Identive Group's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Identiv, Inc. (INVE)
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Identive Group, Inc. (NASDAQ:INVE) Q1 2013 Earnings call May 2, 2013 ET


Darby Dye – Director of Investor Relations

Ayman S. Ashour – Chief Executive Officer, Chairman of the Board

David Wear – Chief Financial Officer


Matthew L. Hoffman – Cowen & Co. LLC


Welcome to the First Quarter 2013 Identive Group Earnings Conference Call. My name is Larisa, and I will be your operator for today’s call. (Operator Instructions) Please note that this conference is being recorded. I will now like to turn the call over to Darby Dye, Director of Investor Relations. Darby, you may begin.

Darby Dye

Thank you. Hello, everyone, and thank you for joining us today. The purpose of today’s conference call is to supplement the information provided in our press release issued earlier today, announcing the Company’s financial results for the first quarter ended March 31, 2013. Speaking on today’s call are Ayman Ashour, Chairman and CEO; and David Wear, CFO of Identive.

Before we begin, I would like to remind you that various remarks we make on this call, including those about our projected future financial results, economic and market trends, and our competitive position, constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. The forward-looking statements we make today speak as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

Please refer to today’s press release or Annual Report on Form 10-K for the year ended December 31, 2012, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. Also during this conference call, we will be making reference to non-GAAP results or projections including non-GAAP gross margin, operating expense, adjusted EBITDA and earnings per share. Identive uses these non-GAAP measures internally and believes that they provide a meaningful way for investors to evaluate and compare our operating performance from period-to-period, but cautions investors to consider these measures in addition to not as a substitute for nor superior to Identive's consolidated financial results as presented in accordance with GAAP. Each of the non-GAAP measures we discussed excludes various items, and a complete reconciliation between GAAP and non-GAAP and financial measures is included in today’s press release, which is available in the Investor Relations section of Identive’s website.

As a reminder, today’s call is also available as a webcast with slides, which can be accessed from the Presentations, Reports and Webcasts page within the Investor Relations section of our website at If you are viewing the webcast, you may enlarge the size of this presentation by clicking on the magnifying lens in the bottom right hand corner of your screen.

I would now like to introduce, Ayman Ashour.

Ayman S. Ashour

Thank you, Darby, and thanks to all of you for joining us today. Good morning. The strong momentum we saw starting late in Q3 for our transponder and smart card reader products continued in Q1. As a result, our ID product sales grew 18% year-on-year in what’s our typically our weakest quarter. This positive performance was over shadowed by 24% decline in our access control business. as a U.S. Government customers delayed and put on hold various projects as a result of the sequester and with the budget cuts. Our sales for the quarter were therefore relatively unchanged year-on-year at $21.1 million.

Lower operating expenses help drive significant improvement in our bottom line year-on-year, including the $1.2 million improvement in adjusted EBITDA. Outside of the U.S. Government sector we’re seeing significant growth in demand and in orders. We entered Q2 with a record backlog of actually $22 million in orders of which $19 million are scheduled to be built over the next ## months. This is highest order book we’ve ever had at Identive and it comes from a far wider base of growth markets. I will talk more about the specifics of these orders and our demand trends in the next few moments.

Touching briefly on some further detail of our main business categories, ID infrastructure products grew 18% year-on-year. This included some new wins for new Citizen ID programs in the Middle East. European reader sales remained relatively weak due to economic concerns here in Europe, while sales in the U.S. and Japan were slightly up year-on-year.

Transponder sales were up 17% year-on-year with significant shipments for transit ticketing and strong growth in NFC inlays and NFC tags; for a variety of applications including machine to machine for electronic gaming and other NFC applications. Importantly, the improvement in the product sales business and moving up the value chain in Transponders, in particularly helped us improve the margins in Q1 and we expect this trend to continue.

Our ID solutions business sales levels were relatively consistent year-on-year with strong performance from payment solution where we secured the major contact for our payment systems for retail food franchise in Europe.

I’ll move on the business review. Looking now at the business and market activities in Q1; the sequester had a significant impact of our sales of Access Control Systems to the U.S. Government and access to broad budget cuts disrupted virtually all project activity and Fed agencies began to re-prioritize project activities around employee furloughs and other cost savings that the U.S. Government enacted. There continued to be significant uncertainty in this area of our business.

Overall our U.S. Government business was down to an estimated $3.8 million well below of last quarter Q4 of 2012 as well as year-on-year Q1 of 2012. We don’t see any project cancellations or contract losses, what we only see is disruptions and delays.

In other areas of our business significant amount of our business came from several new large orders and new customers. This is an encouraging trend both for our business and for the development of some of the emerging markets that we target, such as NFC and Mobility in general. We are also encouraged by further expansion of our payment solution business in Q1 with the receipt of the retail franchise contract I referenced earlier covering several 100 locations, our first significant win in the retail sector.

We have commenced deployment of our payment system under this contract and expect to generate over $1 million during the first year with over $4 million in total. We also expect that these numbers will grow as the franchise operation itself grows in numbers of stores and additional services that we can provide our introduced our customers.

On the operational side, we show positive margin improvement across most areas of our business, which along with the positive expense trend, our OpEx were significantly down help to counter the effect of lower sales in our higher margin access control business. It is obviously not good to have our access control being the most profitable area down, but it is good to see that the impact was limited by improvements elsewhere.

David Wear our CFO will provide more color on this in few moments. The strong order intake and continued growth demand for our new products and solutions in Q1 puts us in a more favorable position for the remainder of the year. We believe this will help us to balance the effects of continued uncertainty in our U.S. Government business.

In our Transponder business our full order book and ongoing demand means that we are operating at around 100% capacity, and we’ll continue to do so for the foreseeable future. This obviously puts strain on the production process and staff, as we push against the limits of our capacity to fulfill customer orders.

We are looking for ways to expand our capacity, cost effectively and juggle to meet strong customer demand for our products particularly, the most recently launched products on the NFC side and the SmartCore.

I would like to now hand over to David Wear, who will take you through our financial results for Q1, and then I’ll come back to wrap up with some specific comments on outlook and the backlog.

David over to you.

David Wear

Thank you, Ayman. The $21.1 million Q1 revenue was 21% lower than reported in Q4, was consistent with the level reported in the previous year. Q1 is traditionally our weakest quarter and 2013 was particularly impacted by the U.S. Government sequester as commented on earlier by Ayman. As a result the Identity Management & Cloud division revenue at 27% lower quarter-on-quarter and 25% lower year-on-year.

ID products revenue were 24% lower quarter-on-quarter reflecting typical seasonality in what is generally our weakest fiscal quarter. Given this trend we are very pleased that the ID products grew 18% compared with the same quarter the previous year with both transponder and smart card reader showing similar levels of growth. Non-GAAP gross profit margin improved by 0.5 percentage points sequentially, but declined 2.2 percentage points year-on-year as a result of lower sales of Access Control Systems.

With the exception of readers within the ID Products business, our other parts of the business improved their margins both quarter-on-quarter and year-on-year. The temporary reduction in reader margins arose from a large strategic Citizen ID order in EMEA, which was largely filled during the first quarter and will be completely delivered by the end of April. Thereafter margins in ID infrastructure are expected to return to trend levels.

Although the slide highlighted 14% increase in OpEx compared to the fourth quarter, after adjusting for the effects of software capitalization, executive salary sacrifice another one time margins OpEx in Q1 is approximately 5% higher quarter-on-quarter. The increased expense is largely associated with higher product development and (inaudible) and where is the timing of sales conferences and exhibitions.

Year-on-year we took had approximately $1.7 million of cost from our operating expenses as a result of restructuring program of which $1.1 million our employee cost savings. Now restructuring expenses reporting the quarter and training cost associated with termination of two executives we'll report in a non-GAAP operating expenses for the final time.

Lower operating expenses boosted our EBITDA performance in the quarter and helped to offset the weak performance of the Identive [eManagement] and Card division. GAAP gross profit percentage is similar quarter-on-quarter and 2 percentage have this year-over-year as a result of the lower sales of Access Control Systems and the reader margin are that I’ve just described.

Taking non-GAAP operating expenses and again just interchange the number of (inaudible) and the remeasurement of related parties liabilities before during the first quarter précising the reasons for the change in the operating expense are similar to those reported at the non-GAAP both quarter-on-quarter and year-on-year.

Moving to the balance sorry, moving to adjusted EBITDA recorded few [resistance] below the line and I would limit my comments to those items reported in the current quarter.

Depreciation and amortization is consistent quarter-on-quarter. However, when compared to the same quarter of the prior year, it is $0.5 million lower. This reflects the impact of the intangible write-down carried out in 2012, and the associated benefit that charges had on future amortization expense.

Equity-based compensation expense is associated with employee share purchase plans and employee compensation schemes. The increase in Q1 compared to the fourth quarter is principally the result of accruing the expense associated with anticipated incentives for the current year.

Post-acquisition expenses continue to decline and expected to be minimal in future quarters. Interest expenses increased slightly as a result of a full quarter of interest and associated charges accruing on the outstanding (inaudible) loan.

Foreign currency losses are largely non-cash and relate to looses translating our closing balance sheets for those entities not denominated US dollar to the prevailing exchange rate at end of the quarter.

Pension expense is non-cash and relate to recording our Swiss Pension Plans as defined Benefit Plans following the change in accounting practice in the previous quarter.

Moving to the balance sheet, we ended Q1, 2013 with $5.5 million in cash. Working capital defined as inventory plus accounts receivable less accounts payable, reduced by $0.9 million when compared to the end of 2012. However, the $2.1 million improvement arising from reduction in accounts receivable, was largely offset by an inventory build of $1.6 million. Inventory increase in anticipation of stronger demand for ID products in Q2. Accounts payable were largely unchanged in the quarter, increasing by $0.4 million.

After adjusting for depreciation of $0.5 million in the quarter, property and equipment included $0.5 million of capital expenditure in our Identity Management and Card facility in Santa Ana. This will improve the layout of the existing space and prepare the site for additional manufacturing capacity.

Software development expense capitalized in the quarter amounted to $0.2 million. The increase in accrued expenses was matched by a decrease in long-term obligations as the debt received from Hercules Technologies at the end of October 2012 becomes repayable from May 2013 onwards. Overall, short and long-term financial liabilities declined $0.7 million in the quarter and Telecom debt outstanding amounted to $13.6 million, of which $5 million is recorded as a current liability. Amount to related parties were $7.6 million with $1.5 million recorded as a current liability.

Turning to the cash flow, we saw a decrease in cash and cash equivalents of $1.9 million in the quarter. The different uses of cash were capital expenditures of $1.1 million and debt service of $1 million, no additional debt or equity raised in Q1 and net cash provided by the operating activities was slightly positive.

On April 16, we entered into a three-year purchase with Lincoln Park Capital, allowing them to purchase up to $20 million of our stock subject to the terms of the agreement and as directed Identive. The ability to raise funds in a respectable manner will allow us to meet demand for additional working capital while buffer against short fall in internally generated funds should U.S. Government uncertainty continue. Identive controls the timing and the value of the stock sales and we expect to make modest use of the facility to the tune of approximately $1 million through the current quarter.

With that, I will turn the call back to Ayman.

Ayman S. Ashour

Thank you, David. I would like now to give you a closer look at our backlog and discuss the product and market momentum that’s driving our business. While we’re seeing continued uncertainty with the U.S. Government, which is collectively our largest customer, we’re also forecasting significant growth in virtually all other areas of our business. Beginning with Access Control, we had a successful launch of our new Hirsch Mx controllers in Las Vegas earlier last month, which further improves our competitive position and allow us more growth in the enterprise and international sectors. We have also started adding some important Cybersecurity capabilities in our physical access control systems, which are unique to us in the market.

We’re making good progress with recent significant wins for new projects in China and in the Middle East. Our NFC business continues strong growth trend and our backlog reflects a healthy contribution from NFC programs for new and existing customers. Driving our NFC sales growth are machine-to-machine gaming applications and other machine-to-machine applications payment including our tomPAY and other payments stickers, retail display and many other applications.

We have seen in the last two quarters a significant jump ahead in the electronic gaming area ahead of NFC built into mobile phones. We are now also seeing significant orders associated with NFC and mobile phones and applications related to the use of NFC tags in mobile phones for any related applications in retail and payment.

In Q1, we had our first commercial deployment of Tagtrail NFC mobile services delivery platform. This is our cloud-based services platform with major mobile network operators in the U.S. and Europe. We are not at liberty when it comes to naming customers, but you may have already tapped your phone into a March madness posters in American stores, or various loyalty programs and posters in German movie theaters. These posters have NFC tags from Identive, but linked to our cloud based Tagtrail service to deliver dynamic marketing other content directly to our phone.

Our M&O customers report to us that this is the first time they have been able to measure how many people are actually looking at their marketing campaign materials and to track the effectiveness of these marketing campaigns. The general feedback we are getting is very positive for the initial use of that trail and people are now and our customers are now widening their rollouts and launching new campaigns using Tagtrail.

I would like to emphasize that these are not trials these are actual deployments. If you have an Android phone you can now download the Tagtrail app and we expect to make the app available for iPhone users with QR codes in the coming quarters. Additionally we will continue to expand Identive NFC online market plays with new products and new geographic coverage most recently in Japan and France.

SmartCore addresses a growing market with contactless cards with an innovative Card Core technology that allows card manufacturers to produce higher value products with their existing production equipment. We reported significant design wins and we have also received orders during Q1 which we expect to deliver late in Q2, most likely Q3 for over 9 million units.

On to the area of mobility and BYOD, or Bring Your Own Device, we received the certification for the iAuthenticate reader under the Apple MFi license program and we are shipping it now. This means IT departments can now start purchasing the readers and allow their employees to use their own iPhone’s or iPads to authenticate themselves to corporate networks and applications without compromising their security levels.

At the beginning of Q2, we finally started shipping the iAuthenticate readers to our distributors and clients and we expect that to see orders building up from here on.

Looking now at Identity as a Service, we announced earlier this week we have secured a $2 million contract with a Fortune 100 global tech company for our idOnDemand cloud-based Identity Management service. This contract follows an extensive trial with our customer who has now placed orders for their own instance within our cloud, signaling plans for larger rollouts and entry into long-term relationship with Identive. This started in Q2 already.

The ramp up of our idOnDemand business has been protracted and is taking us a lot longer than we anticipated, but we are beginning to get there. During Q1 we had an important rollout of an international government customer and we are looking forward to follow-on projects. Also augmenting our backlog is our contact to supply payment systems and data hosting services to our Europe retail food franchise. This contact, as I mentioned earlier, is valid over $4 million with $1 million included in the backlog for the next 12 months and the remaining $3 million to be billed later on. This contact includes a significant amount of recurring business from the use of the data centers.

The growth in the backlog and the continued evidence of the demand across multiple areas of our business give us confidence that we are turning the corner in our business and beginning to see the rewards of investments we’ve been making in NFC, cloud-based solutions payment and other areas. This is what allows us to forecast growth despite the uncertainty with our largest customer, the U.S. Government.

I’ll now move on to guidance for Q2 and 2013 in total. The order backlog and the strong momentum across much of our business is tempered by the risk of our access control sales from the sequester; and this is reflected in the broad range for our guidance for Q2, which includes revenues in the range of $22 million to $26 million and EBITDA of minus $0.5 million to plus $0.5 million.

For the full year, we are tightening the range of revenues to between $105 million and $110 million and broadening the range of EBITDA to between plus $2 million to plus $6 million.

And David where mentioned earlier, while we’ve secured the LPC or Lincoln Park Equity line, we are planning relatively light use of this facility. So the EPS in the guidance, the non-GAAP EPS and the guidance should reflect the expected, any expected new shares we will be issuing under that agreement.

With that I’ll thank you and turn the call back to the operator.

Question-and-Answer Session


Thank you (Operator Instructions) Our first question comes from Matthew Hoffman from Cowen & Co.

Matthew L. Hoffman – Cowen & Co. LLC

Hi. Good morning, Ayman. So, I'm looking at the NFC bookings number, I think it’s the $19 million plus the $3 million, and I believe that bookings number I just want to confirm is just for that segment of the business. Do you have an overall bookings number for the Company?

Ayman S. Ashour

No that is the overall booking number Matt, it is $19 million for billing within the next 12 months. And if we include the additional $3 million from payment solution post the 12 months that’s come out to $22 million. The Transponder NFC portion of it, I would estimate to be somewhere between $5 million and $8 million in that range.

Matthew L. Hoffman – Cowen & Co. LLC.

Okay that’s either way it’s significant increase from where it had been I believe, but it’s probably better to get the number from you. How much the overall bookings number then change sequentially from the end of the year? It’s a question for David.

Ayman S. Ashour

I think the end of the year, we were right at about $15 million or somewhere like that David?

David Wear

If I look at the end of the year was just over $15 million, Matt.

Matthew L. Hoffman – Cowen & Co. LLC

So you're looking at an increase from $15 million to $19 million just, and the then $3 million on top of that?

Ayman S. Ashour


Matthew L. Hoffman – Cowen & Co. LLC

Well, that’s pretty interesting. Okay. So, you called out the idOnDemand business in the release, and you said a couple of words about it. Ayman, I would love to have you elaborate a little bit more on why you think you're an in inflection point now on idOnDemand? It’s been a couple years, what five or six quarters since you made the acquisition, why now? Why is it turning on? Is it the availability of handsets that with NFC onboard? What is it exactly changing with the idOnDemand business? Has the product reached some milestone that enterprises are now willing to use these SaaS based building access type solutions? Thanks.

Ayman S. Ashour

We’ve had, we’ve been going through pilots and bigger pilots and trials and partial rollout with several big customers and one of these customers, which has really been a premier customer and premier focus area for us, after large trial have decided that they’re going to go forward with it. So we’ve entered into this agreement of just under $2 million and they’ve actually committed to purchasing their own instance so, we’ve actually had the orders for the instance during April. And instance would allow them to roll out up to about 70,000 or 80,000 people in their own secured environment within our cloud.

So that gives us a much higher level of confidence in particular on the U.S. side of the idOnDemand. Other big customers, we have in this area such as utilities people like PG&E et cetera are you still rolling it out to ever increasing numbers of people? And then internationally we had our first significant deployment it was in the range of just under $100,000 with a ministry of – one of international governments, we work with, and we are expecting further roll outs in different parts of that particular customer. It is just, it is really, it's a long sale cycle, and it is so far the majority of it’s focused more, still on the IT aspects of it, a little bit is one the physical. On the converged access area that’s area is also continuing to grow but we report that separate from idOnDemand. I don’t know if that answers gives you enough color, Matt or…

Matthew L. Hoffman – Cowen & Co. LLC

Yes, it does, it does. Now, when you talk about converged access as a lot of, kind of comm industry specific, or Identive-specific terms that I want to get clear on. So, with the idOnDemand products and the traction you’re seeing with the 70,000 or 80,000 user deployment you referred to, are they actually getting rid of building ID cards and using smartphones, or other NFC-based tokens to building access at this point? Or is it simply the backend SaaS right now, which is really what they’re moving to?

Ayman S. Ashour

It’s a backend SaaS side of it, and there are some physical tokens that we supply. If you look in our website you will see the mobile token or mobility and tokens area. So these look like typical USB tokens and the like that we supplied. And that’s mainly used for PKI validated logon. In terms of when we acquired idOnDemand we really had different areas of technology that spun out, so the part that is, we still refer to as idOnDemand is a basic SaaS or the direct sales to large customers be it fiscal or combination logical and typical or just logical or IT. We have another part where we’ve taken the very clever reader technology that the idOnDemand founders originally developed and integrated that with our basic reader and card offering and we offer that through a new focused area entering the physical access controlled market in the U.S. and that area is seeing already some good growth and it is part of the growth that you see in our ID products business. So that’s the second area.

The last area is actually some of the technology from idOnDemand and taking it and applying it with our Hirsch Identive – our Access Control for higher security applications for government and other users that also otherwise is getting early stages of traction, but we’ll probably still be few quarters away. But the bit, I was specifically reporting more excitement about right is really the SaaS aspects of it.

Matthew L. Hoffman – Cowen & Co. LLC

Okay. And I just want to make sure that it was maybe a couple of Julys ago, the other day, in Munich, where we met some of your experts and it was – the smartphone aspect of idOnDemand was something you’re working toward at that point using the smartphone as part of the physical access solution. Is that still on the roadmap? I know it’s not driving it now, but is it still on the roadmap?

Ayman S. Ashour

Very much so, and in fact it is – the use of the smartphone for three different things. It is the use of the smartphone for physical access, for IP access, for payment applications, and as distinct from payment, for baking applications because I think one of the things that we’ve demonstrated before is the use of the NFC enabled phones to generate one-time passwords. And this is actually the, our invention here is as already started translating into granted patents in some countries so we’ve received we’ve been granted some patents on this specific area already.

Matthew L. Hoffman – Cowen & Co. LLC

And so the value proposition, the place you will make money in that ecosystem, when you have idOnDemand at the backend, and smartphones with NFC generating this one-time pass is going to be on the reader side, where Identive will saw the readers, correct? And then the backend services also, correct?

Ayman S. Ashour

Yeah, but I mean that’s correct, but the primary aspect of this will be the software and the subscription type capabilities. And so it is, if the phone is being used as a credential then it’s a reader. If the phone is being used as a reader then it’s a credential. And in both cases it’s a software.

Matthew L. Hoffman – Cowen & Co. LLC

All right, beautiful. That helps a lot. And I just have one – one last housekeeper here on the guide. I’m looking at an improved adjusted EBITDA but obviously there’s always a lot of moving pieces with the model here. You or David can help us. It seems like you’re guiding the OpEx maybe slightly better and also a little better gross margins sequentially with better top line that we kind of fall out, but can you confirm that just OpEx dollars not percentage, but OpEx dollars will be lower in 2Q? Thanks.

David Wear

Sorry the OpEx dollars will be low in Q2 and yes, the expectation is that the OpEx dollars will be lower in Q2, Matt but it’s most of their restructuring has been completed we’re looking now the modest changes, we’re not looking at step change in OpEx from this point forward.

Matthew L. Hoffman – Cowen & Co. LLC

Good, I was just trying to – trying to see what it took to get the model to that breakeven in EBITDA, so that (inaudible).

David Wear

I think on the margin – I think on the margins what’s are you seeing that we have the large (inaudible) ID project, we’re delivering during Q1 and some of it was left into April, was really the only thing that affected the ID margins adversely, and otherwise, the underlying margins in virtually every area of the business is strengthening, and particularly in the Transponder, because of the move up the value chain from just simple inlays into finished products into higher value product is driving a lot more of the margin.

Matthew L. Hoffman – Cowen & Co. LLC

Okay, good, Okay, good. It turns out I have one more. Cash burn, projected cash burn for 2Q?

David Wear

I think it is relatively sort of obvious in terms of the debt paid down of another, you know, sort of [million] or so, there is probably bit more CapEx and a little bit on the working capital and payment solution of fluctuation so you’re probably looking at somewhere in the range of $2 million and $2.5 million and that’s it really dependent on how strongly be the U.S. Government business hold on certify the one sort of the main reason really we went and that the equity line is to be able to pulling additional cash if we needed to.

Matthew L. Hoffman – Cowen & Co. LLC

Okay, right thanks guys, Good Luck.

Ayman S. Ashour

Thank you.

David Wear

Thank you.


We have no further questions. I’ll now turn the call over to Darby for final remarks.

Darby Dye

Thank you. Thanks everyone for joining us today. We look forward to providing with further updates on the progress of Identive’s business and speaking with you again on our Q2 earnings in a few months. Have a good day. Bye-bye.


Thank you, ladies and gentlemen. That concludes today’s conference. Thank you for participating. You may now disconnect.

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