Identive Group, Inc. (NASDAQ:INVE)
Q3 2013 Earnings Conference Call
November 7, 2013 17:00 ET
Darby Dye - Investor Relations
Jason Hart - Chief Executive Officer
David Wear - Chief Financial Officer
Welcome to the Q3 Identive Group Incorporated Earnings Conference Call. My name is Joe and I will be your operator for today’s call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Ms. Darby Dye. Ms. Dye, you may begin.
Darby Dye - Investor Relations
Thank you. Hello, everyone and thank you for joining us. With me on the call today are Jason Hart, CEO of Identive and David Wear, our CFO. In a moment, we will hear remarks from both of them and then we will take questions.
Before we begin, please note that during this call, we will also be making reference to non-GAAP results or projections including non-GAAP gross margin, operating expenses, adjusted EBITDA and earnings per share. A complete reconciliation between each of these non-GAAP measures and the most directly comparable GAAP financial measure is included in today’s press release which is available on our website.
In addition, during our call today, we will be making forward-looking statements. Any statement that refers to expectations, projections or other characterizations 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 the documents we filed from time-to-time with the SEC, including our annual report on Form 10-K for fiscal 2012 and our subsequent quarterly reports on Form 10-Q. Identive assumes no obligation to update these forward-looking statements which speak as of today.
Now, it is my pleasure to turn the call over to Jason Hart.
Jason Hart - Chief Executive Officer
Simplification, focus and growth, thank you, Darby. Thanks everyone for joining us today. I understand for our European colleagues it’s a little late. I wanted to take a few minutes to share with you all the broad strategy that we have embarked on some eight weeks ago. We believe that the business has substantially undervalued. We fundamentally believe that there is a great opportunity to create a long-term platform for value, not just for our shareholders but for our customers and staff.
During Q3/Q4, the management team have focused very much on this principle of simplification. We look to create value through dramatic change to the company and I am going to highlight some of that in a few minutes. I am also going to talk a little bit about the focus for the business as we move forward, but for right now, I would like to cover something that I found really quite interesting as a backdrop to the simplification plan. In a few short weeks, we have been able to make some dramatic changes to the long-term operating expenses of business. We saw some really good results in September, a positive operating financial performance in Q3 overall. We saw strong demand for some of our segment products, particularly in the areas, in high growth areas, such as our cloud identity security products. And in the lot of our new electronic toy NFC, RFID products, particularly with some strong contracts from at least one gaming company.
We saw our Q4 backlog and receivables at almost 40% of our annual revenue. For me, this is quite impressive, because when I look at the business, I look at the foundations of what we have is rare in my opinion to see a business with such strong backlog and receivables, particularly given the cash constraints that the business has had. I have seen a recovery in our trusted physical access solutions. There has been a lot of discussion around the U.S. government, U.S. federal government sequestering. We are beginning to see some slight recovery in that. We saw that in Q3. We began to diversify some of our product lines into electro markets and we saw some growth there.
We of course are still challenged by the cash and Dave is going to talk about that in just a few moments, but it’s important for our investors to understand that today the number one priority for the management team is simplification and as part of that addressing the long-term balance sheet and cash position of the business. So in the last eight weeks, we have been focused on transforming Identive Group at both a philosophical and technical level into a single company. I believe that the business has been structured in set of silos that have caused us to have a fairly significant operating expense base that quite frankly has been really tough for management to change. In the last eight weeks, we have right-sided the business a full 90 degrees and we have taken all lines of business from product management, engineering, the sales organization as well as the management and we have globalized all functions.
I am pleased to announce that we have also bought some new strength to the bench on the executive team with new hires from EMC and Hewlett-Packard to help in that process. So we will continue to divest what I call our non-core assets, I believe we have been doing too much with too little. It’s a classic way for us to not perform and we will continue to look at strategic options for a number of these non-performing assets or assets that don’t fit in the high growth market segments that I outlined earlier.
We have been realigning much of the management team and that’s taken a number of weeks over the last days. And I believe we have developed what I considered to be a world class plan for the future. And I put this into our growth sector. We will be talking more about this plan probably next year, but for this quarter our focus is very much simplification and solidifying the foundations of the business. We have obviously focused on significant cost reduction and we will talk more about that next quarter. A number of things will become apparent to the market through the course of the quarter. And as those things are ratified by our Board, we are working to a certain point execution plan that we are half way through as of today.
We are inward focused for now and I will leave you with really one my number one priority over the next few weeks is looking at restructuring of debt as we obviously focus on our cash position. So I think my fundamental excitement about the businesses here I am seeing very strong growth in a couple of our market segments and I am very excited about the management team I have around me. I think for now I will leave everything else for questions, but I would like to hand over to David and David can give you the actual financials of Q3 and our forward projection.
David Wear - Chief Financial Officer
Thank you, Jason. As noted by Darby, today we are discussing our third quarter non-GAAP results for which we provide further details and reconciliations in our earnings press release. During the third quarter of 2013 total revenues were $26.3 million, up 11% from $23.6 million reported in the second quarter and up 14% from $22.9 million reported in the same quarter last year. Revenues from identity management were $12.3 million, up 17% from $10.6 million in the previous quarter, but down 11% from $13.8 million reported in the same quarter last year. Although revenue from access control and security systems decreased 12% year-over-year as a result of the U.S. federal government spending sequester, they improved substantially on the previous quarter.
Seasonal government spending anticipation of the October fiscal year end as well as from increased shipments of our new HIRSCH Mx Controller to commercial customers were the contributing factors. Revenues from ID product segment were $13.9 million, up 7% from $13 million in the previous quarter and up 53% from $9.1 million in the same quarter last year. This growth was primarily driven by strong revenues from both RFID and NFC product sales, which increased 131% year-over-year. Revenues from readers and associated card sales also grew by 10% both sequentially and year-over-year.
As Jason mentioned, we are entering the fourth quarter with a strong backlog which includes $20 million of orders for delivery over the next 12 months and a further $7 million in longer term contracts. Our backlog reflects stronger – continued strong market demand for our RFID and NFC products as well as growing demand for our credential and reader products. Also included in the backlog is approximately $7 million of orders related to businesses being reviewed for divestment.
Some commentary on our operating highlights. Non-GAAP gross profit margin improved to 45% when compared with the 41% reported in the previous quarter. Increased access control revenues were the most significant contributing factor. Year-over-year our non-GAAP margin declined by just 25 basis points. However, robust sales and higher capacity utilization in our RFID and NFC business did help to offset lower sales on our higher margin access control and security systems activities.
Non-GAAP operating expenses in the third quarter were $11.3 million compared with $10.8 million in the prior quarter and $10.7 million in the same quarter last year. In the quarter, we have recorded high general and administration expenses as a result of increased external services associated with corporate activities, including a strategic review.
As Jason mentioned, restructuring activities were initiated in the third quarter that resulted in the elimination of certain non-core functions. Including the expense associated with the departure of our former CEO, we have recorded restructuring expenses of $1.3 million in the quarter, primarily for patent accrued severance. Looking ahead, we do expect our current restructuring efforts to simplify our operations and our structure. This is also likely to result in further charges in the fourth quarter.
As noted in our earnings release during the third quarter, we performed interim impairment testing of our goodwill and long-lived assets. Based on this review, we concluded that some of our assets are impaired and recognized preliminary non-cash charges to opening $22.9 million in the quarter, which accounted for $0.34 per share of the $0.35 GAAP net loss per share recorded in the quarter.
Non-GAAP net loss in the third quarter was $1 million or $0.01 loss per share compared with a net loss of $2.5 million or $0.04 loss per share in the second quarter. A net loss of $1.6 million or $0.03 loss per share was recorded in the third quarter last year. Adjusted EBITDA improved to positive $0.6 million in the quarter compared with an adjusted EBITDA loss of $1 million in the second quarter. Adjusted EBITDA in the third quarter last year was also a loss of $0.2 million. High revenues and sustained margins was the driver behind the improved adjusted EBITDA.
Looking at the balance sheet, cash and cash equivalents were $9.5 million at the end of September, an increase of $5.8 million from the $3.7 million recorded at the end of June. This included approximately $2 million of football match day concession receipts at the quarter end, which were remitted to caterers at the beginning of October. Gross cash proceeds raised from our private placement in August was $7.1 million. The principle uses of the cash in the quarter included service of financial related party liabilities and associated interest of $1.8 million. Working capital expanded by $0.2 million and we spent $0.5 million on capital investment.
Working capital, which we define as inventory plus accounts receivable, less accounts payable increased by $0.2 million from the end of June. An increase of $3.3 million in accounts receivable was offset by a $2.4 million increase in the accounts payable. Including within this was $2 million payable to match day concession holders, which I commented on above. Inventory declined by 0.9 million of shipments following the buildup of new reader products in the quarter.
Accrued expenses increased by $3.1 million included fees associated with the private placement of $0.8 million, an increase card liabilities of $1.3 million as well as employee severance accruals of $1.2 million. As a result of our third quarter impairment review, goodwill was impaired by $22.6 million and long-lived assets impaired by $0.3 million. These figures may well be revised in the fourth quarter once the annual impairment review is concluded.
Finally, to give some comments on our guidance, management’s outlook for the fourth quarter is set against the background of uncertainty caused by the recent U.S. government shutdown. And we are expecting revenue of between $25 million and $27 million and adjusted EBITDA of 0 to positive $1 million. These estimates include non-core businesses which maybe divested during the fourth quarter. Revenues associated with these businesses are expected to be between $5 million and $6 million and associated EBITDA loss of between $0.5 million and 0.
That concludes our prepared remarks. And I will pass the call back to the operator. Operator, please begin the Q&A.
Thank you. We will now begin the question-and-answer session. (Operator Instructions) And at this time I am showing no questions. Jason do you have final remarks.
Jason Hart - Chief Executive Officer
I do. Thanks Joe. And again I wanted to thank everyone for taking the time out. Just to summarize, we have really taken a very proactive view to simplify, to focus and then to grow and we are concentrating the business as we do that in the high growth security and identification markets. I think our investors will ultimately see the reward from that focus. And I look forward to speaking with many of you over the course of Q1 as we talk more about our strategy forward. So with that I want to thank everyone for their participation.
And thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. And you may now disconnect.
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