Identiv Inc (INVE) 2020 Q3 法說會逐字稿

Good afternoon. Welcome to Identiv's presentation of its third quarter 2020 Earnings Call. My name is Taren, and I'll 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. In our preliminary results, we said we expected to beat the aggressive growth projections we outlined on our second quarter call, including 80% growth in RFID for the full year, 20% sequential growth in physical security in Q2 to Q3, and federal sales up 80% sequentially. With our finalized financial results, we're confirming that we beat each of those expectations. This shows both strong industry trends driving our business and our leadership within the industry.

Overall, revenues grew 30% sequentially to $24.9 million, showing strength across the business. We projected our Premises business, which is about 2/3 federal, to grow 20% sequentially. We actually grew 26% sequentially in Premises. Our RFID business grew more than 50% sequentially and over 100% year-over-year, and is on track for 80% full year growth. And our Federal revenues grew nearly 90% sequentially. So this has us lined up for a strong fourth quarter and the second half of the year that will be more than 30% higher than our first half.

We're seeing business momentum continuing, backlog building, and the pipeline for 2021 becoming stronger. But before we talk too much about the future, let's review the operational and financial results for the third quarter.

Now, our key focus areas of RFID and our Federal business were particularly strong. Within our Identity business, which is predominantly RFID, revenue increased sequentially by 33% to $15.4 million. And year-over-year, Identity in total grew 53%, from $10.1 million in Q3 2019 to $15.4 million in Q3 2020.

The growth was mainly driven by RFID, of course, where we ramped up production volumes for a number of customers. In particular, a major customer whose production started in Q2 came through in Q3 even stronger than we expected. As a result, our RFID business more than doubled the volume we produced a year ago. Even with our ramp-up, there was nearly $1 million of shipments we didn't fulfill. We balance customer requirements to make sure the most critical deliveries were covered.

Now, the business implication is that the industry launches we expected are well underway. The mass market adoption of RFID integrated products is happening. Our major customers are incorporated RFID devices into health care products, mobility, consumer products, appliances, libraries, pharmaceuticals and app-enabling the physical world. The point is that each of these are 100 million or billion-plus unit applications. It's a huge market that's just beginning to grow. The overall trend clearly showed in our third quarter results, as well as in the continuing backlog strength, where we went into the fourth quarter with backlog for fourth quarter shipments up 68% over last year. I will talk about the implications, going forward, of all these trends later on the call.

Also within Identity in the third quarter, our Identity readers grew strongly, up 38% over last year's third quarter. Now, we all expected the work-from-home trend to plateau after the initial lockdowns in the spring, but this really shows that demand is continuing. The third quarter is always strong for smart card readers because of the federal year-end, so the growth comes over a normally strong year prior period. The reason is that the federal government, and especially the DoD, are adopting policies supporting work-from-home and work mobile for the long term. So we do expect these trends to sustain. We'll talk more about them as we look at 2021.

So turning to our Premises business in Q3, this shows the strength of our full product range as well as of our federal government focus. As I mentioned before, Premises grew 26% sequentially. The federal business for our Velocity security platform was the strongest vertical, growing 90% sequentially, but we also saw activity in banking, retail, utilities and others.

For example, in financial services, we quoted our first large 3VR Prime Managed Video Services order, which is now closed. A leading bank is adopting our platform across almost 100 branches. The 6-year, $650,000 agreement provides video surveillance, analytics and case management on a subscription basis, sending tens of thousands of dollars in capital expense for our customer and assuring a predictable revenue stream of over $100,000 annually for our business.

Now, to be clear, we've had continuing strong business progress; but in our industry, some small dealers and small businesses are under pressure, as are our competitors who focus there. Now, since federal, state and local government customers are more than 2/3 of the business for our physical access platforms, we're seeing strong performance in Premises. And our quick pivot to recurring revenues with lower cost of entry has put us in a strong position overall. These include our Velocity Cirrus product, MobilisID, 3VR Prime, our Freedom Cloud and Freedom Mobile, which we just launched this week. All of these are recurring revenue products, all launched in the last 12 months.

Now, as we talked about in the second quarter, the broad adoption of RFID in our major customers' core products is what really gives us reason to believe this growth is a long-term trend that we're just starting to see take off. It's building backlog for the fourth quarter and for 2021.

So overall, the third quarter was highlighted by 30% sequential revenue growth, over 100% year-over-year RFID growth, a 90% sequential growth in Federal sales, 38% year-over-year Identity Reader growth, and Q4 backlog up 68% from last year. There certainly are challenges in the economic environment we're all in, but the strong secular growth we're experiencing RFID, our strength in Federal, work-from-home going into a second wave of demand, and the products we've launched in the third quarter to take advantage of return-to-work needs have built the base for a strong fourth quarter and 2021.

So let me turn it over to Sandra to go through the third quarter financial results. Afterwards, I'll go into more metrics and the industry-wide trends that are really accelerating our business into the fourth quarter and into 2021. Sandra?

As Steve mentioned, our results show the continued delivery of what we committed with a solid trajectory for 2021. Please note that these results are all within the preliminary results announced October 29 prior to market open.

The first metric is revenue growth. Even with the continued impact of COVID-19, we closed out the third quarter of 2020 with $24.9 million in total revenue, up 30% compared to the second quarter of 2020 and up 8% compared to the third quarter of 2019. Our recurring revenue accounted for 6% of our third quarter revenue and 8% of our total revenue in the first 9 months of 2020. This part of our business remains steady at 8% of our total trailing 12-month revenue.

For the third quarter of 2020, our GAAP and non-GAAP adjusted gross profit margins were 40% and 41%, respectively. For the trailing 12-month period, our non-GAAP adjusted gross profit margin was 42%. For the third quarter 2020, our non-GAAP adjusted EBITDA margin was positive 11%, with a positive 4% for the trailing 12-month period. Our GAAP net income for the third quarter 2020 was $0.4 million compared with a loss of $2.7 million in Q2 2020 and net income of $1.1 million in Q3 2019.

With the dividends on the Series B preferred, our GAAP net income attributable to stockholders was $0.1 million, or net income of $0.01 per share compared with a loss of $0.17 per share in Q2 2020 and positive $0.05 per share in Q3 of 2019. We have provided in the appendix a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release.

On our next Slide, further analyzing trends by segment; our Premises segment, which includes sales of physical access control and video products and services, accounted for $9.4 million, or 38% of our total revenue in Q3, representing an increase in dollars of 26% from Q2 2020 and a decrease of 27% from Q3 2019. Revenue from our Identity products, which includes sales of access credentials, SmartCard readers, RFID transponders and mobile security products totaled $15.4 million, or 62% of our total revenue in Q3 2020, an increase of dollars of 33% from Q2 2020 and an increase of 53% from Q3 2019.

Our non-GAAP gross profit was 41% in the third quarter of 2020. This compares with 42% in Q2 2020 and 47% in Q3 2019, driven by both the mix of products across segments and within segments. Our Premises segment margins were 55%, relatively flat compared to Q2 2020 and Q3 2019 at 55% and 56%, respectively. Our Identity segment margins were 30%, relatively flat compared to Q2 2020 at 31% and lower than Q3 2019 at 33% due to a higher proportion of lower-margin transponder sales.

Now, moving to our operating expense management. Our GAAP operating expenses for the third quarter were $8.9 million, which was down from $10 million in Q2 2020 and down year-over-year from $9.3 million in Q3 2019. The sequential decrease was primarily due to the nonrecurring $1.2 million restructuring expense in Q2 2020.

Our non-GAAP operating expenses as a percentage of revenue decreased to 30% in the third quarter of 2020 compared with 40% in the second quarter of 2020 and 34% in the third quarter of 2019. Our non-GAAP operating expenses totaled $7.5 million in the third quarter of 2020. This compares to $7.6 million in Q2 2020 and $7.9 million in Q3 of 2019. Bringing all the pieces back together, our non-GAAP adjusted EBITDA was $2.8 million in the third quarter of 2020, a sequential increase of $2.3 million over Q2 2020.

Turning to the balance sheet. We'll be comparing our position at September 2020 to the position 1 quarter ago at June 2020 and the prior year quarter ended September 2019. We exited the third quarter with cash at $12.3 million, a net decrease of $0.8 million from Q2 2020 and a $1.2 million increase from Q3 2019. Net cash activity for the quarter was driven by $2.2 million of cash provided by our net income, excluding noncash items, $3.6 million of cash used for working capital and Capex, driven primarily by late Q3 billings that were not collectible within the quarter; and by an increase in working capital to support our Singapore growth.

Under financing and foreign currency, we had a $0.6 million net cash provided, driven by a $0.9 million increase in net borrowings under our revolver and a $0.5 million reduction through scheduled payments on the term loan facility. We believe that we have adequate capital available to fund our business growth and return to positive non-GAAP free cash flow exiting Q4 2020 as well as retiring the term and note debt on schedule in Q1 2021.

In our 10-Q filings, we will be providing a full reconciliation of the year-to-date cash flows. For completeness, we have included the full balance sheet per the earnings release in the appendix.

Even with the global disruption continuing, today we are confirming our guidance for the consolidated results of the company for full year 2020 at revenue between $86 million and $88 million, within our original guidance entering this year. We achieved GAAP EPS profitability in Q3 2020 ahead of expectations and continue to see the benefits of our actions to optimize cost carry-forward. In addition, we believe we will be non-GAAP free cash flow positive as committed during Q4 2020 and beyond.

In addition, today we're providing guidance for the full year 2021, building on the strong base of growth that we have delivered. Our full year 2021 guidance is for revenue between $96 million and $102 million, which reflects growth year-over-year from the midpoint of our 2020 guidance, exceeding the market growth by a factor of 2. We expect our normal seasonality to continue with our lowest quarter in Q1 2021 and building up quarter-over-quarter through the end of 2021. We will be issuing a full set of guidance at our Q4 and full-year 2020 earnings release targeted for March 2021.

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

Thanks, Sandra. As I said earlier, our RFID growth is predictable for 2 reasons. It's heavily backlog-driven and it's driven by major companies who've incorporated our RFID devices into their products. Planning for global products is a year-long process. So even now, we're getting visibility into plans throughout 2021.

First, backlog. Going into the fourth quarter, our total backlog stood at $10.5 million, up 68% from last year, and our RFID backlog for shipment in the fourth quarter is up 125% over last year. We've now gotten in orders for about 95% of our expected shipments for the quarter in RFID, and that means most additional orders either contribute to upside within the quarter or drive more backlog for 2021. This is a key driver of our growth for 2021, and we expect the RFID portion of our business to grow well over 50% in the first half of 2021 versus the first half of 2020, the full year growth in the mid-20% range for 2021.

Now, the core driver of our RFID business is the mass-market adoption of RFID-integrated products. Our customers are leaders in their own industries, incorporating RFID devices into their products, each with volumes of tens or hundreds of millions of units. So this is a huge market that's just beginning to grow.

In the third quarter, 2 strong use cases were launched in the market, one by CVS and the other, of course, by Apple. Now, we don't generally disclose customers, so these are just industry examples, to be clear, but both are great examples of the RFID market accelerating. They're both basic uses that established platforms to then drive multiple products from already big first launches.

So first, some of you saw in a demo session we had a couple of weeks back CVS's Spoken Rx for visually impaired people. You tap your phone to the RFID tag on the prescription bottle, and it reads out the medication with dosage and all the other information for people who can't read the label. Now, about 13% of prescriptions go to people with some visual impairment, and there are about 4.5 billion prescriptions annually. So in the U.S. alone, that's over 0.5 billion RFID tag every year just for the visually impaired sector.

Now, that's the current use case and the first use case, so now extrapolate. With the platform deployed, every CVS pharmacy now is set up to program and put RFID tags on every prescription, and that's really where they should be, on every one.

So when you open your prescription bottle, you tap each time you take it. You'll know if you've taken it morning or evening or whatever the prescription regimen is. It will auto-refill as you get low. There's all kinds of capabilities you can do there. You could even opt-in, and your doctor could get information about how consistently you're taking your meds, because anyone who studies this area knows that the biggest issue with prescription pharmaceuticals is people complying with taking their meds.

So there's a number of things that companies like CVs are thinking about. Now that they've made that additional investment, they can really expand into other categories. So ultimately, we think the opportunity is for all 4.5 billion of the prescriptions in the U.S. annually. The U.S. is about 1/4 of the world prescription. So, again, you can see, for the visually impaired application, it's a couple of billion units worldwide and nearly 20 billion units for all prescriptions worldwide.

Now of course, it's going to take time, but you can see the volume potential. And again, the investment is really now done, and of course, the reader and the app technology is already in everybody's pockets in their phones.

Now, related to the mobile space and the phones, the biggest event, of course, was Apple's launch of full NFC support in iOS 14 and the iPhone 12, and especially the new ecosystem of products around MagSafe. So Apple's made it very easy and secure to connect peripherals to the iPhone; and then through NFC, to connect them into core iPhone features.

So just as a couple of examples, the first Apple branded cases, for example, if you buy an orange case, you pop it on your phone, the screen turns orange, it goes through an animation. You know you've connected it, and you know it's an Apple verified phone. It seems pretty trivial, but what it's showing is the peripherals are actually communicating securely with the phone, launching processes in the phone, and all secured and controlled by Apple through a secure NFC link. Now, this enables a whole world of new peripherals to connect to the phone and seamlessly but securely launch apps and experiences.

So this is really the vision for this type of connected device that Apple is deploying. And with over 200 million iPhones shipped a year, connecting multiple MagSafe-enabled devices each, again, you can see the market in the 1 billion unit-plus range annually.

Now additionally, of course, where Apple and CVS go; Samsung, Walgreens, Amazon Pharmacy and others have to match. So you can see the scale of the markets we're going after and the volumes that already are happening.

So RFID is gaining traction right now. We've been the trusted co-developer and supplier for some of the most advanced applications and the most demanding companies. This is where the growth is, and it's where our competitive advantage is strongest.

So how are we going to keep our advantage? We're expanding our technical capabilities. And for 2021, we're launching services to help companies put RFID into their products. Now, we're unique in our ability to go from concept to optimized design to early production to scaling production, and then to immediately start back into the next generation of devices, and this is exactly the cycle that the customers need.

We're also innovating with new products, answering needs we know from our own customers. Now, an example is a new product we've launched, what we think is the industry's lowest carbon footprint RFID tag, our ECO Tag. Instead of being an etched antenna on a plastic substrate, we've developed a unique laser-cutting process, and it's on recyclable paper substrate. We even use recycled aluminum for the antenna. So there's no etching chemicals, no lost metal, no plastic layers, no chemical runoff.

Now, why do we do all this? Well, the biggest users of high-end RFID are consumer-facing companies, and sustainability matters to them. Companies like Amazon and Apple have made public commitments to being carbon-neutral. And RFID tags are consumer visible devices, so our ECO Tag shows their eco-commitment and eliminates what otherwise would be a negative on their carbon footprint.

Now, our customers told us this is what they want. It's very tricky technology, but we developed it. And fundamentally, this is exactly why we're going to keep our lead in the fast-growing RFID market.

So that's RFID. Now, let's look at Premises, which has some similarly exciting opportunities. And remember, the core technology in our RFID tag is shared with our access cards, door readers, Identity readers and other parts of our physical and data security solutions. So one growth driver really supports the other.

So with the Premises industry overall growing about 6%, we grew 26% sequentially, and we're expecting Premises to grow about 25% year-over-year this quarter. For 2021, we expect growth in the mid-teens, more than double the industry rate.

Now, the fundamental drivers are recurring revenue growth, the shift to IT-driven buyers and Federal growth. So why will we be growing faster than the market with these dynamics? Just like in RFID, we're both the trusted provider, and we've got some of the most advanced technology and broadest product range. As customers move to software-defined platforms, they need to migrate their entire platform across readers, credentials, controllers, access, video and audio, and it's all got to be integrated with their active directory or other sensitive data repositories.

Now, we're the only company that delivers all of this. And we think total solutions and IT-centric recurring revenue platforms will be the fastest growth sector in physical security and the strategic position of combined access, video and audio management is the key for anyone trying to win.

Now, a great example of this is our Freedom Cloud platform that we just launched this week. It's the lightest weight implementation in the industry, totally Web- and mobile-based, and especially on the hardware side, our Freedom Bridges are extremely compact and cost-effective IoT devices. A bridge that can control 2 doors is the size of a pack of playing cards. And this is what customers are looking for, hardly noticeable, really intuitive to deploy and manage, and a platform that the IT department is totally comfortable owning and managing. The software is browser-based, and the hardware is managed just like a network switch.

So we've described the growth in each segment. So to put it together, in the fourth quarter, we're expecting overall revenues to grow in the 25% to 30% year-over-year range.

So looking at the business drivers for next year, we have RFID use cases that each can be hundreds of millions of units over time and give us clear line of sight into 2021. There's strong federal government demand for our physical security, identity readers and mobility apps, and our complete range of recurring revenue products is now in place. Now, with all these growth drivers, we could see faster growth in any given quarter. But to keep our predictability, we've given a strong base growth outlook, and we'll update as we get further into the market's take-off.

So 2020 has been a challenging year, but we're in markets that are taking off, and we've been able to strengthen our leadership even as they're accelerating. The result is we're looking forward to a strong finish to the year and an exciting 2021.

So with that, let me open the discussion to questions. Operator?

(Operator Instructions) We'll take our first question from Jaeson Schmidt with Lake Street Capital markets.

Steve, I appreciate all the color and sort of why you're feeling so confident in 2021, but curious if you could talk about sort of the backlog coverage to 2021; and if some of this confidence is really just driven by some sizable orders already in hand, or if it's just general confidence, especially on the RFID side, that you are just going to see this big general adoption?

Yes, backlog has been growing nicely. I think we earlier indicated that, at the time it was up, it's doubled from what it had been just a couple of months earlier. And I mentioned that we've already got over 95% of our Q4 shipments already covered in backlog, so all the orders coming in are 2021 orders, and we actually have orders that go throughout all of 2021.

So we've got good visibility, both front-ended, and as I said, we expected the first half of the year already to be 50% growth over the year prior. And obviously, we wouldn't be saying such clear numbers if we didn't have a fair amount of visibility in it. And that's really driven by our backlog.

And in your prepared remarks, you noted about $1 million in business not being able to shift in Q3. Could you just comment on what sort of constraints you're seeing there, and if those constraints have eased now in Q4?

Yes. As I mentioned in the second quarter call, we've been expanding our capacity rapidly. But when you look at doubling your capacity, and then we talked about in Q4 we've got backlogged 125% of the year prior, that's indicating more than double where we were a year ago.

We're building out space, and we're putting in more equipment. And some of the devices that we're producing are particularly complicated and high-end, which is great for us because it's more differentiated, but they take more machine capacity because there's multiple processes, multiple passes versus some of the more straightforward products. And those, of course, the more complicated products often go to the more sensitive and high-end customers, so we always want to favor those.

And so, we did have some that we couldn't ship. We're catching up in this quarter, and we'll have the capacity built out by the end of this quarter. Again, when we talk about building capacity, you're talking $100,000, $150,000 in facilities build-out and a few hundred thousand dollars in equipment. It's not a major capital absorption. But we have been catching up through the third quarter, and we'll be all caught up and in good shape going into 2020.

I mean, obviously, the school and education market could be a little challenging with budgetary pressures and whatnot. But just curious if you could comment on what your expectations in that market are, going forward?

It is choppy, as you say, but it's also highly motivated for security. We put out a white paper on remote school and cybersecurity, for example, with our FIDO keys that we just launched.

One of the dirty secrets that a lot of people haven't focused on is we've taken all the kids in our country and put them online to go to school. And if anyone thinks that we've actually properly secured their data pipes for their learning, they're being a little optimistic. And so, there's opportunities there, for example, to cybersecure more of the distance learning environment. And there's also, as we go back-to-school, physical security is as important as ever, and especially physical security infrastructure is now being integrated with health and safety infrastructure.

So there's opportunities there. We're seeing a lot of interesting bids, but also schools are in financial challenges. And so some of them are going ahead fast, and some of them are really, frankly, hunkered down. So I don't know, on a month-by-month basis, how it's going to emerge. But from a market opportunity over the course of the next year, I actually think schools and universities are going to be a very good segment for us, both on the cybersecurity side and on the health and safety, physical security side.

(Operator Instructions) We'll take our next question from Mike Latimore with Northland Capital Markets.

Steve, I couldn't tell, did you give some guidance on what you thought Premises would grow in the fourth quarter? I couldn't tell if you said that or not.

Specifically for Premises in the fourth quarter, I don't know that we -- I've got to go back and look at that. No, we did. We did. I'm sorry, I'm looking at my notes here. We said about 25% year-over-year for the fourth quarter.

Right. So that's up sequentially. And is that driven by nongovernment, or is that government driving that sequential pattern, then?

Good question. It's across the board. And it's both government and nongovernment actually on the growth. As I think about underneath the numbers, it's probably more commercial than government in terms of increases sequentially.

We have seen a rebound in activity on the Premises side. You can only defer these things so long. And now, a lot of the installers and others are getting out there, getting back in line. Also, customers, things like video systems, where Microsoft stopped supporting Windows 7 or something, they have to do something. So there's a built-in migration, the growth pattern that we're starting to see come back.

And then on the Identity, it seems like a ton of opportunity there. I guess how diverse do you see that revenue stream being in terms of customer base over the next year? Is it going to be very diverse, or is it going to be a couple big customers really driving the growth?

Are you asking primarily about RFID and Identity?

Yes.

So actually, it's going to be quite diverse. Certainly, when some of these global corporations launch, their numbers are big, but there's several of them that are either already launching or in pilot and building in the launch for 2021. And you might have noticed we didn't have any 10% concentration customers disclosed. So it's certainly some gorillas, but a range of them.

And the other interesting thing is a range of applications that are not just in one vertical, either. There's several different use cases that are getting momentum.

And then, you have a number of cloud offerings now, and I'm sure you're going to be promoting that even more aggressively next year. I mean, when you book a cloud deal, it doesn't always show up within the quarter year, obviously. But what would be sort of a good amount of cloud bookings for next year if you're successful? Is it $1 million? Is it $5 million? What would be a successful cloud booking year?

Well, I think we're just learning what the profile looks like. But I think the 6-year, $650,000 bank installation that we did is on the high end, but it's characteristic of how these things work. So if you mean how much will be recognized within the year, probably a few million dollars incremental to the 6% to 8% we're already asked. But that would represent, of course, 5x to 6x that much in terms of booked business.

At this time, this concludes our 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. And Operator, I just want to confirm we don't have any other questions in there. That's right?

No further questions in the queue at this time.

Terrific. All right. Thank you very much.

Well, thank you all for joining us. Very much appreciate it. Also, please join us at some of the virtual investor events coming up this quarter. We've got Imperial Capital the first week in December, and Northland the week after that. So look forward to continuing to update you on the business. And until then, best wishes, be well and be safe, and have a good evening. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time. Have a great day.