Q3 2020 Identiv Inc Earnings Call
Good afternoon, welcome to identify presentation of its third quarter 2020 earnings call. My name is Karen and I'll be your operator this afternoon.
Joining us for todays presentation are the Companys CEO, Steve Humphreys and CFO Sondra Wallich. Following managements remarks, we will open the call for questions.
Before we begin please note that during this call management may be making references to non-GAAP measures or projections, including adjusted EBITDA and free cash flow.
In addition, during the call management will be making forward looking statements.
Any statement that refers to expectations projections or other characteristics of future events, including financial projections and future market conditions is a forward looking statements.
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 FCC, including the company's latest annual report on form 10-K, Identive assumes no obligation to update these forward looking statements, which speak as of today.
I will now turn the call over to CEO, Steve Humphreys for his comments Sir. Please proceed.
Thanks, operator, and thank you all for joining us today.
In our preliminary results, we said, we expect it to be the aggressive growth projections, we outlined on our second quarter call, including 80% gross profit Arclight de for the full year, 20% sequential growth and physical security in Q2 to Q3.
Federal sales up 80% sequentially.
With our finalized financial results, we're confirming that we beat each of those expectations.
This shows both strong industry trends driving our business and our leadership within the industry.
Overall revenues grew 30% sequentially to 24.9 million.
Going strength across the business.
We projected our premises business, which is about two thirds federal to grow 20% sequentially, we actually grew 26% sequentially and premises.
Our I'd business grew more than 50% sequentially and over 100% year over year and is on track for 80% of your grip.
At our federal revenues grew nearly 90% sequentially.
So this has its lined up for a strong fourth quarter and the second half of the year that will be more than 30% higher than our first half.
We're seeing business momentum momentum continuing.
Backlog building and the pipeline for 2021, becoming stronger.
Before we talk too much about the future, let's review the operational and financial results for the third quarter.
Our key focus areas of RF I'd at our federal business were particularly strong.
Within our identity business, which is predominantly our I'd revenue increased sequentially by 33% to 15.4 million.
And year over year identity in total grew 53% from 10.1 million in Q3 2019 two.
To 15.4 million in Q3 2020.
The growth was mainly driven by our idea of course, where we ramped up production volumes for a number of customers.
Particular major customer whose production started in Q2 came through through in Q3, even stronger than we expected.
As a result, our I'd business more than doubled the volume we produced a year ago.
Even with a ramp up there was nearly a million dollars shipments we didn't fulfill.
We balanced customer requirements to make sure that most critical deliveries were covered.
As a business implication is that the industry launches, we expected are well underway.
The mass market adoption of our if I'd integrated products is happening.
Our major customers are incorporated arkady devices into health care products mobility consumer products appliances libraries pharmaceuticals, and app, enabling the physical world.
The point is that each of these are hundred million or billion plus unit applications. It's a huge market. That's just beginning to grow.
The overall trend clearly show that our third quarter results as well as in the continuing backlog strength, we went into the fourth quarter with backlog for fourth quarter shipments up 68% over last year.
I was talking about the implications going forward of all these trends later on the call.
Also with an identity in the third quarter, our identity readers grew strongly up 38% over last years third quarter.
Yeah, we all expected to work from home trends plateau. After the initial locked EPS in the spring, but this really shows the demand is continuing there.
Third quarter is always strong for smart card readers because of the federal your EPS. So the growth comes over normally strong your prior period.
Reason is that the federal government and especially the D are adopting policy supporting work from home and work mobile for the long term.
So we do expect these trends to sustain we'll talk more about them as we used to be like 2021.
So turning to our premises business in Q3.
This shows the strength of our full product range as well as of our federal government focus.
As I mentioned before premises grew 26% sequentially.
Federal business for our philosophy security platform is the strongest vertical from 90% sequentially, but we also saw activity in banking retail utilities that others.
For example in financial services, we quoted our first large three D.R. private managed video services order, which is now closed.
Leading banks adopting our platform across almost a 100 branches.
The six year 650000 dollar agreement provides video surveillance analytics and case management on a subscription basis setting tens of thousands of dollars in capital expenses for a customer and assuring a predictable revenue stream of over $100000 annually for our business.
That'd be clear, we've had continuing strong business progress within our industry. Some small dealers and small businesses are under pressure as our competitors who focus there.
That's it's federal state and local government customers are more than two thirds of the business breakfast go access platforms, we're seeing strong performance in premises and our quick pivot to recurring revenues with lower cost of entry has put us in a strong position overall.
These include our velocity Zerust products mobile I'd Threed airprime.
Our freedom cloud and freedom mobile, which we just launched this week.
All of these are recurring revenue gross all launched in the last 12 months.
That was we talked about in the second quarter, the broad adoption of our ideas that our major customers core products is what really gives US reason to believe this growth is a long term trend that we're just starting to see take off.
It's building backlog for the fourth quarter and for 2021.
So overall the court in the third quarter was highlighted by 30% sequential revenue growth.
Over 100% year over year our growth.
90% sequential growth in federal sales.
38% year over year identity theater growth and Q4 backlog up 68% from last year.
Certainly your challenges in the economic environment, we're all in but the strong secular growth, we're experiencing RF I'd our strength in federal work from home going into a second wave demand.
Products, we've launched in the third quarter to take advantage of returned to work needs to build the base for a strong fourth quarter and 2021.
Now, let me turn it over to Sandra to go through the third quarter financial results.
Afterwards, I'll go into more metrics and the industry wide trends that are really accelerating our business into the fourth quarter and into 2021.
Sandra.
As Steve mentioned, our results show the continued delivery of what we committed with a solid trajectory for 2021. Please note that these results are all within the preliminary results announced on October 29 prior to market open.
First metric is revenue growth, even with the continued impact of Cup at 19, we closed out the third quarter of 2020 with 24.9 million in total revenue up 30% compared to the second quarter of 2020 and up 8% compared to the third quarter of 2019.
Recurring revenue accounted for 6% of our third quarter revenue and 8% of our total revenue in the first nine months of 2020.
It's part of our business remained steady at 8% of our total trailing 12 month revenue.
For the third quarter of 2020, our GAAP and non-GAAP adjusted gross profit margins were 40 and 41% respectively.
For the trailing 12 month period, our non-GAAP adjusted gross profit margin was 42%.
For the third quarter 2020, our non-GAAP adjusted EBITDA margin was positive 11%.
It's a positive 4% for the trailing 12 month period.
GAAP net income for the third quarter 2020, with zero point Fourmillion compared with a loss of 2.7 million in Q2, 2020, and net income of 1.1 million in Q3 2019, but.
But the dividends on the series B preferred our GAAP net income attributable to stockholders was 0.1 million or net income of one cents per share compared with a loss of 17 cents per share in Q2, 2020 and positive five cents per share in Q3 of 2019, we.
We have provided in the appendix I sold reconciliation of GAAP to non-GAAP information, which is also included in our earnings release.
Our next slide for further analyzing trends by segment.
Our premises segment, which includes sales of physical access control and video product video products and services accounted for 9.4 million or 38% of our total revenue in Q3, representing an increase in dollars of 26% from Q2, 2020, and a decrease of 20.
7% from Q3 2019.
Revenue from our identity products, which includes sales of access credentials smart card readers are if I'd transponders and mobile security products totaled 15.4 million or 62% of our total revenue in Q3, 2020 and increase it dollars up 33% from Q2 20.
He 20, and an increase of 53% from Q3 2019.
Our non-GAAP gross profit was 41% in the third quarter of 2020. This compares with 42% in Q2, 2020, and 47% in Q3 2019, driven by both the mix of products across segments and within segments.
Our premises segment margins for 55% relatively flat compared to Q2, 2020, and Q3 2019 at 55 and 56% respectively.
Our identity segment margins were 30% relatively flat compared to Q2, 2020 at 31% and lower than Q3, 2019 at 33% due to a higher proportion of lower margin transponder sales.
Now moving to our operating expense management, our GAAP operating expenses for the third quarter were 8.9 million.
Which was down from 10 million in Q2, 2020 and down year over year from 9.3 million in Q3 2019.
The sequential decrease was primarily due to the nonrecurring 1.2 million restructuring expense in Q2 2020.
Our non-GAAP operating expenses as a percentage of revenue decreased to 30% in the third quarter as 2020, compared with 40% in the second quarter EPS 2020.
And 34% in the third quarter of 2019.
Our non-GAAP operating expenses totaled 7.5 million in the third quarter of 2020. This compares to 7.6 million in Q2, 2020, and 7.9 million in Q3 of 2019.
Bringing all the pieces back together, our non-GAAP adjusted EBITDA was 2.8 million in the third quarter of 2020, a sequential increase of 2.3 million over Q2 2020.
Turning to the balance sheet will be comparing our position at September 2022 that position one quarter ago at June 2020, and the prior year quarter ended September 2019.
We exited the third quarter with cash at 12.3 million and net decreased as 0.8 million from Q2, 2020, and a 1.2 million increase from Q3 2019.
Net cash activity for the quarter was driven by 2.2 million of cash provided by our net income excluding noncash items.
3.6 million of cash used for working capital and Capex driven primarily by late Q3 billings that were not collectable within the quarter and by an increase in working capital to support our Singapore growth.
Their financing and foreign currency, we had a zero point Sixmillion net cash provided driven by is there a point 9 million increase in net borrowings under our revolver and is there a point 5 million reduction through scheduled payments on the term loan facility.
We believe that we have adequate capital available to fund our business growth and return to positive non-GAAP free cash flow exiting Q4, 2020, as well as retiring the term and no debt on schedule in Q1 2021.
In our 10-Q filings, we will be providing providing a full reconciliation as the year to date cash flows for completeness. These included the full balance sheet for the earnings release in the appendix.
Even with the global disruption continuing today, we are confirming our guidance for the consolidated results of the company for full year 2020, and revenue between 86 and 88 million within our original guidance entering this year.
We achieved GAAP EPS profitability in Q3, 2020 ahead of expectations and continue to see the benefits of our actions to optimize cost to carry forward.
In addition, we believe we will be non-GAAP free cash flow positive as committed during Q4 2020 and beyond.
In addition, today, we are providing guidance for the full year 2021 building on the strong base of growth that we have delivered our full year 2021 guidance is for revenue between 96, and 102 million, which reflects growth year over year from the midpoint of our 2020 guidance exceeding the market growth.
Just after a two week.
We expect our normal seasonality to continue with our lowest quarter in Q1, 2021 and building up quarter over quarter through the end of 2021.
We will be issuing a full set of guidance in our Q4 and full year 2020 earnings release targeted for March 2021, with that I will conclude the financial discussion and pass it back to Steve.
As I said earlier, our Arclight de Groot, it's predictable for two reasons, it's heavily backlog driven and it's driven by major companies, who have incorporated our I'd devices into their products sales.
Many for global products, a year long process, so even though we're getting visibility into plants throughout 2021.
First backlog.
Going into the fourth quarter, our total backlog stood at 10.5 million up 68% for last year, and our RF I'd backlog for shipment in the fourth quarter is up 125% over last year.
We've now gotten in orders for about 95% of our expected shipments for the quarter in RF ideas and that means most additional orders either contribute to upside within the quarter or drive more backlog for 2021.
This is a key driver of our growth for 2021, and we expect the art by deep portion of our business to grow well over 50% in the first half we 2021 versus the first half 2020.
The full year growth in the mid 20% range for 2021.
At the core driver of our I'd business is the mass market adoption of our if I'd integrated products.
Customers are leaders in their own industries, incorporating our if I do devices into their products each with volumes of tens or hundreds of millions yes.
So this is a huge market that's just beginning to grow.
In the third quarter, two strong use cases relaunched in the market went by CBS and the other of course by Apple.
No we don't generally disclose customers. So these are just industry examples to be clear.
But both are great examples of the RF I'd market accelerating.
They're both basic uses that established platforms to then drive multiple products from already big first launches.
So the first some of you saw in a demo session. We had a couple of weeks back CBS is spoken our EPS for visually impaired people.
You tap your phone to the off I'd tag on the prescription bottle and it reads out medication with dosage and all the other information for people who can't read the label.
How about 13% of prescriptions go to people with some visual impairment and there are about four and a half billion prescriptions annually. So in the U.S. alone that's over half a billion are like the tax every year just for the visually impaired sector.
Now that's the current use case in the first use case. So so now extrapolate with the platform deployed every Cvs pharmacy now was set up to program and put RF I'd tags on every prescription and that's really where they should be on everyone. So when you opened your prescription bottle UTAP. Each time, you take it you'll know if youve taken at morning or evening or whatever.
Was it prescription regimen is.
It'll ought to refill as you get low there's all kinds of capabilities you can do there you could even opt in and your doctor could get information about how consistently you're taking your meds because anyone who studies. This area knows that the the biggest issue with the prescription pharmaceuticals is people complying with taking their meds. So there's a number of things that companies like CBS or thing.
Taking about now that they've made that initial investment they can really expand it into other categories. So ultimately we think the opportunity is for all four and a half billion prescriptions in the U.S. annually.
It's about a quarter of the world prescription. So again, you can see the visually impaired application. That's a couple of billion units worldwide and nearly 20 billion units for all prescriptions worldwide.
Of course, it's going to take time, but you can see the volume potential and again the investments really have done and of course the reader in the App technology is already and everybody's pockets in their fabs.
Now related to the mobile space and the phones. The biggest event of course was apples launch a full NFC supports it is 14 and the iPhone 12, and especially the new ecosystem of products around I'd say.
So apples made it very easy and secure to connect peripherals to the iPhone and then through NFC to connect them into core iPhone features. So just as a couple of examples the first Apple branded cases for example, we buy Orange case, you pop it on your phone.
The screen turns orange it goes through an animation you know you have connected and you know, it's an apple verified Tony it seems pretty trivial, but what it shows is the peripherals are actually communicating securely with a phone launching processes and the phone and all secured and controlled by Apple through secure NFC way.
Hi, this enables a whole world of new peripherals to connect to the phone and seamlessly, but securely watch apps and experiences.
So this is really the vision for this type of connected device that debt that apples to point and with over 200 million I phones shipped year connecting multiple mag safe enabled devices. Each again, you can see the market into billion unit plus range annually.
I would just somebody a course, where apple and Cvs go Samsung Walgreens, Amazon pharmacy, others have to match. So you can see the scale of the markets were going after and the volumes that already are happening.
So RF ideas, gaining traction right now.
We've been the trusted co developer and supplier for some of the most advanced applications and the most demanding companies.
This is where the growth is and that's where our competitive advantage is strongest.
So how are we going to keep our advantage.
We're expanding our technical capabilities that for 2021, we're launching services to help companies, but RF ideas they're products.
We are unique in our ability to go from concept to optimize design to early production scaling production and then to immediately start back into the next generation of devices and exactly the cycle that customers need.
We're also innovating with new products entering needs, we know from our own customers have an example is a new product. We launched what we think is the industry's lowest carbon footprints are if I'd tag our eco type.
Instead of being an EPS then Ted on a plastic substrate, we've developed a unique laser cutting process and it's on recyclable paper substrate, we even use recycled aluminum for the antenna.
So there's no etching chemicals, no lost metal no plastic layers no chemical write off.
Now why do we do all this well the biggest users of high end art I'd, our consumer facing companies and sustainability matters to them.
Like Amazon Apple have they public commitments to being carbon neutral.
I'd tags are consumer visible devices. So our eco tag shows their eco commitments and eliminates what otherwise would be a negative on the carbon footprint.
Our customers told US this is what they want it's very tricky technology that we developed it.
Fundamentally this is exactly why we're going to keep our lead in the fast growing RV market.
So that's our if I'd now, let's look at premises, which had some some of the exciting opportunities.
Remember the core technology in our I'd tag is shared with our access cards door readers identity readers and other parts of our physical and data security solutions. So one growth driver really supports the other.
So with the premises industry overall growing about 6%, we grew 26% sequentially and were expecting premise is to grow about 25% year over year this quarter.
For 2021, we expect growth in the mid teens more than doubled the industry right now.
The fundamental drivers our recurring revenue growth.
The shift to IC, driven buyers and federal grant.
So why do we be growing faster than the market and these dynamics.
Just look at our if I'd revoke the trusted provider and we've got some of the most advanced technology and broadest product range.
As customers move to software defined platforms, they need to migrate their entire platform.
Cross readers credentials controllers access video and audio.
And it's all got to be integrated with their active directory, rather sensitive data repositories.
Now were the only company that delivers all of this and we think total solutions and IP centric recurring revenue platforms will be the fastest growing sector in physical security and the strategic position of combined access video and audio management is the key for anyone trying to win.
A great example of this is our freedom cloud platform that we just launched this week it's.
It's the lightest weight implementation in the industry totally web and mobile base and especially on the hardware side, our freedom bridges are extremely compact and cost effective ironkey devices.
A bridge that can control two doors is the size of a pack of playing cars.
And this is what customers are looking for hardly noticeable really intuitive to deploy and manage and a platform that the IP department is totally comfortable owning and managing.
The software's browser based and the hardware is managed just like in networks, which.
So weve described the growth in each segment so to put it together in the fourth quarter, we're expecting overall revenues to grow in the 25% to 30% year over year range.
So looking at the business drivers for next year we.
We have our if I'd use cases that each can be hundreds of millions of units overtime.
And give us clear line of sight into 2021.
There's strong federal government demand for our physical security identity readers and mobility apps.
And our complete range of recurring revenue products is now in place.
That with all these growth drivers, we could see faster growth in any given quarter, but to keep our predictability weve given a strong base growth outlook and we'll update as we get further into the markets take off.
The 2020 has been a challenging year, but we're in markets that are taking off and we've been able to strengthen our leadership, even if they're accelerating.
The result is really going forward you a strong finish to the year and then exciting 2021.
So with that let me open the discussion to questions.
Operator, ladies and.
Thank you ladies and gentlemen, we will now take questions. If you do have a question. Please press star one on your telephone keypad at this time.
If you're using a speaker phone, we ask that while posing your question you pick up your handset to provide the best sound quality.
Again, ladies and gentlemen, if you do have a question or comments. Please press star one on your telephone keypad at this time.
We'll take our first question from Jason Smith with Lake Street Capital markets. Please go ahead.
Hey, guys. Thanks for taking my questions. Steve appreciate all the color and sort of why you're feeling so confident in 2021, but curious if you could talk about sort of your backlog coverage to 2021 and if some of this confidence is really just driven by some sizable orders already in hand or if it.
It's just general confidence, especially on the art if I decide that you are just seeing during just see this big general adoption.
Yeah. Thanks for the question, Jason and yes backlog has been growing nicely I think we earlier indicated that at the time it was up Oh he was.
It's doubled from what it had been Oh, just couple of months earlier and I mentioned that we've already got over 95% of our Q4 shipments I can probably in backlog. So all the orders coming in our 2021 orders and yet you have orders that go throughout all of 2021. So we've got good visibility both London.
Did you know that they said we expected the first half of the year already be 50% growth over up over the year prior and obviously, we wouldn't be saying that's clear numbers, we didnt have a fair amount of visibility in it and that's really driven by buyer backlog.
Okay. That's helpful and in your prepared remarks, you noted about a million dollars in business not being able to ship in Q3 could you just comment on what sort of constraints, you're seeing there and if those constraints have east now in Q4.
Yeah also you guys. Thanks for picking up on that when yes, as I mentioned in the second quarter call, we've been expanding our capacity rapidly, but when you when you look at doubling your capacity.
When we talked about in Q4, we got to your backlog get younger than 25% of but you prior to that that's indicating more than double where we were a year ago. We're building out a space and we're putting in more equipment.
And some of the devices that were producing are particularly complicated in high end, which is great for us because it's not.
Hi, it's up more differentiated but they take more time machine capacity, because there's multiple processing multiple passes.
And somebody had more straightforward products and data those of course, the more complicated products off and go to the more sense.
Sensitive and that high end customers. So we always want to favor those and so we did have.
Have some that we couldn't ship were catching up in this quarter and will have the capacity built outside by the end of this quarters, you're going to be talking about building capacity, you're talking hundreds I didn't get the grand in that in facilities build outs and a and a few hundred thousand dollars and equipment, it's not a major capital absorption.
But we have been catching up to the third quarter and will be all caught up in a good shape going.
Going into 2000 platelets.
Okay, and then just the last one and I'll jump back into queue. I mean, obviously the school in education market could be a little challenging with budgetary pressures and whatnot, but just curious if you could comment on what your expectations in that market are going forward.
Yes. It is choppy as you say, but it's also are highly motivated for security Oh, Yeah, we put out a white paper on a remote schooling cyber security for example, with our Fido keys that we just launched you know one of the Dirty secrets that a lot of.
People haven't focused on it we've taken all the kids in our country and put them on line you go to school and if anyone thinks that we absolutely properly secured their their data pipes or where they're learning, they're they're being a little optimistic and so there's opportunities. There for example to cyber security.
More of the distance learning environment and there is also as we go back to school physical security is as important as ever and especially physical security infrastructure is now being integrated well with health and safety infrastructures. So there's opportunities there we've seen a lot of interest in bids but.
Also you know schools are in the natural yeah challenges and so some of them are going ahead, yeah fast and some of them are really frankly hunker down. So I don't know on a month by month basis, how its going to emerge but from a market opportunity you know over the course of the next year.
I actually think schools and universities are going to be a very good segment for us.
Both on the cyber security side, and other health and safety physical security side.
Okay. That's really helpful. Thanks, a lot.
As a reminder, ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time.
We'll take our next question from Mike Latimore with Northland Capital markets. Please go ahead.
Great. Thanks, a lot yeah, great quarter there.
Thanks, Steve I couldn't tell if it did you give some guidance on what you thought premise. This would grow in the fourth quarter I couldn't tell if he said it or not.
Specifically for premises in the fourth quarter I don't know that we are going to go back and look at that you know you that Oh, we did we get them sorry, I'm looking at my notes here. It was that about 25% year over year were up for the fourth quarter.
Right, so that's like up sequentially.
And is that driven by non government or government driving that sequential pattern.
Yeah. Good question, it's it's across the board and and dies do you suppose government and non government. That's on the growth as I think about underneath the numbers. It's a it's probably more commercials in government.
Consumption increases sequentially.
Okay, Okay very good.
I think you have seen that a rebound in activity.
And on the premises sides you can only defer these things so long and <unk> are now a lot of the install is not these are getting out there getting back in my also customers. You know it seems like video systems, where Microsoft's stop supporting you know windows seven or something they have to do something.
There's a there's a a built in migration the growth pattern that we're starting to see them back.
Yep got it.
And then on the identity just it seems like a ton of opportunity there I guess.
How diverse do you see that revenue stream being in terms of you know customer base over the next year is going to be you know very diverse or is there going to be a couple big customer is really driving the growth.
Are you asking primarily about RF IDN identity.
Yes.
So actually it's going to be quite covers yes, certainly when some of these you know global corporations are launched their numbers are big but there's a there's several of them that are.
Either already launching the Orient pilots and building in the launch for 2021 anybody notice we didn't have any you know 10% concentration customers disclosed. So it's certainly some some bugs the real is but but a range of them and the other interesting thing is a range of applications a bit.
They're not just in one vertical a either there's a there's several different use cases that are up.
That are getting momentum.
Yeah Okay.
And then.
You have a number of cloud offerings now.
You know and I'm sure you're gonna be promoting that even more aggressively next year I mean, what would be you know when you. When you book a club deal doesn't always show up within a quarter a year, obviously, but like well what would be sort of a good amount of cloud bookings for next year. If they're successful is it you know a million dollars and 5 million like it like <unk>.
Well only be successful cloud bookings here.
Well I think we're we're just you know learning what the profile looks like but I think you know that that six years 650000 dollar are you all right. Thanks installation that we did is is on the high end, but its characters that others things work. So if you mean, how it should be.
Nice within the year, you know probably a couple of million dollars incremental to that to the 68% were already asked but that would just presented scores five to six times that much in terms of you know book.
Yeah, I guess it sounds more when I was referring to okay, great yeah.
Good Thanks a lot.
I was like at this time. This concludes our companies the question and answer session. If your question was not taken you may contact identity and Investor Relations team at I.N. V E at Gateway I our dotcom.
I'd now like to turn the call back over to Mr. Humphreys for his closing remarks.
All right and then operator, just want to confirm we don't have any other questions in there that's right.
No further questions in the queue at this time terrific all right. Thank you very much well. Thank you all for joining us very much. Appreciate it also please join us at some of the virtual investor events coming up this quarter.
We've got the Imperial capital the first week in December and Northland or the week after that so oh.
Look forward to continuing to update you on the business and until then best wishes to be well be safe and have a good evening. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation you may disconnect. Your lines at this time have a great day.
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