Q2 2022 Identiv Inc Earnings Call
Okay.
Good afternoon.
Noon welcome to identify the presentation of its second quarter 2022 earnings call My.
My name is Matthew and I will be your operator. This afternoon, joining us for today's presentation of the company's CEO , Steve Humphreys and CFO Justin Scarpulla.
Following management's remarks, we will open the call for questions.
<unk>. We begin please note that during this call management will be making references to non-GAAP measures, our guidance, including adjusted EBITDA and free cash flow.
In addition, during the call management will be making forward looking statements any.
Any statements that refer to expectations projections or other characteristics of future events, including future financial results future business and market conditions and future plans and prospects is a forward looking statement actual.
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.
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 in the second quarter Identive continued to make progress securing our leading position in the expanding RFID enabled internet of things sector. We had two primary goals in Q2 growth in RFID of over 40% validating our long range plan and gross margins holding at the 37% or above.
The range, we guided for the year, we beat both goals RFID growth was 41% and non-GAAP gross margins expanded to 38% showing margin expansion, even while driving RFID growth.
Two other key goals in Q2 were growth in our premises business and expanding EBITDA, our premises business grew 19% another quarter of growth three times, the industry growth rate and bringing our half year growth rate to 21%. We think this level of growth is sustainable throughout this year and next.
EBITDA of $1 4 million.
<unk> was above our projections as we go into choppy economic times growth has to happen with strong positive EBITDA. So we can self fund our growth regardless of the macroeconomic environment and we demonstrated this in Q2.
Now, we see a clear path to continue and to expand these growth and profitability ranges are core markets medical devices in RFID as security and premises are both reliably stable and grow even in recessions and we've shown their strength in inflationary times with our ability to raise prices to hold and expand gross margins as a debt free company were also not exposed to.
Interest rate rises.
These all give us confidence that our long term strategy is paying off in growth and EBITDA results and that the nature of our business and balance sheet have us in a good position to execute our strategy regardless of macroeconomic issues.
In Q2, we kept disciplined in our business execution to drive these strategic priorities now that led us to decide not to pay premiums for components for our legacy business. As a result, we didn't ship almost $2 million in legacy smart card readers and access hardware choosing not to pay expedite fees and inflated component prices. These would have compressed.
Gross margins in non strategic categories that we over performed in RFID to offset most of this and delivered above planned gross margin dollars as a result, which drove our above plan EBITDA results that will continue this discipline prioritizing strategic growth in RFID and premises and gross margin strength over shipments of legacy products if.
They create margin pressure.
Another characteristic we're driving into our business model is recurring revenues as a result of this effort deferred revenues on our balance sheet are up 37% versus last quarter over $1 billion of bookings in Q2 will recurring meaning they weren't recognized as revenues in Q2, even though they were booked orders and that'll be recognized as recurring revenue over the next 12.
Months.
So putting us together this is the momentum we need to drive sustained 40% plus RFID growth with steady margins Thats. The core of our strategy. In fact, we expect RFID growth in the current quarter to be over 50%.
Also as we go into uncertain economic times, we are well positioned to keep growing with our expanding EBITDA strong balance sheet with no debt and our focus on recession resistant medical device solutions, and RFID and federal government security solutions on premises.
From a market perspective, we're enabling the Iot, where we continue to differentiate our business model and technology and this goes beyond our foundational strength and identification and tracking.
RFID based Iot devices require complex highly integrated designs and we are the industry leaders in deep technology specialty RFID applications. We're powering use cases with multi technologies and flexible designs for Iot partners, our new BLE RFID device with Willie is a prototypical example, we.
Also have the Iot software stack in place with companies like Blue bite tap out and collect it.
We are an enabler for all of those platforms without our design and coding capabilities, they wouldn't be able to deliver the product engagement and experience that their customers demand. So we're creating solutions that are driving the future of the Iot.
So with that overall growth context here are some details.
Our high margin specialty applications continued to expand with 38 different <unk> projects underway in Q2 that will go into more details in our forward discussion later, but we really expanded our NRA activities and as a result, our reputation as the leader for advanced RFID applications.
Now a couple of energy projects with major volume potential that we launched in Q2 were for a major athletic footwear company. Another for a golf ball project, a third that uses accelerometers to track shock and vibration and five different projects that our medical device related.
So with this progress in Q2, RFID is positioned to grow even faster with upside volumes from specific projects that can transform our business and our initiatives that are creating even more transformational use cases.
Now as I mentioned, our premises business is growing at more than three times the industry growth rate. So what drove it and is it sustainable.
In physical include converged security, we've always been strong in the federal market our drive to expand our commercial premises business has made progress now representing over half our premises sales sales to federal government also continued to grow as well as airports schools and other public sector markets that are security sensitive.
With this broad market product and services strength established we expect to continue to grow at a multiple of the industry's rate as the season really strong federal cycle in the third calendar quarter drives growth in our federal state local education markets. This gives us high confidence in our 20% to 25% growth expectations for premises in 2022 and hits.
Well in this range in the first half clearly has us on track for the year.
Overall gross margins continued to strengthen as we focused on them in Q1, you might remember our non-GAAP gross margins rebounded over 300 basis points and in Q2 gross margins expanded another 97 basis points. Our systems implemented in Q1 are working we're staying committed to our prioritization of gross margins even over legacy growth.
As long as we're supporting all of the growth opportunities in RFID and premises.
Continuing progress on gross margins is important of course for the strength of our business model and also because it validates that because higher margin specialty RFID devices are the fastest growing segment, we can drive growth as well as margin expansion.
So overall revenues grew to $27 9 million up 16% versus Q2 of 'twenty one.
This of course was without the almost $2 million of legacy products, we didnt ship and excluding the deferred revenue component of another million dollars consistent with this our forward integrate caters group with total backlog of $34 2 million up 23% year over year in.
In addition to these growth metrics, our business model progressed, while increasing gross margins, we tightly controlled operating expenses, resulting in EBITDA ahead of plan.
Behind the financial and operational aspects of our second quarter results. We continued our track record of 100% customer retention in RFID or other growth drivers made strong progress across existing customer lunches and expansion new design wins and technology launches as.
As expected in Q2 growth was driven by a wide base of existing customers. This shows the sustainable growth in our core RFID business, which is the basis for our projections on top of this core predictable growth are transformational projects, which are a major scale, but whose full scale production timing is less predictable each made progress.
Our auto injector category built more momentum we have two new designs in progress as separate <unk>, one for a faster track near term product, our chip allocation and commitment from the suppliers for this project has been confirmed for the ramp to.
To be clear these are for a basic capability device with a price point in the 35% range.
We're also expanding our activities in this category. We're now in discussions with the largest provider of auto injectors worldwide and a third smaller but very proactive auto injector company.
Lastly, possibly most strategically important we've now completed and signed the intellectual property and development agreement with our anchor customer for the technology. We jointly develop for our high end Auto Injector project. This agreement includes at R E and about 2022 and 2023.
Both of our cannabis initiatives also made progress the retail pilot we've been tracking is launching in August rather than July , but its broader covering almost 100 dispensaries. Each deploying about 500 units on the design side. We now have three designs in place to for the U S market and one for Canada as described last quarter, we still expect around $2 5 million.
In the second half of 2022 across the U S and Canada.
Progress in Q2 also included an LOI for 80 to 100 million units for 2023, and the market potential is much more but getting tangible projections. This early in the cycle is a key step.
As described before the dual frequency design and services, including conversion and encoding support strong margins.
Now the cannabis program in Canada also is progressing with about 2000 of our test units delivered in and test production program are tuning in converting which includes a hologram in the finished product is going well.
We can go into more details in the Q&A, but this 1 billion plus unit program is moving as we expected.
Turning to our RFID enabled prescriptions, we continue to win awards and get industry recognition for accessibility solution.
Plenish volumes at Cvs are continuing and for other pharmacy chains are in various stages of pilots and deployments, giving the solution more visibility and putting more pressure on other pharmacies to adopt our solution.
Our largest mobile device customer ramp the new design, we mentioned last quarter. We're now shipping this design and multimillion unit quarterly volumes and expect to continue into Q3 as they build for ball launches in the holiday season.
Are there prior designs are continuing resulting in more total demand than we had projected.
Our RFID business is on track with our transformational projects moving forward and volume outlook looks getting clearer as the programs progress.
Demand is growing fastest for our specialty RFID devices strengthening margins and unit prices design wins are growing with our expanded technical sales and engineering team and our marketing investments are driving more opportunities that our expanded sales team is converted.
Our production capacity continues to expand to meet this higher demand and our systems are in place to manage customer life cycles, as more and more customers and projects come into our revenue streams.
In premises, we continued to take market share aggressively.
Growing as I mentioned at a rapid rate and winning in the commercial market. Just the security is getting more focus and budget allocation than ever and just as the seasonally strong federal state and local government buying cycles ramp up our.
Our premises growth was also well balanced across software services products and recurring revenues, so before getting into the next quarter and our outlook for 2022 and beyond I will turn the call over to Justin to review the financial highlights for the second quarter Justin over to you.
Thanks, Steve as Steve mentioned, our financial results reflect our continued strength exiting the second quarter of 2022 with.
With the delivery of sequential and year over year growth in revenue sequential increases in GAAP and non-GAAP gross margin.
And a positive non-GAAP adjusted EBITDA.
Both non-GAAP gross margin and adjusted EBITDA were above consensus estimates. In addition, total future backlog increased 23% year over year.
We believe these results demonstrate our continued commitment to protecting our margin and maintaining tight control over our operating expenses, reflecting strong operating leverage.
We closed the second quarter of 2022 at $27 9 million in revenue up 16% compared to the second quarter of 2021 and up 11% compared to the first quarter of 2020 to.
Our revenue in the second quarter of 2022 was slightly below consensus estimates, primarily due to supply chain initiatives and our legacy smart card reader business.
The trailing 12 months revenue was $110 5 million up 15% versus the comparable prior year period.
The sequential and year over year change in revenue was across both our premises and identity segments.
Second quarter 2022, GAAP gross profit margin was 37% an increase compared to 36% in the first quarter of 2022 and comparable to <unk>.
37% in the second quarter 2021.
For the second quarter of 2022, non-GAAP adjusted gross profit margin was 38%, which was above consensus estimates and an increase compared to 37% in the first quarter of 2022 and comparable to the 38% in the second quarter of 2021.
non-GAAP adjusted gross profit margin changes resulted primarily from a product mix as well as our continued margin products.
We remain committed margin products.
We remain committed to our long term non-GAAP adjusted gross margin target of 40% to 45%.
In the second quarter of 2022, our GAAP and non-GAAP adjusted operating expenses, including research and development sales and marketing and general and administrative costs were $10 5 million and $9 2 million, respectively compared to 10.0 million 9.0 margin in the first quarter of 2020 to $9 one.
$1 million and $8 million in the second quarter of 2021.
Our non-GAAP adjusted EBITDA.
It was $1 4 million or 5% of EBITDA margin in Q2, 2022, as compared to zero point $2 million in Q1 2022.
Was above consensus estimates.
And we are continuing to deliver leverage in our operating model. We also remain committed to a long term non-GAAP adjusted EBITDA margin of 15% to 20%.
Our Q2 GAAP net loss was <unk> 3 million or a loss of <unk> <unk> per share, which was in line with consensus estimates.
Compared to a loss of $1 million or a loss of <unk> <unk> per share in Q1, 2022, and net income of $2 5 million or income of <unk> per share in Q2, 2021, which did include a $2 $9 million one time gain on the extinguishment of our debt.
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 analyze these trends by segment beginning with identity.
Revenue from our identity products totaled $16 9 million or 61% of our total revenue in Q2 2022.
This was a 16% increase from Q1 2022, and a 14% increase from Q2 2021.
The sequential and year over year increase in identity revenue was primarily driven by higher sales of RFID transponder products, which were driven by current customer expansion and new customer wins, and our ability to deliver product versus competitors constrained supply chain.
The increase in our RFID products was partially offset by a decrease in our legacy smartcard reader revenues due to increasing component costs, which we elected not to purchase as we were unable to pass this increase on to select customers.
Our Q2 2022 identity segment non-GAAP adjusted gross margin increased to 25% compared to 23% in Q1 2022 analysts.
And was comparable to Q2 2021.
Essential increase in margins were due to a greater proportion of higher margin specialty RFID products sold in Q2 versus Q1.
We continue to actively monitor our component cost increase capacity through to our customers. This combined with our ability to track and focus on higher margin customers should allow us to sustain and expand this margin going forward.
Quarter to quarter margins can fluctuate, but we expect long term margins to trend upwards from current levels as we expand and deepen our existing customer and technology partnerships. We believe our focus on more complex devices and strategic relationships with our customers will only further strengthen our margin profile.
We remain convinced margin target gross margin target of 35% to 40% and our identity business.
Now turning to the premises segment. This segment accounted for $10 9 million or 39% of our total revenue in Q2.
Representing an increase of 4% from $10 5 million in Q1, 2022, and a 19% increase compared to Q2 2021.
The sequential and year over year increases in premises segment revenue was primarily in our commercial business as well as our video product offerings, which have been a key focus area for us to expand on our market share and operate total platform solution.
non-GAAP adjusted gross margin for premises in the second quarter of 2022 was 58% compared to 57% in Q1, 2022, and 15, 9% in Q2 2021, the sequential and year over year changes were primarily due to product mix.
We remain committed to a long term gross margin target of 55% to 60% and our premise.
Business.
Moving now to our operating expense management, our non-GAAP operating expenses in the second quarter of 2022, adjusted to exclude restructuring and severance costs and certain noncash charges, consisting of stock based compensation and depreciation and amortization was 33% of revenue compared to 36%.
In Q1, 2022, and 33% in Q2 2021.
This resulted in a return to positive non-GAAP adjusted EBITDA for two consecutive quarters in 2022.
In summary, we continue to demonstrate a strong gross margin profile and operating leverage in our business, while successfully reinvesting for growth within our current cost structure.
Now turning to the balance sheet, we exited Q2 2022 with $25 9 million in cash and cash equivalents and restricted cash we spent $1 8 million and strategic inventory purchases and $1 1 million and capital expenditures, we remain debt free.
And we have maintained our strong working capital position.
In our 10-Q filings, we will be providing a full reconciliation of the year to date cash flows for completeness. We have included as we move to the third quarter. Our total backlog for all future shipments were $34 2 million exiting Q2, 2022 up $34 2 million exiting Q2 2022 up 23%.
Q2 2021.
This provides visibility into the current business momentum, we anticipate continuing through 2022.
Momentum exiting the second quarter of 2022 combined with this strong backlog gives management confidence that the business is on the right track to meet the company's growth expectations, and our key strategic RFID and premises businesses for 2022 and 2023.
With our continued focus on gross margin in the event that current supply chain and macroeconomic issues would result in margin compression, we may elect to forego revenues in our legacy.
As long as our strategic growth targets are maintained.
As a result, we are expanding our full year 2022 guidance range today with expected revenue between $125 and $135 million.
We are also reaffirming our guidance for 30% to 35% year over year revenue growth in fiscal 2023.
Normal seasonality is expected to continue and with that I will conclude the financial discussion and pass the call back to Steve.
Thanks, Justin as you can hear from Justin's comments, our growth in RFID and premises continued gross margin expansion and EBITDA strength show, our business model continuing to strengthen trending towards <unk>.
Long term operating model of growth gross margins and EBITDA margin.
Now every business is exposed to macroeconomic forces this year, but because of our technology position in the market segments driving our growth. We think results in our strategic businesses will continue to be strong.
This means our business path, it's all about execution regarding macro forces, let me address them quickly. So that we can get back to execution for the rest of this discussion now in terms of macro forces one of the top concerns people have is recession risk and RFID focus on medical devices, and healthcare and our premises focus on federal state and local government security.
Our both categories that are strong even during economic downturns regarding inflation and increasing interest as when our cost increase where guesses when our cost increase were debt free and capital light. So interest rates aren't a major factor now geopolitical risks are also in everyone's minds, but again, we have a strong position if anything in terms of.
<unk> risk investments in security increase and certainly government security budgets grow which we're seeing.
Now regarding supply chain nobody is immune to some supply pressures. These days, we've shown that we can manage supplies and costs, so that RFID and premises businesses grow fast with strong margins.
And we have the demand strength to keep our strategic businesses on track if we need to we will maximize margins in our growth categories over our legacy business lines. We know supply chains are always a source of risk. So we're managing them closely for at least the next couple of quarters, though theres going to be supply churn, but so far we've managed it and made real lifetime tradeoffs to support.
Strategic growth and strong gross margins longer term were even assessing nearshore and onshore supply chain options to keep us in a strong supply chain position, we already manufacture in Canada, and California, So we're positioned to expand near shore activities if needed.
So hopefully that addresses some of the macroeconomic topics on everyone's minds that we could certainly go into in more detail in the Q&A, but now let's turn it back to execution.
So with our expanded world class sales team with the industry's best engineers to support energy projects and other design wins deep relationships and technical expertise engage with a half dozen transformational programs and with our ongoing production capacity expansion. All the pieces are in place to drive division and targets.
Set RFP.
<unk> showed that 40% plus growth, we expected and premises grew in our target range of three times the industry growth rate.
So how do our metrics look going forward and how are we positioned to build our strategic leadership as an Iot company.
Now I updated the status of our transformational projects in my opening comments and we can go into more detail in Q&A. If there's more interest so I'll focus here on the wider base of NRG project design wins.
Design wins are the clearest indicators of our business the strength going forward, leading in design wins drives more wins as customers go to a company. That's proven they can deliver that brings more scale more experience in IP or reputation leadership and a stronger moat around our lead in the market as.
As I mentioned earlier in Q2, we had 38 active NRT projects more than ever in our history. This is up from the two dozen reported in Q1. We also finished a dozen in Q2.
The half dozen completed that we reported in Q1.
So with this growth in energy projects. This is one area. We added people in Q2, both in engineering and project management, we never want our energy capacity to be a bottleneck. It drives future volumes. So it's one of the few areas, we expect to keep adding people to support NRG project demand now.
Now in addition to the athletic shoe in golf ball projects I mentioned earlier, we have energy projects going for an NFC solution provider for sensor enabled applications, including committed the temperature shock and vibration and other sensing I also mentioned, we have five new projects in medical devices and four more in the cannabis and luxury wine and spirits category now.
Theyre more we can talk about but each quarter, we're trying to give a sense of the range of applications and categories with clearly major unit volumes like these.
<unk> projects are clear indicators of both industry leadership and future revenues since most energy engagements lead to shipping projects and then long term customer relationships that are there.
The foundation of our growth and of course of our competitive moat.
So these projects show that our growth drivers are in high margin high ASP devices for Iot applications from a vertical perspective, our focus continues to be medical devices specialty retail and industrial applications, which have higher margins and of course higher switching costs.
So turning to our other strategic lever our technology partnerships are expanding our growth opportunities as I mentioned in my opening comments in Q2, we expanded the capabilities of our Bluetooth RFID device with Williams, we have now implemented a full Iot pixel enabled cold chain solution. This integrates traceability authenticate.
Temperature humidity and capacitive sensing along with Geo location and time stamping all in one solution.
Target markets for this technology are medical devices health care, and pharma and food supply chains, all of which are sensitive to quality and cost as well as being recession resistant categories.
Now there were other technology partnership activities across the software stack and in Silicon and we can go into those in more detail in Q&A, if there's interest.
The third leg of our execution is our growing profile as the industry thought leader and we made a lot of progress here in Q2. In addition to awards social media presence podcasts and speaking engagements. We're also expanding our leadership role in the NFC NFC Forum, which we'll announce more about later this month.
We're also honored to welcome <unk> as a senior adviser to identify some Mr. <unk>. The founder of Smart track. He was also the CEO and subsequently CTO over an eight year period and on their board until their sale to Avery Dennison.
He has made it clear to us and others in the industry that he sees our opportunity to be the leader in the category of advanced RFID.
In announcing his role Mr. Weitz or commented that he thinks we have established a true leadership position in the industry with an exceptionally talented team and innovations in the RFID enabled industrial and Iot markets.
Now this sort of endorsement for the one of the most respected people in the industry is really powerful as potential customers success working with us on advanced solutions and as partners and even employees assess becoming part of our team at.
And even as an effect on chip allocation decisions by some of the big to providers and this of course, all helps our business momentum.
Now another key project for future growth is making sure we have the capacity and cost competitiveness to stay ahead of fast growing customer demand, we're well along planning a second production site to leverage the expertise we have in Singapore, but with lower cost and an ability to expand production volumes were likely to move ahead with an expansion in <unk> in Indonesia.
This is just an hour.
I'd from Singapore, but theres room to build the capacity, we need skilled people bleed and operate the facility in a cost base, that's very competitive with any location while easily leveraging the world class expertise, we built in Singapore with this facility, we're positioned to scale well beyond half a billion units annually very cost competitively to support the expanded margins.
And to support some of the transformational projects as they scale up.
Now in addition to RFID capacity expansion, we are continually working with component suppliers to keep our partners and our own operations running at full capacity.
So that's the execution picture for RFID business, we're confident that our execution is best in class across our design wins partnerships industry leadership capacity scaling team expansion and supply chain.
This gives us confidence that our plans for growth in our strategic categories gross margins and operating margins through 2022 and 'twenty three.
So turning to premises we covered most of the growth drivers in the opening comments with our strength demonstrated in Q2 in both commercial and federal markets as the seasonal buying cycles and government hit in Q3, we're seeing budgets for security continuing to grow in particular for highly secure end to end platforms, where we're the clear leader.
So with all these growth drivers and with the 21% growth we delivered in the first half of 2022, we're confident of the 2025% growth in premises.
So to wrap up RFID is growing over 40% in premises are growing over 20% our industry position and execution support these trends continuing in 2022 and 2023 and.
In Q2, our RFID business grew and our expected long term rate without the transformational projects kicking in we will keep updating tangible progress mile stones to confirm the solid position, we have in each opportunity as well as confirming and refining the scale of each.
The macroeconomic environment is tough, but we're positioned well in particular, we continue to work hard to stay ahead of supply chain shortages. Our priority is to be sure we drive our RFID and premises growth. While also sustaining gross margins if supply chain issues require too much premium being paid our normal cogs such that margins would be pressured.
We are raising price aggressively wherever we arent able to raise price fast enough like in some of our legacy products. We will forego revenues in order to support margins as long as our strategic growth has kept up at all times.
Now as a result of his commitment and knowing supply chain and macroeconomics can have an effect on any business. We are expanding our guidance range for 2022 to be $125 million to $135 million that we have plenty of chances to exceed this range, but as long as we're supporting our RFID and premises growth rates to meet our target model, we might forego some legacy revenues.
It's only responsible to make sure we're meeting expectations. So our strategic growth gets total focus our margins continued to be strong and we keep driving our transformational projects. So they can drive growth well above our 40% baseline RFID growth.
Now we expect the second half of 2022 to build on the trends in Q2 RFID growth accelerated.
Gross margins expanded beyond our target for the year, RFID, driven and our projects reached record numbers and revenue strength in RFID offset.
Legacy revenues, where cost increases would have pressured margins the progress on RFID and premises growth gross margin strategic initiatives and are increasingly high profile industry position are all encouraging for growth and profitability of our strategic businesses.
So with that we'll open the discussion for questions and once again, we are joined for the Q&A by Dr. <unk> <unk>, our COO and GMO identity in the Mira <unk> Vice President General.
General manager of our transponder business. So I'll now ask the operator to open the line for questions.
Operator.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we do ask that we're posing your question. Please pickup your handset if you're listening on speaker phone to provide optimal sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Jason Smith from Lake Street. Your line is live.
Hey, guys. Thanks for taking my questions just wanted to start with the 2022 guidance just so.
Fully understand maybe the slight downshift.
That's entirely due to you guys just baking in the potential to walk away from some low margin legacy business in the future or does that also bake in any RFID projects, maybe being pushed to the right given the macro.
Very good clarification, Jason. Thank you know it is totally the four and none of the latter the RFID business is.
Got a lot of momentum and strength behind it and that led us to even.
The comment that in the current quarter were looking for north of 50% growth in ARPA.
And that is that is certainly a trend the trend that we're on it it is sequentially increasing its growth rate as we look at it.
And but we know how important gross margins are.
In the blended gross margins and want to have the flexibility to do what we did in the current quarter, which is protect aggregate gross margins, while making sure we're creating zero headwinds in fact, we're putting everything behind investment in our growth that growth businesses.
Okay that makes sense and it's really helpful. And then just looking at the auto injector market I mean, Steve based on your commentary it sounds like you're seeing some really nice momentum there.
The comments regarding discussions with some additional customers, including the largest auto injector are those in beta trials that are those just initial discussions.
So Amir is right here across the table from me. So I'll, let him answer that and also that will make sure that I don't step across any lines on customers because that is what I'm talking to them as we can comment on I'm sure still confidential phase, but this is another.
Price level customer that is committed to and our east to us. So they are they are binding NR he's wearing design phase right now.
We anticipate hopefully to get something over the next two quarters, that's actually tangible volume.
Okay.
And last one for me and I'll jump back into queue, you mentioned for other pharmacy chain in pilots and deployments how many of those pharmacies do you think could actually be in full on deployments by the end of this year early next.
Full on deployment as in all of their pharmacies equipped and rolling.
There might be one of them by then.
They are they're all pretty measured in their rollouts.
But in terms of by early next year I expect that that will all be in that they will all be full.
Fully commercialized in that timeframe.
Okay got it.
Thanks, a lot guys.
Thanks, Jason.
Thank you. Your next question is coming from Anthony Stoss.
Craig Hallum. Your line is live.
Hey, guys.
Execution in a really tough market, Steve on the 38.
Projects, we have ongoing do you expect all of them will be commercialized at some point by the end of 2023.
Any any handset potential volume when you lump them altogether.
And then.
Do you in terms of component supply issues do you see that theyre, starting to get better than I had a couple of follow ups for Jonathan.
Sure and I'll talk about in a reason I'll, let him add to it as well.
Hi.
So typically somewhere around two thirds of our NRI is turned into commercial business. There's some that just turned out to be experiments and that's fine.
They often come back around but the vast majority of them definitely do turning to business and we expect that to do.
Sometimes non linear sometimes you start out with a project due in NRT.
Then the product direction changes and you end up doing another REIT or some some variation on it.
And then that ultimately becomes the business you choose and Thats actually the main reason this.
Less than 100% the customers themselves that engaged in MRE, the vast majority of them convert into business over time.
And then there's just there is always the time phasing that because this is a medical device. It can be a year and a half from <unk> to production as I've mentioned in the past that for our mobile.
Customer, who we love very much but it was two years plus between our first designs with them and actually getting it to ramp up so that's how I would characterize that profile then to characterize.
Volumes.
Hi.
That the numbers get they get.
Rather extreme because athletic shoes of course.
There's 7 billion.
Sold a year just in.
In the true Athletic youth category.
And similarly, with some of the medical devices you quickly get into several hundred million dollars uses but I'd say there is.
Two to three new use cases that would be certainly very much could be in the well over $100 million units amongst that.
That cohort of.
<unk>.
New address some of the yet or even that 38 are ones that have been underway in auto injectors and others, but there is.
Okay.
Theres a few that we arent going to add to the list and be tracking every day, but we have them.
As part of our business model that can be driving substantial volumes, but.
But let me comment further on that yes, just to add there is a lot of these in our east are turning from reference selling opportunities. So what may have taken us a longer cycle on the first design now is becoming much simpler than the second and third path. We're also getting a lot of insurers assurance from the customers that are coming forward on the <unk>.
They are coming forward with multiple <unk> and one of them is on an application to other one may coupled with a feasibility study behind it and when that usually happens they know exactly what they want and they want our expertise to craft around it and then hopefully then it goes to the standard sales cycle and the right project plan to ramp up so all the right signs here.
Definitely they are growing quarter over quarter, which is the right trajectory.
Does that answer which is we're trying to get to Tony.
Yes, I think so.
You can see the premier or you Steve when you look at this tranche of potential new customers and the Asps. It sounds like Asps are moving up it if you looked at a year ago kind of the if you had a similar trajectory is what was the average ASP at that time versus what you are at now.
No. It will be just a percentage I guess it would be helpful trying to figure out or get a better sense of how much asps are going up.
So two yes, two dimensions to that is.
Your peer ASP side, partly because of the focus that we have on it and the rigor that Amir is put into his team and everything else it's probably.
Nearly double that certainly 50% higher and some are fixed with auto injectors, we mentioned at 35.
No.
Injectors, we mentioned that 35.
<unk>.
A good proportion of that <unk>.
Year ago could have been in the 20 range.
The other thing I'd add is really just the volume we haven't really been talking about <unk> and tracking them.
As our pipeline until the last few quarters and as I mentioned last quarter. It was a couple of dozen now it's more.
And truth be told I do say, we never want to be gated by NRT.
But amir I'll tell you that that we probably could have done 20% more coming in the hopper and so were adding people as quickly as we can on that so the growth.
Aspect of it is.
Both that we're adding.
Number of opportunities a lot of them as Amir mentioned, our references now that people just coming to us.
And it's the nature of the opportunity as people are getting more comfortable and sometimes second generation designs that you get a lot more value add a lot more complexity and therefore higher prices.
Yes. The only addition is really the price points are going up because the innovation is going up and with innovation. What we were doing last year was more around validation just simple.
<unk> now, we're doing that coupled with capacitive sensing.
Many other add on capabilities around tampering and as we add more value, we could justify a higher price point and the customers are willing to pay for it.
Super helpful guys and then Justin.
Really strong gross margins 38.
Guys were.
In the second half to be relatively flat from Q2, not Q2 came in higher than what you were anticipating what do you see for Q3, you think gross margins are roughly flat or can they keep growing a little bit each quarter.
Yes, we try not to go too granular into quarter by quarter analysis, I think we have put out.
We're trying to shoot for 77% for the year and I think thats good.
A good target for us as I mentioned with identity, taking a bigger and bigger piece and knowing that identity is the 25% range at that mix might keep us right around the 37% would be would be a target for us.
Okay perfect.
Thank you.
Mark that's what the margins are going down in our eyes, it's more just the mix and taken a little bit bigger piece of the pie.
Got it thank you.
Uh huh.
Thank you. Your next question is coming from Mike Latimore from Northland capital.
Yes.
Okay. Thanks, Yeah, great execution EBIT levels here.
Steve did you say that the 41% growth in RFID you did not include the transform any transformational deal revenue.
Effectively yes, I mean, some people count the mobile.
Customer in those transformational deals but of course, that's really as part of our base for the last year and a half.
But for that.
It didn't include anything meaningful we previously disclosed 50000 units that we spent for the candidates pilot and.
Some tens and twenties and 30 thousands of units in that category, but in terms of a multimillion unit ramp up which is what I would characterize one of those actually ramping the answers note with that growth.
And to be fair the growth that characterized for the current quarter.
Is that.
Really a mirror and his team driving the business and.
The real embrace some of these higher end advanced RFID devices.
So I guess that was my next question.
Acceleration this quarter still doesn't include the sort of transformational projects beyond the mobility customer.
Not a big one.
They may they may surprise to the upside but that.
That is not at all necessary for towards the numbers we referenced.
Okay.
And then.
Hugh.
We had a guidance range for the year on the legacy product category I guess.
If you look at the second half of the year.
And the kind of the sales plan.
What percent of the planning would legacy comprise of this claim.
Well, Justin I would remind me because he has in preparation of these conversations we don't break them out.
They are in the identity.
The business segment.
But we don't break out the pieces there.
But you can you can see that it can happen.
You pull a couple of million out it can have an effect that our scale in terms of.
I mean, if we had if we had included those.
But at substantially below gross margins that we wanted it would have had an effect as well. So we're just trying to manage to make sure that we're supporting the core RFID and premises growth Theres, nothing diluting the margin or growth message on that.
And and if the legacy business can contribute to basically funding.
Growth in the rest of the business, that's primarily what is therefore.
Okay and then.
Also just lastly last quarter, you gave a number on backlog.
<unk> contracts as a percent of I think it was RFID Eagles.
And those rough percentages changed much.
No they have if anything they've pre.
Progressed, because I don't remember the exact number off the top of my head, but for the fourth quarter.
It was lighter coverage and of course as we move our bookings.
That get higher coverage there so.
It's moved along sequentially.
Okay great.
Thanks very much.
Thanks, Mike.
Thank you. Your next question is coming from Craig Ellis from B Riley Securities. Your line is live.
Yes, thanks for taking the questions team and congratulations on the execution in the quarter. So Steve I will just start by saying I like what Youre doing with security card and really trying to prioritize strategic growth the right margin structure of the overall business the question.
Are you adjusting is really two fold off of that one just from what youre seeing in the supply chain and should look out here in early August can you give us any sense for the degree to which you may be expecting a similar impact.
In the third calendar quarter.
Fourth calendar quarter, it would seem that that that would something similar which put real well with where the midpoint of the new guidance, but I wanted to check on that as the first supply chain question.
We are we are optimistic, but we have to plan for.
The plan for the worst frankly.
Hi.
It may already be behind Us I believe it will be behind this certainly by the end of this year.
But supply chain is very.
Very strange right now some places some some categories that base are loosening up others are just.
$2 devices that are costing you 50 Bucks, if you want to get them and build today and we're just not going to do that so so we are.
Assuming that the world is not going to get a lot better even though we see some signs that might get a lot better but that but I think it's really important we got such good growth going on in RFID and premises.
That we just don't want to create pressure on supporting that growth and driving it.
Because there are other areas that have a they're supposed to be cashed out.
<unk> business and B I do think the supply chain issues will sort out and then that will come back and its opportunity, but it is not in this quarter next quarter, we don't want to be pressured on the growth businesses to manage our way through that.
And so we look forward.
It does with one clarification I think there were a couple of references in the prepared remarks and in Q&A, thus far about the security of our card business within identity, but are there potentially other businesses that you would be more opportunistic about that.
Potential supply chain impact or is it just that one business thats really quite here yet.
Yes, it is really the security guards and smartcard readers yet.
Okay, Great second question, if I could for a Mir Amir I think over the last couple of quarters, one of the things that I believe we've heard from us.
And interest in our prioritization and sales related to hiring and so with comments today around.
Our priority of white with.
Capability around <unk> does that mean, you are really trying to press ahead on two levers with incremental talent additions or if you really.
One for the other different picture.
I'll help there please.
So right now we're still commercially facing 100%. So the revenue is top priority tough margin business its top priority, but as we're scaling we are trying to find a good balance to support the number of projects, which are coming in because of the sheer demand that currently is is inbound.
Outside of that.
Hiring very strategically so.
I keep given as an analogy as Theyre Navy seals or not soldiers. So all of our salespeople are technical enough that they basically cover two or three competencies and one they are usually salespeople that have came up in the factory. They understood. The production runs they went into inside sales and now they are in the field organization. So as a result of it they can carry the.
Solution selling.
Criteria much further than a green salesperson wood coming into the organization.
Okay and the.
The hiring that's being Dennis that inside of the.
The prior Opex outlook for the business or are you nudging that up just because of the magnitude of the opportunity that's.
That's in play with.
<unk> demand, 20% above where you aren't based on Steve's comments.
No. It's all within budget just right on top of me on that.
Yes.
And then finally, Steve <unk>.
Interesting opportunity to expand capacity can you provide us some color on on the timing for that and what the.
The capital costs would be and when the outlays would occur.
Yes, and actually we've got Michael Miller on the phone as well from Germany, who has been driving that that initiative and we are moving it very fast.
Actually so <unk> do you want to comment on the.
The timeline and process for Tom and then and then Jocelyn can probably comment on that.
Nice to speak with you. Thanks, Hey, that's immediate and so timing wise we have.
Boiled down.
The respective locations in <unk> two only two we will be basically.
Joining a contract within the next week or two in addition to that knowing that some of the machine lead times alone. We have already started communications with.
The factory in <unk> again, so we will be adding an additional two pieces of equipment.
We're starting to hire.
And the people in order to basically trained them in Singapore, and then basically to get them ready for the <unk> facility is supposed to be up and running by the first quarter of 2023.
Got it and then lastly.
One of the things that we've seen in the broader industry team.
<unk> capacity is needed in the current environment customer deposits.
Ben one way too, sometimes partially or meaningfully fund capacity is that something the team is considering and if so.
To what extent.
We will certainly have those conversations.
With our with our broad base of customers there is.
That generally is not the way we go forward, but the other aspect of it is youre talking a couple of million dollars in aggregate.
And it's been said, we expect to be fully up and running in the first quarter, which means we'll be starting pilot runs in early runs for the end of this year. So we think we can cash flow it reasonably well.
And have the capital outlay be pretty well balanced Justin do you want to add anything to that sure.
Taking a look at another rollout, which we all know is roughly $900000 range and we are looking at a DDA type machine, which is an upgrade from there it's about $2 5 million. So.
Steve mentioned, where our Capex is somewhere in the range of.
$3 $5 million to $4 million over the next let's say 18 months.
And we have the working capital on the cash today and upon that.
Excellent thanks team.
Yes.
Thanks, Craig.
Thank you. Your next question is coming from Brian Rotenberg from Imperial Capital. Your line is live.
Yes, thank you very much.
Couple of questions here in terms of cash generation just answered the capex question, but.
Do you anticipate in 2022 generating positive cash in your balance sheet.
I don't see a big cash drain I don't think were going to be generating cash not only because of the outweighed even when I talked about those those two machines. There is a 30% plus deposit that goes on for 60 days and we have a pretty early payment stream on those as well within 2022, so because of the nature of the Capex.
Timing on the cash flows.
Don't see us being generated cash in the next six months, but I don't see it going down significantly.
Okay.
Cash remains around the same.
Does that change in 2023, I know that you can't.
Give us guidance for 2023 other than Youre looking for X amount of growth, but will the cash situation changed significantly in that that year 12 18 months from now.
I don't see it changing significantly.
I think that we'll be able to continue.
Invest in Capex. So even if you look at this quarter that the easiest way to describe it let's say everywhere, we went down about $2 5 million.
But if you look at my cash flow our cash flow statement.
One eight were just strategic inventory purchases were really trying to get out in front of those and $1 million of it was cash capex. So if you just combine those two youll see that were running really neutral on cash flow from operations and we don't have any debt to serve so we hope that trends continue so if there is.
The cash and I'm talking about would be for either strategic inventory repurchases or additional capex.
Okay and then one other housekeeping question I have is RFID units did you state the number of units shipped in the period.
We did not.
Can you.
[laughter].
Sure.
Yep.
We will follow up with you on that one because I don't have it in front of me.
Okay.
Thank you very much great quarter.
Thank you.
Thank you that concludes our Q&A session I will now hand, the conference back to Steve Humphreys for his closing remarks. Please go ahead.
Alright, Thanks, and again, thanks to all of you for joining us this evening.
And so.
No it's very important to keep our investors updated on our business progress. So we're going to be redoubling, our efforts on that but I think the main message will be conveying is that we're executing on our plan. The market segments are growing very strongly despite any of the macroeconomic forces around us and we really think that's going to continue.
But to keep you updated more specifically on our progress we've got several events coming up.
Among investor events, we'll be at the Needham Conference actually just next Monday, which is virtual will be at Canaccord in Boston in person on August 10.
Lake Street Big conferences in New York mid.
Middle of September September 14th.
Craig Hallum Conference also in New York on November 17th and Imperial Capital in New York on December 13th. So you can see a couple right off the bat and then and then monthly phase out and then also we will certainly do some investor outreach and events along the way. So we'll keep you posted.
And as always.
Do you have any other questions or follow ups. Please reach out to our IR team and we'll be happy to keep you posted on all the progress in the business. So again. Thank you all for joining us and have a good evening.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.