Identiv, Inc. (INVE) CEO Steve Humphreys on Q2 2021 Results - Earnings Call Transcript

Identiv, Inc. (NASDAQ:INVE) Q2 2021 Results Conference Call August 3, 2021 5:00 PM ET

Company Participants

Steve Humphreys - Chief Executive Officer

Sandra Wallach - Chief Financial Officer

Manfred Mueller - Chief Operating Officer and General Manager, Identity

Conference Call Participants

Craig Ellis - B. Riley FBR

Jaeson Schmidt - Lake Street Capital Markets

Michael Latimore - Northland Capital Markets

Operator

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 this call, management will be making Forward-Looking Statements. Any statements that refer 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.

Steve Humphreys

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, acceleration of growth over the 22% we saw in the first quarter. Our Identity business continues to be the strongest growth drive 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 in 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.

Since here growth healthy, because it is 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 three 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 the Q1, when expenses were down 6% with revenues up 22%.

Our core growth strategies are 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 are 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 have done for them. And now we have committed to volume orders for in the second half of this year on the new designs.

One major mobile device provider move their latest two designs through prototype test, 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 are 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 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 are going to report on milestone so investors can track progress even while they are pre-revenue.

The first is our auto injector project. We have completed the prototype designs, and these are now in qualification with the customer. They are 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-2020 ramp up. Volumes, of course are still projected to reach over 100 million units.

The cannabis project also made major steps, our designed 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 are getting the final equipment this month to demonstrate the required volumes.

Our engineers know the equipment software very well. So we have offered to help them with qualification calibration and proof of scaling. So progress put some time will still be needed. The government regulator involved really doesn’t want to mandate this to every cannabis provider in the country, and then have to issue waivers if there is not enough supply for their producers to comply. But good progress, and we have got very good visibility.

Now I won’t go through all the major customers. But one of the big updates on these since either of them can be transformation 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 and Q&A if anyone wants to or any of the other major projects that we are 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 they add up and some of them could be the unplanned breakouts that also drive upside.

Lastly, of course it is critical for us to serve all use cases to entrench our leadership and keep out 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 tests as they authenticity and use protocols.

Chemflow for Waterfield for authenticity and use. DuPont also for water filters, [Corvo] (Ph) for drug test kits, Collect ID for consumer engagement with sportswear, MSA for hardhats, and constructions that year, outlet technology and a [indiscernible] both in the cannabis supply chain space.

Tap Online for consumer engagement across a couple dozen brands including Coca Cola, T Mobile, Lipton tea, and others. Helios Hockey for sports tracking and performance. Bullion Works for blockchain based gold bullion transactions and tracking. Mattel for Hot Wheels ID cards for 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. The major projects can more than double the business, but it is this wide base of adopters that will drive our base 30% to 40% growth, the game changing customers and 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 three 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 is allowed, we apply the same use case across an industry. And all three 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 developer’s kits and more that will go into those later.

Now in addition to our high growth RFID segments 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 wins we announced like the deployments that Ross Stores and Banco Azteca Electra in Mexico.

Now Electra is deploying across another 400 stores, bringing their total with our systems over 2000 stores. We also saw rebounded 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 are investing in security and convenience, because their customers and their business models are demanding.

Now our third strategic focus is on revenue repeatability and predictability. In RFID, predictability is driven by customer attention and a focus on consumable products. In Q2, we kept a track record of 100% customer retention in RFID. We also kept expanding 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 recurring revenues to 32% of our premises revenues, up from 24% of revenues just last quarter.

So in Q2, our growth showed strength across our RFID and premises, and not just revenue strength, but also the underlying design wins, supply chain continuity in we all know are tough times for supply chains, and gross margin expansion.

Our product launches and key hires, design winds 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 made great progress in Q2.

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

Sandra Wallach

Thanks. As Steve mentioned, our financial results reflect our continued strength exiting the second quarter with the delivery of sequential incomparable growth on the top line. Future backlog increases improvement in consolidated gross margins and continued operating expense leverage, those results paired with the investments and RFID capacity and capabilities in our supply chain. We believe positioned 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%, the second quarter of revenue, and 6% of total trailing 12-month revenue. For the second quarter of 2021, our GAAP and non-GAAP adjusted gross profit margins are 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 to 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 three 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 TPP loan obligation and recorded the appropriate gain of 2.9 million. Adjusted for this non-recurring gain or EPS would have been a loss of $0.03 per share. We have 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 identity products total 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 2021.

The sequential increase was primarily driven by higher sales of RFID transponder products and access cards as compared to Q1 2021. 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 2021 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 2021. The sequential change in revenue with due to the recovery of selected 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 the first 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 non-cash charges normally excluded from our non-GAAP results such as interest expense, foreign currency loss, income tax, stock base comp, depreciation and amortization and gain on extinguishment of debt totaled eight million in the second quarter of 2021 or 33% of revenue. This compares to 7.6 million, or 34% of total revenue in Q1 2021 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 is 0.7 million increase compared to Q2 2020 and 0.8 million increase compared to Q1 2021.

Turning to the balance sheet, we exited Q2 2021 with 36.4 million in cash, and that increase of 24.9 million from Q1 2021 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 plants.

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 offerings and 0.1 million of proceeds from the exercise of stock options, offset by a 6.8 million increase in net repayments under our East West 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 have 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 million 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 2021.

Our total backlog for all future shipments was also up 26% versus Q2 2020 and up 10% versus Q1 2021 reflecting increasing visibility. Our total new orders booked through the first three weeks of the quarter are 6.3 million up 44% over the same period per 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 2021, over the first half of 2020, with 24% growth.

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

Steve Humphreys

Thanks, Sandra. As our results and our higher guidance show, we are growing faster than we expected as the beginning of 2020. Just as we beat our goals in the first half, we think we are in a strong position for the rest of the year, with some opportunities that can be transformational in 2022.

That was always a focus on our core business drivers of design wins, current customer volume growth and programs to drive growth. For the design wins in Q2, more in the pipeline for Q3, and our current customers all staying with us and some extending designs and volumes, we have got solid visibility into the second half of the year and into 2022.

As a result, as Sandra said, we are 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 are now moving the top of the range 206 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 would like to focus on the higher end of the range, and how we are thinking about that. We all know about the tight supply chain every business is facing. Now I want to be very clear, we are meeting all of our customer demand, and even some upside, which is letting us take share from competitors that let us raise the bottom line of our guidance and now the top ends 206 million.

So we are confident of our ability to keep our supply chain solid, despite the tough situations facing everyone. We are also confident of the demand side, both near-term as of 2022. We are 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 that chip shortages we are all dealing with, we are mostly resolved by next year, at least in the chip categories relevant to our business. Remember, these of course are RFID and NFC related chips, not necessarily the broader base of 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’s over ordering right now to try to get to the front of the line. And anyone in the semiconductor industry seen this before. And it could well result in at least some oversupply.

For us, this time, we would be perfect. Our main breakout projects like the auto injector, other medical devices, cannabis scaling up pressure sensors and others will be 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 I described earlier, will drive strong sustained growth. Even if the charges don’t end will be in a solid position will place the orders to support growth because we have good visibility into what they demand levels will be. And if there is 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 with that context, I want to get back to this year and our guidance. We are confident we will meet our demand growth and the raised guidance range. We pre-ordered supply in some areas we think could go over. So we are as ready as we can be. But it is still possible that some of the excess demand could come from products that we haven’t ordered ahead. So we might not be able to drive shipments even higher right now.

I want to be clear, we are not saying we are constrained by supply like some companies, we are not. Our business is growing and we are meeting demand for the base of that increased guidance. It is possible that customer requests that come in above our plans, or for products that we haven’t pre-ordered for, could be hard to fulfill. This keeps us in a relatively narrow range for our shippable revenue outlook.

Now, if we get demand as above, we expect it will certainly go into backlog and set up for even stronger 2022. But we don’t want to set excessive expectations for shipments in 2021. You know recovers what we can see, but there is some very new designs, we might not be able to fulfill upside opportunities on short notice.

Now, I know that was a lot of detail. And I want to go into some of the growth drivers we are executing on in Q3 for the rest of the year and into 2022, but ultimately, it is reflected in our shippable revenue growth. So I want to put it all in context.

So turning now to our growth drivers design wins for new customers and expansion of existing customers, which is always the core. We have got a solid system in place, that is proving to be a winning combination.

So scaling system and paralyzing our reach across the industry are the keys. To scale we are adding people in key areas. These include project management and engineering to support more design wins. We are also adding in sales, marketing and business development, to broaden our pipeline and reached end users.

Now we have a high profile as the innovator and industry leaders, so we are able to attract the best. In terms of project managers and engineers, we are adding to our already best in the world technical teams.

Now anyone in tact knows the great engineers join other great engineers, and we are seeing this affects. 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 have 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 are attracting some of the strongest players in the industry.

This week, we announced the hiring of a Amir Khoshniyati from SMARTRAC Avery Dennison. Amir was the leader of SMARTRAC’s k high-end NFC solutions business, and he has been tasked to run an expanded NFC group with an Avery. Instead, he saw the opportunity to drive the industry’s next leader and joined us.

Now there are others with similarly high profiles that we are 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.

The natural complement to this great people presence is to build the developer and application community. This month, we are officially launching our NFC Developers Kit as well as launching our Identiv RFID community.

Now we had to onboard some of these key people and expand a team of project managers and engineers before launching the Developers Kit. 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 have design 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 rate of adoption of multisensor RFID subsystems which is core to our strategy and margin expansion.

So great industry leading people, our RFID developers getting community, multi device automated production and are 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 is our core growth driver. The premises part of our business is also lined up for strong growth in the near-term. In particular, federal, state and local government sales look strong as to our recurring revenue products.

With a focus on physical security in both the Federal Government and at the state and local level, we are seeing great demand strength. Combine 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’s 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 intelligence system.

So we are on-track, we are 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 is expanding fast.

Now, before wrapping up these comments, one other topic I would like to touch on is Sandra’s departure. Over the past four years, she has 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 is moving on to other opportunities, and we wish her very well in those. In the meantime, she is continuing to be really supportive of the team and our business. In parallel, we have got a search well underway for finance leader and business partner to support our growth to the next levels. We are 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 will 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 are finding the right long-term financial leader.

So to wrap up, here are 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 three weeks of the third quarter, up 44% versus the same time last year.

We have designs underway are one with over a dozen more RFID customers. We are 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 is 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 as some of the revenue multiplying projects fully ramp during the second half of next year.

So with that I will open the questions and discussion. But let me also mention we again have Dr. Manfred Mueller with us who runs RFID business of course, and this time, he is 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.

Question-and-Answer Session

Operator

Absolutely. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And it looks like your first question is coming from Craig Ellis from B. Riley FBR. Craig , your line is live.

Craig Ellis

Thanks for taking the question and congratulations on raising the high end of revenue growth target this year to 106 million. Steve, I just wanted to ask the clarification related to that your comments around supply and shipment capability was the point on shipment capabilities. What that shipment capability exists to that 106 million level or was the point that it exists to 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 that you have in the business already

Steve Humphreys

Yes, it depends on the mix. Craig, it is a very good question. That is why I pointed out there is some new designs that we haven’t got orders in good parts in order for it to design for just finished up that long ago. And if we get excess demand for that is something that was the current lead time we are not going to be able to meet.

But up to that 106 million if it is the right products that we are ready for which there could be demand for and some of the categories and got good visibility to, Yes, we can. And in certainly, in that range, well above the bottom of it and up that 106 range we have got coverage.

And let me also see a side see if Manfred wants to add a little more color to that.

Manfred Mueller

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 seeing very, very close touch with them. Whether it is NXP, Impinge ST, any of these guys, so from that point of view, that is for sure. So we have put in orders already, like, five, six 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.

Craig Ellis

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 sets and just get a little bit more color on customers like Carestream and [Careflow] (Ph) and DuPont and Corvo, et cetera. How big are those customers in aggregate, and some of them are very large entities and so what is the potential for those customers become much larger in either calendar 2020 and beyond?

Steve Humphreys

Yes, that is what I tried to say there. And it was talking pretty fast through a lot of things. You know, 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.

You know, they are not going to be, 20 million, that they can really change business, although some of them conceivably could, if they turn to that unexpected breakout point. But the point is, that is where a lot of the growth is coming, is in lots of half a million to a couple of million dollar customers. And you get a broad tail of those, and that is driving a lot of the chord growth. Does that answer what you were getting at?

Craig Ellis

Yep, that gets added to the net. And then lastly, I will just shift to the longer term question that I had before hopping back in the queue. And that is a nice to hear increased confidence that some of the large projects can get going around the mid 2022 timeframe. Can you talk about where you feel like you have got the greatest visibility with those and where you have the greatest confidence that one or more of those could begin to ramp?

Steve Humphreys

We have got good confidence in most of them. It is always been a matter of timing and process. So I tried to give some color on cannabis where they are getting machines in and if they can prove scalability, they have got a regulator who is ready to flip the switch and go, but also the regulator doesn’t want a black guy, were 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 that dealt with that, that is not something that is going to not happen, it is going to happen and the question is timing. Similarly with the auto injectors I talked about last time, they got team on it, they are investing on it. They are working on IP the designs accepted. And same thing it is not going to not happen.

So, I think all the ones that we have talked about in the past, and again, without taking all of our time re going through all of them are still on the paths 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 is 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 is what is hard to say. Because a quarter here, quarter there, I suspect cannabis will ramp up, then the question is how fast it will ramp, when the floodgates will get totally open.

But as you know, on the pharmacy side, we have already got one in full production and another one in pilot. So they are already starting to ramp. So I think there is not one or two that I would handicap is first through the gate and there certainly none that I was debt handicap is saying is lower probability.

Craig Ellis

Got it. That is helpful color. Thanks Steve. And Sandra congratulations, thanks for all the help you on the way.

Sandra Wallach

Thank you. It has been a pleasure working with you Craig.

Craig Ellis

That is great. Thanks Craig. Go ahead.

Operator

The next question is coming from Jaeson Schmidt from Lake Street. Jaeson your line is live.

Jaeson Schmidt

So I know, Steve, you mentioned that you are not seeing any supply chain constraints on your end. But just curious at the overall tightness out there. If you have seen some programs and projects get pushed, sorted, definitely by some of your customers?

Steve Humphreys

So first to clarify, we are seeing plenty of supply chain aggravation. It is only, because we are getting ahead of it as being very aggressive. And doing everything needed to keep it open and going, that we have been successful in keeping an open going.

But it is not, for lack of dozens of people in Singapore and Germany and elsewhere, fighting for it. So they, there is a lot of pressure in the system there. And what was the other part of the question?

Jaeson Schmidt

I’m just curious if you have seen some of your any projects or programs from customers, their timetables get shifted. Just because of their inability to get other components?

Steve Humphreys

It is a good question. We worry about that. Always and we have heard some saying or we can’t get this other part. And therefore, this might slow down, but then they then they pause and think. What we don’t know when thing is going to open back up on other components.

And they are all fighting to get through other components. So almost always build and say, you know what, we are just going to go ahead and order yours. And then if there is something slower that comes in, at least we will be ready and locked and loaded. So the net, net is that we haven’t seen that happen. We have had some conversations about it, not in any of the major projects.

The major ones are all running on their own timelines. 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 fazed by this. So it is not affecting the core of our business at all. It is a conversation that happens a lot. That seems like it nets out equally neutral and positive. Do you want to add to that Manfred?

Manfred Mueller

Yes, two problems Jaeson. The first one is we have some flexibility with some parts on our end. So whenever there is a possibility to switch from a dedicated chip or IC, to a related one with similar or the same functionality, we really try to coach our customers through that and give them the possibility of one day shortage on Part A to better move on for Part B.

The other thing is, we really try to scrub 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 increased 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 is really important to know.

And another important comment on that topic as a whole, yes, we have 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 is a great opportunity for us right now.

Jaeson Schmidt

Okay, that is really helpful. And just looking at the pharmacy opportunity. When do you think that second customer could Exeter that pilot stage and I guess relatedly given that you do have two pretty sizable customers you are working with. Have you seen increasing interest from other pharmacies out there?

Steve Humphreys

First on the processors to the first one took almost a year in pilot. And then of course, any of these pharmacies, they all have the 1000s of pharmacies. And so the rollout, they have got to get them supplied everywhere, and all the pharmacists training. So it can take eight 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 are going they don’t stop, and they just grow, but they do take time. So I think that again, that is sort of mid next year timeframe, maybe a little earlier, but in that timeframe is the appropriate way to think about it. Again, to ramp up to aggressive scale, they are already continuing to consume volumes, but not to the [10x] (Ph) scale they can get to.

Jaeson Schmidt

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

Steve Humphreys

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 project 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 by now.

Jaeson Schmidt

Okay. I will jump back in the queue. Thanks a lot guys.

Steve Humphreys

Thanks Jaeson.

Operator

[Operator Instructions] And our next question is coming from Mike Latimore from Northland Capital. Mike your line is live.

Unidentified Analyst

Hi, this is [Aditya] (Ph) on behalf of Mike Latimore. Could you talk about the syringe use case? When could we expect the FDA approval for the syringe use case?

Steve Humphreys

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

Manfred Mueller

Waste got to be designed is ideally avoid FDA approval, because it is just like going to be wrapped around an existing syringe. And it is 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 is not necessarily the Henry part there. So I hope this answers your question.

Unidentified Analyst

Hot it. Alright thanks. 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 margins?

Steve Humphreys

I think gross margins will be more in the consistent with where we are now. More than, again, if you are talking about non-GAAP gross margins that you are talking about in the 38 to 39% range. Because even as we are making sure we are delivering everything.

There are some purchase price variances, there is the logistics costs and a few other things that are going to keep you I think, keep supply chain under pressure. We will be delivering and we might find that to get all the way to the 40%. But I think there is going to be some small pressure on gross margin through this year. For us, like any company.

Unidentified Analyst

Alright, fine. No further questions. Thank you.

Steve Humphreys

Thanks.

Operator

The next question is coming from [Jay Chung] (Ph). Jay, your line is live.

Unidentified Analyst

Hi thank you for the opportunity to ask questions. And congratulations Sandra, hope you have a great turning ahead of you. Then just on the RFID side. Can you give us your next step in plan capacity for this year next year or next year?

Steve Humphreys

In terms of capacity, right now, we are in the mid-200 million range of units. We are not adding a ton of capacity right now per se, but what we are doing is we are 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 more effectively.

So we will be moving that volume up from the mid-200 to the 300 million units. But it is really when we see the demand side come through for some of these larger projects, that will start to add in a couple more meaningful pieces of equipment that the next 100 million units capacity.

Unidentified Analyst

I see. And you mentioned mid next year perhaps anther times when some of those larger programs come into play. How far the bank, you have to build capacity to accommodate them?

Steve Humphreys

Relatively quickly around four to five months. But ordering machine, getting it in, getting it qualified wrapping it up is roughly the timeframe and if you think in terms of three quarters million euros for 50 million to 75 million units. That is roughly the way to think about how we add capacity. There also we tend to back in furlough - it doesn’t need to be three to four months for each 70 million units, we can get, three machines and then add 100 million to 200 million units plus.

Unidentified Analyst

That is great. And then I know you have talked about the second pharmacy, but just on CDS, I noticed that my local CBS, they now all have bespoken RX, we are about a quarter ago, I don’t think they only a few did. So it is the rollout now complete, or is it still ongoing at CBS?

Steve Humphreys

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

Unidentified Analyst

Okay. Now moving on to the premises side, I noticed on your job boards that right now, the majority of current employee searches are all for the premises side. Does this means that you pretty much have to be rapid on the RFID side? And then also, does this means that the premises side is actually growing faster than expected?

Steve Humphreys

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

Unidentified Analyst

I see. And then with the new hires that you did already in pandemic in the second half? What sort of OpEx levels should be pickup by going forward and what sort of revenue level can that report?

Steve Humphreys

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

Unidentified Analyst

The best great leverage, best way to see. And then, in the script, you mentioned 2022 a couple times. And without giving guidance in the future thoughts on I guess how it is shaping versus 2021? Do you expect growth to accelerate from this year? And then I think at the midpoint of about 18.5% or 18.6% revenue increase for this year. What are those programs coming online? Should we see a pretty, look like to be easy hurdle from 2022?

Steve Humphreys

So Sandra is shaking her head at me, as well. We aren’t giving 2022 guidance. But of course if you look at the arithmetic and everything we are adding one would think growth above what we did in 2021 is reasonable. But Sandra, I will let answer that.

Sandra Wallach

We will be giving full guidance in the November earnings. But I think what Steve said is a reasonable assumption.

Unidentified Analyst

Okay, great. And then finally, I think first half of 2020 a designated series of actions to conserve cash and maintain flexibility due to the pandemic. And rather - to pay, Steve is definitely shares instead of cash. Now that the cost level is much higher, your balance sheet looks great. And we are ready to start with a much firmer footing or being practical back to pay the salary costs or do I update with the share and for the record, I apologize that you are still doing your competition shares.

Steve Humphreys

What was the last part?

Unidentified Analyst

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

Steve Humphreys

But, I will answer the first part, I have no intention to shift to cash compensation.

Unidentified Analyst

Okay. That is all I have here. Thank you for that.

Steve Humphreys

I will stick with the equity compensation.

Unidentified Analyst

Great, thank you so much.

Operator

We have a follow-up Craig Ellis from B. Riley FBR. Your line is live.

Craig Ellis

Thanks for taking the follow-up. Steve, I just wanted to go back to the end of June announcement that signaled some strength that was brewing in the enterprise part of the premises business and clearly you are 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 reasonable to think that the engagements that you have in federal government would persist next year and two, from the engagement that you are seeing in premises, 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 two parts?

Steve Humphreys

Yes. Thanks for the follow-up on that. Craig? Two comments. Yes, we do think premises would be growing. On the other hand, you know, RFID, which grew 39%, in this quarter is growing faster. So it is just a, it is just a simple fact that you will have, we will have mix moving that way, which is great, because that is the fast growing part of the business. And we are investing it and we expect it to continue to grow fast accelerate.

But premises is growing, somewhere, four plus times the market growth, we think, we are going to keep taking share that. And Federal Government, those secrets, it is a lot of going, especially cyber and physical for the federal the market growth. And most think we are going to keep taking share that way. We have the most secure platform or federal facility.

So I think that we will continue to grow and grow strongly and grow that much faster than the premises market. In terms of time cycle, there is two things that drive federal growth. One is the expansion of current deployments.

So we are in all the federal courthouses, the IRS, the FBI, most of the Secret Service, secured locations, a number of others, TSA, et cetera. So, they are massive deployments. And there is 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 fiscal access security into video surveillance and Video Intelligence. And then the question, I think, at the core of what you are asking, which is, how long, projects actually, I can take that are relative new.

That can be anywhere from six months, which can happen when there is urgency around. You have had to do appointments to a year and a half when you are talking about a full RFP 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 are in right now. And we are in a few dozen different departments, agencies across Federal Government. So lots of room for growth there.

Craig Ellis

Got it. Thanks for that. And then Sandra, I will ask you one on gross margin. So it sounds like just given some of the incremental costs that go along with operating in the environment that we are 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 types of getting there, if not this year event as we go through calendar 2022?

Sandra Wallach

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

Craig Ellis

Got it. Thank you both.

Steve Humphreys

Thanks Craig.

Operator

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 [e-mail].

I would now like to turn the call back over to Mr. Humphreys for his closing remarks.

Steve Humphreys

Alright, thanks. I will make this a very short because we are almost back at 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 are hitting new milestones, launching new products programs, bring on people. So we will keep up the communications you can track our progress over time and these fast moving markets will be at a number of investor events over the next couple of months. We have got Concord, B. Riley, Gateway, Colliers, Lake Street and Stifle all coming up.

And then also, for anyone who is following the RFID industry, RFID journal live in Phoenix the 26^th to 28^th of September will be going on. That is the main RFID event of the year. It is in-person. And so anybody who has interest there and care to meet with us there, of course, we will have a very meaningful presence here. We would love to see you there and show you through some of the things that we are 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 progress.

So thanks again. Thank you all for joining us and have a very good evening.

Operator

Thank you for joining us today. You may now disconnect.