you want in the way.

Thank you. It's been a pleasure working with you, Craig.

Okay. The next question is coming from Jaeson Schmidt from Lake Street.

Yes. So I know, Steve, you mentioned that you're not seeing any supply chain constraints on your end. But just curious if the overall tightness out there, if you've seen some programs and projects get pushed sort of indefinitely by some of your customers?

So first, to clarify, we're seeing plenty of supply chain aggravation. It's only because we're getting ahead of it being very aggressive and doing everything needed to keep it open and going, that we've been successful in keeping it open going, but it's not for lack of dozens of people in Singapore and Germany and elsewhere fighting for it. So there is a lot of pressure in the system there. And what was the other part of your question?

I'm just curious if you've seen some of our -- any projects or programs from customers, their timetables get shifted just because of their inability to get other components?

Yes, it's a good question. We worry about that always, and we have heard some saying, “Oh, we can't get this other partner, therefore, this might slow down,” but then they pause and think, you know what, we don't know when thing is going to open back up on other components, and they're all fighting to get through other components. So almost always dell and say, you know what, we're just going to go ahead and order yours. And then if there's something slower that comes in, at least we'll be ready and lock and loaded. So the net-net is that we haven't seen that happen. We've had some conversations about it, not in any of the major projects. The major ones are all running on their own time lines and some companies like some of the mobile device companies we work with. They have so much power in the marketplace that, frankly, they don't seem phased by this. So it's not affecting the core of our business at all. It is a conversation that happens a lot. But it seems like it nets out equally neutral and positive. Do you want to add to that to that, Manfred?

Yes. 2 comments, Jaeson. The first one is we have some flexibility with some parts on our end. So whenever there's a possibility to switch from a dedicated chip or IC to a related one with similar with the same functionality. We really try to coach our customers through that and give them the possibility of when the shortage on Part A to better move on for Part B. The other thing is we really try to scrap things up from the chip market out there with distributors and so, and a lot of customers are very willing to pay more for it. So not only that there is some prices increase by the IC vendors.

But even if you can find ICs, they rather don't wait until like February, March and also next year, but get it right now. And that's really important to know. And another important comment on that topic as a whole, yes, we've seen some challenges on the customer side, but we also have seen a lot of projects and a lot of customers from competition, reach out to us now because everybody is struggling. So from that point of view, we are seeing a lot of projects basically coming to our surface, which we haven't had visibility in the past. So it's a great opportunity for us right now.

Okay. That's really helpful. And just looking at the pharmacy opportunity, when do you think that second customer could exit out of that pilot stage? And I guess relatedly, given that you do have 2 pretty sizable customers you're working with, have you seen increasing interest from other pharmacies out there?

First, on the process 3. So the first one took almost a year in pilot. And then, of course, any of these pharmacies, they all have thousands of pharmacies. And so the rollout, they've got to get them supplied everywhere and all the furnaces trained. So it can take 8 months to a year to get that through the pilot and then some months after that to deploy and ramp up. So the great thing about these projects is once they're going, they don't stop, and they just grow, but they do take time. So I think, again, that sort of mid- next year time frame, maybe a little earlier. But in that time frame is the appropriate way to think about it. Again, to ramp up to aggressive scale. They're already continuing to consume volumes, but not to the 10x scale we can get to.

Okay. And Steve, are you talking with additional pharmacy customers or potential customers?

Yes, everybody, at this point, pretty much every major player in the industry and some of the online participants are looking at evaluating some kind of projects like this. Sometimes, we go direct to some of them and some through integrators and third parties that we have. But I would be surprised if there are any that aren't looking at it right now.

(Operator Instructions) And our next question is coming from Mike Latimore from Northland Capital.

This is [Aditya] on behalf of Mike Latimore. Could you talk about the syringe use case, when could we expect the FDA approval for this syringe use case?

So it's a device use extension, and you're going to rapidly exceed my knowledge of FDA approvals. They're the experts on it. But there's a filing that isn't a full -- for example, there's not a medical device trial involved in this. It's an existing medical device, all approved. It just needs an extension on it. Manfred is nodding. So you want to answer more.

The way it's going to be designed is to ideally avoid FDA approval at all because it's just going to be wrapped around an existing syringe. And it's just like offering additional services and is not going to be interfering with the way how like medicine or whatever is going to be applied. So from that point of view, that's not necessarily the hindering part there. So yes, I hope this answers your question.

All right. All right. Fine. And could you give some color on what can we expect the gross margins in the second half of the year? Could we expect 40 percentage above gross margins?

I think gross margins will be more in the -- consistent with where we are now more -- again, if you're talking about non-GAAP gross margins that you're talking about in the 38% to 39% range. Because even as we are making sure we're delivering everything, there are some purchase price variances. There's some logistics cases, a few other things that are going to keep -- yes, I think, keep supply chain under pressure. We'll be delivering. But -- and we might find that we get all the way to the 40%. But I think there's going to be some small pressure on gross margin through this year for us, like any company.

The next question is coming from [Jay Chan].

And congratulations, Sandra, I hope you have a great journey ahead of you. And then just on the RFID side. Can you give us your next steps in plant capacity for this year and next year?

In terms of capacity right now, we're in the mid 200 million range of units. We're not adding a ton of capacity right now per se, but what we're doing is we're swapping out some of our older equipments for some newer equipment, and that will add 10 million to 20 million unit increments on some of the equipment because the newer stuff can handle the more critical processes faster and more effectively. So we'll be moving that volume up from the mid 200 to the 300 million unit. But it's really when we see the demand side come through for some of these larger projects that will start to add in a couple of more meaningful pieces of equipment at the next 100 million unit capacity.

I see. And you mentioned mid next year (inaudible) made upon when some of those larger programs come into play. How far in the bank you to fill capacity to accommodate that?

Relatively quickly, around 4 to 5 months, but ordering machine, getting it in, getting it qualified, ramping it up is roughly the time frame. And if you think in terms of [EUR 750,000 to EUR 1 million] for 50 million to 75 million units, that's roughly the way to think about how we add capacity. To be clear on that in Jay. It doesn't need to be 3 to 4 months for each 70 million units, we can get 3 machines in and add 100 million to 200 million units plus.

I see. Yes, that's great. And then I know you talked about the second pharmacy, but just on CBS. I noticed that my local CBS' did not all have these spoken (inaudible) where about a quarter ago. I don't think there's only a few bid. So is the rollout now complete? Or is it still ongoing on CBS?

It is complete, and I think that means every CBS, they might have left it out of some, but it should mean every CBS. And as we mentioned before, they seem to be expanding the marketing beyond this visually impaired to all customers as a great way to get more to prescription information without having to read all the fine prints on the paper.

Okay. Then moving on to the printer side. I know it's on your job boards that right now, the majority of current employee searches are on for the persist. Does this mean that you're pretty much hard to be wanted on the RFID side? And then also, does it mean that the petite side is actually growing faster than we expected?

Premises is growing faster than we expected. That's true. And -- but we do have hiring going on both sides. We're still recruiting actively on both premises and RFID. RFID sometimes is more targeted. If you're trying to pull a specific person out of a targeted company, that might not be a broad position that you post and advertise out there. So it's often more rifle shot.

I see. And then what the new highest that you did already and plan to make in the second half? What sort of OpEx level should we pick up out going forward? And what sort of revenue level can that report?

So revenue level, we think that we should be able to support 30% to 50% more based on the level we'll be at going out of the year. We do think that we'll be adding something of the order of 10% the OpEx to drive that 30% to 50% on the top line.

That's great leverage. That's great to see. And then in this group, you mentioned 22 -- 20.3 a couple of times. And you not giving guidance, can you just give your thoughts on, I guess, how it is shaping versus '21, do you expect go to accelerate from this year as in, I think at your midpoint of about 18.5% or 18.6% revenue increase for this year. With all those programs coming online? Should we be a pretty -- would that be an easy hurdle for 2022?

So Sandra is shaking her head at me as well. (inaudible) '22 guidance. But of course, if you look at the everything we're adding, one would think growth above what we did in '21 is reasonable. But Sandra, I'll let you to answer that.

Yes, we'll be giving full guidance in the November earnings, but I think what Steve said is a reasonable assumption. Okay. Great.

And then finally, I think first half of 2020, I (inaudible) a phase of assets to conserve cash and maintain financial flexibility due to the pandemic, and lot of them was to pay Steve adjusting shares in term of cash. Now that your cash level is much higher, your balance sheet looks great, and your business has stopped on much from referring. Are there any part to go back to paying a dollar in cash or you are able to share? And for the record, I apologize that you're starting your compensation shares.

What was the last part?

I apologize that you still get your compensation in shares versus cash.

I'll answer the first part. I have no intention to shift to cash compensation. Statistic with the equity compensation.

Okay. We have a follow-up from Craig Ellis from B. Riley FBR.

Steve, I just wanted to go back to the end of June announcement that signaled some strength that was growing in the enterprise part of the premises business. And clearly, you're talking about that continuing today. The question is really on how the premises business mix will shift as we go from this year to next year with so much of this year's year-to-date strength, at least driven by federal government, that remaining strong. One, is it reasonable to think that the engagements that you have in federal government would persist next year; and two, from the engagement that you're seeing in prices, how long does it take for different types of projects to really come to revenue level and then to scale up to be material things? And how does that play out with the mix of business between those 2 parts?

Yes. Thanks for the follow-up on that, Craig. 2 comments. Yes, we do think premises will be growing. On the other hand, RFID, which grew 39% in this quarter is growing faster. So it's just a simple fact that you will have mix moving that way, which is great because that's the fast-growing part of the business, and we're investing in it, and we expect it to continue to grow fast and accelerate. But premises is growing somewhere -- our premises business is growing somewhere around 4 plus the market growth, and we think we're going to keep taking share that way. In federal government, it's no secret. There's a lot of spending going on, especially in cyber and physical security for the federal government. And most people acknowledge, and we certainly believe we have the most secure platform for a federal facility. So I think that will continue to grow and grow strongly and grow much faster than the premises market.

In terms of time cycle, there's 2 things that drive federal growth. One is expansion of current deployment. So we're in all the federal court houses, the IRS, the FDI, most of the secret service secured locations and a number of others, TSA, et cetera. So they are massive deployments, and there's growth driven as they go across more facilities and they go deeper into or they upgrade their facilities to higher security infrastructure. We also have launched our video intelligence platform, and so they can expand their physical access security into physical -- sorry, video surveillance and video intelligence. And then the question, I think, at the core of what you're asking, which is how long projects actually take that are relatively new, that can be anywhere from 6 months, which can happen when there's urgency around the (inaudible) appointments, two, 1.5 years, when you talked about a full RFID process, multiple bidders, objections and everything else that comes along with it.

But the near-term growth is coming from more urgent short-term projects and from expansion of a lot of the departments that we're in right now, and we're in a few dozen different department (inaudible) across federal government. So lots of room for growth there. Got it. And then, Sandra, I'll ask you one on gross margin. So it sounds like just given some of the incremental costs that go along with operating and the environment that we're in that will be in a high 30s gross margin range, 38% to 39% in the back half of this year, but I know the business would like to get back into that 40% range. So the question is this, as we look at getting back to historic levels, 40% to 41% to 42%. Can you talk about some of the puts and takes of getting there, if not this year, then as we go through calendar 22?

Yes. I think through calendar '22, we're going to see some of the extra cost and logistics costs that we're seeing now subside, we're going to see the expansion of our subscription and cloud offerings and premises, which will give us gross margin expansion, and we'll continue to see our transponder business really grow into the capacity that we've put in place. So we expect both segments to continue to move up in the 2022, and we should be firmly above the 40% for that year.

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.

All right. I'll make this very short because we're almost back to the top of the hour. But thank you all again for joining us this evening. This is a very fast-moving industry. And every week, as you can tell, we're hitting new milestones, launching new products, programs, bringing on people. So we'll keep up the communications. You can track our progress over time in these fast-moving markets. We'll be at a number of investor events over the next couple of months. We've got Canaccord, B. Riley, Gateway, Colliers, Lake Street and Stifel all coming up.

And then also, for anyone who's following the RFID industry our Fad journal live in Phoenix, the 26th and 28th of September will be going on. That's the main RFID event of the year. It's in person. And so anybody who has interest there and cares to meet there. Of course, we'll have a very meaningful presence here. We'd love to see you there and show you through some of the things that we're doing, both ourselves and in the industry. So any of those events, hopefully, we can see you and keep you up to speed with the businesses that progresses. So thanks again. Thank you all for joining us, and have a very good evening.

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