Q3 2019 Earnings Call
Good afternoon, welcome to identify Q3 2019 earnings call.
My name is Carlin I would be your operator this afternoon.
Joining us for today's presentation or the company CEO , Steve <unk> as CFO Sandra will.
Following management's remarks, well open the call for questions.
For the begin please note that during this call management, maybe making references to non-GAAP measures our projection.
Adjusted EBITDA.
During the call management, only making forward looking statements.
Any statement the refers to expectations injections or other characteristics of future events.
Leading financial projections and future market conditions, it's a forward looking statements.
Actual results May include an actual production.
Actual results may differ materially from those expressed in these forward looking statements for more information. Please refer to the risk factors discussed and documents filed from time to time with U.S. easy.
The company's latest annual report on Form 10-K .
I seem to no obligation to update these forward looking statements, which speak as of today.
I'll now turn the call over does he always keep hungry for his comments.
Please go ahead, all right. Thanks, operator, and thank you all for joining us.
The third quarter continued the growth and profitability trends from the first half a year.
Showing that our strategy is getting traction right now.
With revenue growth of 38% in the premises business year over year, we're growing much faster than our market, which is growing at around 7%.
Just as important our progress on profitability took another major step.
Last quarter was I got it was first profitable quarter in a dozen years and this quarter. We grew our E. P. S to about five cents a share when toppling over the prior quarter.
No. It's just the beginning of course, but it shows have clearly we've turned the corner on profitability right now.
We grew our recurring revenues to about 8% of revenues and our total software and services revenues grew sequentially from 12% of revenues grew by 14%.
So expanding profit and profitability core business growth at a rate that's a multiple of our markets growth rates growing recurring revenues and software revenues. All show why we think our business is hitting its inflection point right now.
Dps growth was especially meaningful because it came through while some large deals in our thursby business pushed out to later periods.
We've already had major wins in the Air Force a navy reserves with T.S.S. and we expect to close another branch of the armed services, but it didn't happen with year end funds in our third quarter, which was the federal government fiscal year end.
As a result, we had a couple million dollars of high margin Thursday business that'll be coming in a future period instead.
To expand our profit as we did based on growth within our core premises and art I'd businesses really shows the strength of the business model we built.
Then you can imagine with a couple million more on the top line of Rts, That's mobile software, which we've shown can come through with that scale in any given quarter. We're already close to our target profit model, which Sandra will talk about a bit.
So looking at the quarter in a bit more detail premise is continued its strong path.
You might recall, we grew their 21% year over year last quarter and this quarter, we grew 38% year over year. So we're accelerating.
Comparing this to some of our comparable is like alarm dot com and NAPCO, which are growing in the low to mid teens, our strategy clearly places us in the fastest growing part of the market.
We're just at the beginning of the growth curve because we're currently piloting some of our most exciting cloud based services and our next generation reader and I O T platforms, which will be coming out at the end of this year and early next year.
Also as in premises as we noted in the earnings release two of our top 10 customers in the quarter and five of our top 10 customers on a year to date basis were video customers.
Now you might recall this was four at the top 10 last quarter. So video continues to grow within promise is showing the strength of our analytics platform and especially the strength of our total solution strategy.
We're already known for our physical access platforms, especially in the federal state and local government area.
Seeing the strength in video demonstrates the opportunity. We have ahead of us as more companies turned to our total solution and more value added software and services, especially in analytics around the huge data streams our system generate.
Now of course, our federal government business continued to be strong.
In public government filings our systems have been visible it solutions for the secret service. The <unk> are asked the T.S.A. customs and border protection. The U.S. Marshal service military installations worldwide and a range of other departments and agencies at the federal as well the state local levels.
And we highlighted the U.S. marshals in an earlier press release, because their deployment program across 900 sites is particularly substantial and because the publicly available filings specifying a hearst philosophy system are really a good clear proof point to highlight.
No we don't typically announced these wins because our customers generally prefer to simply continue their good work for our country, but they're also visible on government web sites as contracts are issued so so interested parties can usually figure out the strength that breadth of our footprint.
So you can see the depth and breadth of the activity in our premises business across the federal government.
But our involvement in the federal government space also includes our smart card reader business, which is the dominant solution for the de for desktop cat card secure side on.
And of course, there's our 30 be software, which is a primary secure b Y O de mobility solution for their best apart.
On the identity side, our if I'd grew 11% year over year, and 6% year to date and during the quarter, we had several strategic wins in this sector.
We announced our partnership with label tries to lodge applying our rough idea I O T devices to ensure authenticity for high end brands, such as Remy Martin cardiac.
Probably the biggest news for the market overall, though with the launch of the iPhone 11 at Iowa 13, Apple is really fully embraced all aspects of NFC.
There are always a bellwether and partly as a result, we're really starting to see the pipeline of NFC based RF I'd applications expand more than ever and I'll talk about that more a little bit later it some specific examples.
So in total our identity segment was down year over year, but mostly due to two factors, which are positive for our future business.
We're moving our access card mix to higher margin more secure identities and away from lower margin Unsecure H.I.D. cars.
This is partly why we're seeing expanded margins and why we're moving fast along our profitability.
Within the scorecards themselves, we're well ahead of plan, even though we had planned a reduction in total revenues to moved higher margin identities.
Also as I mentioned earlier Thursday's next major armed service deployment wasn't covered by year end funds and the government.
Which reduced our topline than identity.
We still expect that deployment, which puts another chunk of high margin TSS business ahead of us rather than behind us.
So with that context, a stronger earnings progression recurring revenues at 8%, becoming a material part of our business software and services growing strongly sequentially overall growth of 15% year over year about double our markets growth rate our business strategy really showed it strengthened the <unk> third quarter.
I'll turn the call over to Sandra now to go through the financials in more detail and then I'll come back to give some updates on our growth drivers. The defensible advantages, we've established and the scale of the market transition that's happening right now.
Sandra over to you.
Thanks, Steve before we dive into our Q3 financials here I keep a few key metrics that we think are important and analyzing the progress and performance of our business.
The first one its growth.
As represented by our third quarter, 2019 revenue, which is up 15% compared to the third quarter 2018, both organic and inorganic growth drove the increase.
This brings our third quarter year to date growth rate to 14% over Q3, 18 year to date and our trailing 12 month growth rate to 17%.
It's also important to note that our Standalone software and services business has increasingly become a bigger component of our revenues, enabling us not only to expand our crop.
More consistent in our results and drive higher margins as well this part of our business grew to 14% of our total consolidated revenues and 422 basis points over the prior to <unk> trailing 12 month period.
Well, we are starting to report on recurring revenue as a key driver for our business grows as a reminder, this is a subset of our Standalone software and services metric, reflecting those longer term multi <unk> multiple period commitments for support services and maintenance.
As we bring our solutions as a service from pilot to market. We will report those revenues as part of this new metric broken out.
Our GAAP and non-GAAP gross profit margins have have steadily increased over comparable periods based on our stronger sales of higher value add solution with our third quarter 2019, and trailing 12 month non-GAAP adjusted gross profit margin study at 47% ABT 460 basis.
Points over the prior trailing 12 month period.
In addition, based on our strong growth profile shift to higher margin mix and consistent Opex management. This will be the 13th straight path on GAAP adjusted quarter in a route.
This quarter, our trailing 12 month period, non-GAAP adjusted EBITDA margin hit 11% over double our comparable trailing 12 months.
In addition, we delivered our second consecutive quarter of positive vps since the fourth quarter of 2007 with exception of Q4 2012, when the company recorded GAAP net income of 0.2 million as a result of a nonrecurring 1.4 million benefit for income.
Taxes, mainly related to impairment charges taken earlier in 2012.
We also truck our quarterly and trended year to date free cash flow results as we go back a little of our progress.
During the third quarter due to the significant backend loaded loading of our quarter due to late federal government buying patterns, but we are still writing 1.2 million positive free cash flow to allow us optionality to pay down debt and fund investments for the company. We expect to that we will exit full year 29.
18, net positive and accelerating.
Our next side our revenue in the third quarter was 23 million.
15% increase compared to the third quarter, 2018, and a 4% sequentially compared to the second quarter of 29 team.
Our premises segment generated 56% of our total third quarter revenue or 12.9 million an increase of 38% from the third quarter of 2018, and an increase of 22% from the second quarter of 29 team.
The comparative quarterly increase was primarily driven by strong organic demand for our sales of our physical access control solution and our video technology and analytics software. In addition, our recent acquisition of freedom Liberty in Interphone mesh products.
Added inorganic growth.
Sequentially quarter, the quarterly increase was driven primarily by higher physical access control solution sales and is our highest seasonal quarter with the federal government year at it.
Revenue from our identity products, which includes sales of physical access credentials readers modules transponders and mobile security products was 10.1 million in the third quarter of 2019 or 44% of our total revenue.
Is it represents a decrease of 5% from the third quarter of 2018, and a decrease of 13% from the 11.6 million in the second quarter of 2019.
The comparative quarterly decrease was primarily driven by the reduction in revenue from our lower margin access card segment as discussed in prior calls partially offset by the return of transponders to double digit growth this quarter.
The sequential quarterly decrease was primarily due to lower sales of access cards with some natural unevenness in our transponder products sales quarter to quarter are within our year to date growth trajectory.
Now turning to our GAAP gross margin gross profit margin.
GAAP gross profit margin was 46% in the third quarter 2016, compared with 44% in the second quarter of 2019 and 42% in the third quarter of 2018.
By segment, our GAAP gross profit margins continued to be strong and stable with our premises segment and 56% in the third quarter 2019, and the second quarter 2019, and 57% comparably.
In the third quarter of 2018.
Our identity segment was at 33 in the third quarter of 2019 versus 34% sequential and 29% comparable with the third quarter of 2018.
He note is that even with the 5% decrease in revenue comparable Q3 of 29 team to Q3 of 2018, our refocusing on higher value added solutions generated more absolute GAAP gross profit dollars as measured in 33 versus 29% comparable margin rate expansion.
On a non-GAAP basis, excluding certain non cash items, our gross profit margin was 47% in the third quarter of 2019, 46% in the second quarter of 2019, compared with 44% in the comparable quarter of 2018.
The comparable increase in both GAAP and non-GAAP gross profit margins was primarily attributable to favorable product mix.
If we turn to the full income statement per the earnings release, our GAAP net income attributable to the company for the third quarter was 1 million compared with net income a 0.4 million in the second quarter, and then that loss of zero point Threemillion in the third quarter of 2018.
With the dividends on the series B preferred stock our net income attributable to common stockholders was there a point 8 million or a positive five cents per share compared with the third quarter 2018 loss of two cents per share.
We have provided here a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings certainly.
There are few are worth noting at this point interest expense was lower at approximately 0.2 million for the second and third quarter compared with 0.3 million in the third quarter of 2018.
Depreciation and amortization increased to approximately 1 million for the third quarter compared was your 0.9 for the second quarter 2019, and 0.8 for the third quarter of 2018.
The increase comparably was related to the amortization of acquired assets.
Ah intangibles associated with the acquisition of Thursday, and <unk> assets.
Now moving to operating expense management, which is included in the next graphic on the webcast presentation.
Underlying the continued management of non-GAAP operating expenses as a percent of revenue is a relatively flat expense basis, which we have managed to normal seasonality in acquisitions.
For the third quarter of 2019 per earnings release, our total GAAP operating expenses were 9.3 million compared with 9.1 million in the second quarter 2019, and an increase of zero point sixmillion compared with the third quarter of 2018.
Which was prior to the acquisition and integration of both Thursday invite him.
Our non-GAAP operating expenses adjusted to exclude restructuring and severance cost and certain noncash charges normally excluded from our non-GAAP results such a stock based compensation and increase in fair value of earn out liability depreciation and amortization as well as additional non-GAAP items consisting of ACA.
Position related transaction costs were 7.9 million in the third quarter of 2019 as compared with 7.8 million.
In the second quarter of 2019, and 7.2 million in the third quarter 2018. The graph continues to show integration leverage that we are achieving with delivering top line growth instead, the operating expenses.
Bringing all the pieces back together and given our strong growth profile and ongoing cost management, our non-GAAP adjusted EBITDA gain was approximately 3 million in the third quarter of 2019, 86 0.6 million increase from the second quarter of 2019 on an absolute revenue increase of only 0.8 million.
And 1.3 million.
More than the comparable quarter 2018, non-GAAP adjusted EBITDA.
Now if I could turn to the balance sheet, we will be comparing our position at September 2019 to the position one quarter ago at June 2019, and the prior year quarter ended September 2018.
Cash at September 2019, and June of 2019 was 11.1 million then that activity for the quarter was primarily comprised of a source of 2.8 million cash driven by our net income excluding noncash item.
3.8 million cash used in operating assets and liabilities with the Diminimus amount of cash capital expenditures are non-GAAP free cash flow generated was a negative 1.2 million.
The performance within this quarter was highly influenced by the back end loading of our corner.
And is reflected in the accounts receivable increased noted in the Oh.
Under financing activities, we had 1.4 million net cash generated.
By 1.6 million net increase in net borrowings under our east West Bank revolver, while retaining excess available on the line of credit of 20 million if needed for sprint capacity offset by 0.2 million tax payments related to ours, you really says.
Lastly, there was a small zero point threemillion negative impact of foreign currency fluctuations to reconcile to our GAAP cash flow.
In our 10-Q filings, we will provide we will be providing a full reconciliation of the year to date cash flows.
For completeness. We've included the full reconciliation of non-GAAP adjusted results to GAAP and the full balance sheet for the earnings release in this appendix.
In the context of our target business model, we continued to deliver what we set out to do grow both revenue and non-GAAP adjusted EBITDA consistently.
We have achieved net income profitability for our stockholders ahead of expectations.
As we head into the fourth quarter of 2019 and 2020, we've already exhibited many of our target metrics within select quarters of 29 team.
Today, we are updating our guidance for the consolidated results for the company for full year 2019.
Our revenue will be between 88, and 90 million slightly under our original guidance coming into this year are projecting non-GAAP adjusted EBITDA at the high end of our original guidance at Eton have to 9.0 million.
And net income attributable to identify out or over the high end up our original guidance now projected to be 1.0 to 1.2 million.
This guidance includes a full year profitable EPS, which is the first since 1990 920 years ago with the exception of 2006, where the positive net income of 1.9 included a non operating gain on discontinued operations of 8.7 million.
In addition to they were providing guidance for the full year 2020 building on the inflection points. If we have delivered.
Our full year 2020 guidance.
<unk> revenue is 102, 104 million, which reflects a 14% to 16% growth year over year far exceeding the market growth by a factor of approximately two Alex.
non-GAAP adjusted EBITDA between 12, and 14 million and net income attributable to the company between 4.5 and 6.5 million.
We expect our normal seasonality and as we have committed we will come to we will see more quarters in 2020, where we hit our target model metrics on a sustained basis. After we consistently break through the 25 million run rate.
Our guidance for full year 2020 bps is 20 to 31 cents per share, reflecting the continued focus on profitable growth leverage and strategic cost in cash management as we continue to be cumulative cash flow.
Positive.
We believe that our business models position to continue to accelerate towards generating positive and profitable growth, but that I'll conclude the financial discussion and pass it back to Steve.
Thanks Sandra.
As you heard from Sanders commentary our foundation of profitability has been established now at our growth rates of 38% and premises and 15% in transponders and overall give us the revenue growth to drive expanding that income.
So just like last quarter, given growth and profitability the core investor questions, we want to address our how defensible as our position how leveraged and scalable as it and what's the size of the opportunity.
I focused last quarter on how defensible. Our total solution strategy is as the only company in our industry with a total solution the technical capabilities needed to develop all the parts of a total solution and the customer trends to consolidate vendors.
Obviously, our strategy is highly defensible, but it's also very attractive to the fastest growing customer segments, which is why we're seeing such strong growth in premises.
We have is validated the GSX trade show in Chicago in September .
As I said on our last call we were planning to show our total solution challenging any other company to provide the same.
We did exactly that a GSX and indeed, they can't match it.
Our positions unique highly defensible and its where customers want to go.
So with defensibility establish today like focused on how leveraged our strategy is.
Leverages the key to expanding profitability. This is the base, where 2020 guidance that you just heard and especially validates our expectations for EBITDA and net income expansion.
So our leverage is built on two components customer leverage and technology leverage.
As a single customer requires identity cards access systems video analytics and integrate them into their I T systems, We do one sale and managed one account generating business for a range of products.
Competitors have to generate profits on one or a subset of these.
The cost of sales about the same if you're selling one product or several products for the customer obviously, so thats where leverage comes in so let me give you. An example that shows this leverage and also shows the connectedness of nearly all of our products.
There are two physical security federal government customers that are evaluating TSS sub rosa for their mobile security.
It would have been a year long sales cycle or more to get into these agencies with an independent mobile security products.
With us the internal decision makers know us they have the existing need for secure mobility and they have contract vehicles in place. So.
So they simply added on as a clinic contract line item number and they're ready to deploy with one customer assessing deployment of sub Rosa secured I pads across 900 sites.
Another agency is currently at security customer rehearsed velocity as gravel pack products and they're also assessing deployment of sub Rosa for over 20000 feel operators.
I previously I've given several examples of access control and video cross selling and identity card Cross sales are obvious. These examples really show how broadly the sales leverage goes across virtually all of our products.
So the sales leverage we have is clear.
It would have been more than a year long sales cycle became a couple of meetings and some technical discussions.
I could give it doesn't other examples of cross selling into customers, establishing beachheads with lower end products like identities and growing into other systems, all delivering best in industry leverage of our sales and channel investment.
That was a bit of further validation. Some other very good cost companies are trying to started similar approach.
Some of you follow alarm dot com and saw their acquisition of a video analytics company last month similar to what we did more than a year ago with three VR.
Now, we're not so worried about them competitively because they're coming from the consumer side and the SMB Party commercial but we do see them as a long term comparable and their moves do corroborate our vision of where the market's going which were already ahead of the curve on.
The other leverage points at our strategy is technology.
Mobile solutions and cloud based recurring revenues are core to our strategy and our core to the transformation happening in the fastest growing parts of the industry.
Across freedom velocity, Threepi Rts Aesynt credentials, we already have nearly a dozen mobile apps deployed license or under development.
Now some of these are customer or sector specific and some are pilot stage in terms of deployments, but all are up and running and some are available through the Apple store and Google play now.
We believe mobility is core to everything our customers want to do our advantage is that we take our investment in mobile expertise mobile security mobile you I knew acts and we leveraged across access video CAC and digital signing CAC and pave remote log in and security cloud based security and identity credentials.
Nobody in our industry can match that range of product leverage across their investment in mobile apps.
Similarly for cloud infrastructure.
We used our cloud infrastructure for a long time for issuance obscure identities and significant issue as far as secure access for years.
Now that core expertise has enabled us to rapidly build cloud native access control and video platforms.
Now let me focus on this point from it because our cloud strategy is different from our competitors.
One of the impediments to adoption in cloud based security is that access control as a service and video surveillance as service providers have tried to push software centric the vendor owns the customer business models onto the channel.
Now as a result early interest like Riva forced the security channel to turn it over a customer control to them. So dealers would install and set up customers. They then became Bravo customers as you might imagine dealers hate this and as a result adoption of cloud based security services in the commercial and government segments has really been slow and expensive.
Now our strategy is different and it's really tailored because we know the customers and the channel so well.
Our Clark cloud architecture empowers dealers to operate through our cloud infrastructure brand the services their own and then manage unveiled customers directly if they want.
However, if they don't want the overhead of managing and billing customers. We can also operated as an identiv service paying the dealer a fee for the customer.
A third capability of our architecture allows the end customer to run the system in their own cloud if that's how they prefer.
And then a fourth implementation leveraged the federal cloud.
A requirement for some of our federal customers. What's important is it's all the same technology and the same underlying architecture.
Now I can't emphasize enough how leveraged and differentiated this cloud strategy is.
Talking about it more in the Q and a if there is interest I'll, probably will focus on it and assessment call.
The point is that we analyzed me affection points of adoption, we think we've developed a superior and broadly applicable cloud architecture.
As I've said, we're still piloting some of this but we've got a list of dealers lined up who want to set up and get started.
The attractiveness of being able to provide the power brands like Hearst velocity at our freedom solutions and to do it on their own dealer branded cloud is really compelling for the channel.
This architecture advantage is another way to leverage our technology and to empower and leverage our channel.
So hopefully this makes clear highly leverageable our businesses through both sales leverage and technology leverage a defensible leverage business model is the base we built.
Why you're already seeing expanding profitability and why we expect continued multiple that market growth rates and further expanding profitability.
Now in addition to the core strengths of our total solution, our federal government advantages, our cloud mobility leverage I'd like to touch on just a couple of related growth drivers for us in the fourth quarter.
You might have seen our announcement yesterday of our partnership in the consumer space craft times.
This is obviously one of the leading brand companies worldwide and it reaffirms the adoption of NFC technology, that's going on in the security and consumer engagement spaces.
Consumer branded adopters that have been active in the marketplace include Mattel Nike Adidas and many more that's certainly apples complete adoption of the NFC stack that I mentioned earlier has really signal to the industry time for wide adoption is now.
That's why you're seeing mass marketing deployments that were part of and you'll see more of that.
I can also go into more details of the Kraft Heinz application in Q and a if there is interest.
On the mobility side, we've got a lot coming through from TSS, We're launching a new version of sub Rosa version, five with great usability and applicability across all the armed services and the wider federal government for secure view Io devices.
We're especially excited about our new CAC and pivot able PDF signing application, which lets any federal government employee use their mobile device digitally signed documents using the service on their CAC or PIV I'd card.
That's a lot of jargon, but but I think everybody can appreciate how important signing forms in a secure fashion is to our government and this is it really unique technically hard but very widely used flap and again I can discuss it more in Q1 day.
Now I could go into a lot more releases and channel it issues coming this quarter, but they all aligned with the sales leverage and technology leverage I talked about earlier. So hopefully is giving you a sense of the internal development, we have going on it and we'll just keep updating progress through press announcements and trade events.
So you can see the profitability leverage point, we've hit why we think it'll continue to expand and scale and the clear trends in business drivers that give us visibility to our profitability in revenue outlook.
This is the foundation for the 2020 guidance that Sandra described as well as the updated 2019 guidance, both of which I'll expand on for a business perspective.
For the balance of this year with 64.8 million written in revenues year to date, including 23 million into the third quarter normally the third quarters, our highest quarter the year.
This year a growth is strong enough that we expect fourth quarter revenues to be inline or slightly higher than the third quarter and this takes our revenue guidance for the 2019 year as sandy Sandra indicate indicated to the $80 million to $90 million range.
Which is below our prior guidance, primarily as a result of the delays in the various be deals we expected with the end of the fiscal year.
We're confident that business will come in but the government fiscal year end past. So we can't be confident it will happen before the calendar year end.
Now for EBITDA net income, though Sandra confirmed guidance at the top of the range or better where our full year EBITDA guidance was not $7 million to $9 million and we now expect EBITDA at the high end of this range the it and have to $9 million range for 2019.
With the strength, we're already showing on net income as you heard we're expecting full year 2019 results above our guidance range. Our full year 2019, net income expectation was trina half a million dollars loss for the year and positive net income of $1 million and we now expect net income for the full year at around one to one another $40 million.
Now for 2020, all the trends, we've discussed puts us in a stronger growth and profitability position.
As a result, the 2020 guidance you heard incorporates higher growth rates and profitability.
We had been projecting low double digit growth going into 2020, we now expect growth in 2020 in the mid teens, leading to revenues in the range that Sandra indicated.
We expect to be free cash flow positive. So this is because our revolver debt reduce interest income and drive net income to more than tripled to the foreign after six $9 million range.
So, finishing 2019 with three profitable quarters, and particularly of profitability of the core business, even with limited contribution from higher margin TSS revenues. This this constant our continued growth expanding profitability.
Solid growth above our best Comparables and competitors expanding recurring revenue a strong market and competitive position and a long term trend to software defined security and converge mobile access which is happening right now.
This combined with strong customer and technology trends, we're seeing we expect acceleration in this direction sustained over the next several years.
So with that I'd like to over the discussion to questions.
Thank you we will now take questions.
He joined the question Q you May Press Star then one on a telephone keypad.
You will hear a tolling acknowledging or request.
If you're using a speakerphone please pick up your handset before passing any key withdraw your question. Please press Star then too.
We will pause for a moment as college trying to Q.
Yes.
The first question comes from Michael at more of Northland Capital markets. Please go ahead.
Yes, hi, this behavior of our far Mike lateral.
I have you did I, especially want to good.
Thank you.
Yeah.
Yes.
A little bit more about doing yes, masha be done, but what I know what the timeframe.
I will include the hardware and software any.
Commenced on the dance debate we have.
Yeah. It's.
The of course, we can't disclose what's not already in the public filings there, but it is 900 sites I it'll be a four to five year program across those sites.
Each site for us will be 20 to $30000 of a of revenue.
And that that will.
Got you into the scale of the overall business opportunity, it's a mix of services and I and systems.
And also I would point out.
It is it is part of an overall VPA. So those contract line items I indicated in there we can move our entire ranger products through so at the outset, its direct Hirsch FICA and readers Digest services and software to drive it forward, we expect over time that that will expand in.
Two other of our products as well in the marshals.
Sounds good and one of the key what steps inviting identity right now and Oh, well in quality give 'em. When did you see the same what to go to driving.
<unk> revenue and profitability.
Yes, so there's there's two categories a vertical say in on the identity side on the RF I decide yield typically see consumer goods.
Retail and hospitals and hospitality.
Very heavily.
On the identity as in Smart card reader.
Please be software.
It's very aligned with our premise business in terms of federal government.
And then security conscious enterprises, such as banking in health care.
Okay, and a quick question on making some.
The mix.
When new customize them.
Our existing customers, how do you see that bookings mix signed up.
Do you see.
Let's see Glenn in some of the next year.
Yeah, it's it's as we've always talked about.
The predominant portion of our revenues come from expanding sales into current customers because we've been in the market. So long, but we're actually seeing the proportion of new sales to new customers expanding.
As well so so for example, with Thursday software.
Those are even though it's in the federal government, it's different agencies and departments within the federal government and that's that's often new similarly for video that's going into a number of new customers and as we bring in the.
Cloud based platforms.
We expect that will also open from our mainstream state local federal education markets, and and large enterprises into small and medium businesses. So I think going forward, you'll see more brand new customers in names.
Often at smaller scale, but a more diverse customer base.
Okay and Brett.
And that's missions once again thank you.
Alright, thank you.
The next question comes from read Matelski of Imperial capital. Please go ahead.
Hi, as you were talking earlier about the seasonality.
A couple of quarters or a couple of years in a row now where the third quarter has been a little lower compared to what the fourth quarter is not expected to be continuing going forward into future years, where.
Our earnings continue to grow throughout the year and it's less of a middle year peak.
Yes, very good point read I do believe that will be the case.
The diversity of customer base that we just added talked out in the last call.
I think that plus the.
The non federal parts of the business that are growing and typically grow strongly in the fourth quarter of the year.
Enterprises are using their year end budgets up.
Consumers you have the holiday buying season on on some of the products that RF ideas associated with so I think you will see more of a sequential quarter on quarter growth throughout the year versus heavily driven in a third quarter Spike that said, we'll we'll always have.
Third quarter federal yearend.
Buying in the in the third quarter is that it could push it up higher than fourth in any given year, but there will be more sequential linearity.
Got it thank you and talking about the state and local government education have you guys see in a significant uptick, especially in the educational market for.
Any sort of access control as or any sort of pressure there.
Yes, very good question. So we've been in education for for a long time, but we do some of the Houston Community College.
The amount of community College, a number of that the large community colleges.
Hi, its local school districts are little more reticent to allow disclosure of their names because of that sensitivity around security that requires but.
We are seeing a lot of growth. There you may be aware the department of Justice has a program about $70 million that they apply as matching funds to local school districts for.
For for physical threats as what they call it for threat risk and and we have had especially our wireless infrastructure going into the school environments. So yes, it's very active.
Got it that's great and in terms of recurring revenue I know you guys disclose that 8% now which is great what is causing the uptick there in which which portions of your revenue you see contributing to that going forward.
So in terms of.
Technology platforms.
Access control is the furthest along on the.
On the.
Recurring revenue platform.
But I expect we as we do more product launches and get our mobility as well as our cloud infrastructure in place next year, you'll see it in access control in video and also in identities.
As well with though with cloud issues of identities.
So I think you'll see it across the board but.
But it will be led I think with access control.
Got it thank you very much.
Thanks.
The next question comes from the halt Coke sheet of Maxim Group. Please go ahead.
Ah yes, thank you and apologizes my questions have been asked a already the U.S Marshal one.
It seems really huge and that's awesome I was wondering if you could talk about where your primary competitors and that's efforts for.
Compelling case.
Sure we did talk about Marshall little earlier, but that didn't talk about the competition. So that's a that's a good when it was it was certainly the mainstream.
And let ALS and software houses of the world and that really demonstrated the strength of our five Cam solution, which really is the best in the industry for the federal government.
Yep Gallagher is in.
Strongly with with GSK and and so there are always somewhere in the Hunton day, and we'd beat them out.
The soundly as well and there was also the an assessment of some of the you know some of the.
Cloud platform infrastructure like the brief most of the world and up I think we've got a a a superior approach there as well as I mentioned in that in the comments. So as you as you can imagine with that.
A deal that big 900 sites, all the federal court houses nationwide and the number of other.
Security sites. It was yes, everybody in the industry was competing for it.
And just to give some context in terms of this win relative to the overall.
It's huge for Identive, but.
Just a rig frame it up again as far as how big is us relative to the tenure opportunity that you guys have been talking about in the past.
So it's a substantial portion of it what I what I mentioned earlier is across 900 sites it will be anywhere from 20 to $30000.
Site for us.
So that gives you a sense of the scale of it for us So it's up a it's very meaningful and.
Hi into what context for you try to put it in the so answering my question.
So overall five chem opportunity.
As you have has been talking about as the.
Federal.
Access.
Refreshes to be compliant with bike him I believe you guys talked about being in I can't remember that number but I believe it's much much bigger than does a night her site opportunity here.
Yes, exactly I mean that the federal government is the largest property owner in the country by far so.
Yeah. This is this is something in the high teens to low twentys millions.
Worth for us.
And I and it is.
Less than 1% of the total government opportunity.
Great. Thank you and then Oh, Florida talked about the video surveillance space HM.
Recently, the United States has placed a a couple key vendors onto their export restriction list that being good ROI exotic hey, I presume that they have yeah, you have no exposure to them and is this actually opportunity for your guys.
It is yes first on the first question no no exposure, we don't license anything from or whatever you sell anything of there is et cetera. Unlike many of our competitors, who have and then and they do we do we of course don't directly compete in cameras, which of their core strength.
But they also do have video management platforms and video analytics and of course, there. There is an opportunity this place in which we're working hard on and then even on the camera side.
It's it's it's just becoming so risky because often even American companies are labeling die cameras from these vendors and other Chinese vendors.
As nominally American as getting hard and tricky for a contract management officer to make sure theyre not stepping on a landmine. So we're evaluating licensing some very clean completely non Chinese including know why wait chips or anything else.
That we can then provide as a trusted technology vendor to our customers.
Okay, great. Thank you very much.
Thanks all.
The next question comes from Jeff Kessler of Imperial Capital. Please go ahead. Thank you.
I'm, sorry for the overwhelming with Imperial capital people here, but first question I have is [laughter] first question I have is.
Recently recently Apple has allowed the has has started to allow the use of NFC around college campuses and I'm wondering if.
Yes, as we begin to if we get as you'd be it to broaden the.
The amount of.
The amount of credential.
The amount of crude could that credential technologies that can be used.
Two or four I identity hub and is there a way for you to drive a higher value proposition, meaning not so much if it's more of the identity. Then it is the actual card itself.
And how do you take advantage of and how do you take advantage of that if there are multiple multiple multiple ways.
Of being able to access or b or be allowed into given inside into given places.
How do you.
Quickly.
<unk> leverage that the fact that theres now multiple ways of getting involved.
In checking out who can get in who can who can stay in.
Yeah. They said there is a number of up.
Thoughts in their first off is.
Yes, it really start to enable frictionless access which is something we've been talking about for a long time that makes your phone.
Very usable and frictionlessly usable because with other technology you got to open it up and then you've got to click to open the door and that's not very frictionless, but with NFC of course, you can just use the you use the device and tap it right NFC reading in the reader. So that's certainly one of the areas that we're going to leverage in fact, we've got up.
A development partnership with a company in the PK I space, because one of the issues with mobile identity is is security of the mobile identity.
So is this this up development activity working on involves issuance of a secure search for a derived credential that then is that is very secure nontransferable a non repudiated Bill and then you just use NFC at the at the door and like you said because Apple is now completely open the NFC stack that becomes practical that that all the iPhone.
Ones and everything from iOS 13 on our enabled with.
Then.
On the on the identity itself not to rat hole too far with it.
As you May know, we actually have had cloud based secure identity issuance capabilities for a long time.
And.
We have been careful about launching it because the market hasn't really been ready to adopt them quite yet.
It's it's like Bluetooth access, it's great that everybody wants to see it and then then they don't take it. So we'll we'll see how that that takes off but were.
We're pretty close with Apple is you know on a number of fronts.
And I and we think that will enable lot of activities. The other thing is since you mentioned Apple the other thing they have in their enabled that has been much less publicized than NFC is apple fully enabled ultra wide band.
Maybe in in the latest I iPhone 11.
And that gives you real time location services with very high granularity in virtually every phone so between NFC and you WB, there's going to be lots of capabilities that we can bring to market and I think we have one of the much better technology platforms to leverage those capabilities.
Okay.
Thank you and.
One other question and that would be.
I know read re was asking you about about your recurring revenue, 8% the 8% recurring revenue number up where are you with regard to.
Where are you with the with regard to acceptance of your customers and your willingness to provide.
Either video.
More more or less for you folks access control as a service, which is beginning to which is beginning to accelerate throughout the entire industry and also video video obviously as a service where.
You don't have the hardware, but you do but you do have the but but you do have the software.
Capabilities of of being able to do that obviously, that's it's it's it would be it would be it would be beginning of life.
You have to convince certain customers to be able to tends to be able to start doing this on a monthly basis instead of paying up front and I realize that most a lot of what you do is gross margin of front.
Where do you use where do you seem to stand on being able to start using or promoting a service based service based application.
So yes, yes. Good good question and we are absolutely committed to the services platform.
As I kind of mentioned this in my comments.
One of the reasons I think it's been slow to take off is some of the.
Cloud based access control serves in video surveillance service customers companies have tried to keep control of the customers which is really.
Calendar to the way the channel in the industry has worked.
And our so our strategy is to empower the dealers and channel, let them basically make hirschmann freedom.
Capabilities available through their own dealer branded cloud and they keep the customer, but we get the recurring revenues as a as part of the provision to that service and I think that will then you can have hundreds of dealers pushing the recurring revenue services to their customers and you're not sitting here one of the.
Try it time trying to sell them and ramp them up overtime and so I think.
That are really start to break the bottleneck that companies like Bravo and others have created by trying to grab all the customers for themselves. So we're very bullish on on a recurring revenue aspect to the business. We we think that going to market through the dealer channel is the way to really have thousands of feet on the street in parallel.
Yeah.
Is this something you've begun to do already.
We have pilots going with several dealers right now when we expect to turn it lives this quarter yes.
Wow, Okay. Thank you very much I appreciate it.
Thanks, Jeff.
Once again, if you have a question. Please press Star then one now.
The next question comes from Matthew Galinko of National Securities. Please go ahead.
Hey, good afternoon, and thanks for taking my question.
I'm curious how you think about.
The margin contribution from.
Cloud service subscriptions that you might start generating and you know what sounds like 2020.
So you mean, how will calculate the cost cost of goods that goes into the recurring revenues, we want to be sure. We're answering that question.
No. We're you know maybe an aggregate how how you said hitting our operating income just.
Early.
Subscriber is going to be kind of lower margin, while you scale up.
The platform or are the you're always going to be relatively high margin relative to the.
Our NPL.
If you talk about is on a variable basis, because most of the cloud platforms. Our variably priced yes, there is a little bit of a a startup cost.
But then it scales with utilization.
No we won't be going you know underwater from a you know gross margin or profitability perspective on subscription customers that will be.
Yes nicely.
Very very solid contribution margin from the beginning.
Yes, as you got up to scale of course, you always get greater contribution margin, but that it will be fairly continues throughout.
Is that what you're trying to get up.
It was thanks I appreciate that and maybe just a I assume you won't speak to that was stronger than just want to 20 on.
Option there but.
How quickly do you see scaling the subscription business.
So it's already been been growing nicely certainly, it's it's really quite I just answered.
Hi, Jeff about the parallelism that we can get by selling through the channel if that.
Works the way, we hope it will work because they seem to be very hungry for this capability that they can actually brand and sell themselves.
We could see it taking off relatively quickly if it if it turns out that that's more of a enterprise type sale, which is what most of the competitors have done going to market and you got to sell one individual end customer at a time.
It will still be.
A great SaaS profile take off but as we know that takes a little more time, but I'm very optimistic that the dealer parallel selling effort will take this off.
A good deal faster than than a SaaS businesses typically take off.
That being taught me do.
We do have some expansion.
Built into our guidance, which is also what's driving that growth margin and the EBITDA margin expansion.
And I think the you know the question is.
Where we think we're going to move aggressively and bring customers on but it is it's still a smaller part of our total revenue and as we've talked about we don't expect that we're gonna have large installed customers rip out and replace stuff. So it's going to continue to grow is a nice.
Addition to our portfolio.
And it will you know drive probably you know a percent of total GAAP gross profitability.
Upward, giving us some great pressure, but it is baked into our guidance.
Got it thank you.
Thanks, Matt.
The next question comes from Jeff Kessler of Imperial Capital. Please go ahead, sorry can you just can you just give me a some update on.
On how you are developing the channel are there I'm going forward as <unk> as as you as you hit this kind of an inflection point that you are in your revenues.
How are you dealing with partner programs are there or are there certain which are under what circumstances are you going direct under what circumstances are you going.
Through various through various forms of the channel it probably means the integrators and how are you dealing with them, making sure obviously, you've just one you've just want to.
A marquee contract.
How do you keep your name if some of those.
In front of those installers, and those and those and those integrators in order to into it in order to basically build up build the confidence of you in the channel.
Okay.
Yes, Identiv call. Please we just got dumped off in the middle of the sentence.
Okay.
Hi, I'm I'm still here are you can you hear me.
Thank you yeah, we're dialing back at more than one second we had a technology is another.
Okay, sorry about that.
All right did you did you catch your question or did you want me repeat it.
If you could repeat it I'd appreciate it were okay. Our that want to know how you are I want to know how you're going to market with the with the in how are your developing the channel now that you've gotten to a certain level of revenue. You. You have you. Obviously you have the chance to go direct summit.
A little bit in time, but generally it's going to be through the channel. What are you doing do create partnered programs and to create more relevance and more recognition in the channel with the integrators. So that they all know who you are and and that you're you can compete more easily.
For first one for from anymore, So, let's call it singles and doubles types of contracts.
Yeah, great great questions, we talk about that a lot and Ah and the answer is twofold one is.
On the cloud side, where we are doing these as dealer branded portals and services. They love that that gets people that pension immediately the other one is back on the.
The total solution.
Part that we approached dealers as you know.
It's a it's a relatively interconnected industry.
So we approach them with different products for different dealers. So if the dealer is just stuck and being LNL shop. They all hate HIV. So we come in with TS cards in Ts readers and we say don't gets grew by buying these age I'd cards and readers here is a perfect solution an alternative they'll say, great you know I get higher margin another thing.
Things and they work better.
And they can swap that out and then they say, okay what else if you've got.
And then the other thing in the third thing were doing is with the addition of.
And our phone and some of the other products that are front and Liberty. We've got distribution products products that are going through distribution and a lot of dealers as you know biotrue distribution and so we're also putting Rts cards, and we're putting our readers going through distribution as well so they can get recognition and exposure to it so three prong program.
What is land and expand find out with the entry point is the other one is distribution. So they can get exposure to the third one is dealer branded club.
Okay, great. Thank you very much.
Sure.
At this time. This concludes the company's question answer session. If your question was not taken you may contact at <unk> Investor Relations team at <unk> NVE at Gateway <unk> Art Dotcom I'd now like to turn the call back over to Mr. Humphreys for his closing remarks.
All right. Thanks, operator in the end. Thank you all for joining us and especially for for hanging with us with little bit of.
Some glitches and and running a little bit over but depth.
What we really do welcome you all that our industry and an investor events. If you have time to attend them, we'll be at the Roth Conference in New York next week as well as at Imperial capital in early December .
Also we're going to be opening our federal government open house to the Investor community in the Washington area. So that's on December fit.
And last year. This was a tremendous event with decision makers from a whole bunch of agencies and departments number a current customers as well as a as well as new prospects.
We'll also of course have our entire ranger products and services, including cloud and mobile solutions. There. So we'd welcome anybody you can make it down to DC on December 5th.
And of course, we'll certainly keep updating.
Route with our press releases and other communication methods. So thank you again for joining Sol and have a very good evening.
Thank you for joining US today, you may now disconnect.
Yeah.
Yeah.
Okay.
Oh.