Q3 2022 Identiv Inc Earnings Call
Good afternoon, welcome to Identive presentation of its third quarter 2022 earnings call.
My name is John and I'll be your operator this afternoon.
As for today's presentation are the company's CEO , Steve Humphreys and CFO Justin's Kapoor.
Following management's remarks, we will open the call for questions.
Before we begin please note that during this call management may be making references to non-GAAP measures or guidance, including adjusted EBITDA and free cash.
In addition during the call.
Management will be making forward looking.
Thank you Peter.
Please proceed.
Christa and.
In future financial results future business and market conditions.
And future plans and prospects is a forward looking statement.
Actual results may differ materially from those expressed in these forward looking statements for more information. Please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company's latest annual report on Form 10-K.
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 third quarter, we had record revenues and took strategic steps forward, but also ran into some serious challenges.
We have a scale up order for delivery in Q4 of up to 25 million units and Bluetooth enabled Iot for Willeit transformational category that we believe is now happening going from just sample units to millions of units our premises segment showed increasing strength delivering another quarter of growth and nearly three times the market rate and record premises backlog going into Q4.
This is especially important because premises generates a great majority of the gross margin dollars that are key to our business the strength.
We delivered record quarterly topline revenue at $31 million. The first time, we have been over $30 million in a quarter revenue identity was $19 2 million premises was $11 8 million, both new records and revenue for the trailing 12 months was $112 4 million non.
non-GAAP gross margin was 37% on our target level and adjusted EBITDA for Q3 was $2 million.
We grew RFID unit shipments, 17% year over year to $45 4 million units and this would have been higher but we were limited by component supplies, which I'll talk about later.
We also set new records for order backlog, our total back log at the end of Q3 was $36 9 million up 31% year over year and backlog for delivery in Q4 is $16 6 million up 42% year over year and 19% Quench Lee.
So our growth drivers are in place, but I need to start by thoroughly addressing the shortfall in our Q3 top line revenue relative to our internal expectations and the actions we're taking.
Despite the strong business results in absolute levels, they are below where we planned to be.
Now the shortfall was all in our identity segment, our contingency planning wasn't solid enough to offset what happened and we totally on that.
Go into the details, but I'll say right now our contingency planning failures can never be allowed to happen. It happened, it's unacceptable and we've taken steps to make sure. It never does again.
Our identity revenues fell short for three reasons.
First a major customer decommit at almost 1 million and $5 of orders as they realign their supply chain from China to India and ran into soft demand for their products.
Second we had component shortages that would've impacted over $4 5 million of revenues across identity and premises, we offset about $1 million of premises, but couldnt produce in identity about $3 $5 million in the quarter as a result.
Third we decided not to fill in the identity revenue gap with lower margin product. We did that in Q4 of 2021 and that hit our gross margins by more than 400 basis points.
We committed that we'd never do that again, so we didn't.
Result was revenue shortfall in Q3 of almost $5 million.
Our contingency planning clearly was poor we missed by far more than we ever should customer demand shift in supply chain with immediate cause but we should have had the extra flexibility in demand supply and production built in to absorb it.
It doesn't matter that we manage the supply chain the past two years, that's all undone with a miss like this we own that we've made changes and are taking actions to fix it.
It doesn't change the disappointment I personally feel for this impact.
So here are the actions, we're taking first we have new operations and supply chain leadership, our new global VP of supply chain in our Santa Ana headquarters started last month with experience at Flextronics and other world class operations.
In parallel our COO Manfred Mueller is focused almost exclusively on RFID supply chain and operations.
Second we've sharpened our focus on supply availability at our only planning and forecasting based on reconfirm chip supply in house, we're known to be on the way.
For the Big program and BLA Iot, we have the chip supply already in house for committed deliveries for the volumes that we're counting on in Q4, and we've aligned with them on an allocation schedule through 2023.
In terms of customer forecast, we built on the books orders to offset variations in previously committed customer orders and we're managing it weekly.
Third we finished redesigns for two of our main products, giving us component interoperability, so the highest volume product and premises and identity readers each have chip alternatives either in place already or fully online by Q1.
Now there are other actions we've taken to make sure. This never happens again, we could go into more details in Q&A and as we hear later, we're also taking a hard line on base expectation setting.
I wanted to take this revenue shortfall head on so it doesn't overshadow our progress right. When transformational projects are driving volumes in Q4, our Iot industry leadership is growing and our premises business is in the best position ever and showing it in its results.
Now both BLE enabled Iot and cannabis our transformational categories for our business in the case of Willeit, we're going from sample amounts to over 10 million units in a single quarter.
With multi frequency data devices for cannabis Msos, we're going from a few tens of thousands of units to over $1 billion in the quarters ahead.
Similarly, our premises growth and market share gains continued in a market growing 5% to 6% we grew 14%.
Even with this growth we went into Q4 with a record premises backlog of over $3 million that plus our pipeline indicate continued above market growth in Q4 and 2023.
This is key for three reasons, our premises business contribute disproportionately to our gross margins.
Our strategy always has incorporated both segments as they connect in the Iot category. So growth in each business reflects health in our strategy.
And third recent valuation proof points like <unk> 3 billion valuation and its recent financing chose the asset value of premises security businesses contributing meaningful value to our overall company.
So with that context I'll go into other trends and events in Q3 that underlie our results and that are the foundation for our projections.
Now despite the problems I went through earlier, our engineering driven RFID activities were strong our energy projects grew from 38 projects in Q2 to 56% in Q3.
We're continuing to build more tangible opportunities through our engineering excellence. We also continued our track record of a 100% customer retention in RFID.
In healthcare, we made particular progress we've added another global injector vendor. So we now have active projects with four of the top five global auto injector companies. The one that's furthest along is placed an order for 500000 units and in Q3, we delivered our second and third auto injector NRA projects.
This category as part of the medical industry trend towards in home self administered care because of the very high ROI versus in clinic care.
In premises momentum was strong across the board continuing our growth and market share gains we grew nearly three times the industry rate in our premises segment.
Now, we manage premises combined with our access card products since at the same end customers that buy access cards.
For our premises and access card revenues combined which together are managed by our premises business unit team growth year over year was 22%.
Now the health of this business also shows in the premises segment gross margins, which have held solidly despite supply chain challenges.
Here's some other premises metrics for Q3, our commercial business is continuing to strengthen in addition to our federal government business, where we've always been strong we've completed OEM and reselling agreements for our access card readers with two of the top five access control vendors building on the market share we're winning from HIV.
We had supply chain challenges in premises and we're able to overcome nearly all of them having in house U S. Based final production, let us adjust right up through the final days of the quarter.
Even with shortages of some of our most critical components, we were able to build substitute configurations and work with the suppliers, we had to fulfill nearly all our demand.
Having strong demand in total production flexibility, let us meet our goals and puts us in a strong backlog position with a record premises backlog of $3 million coming into Q4.
Now I don't want to over focus on our premises business since the challenges we've got to work on or an identity.
But our strategy has always been to have two strong businesses that cross leverage technology and converged strategically over time now.
Now the recent pressures in small cap growth equities have reached a point that any reasonable value placed on the premises business alone.
Business Thats growing sustainably at 15% to 20% with strong gross margins and over 15% recurring revenues, a strong balance sheet and no debt should support our company's entire current value continued growth and profitability in our premises business plus our RFID based Iot business, which has shown strong market demand, we believe will drive.
Value creation now.
Need to execute deliver predictable core results and build on the progress in our transformational opportunities.
Now before Justin goes into the financials, let me give one more view on our overall business in September alone, we delivered nearly $17 million in revenues in that month.
This shows that our business base can generate revenues on an annualized basis of nearly $200 million with healthy margins.
So to summarize the underlying business demand is solid.
Our business model is intact and our strategy is hitting milestones our focus is on execution and predictability by anticipating problems in our RFID supply chain supporting the growth and margins in our premises business, keeping our disciplined momentum in specialty RFID devices, and planning contingencies and projections. So we never again have gap.
Between expectations and results.
So with that Justin over to you for the financial updates.
Steve as Steve mentioned, despite significant supply chain issues and customer demand reductions our financial results reflect our continued strength exiting the third quarter of 2022 with the delivery of sequential and year over year growth in revenue with total future backlog, increasing 31% year over year, we remain committed to protecting our margin.
And maintaining tight control over our operating expenses the.
The trailing 12 months revenue was $112 million.
Up 12% versus the comparable prior year period.
The sequential and year over year change in revenue was across both our premises and identity segment.
Third quarter 2022, GAAP gross profit margin was 36%.
A decrease compared to 37% in the second quarter of 2022, and a decrease compared to 38% in the third quarter of 2021, primarily due to product mix.
For the third quarter of 2022, non-GAAP adjusted gross profit margin was 37%, which was consistent and in line with our consensus estimates a decrease compared to 38% in the second quarter of 2022, and a decrease compared to 39% in the third quarter of 2021.
Our Q3 GAAP net income was zero point $5 million or income of <unk> <unk> per share.
We are providing the appendix today, a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release.
Our next slide further analyses trends by segment, beginning with identity revenue from our identity products totaled $19 2 million or 62% of total revenue in Q3, 2022, which is a 13% increase from Q2 2022, and a 2% increase from Q3 2021.
The sequential and year over year increase in identity revenue was primarily driven by higher sales of RFID transponder and access card products. The year over year increase was partially offset by a continued decrease in our legacy smart card reader revenues.
Our Q3 identity segment non-GAAP adjusted gross margin was 24% compared to 25% in Q2, 2022 and 29% in Q3 2021, the year over year decrease is due to product mix with lower sales of our legacy smart card readers.
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 in our relationships with our customers will further strengthen our margin profile.
We remain committed to our long term gross margin target of 35% to 40% and our identity business.
Now turning to the premises segment. This segment accounted for $11 8 million or 38% of our total revenue in Q3.
Representing an increase of 8% from $10 9 million in Q2, 2022, and a 14% increase compared to Q3 2021.
The sequential and year over year increase in premises segment revenue was across both federal and commercial businesses as well as continued focus on expanding our market share and offering a total platform solution.
non-GAAP adjusted gross margin for premises in the third quarter of 2022 were 59% compared to 58% in Q2, 2022 and 58% in Q3 2021.
The sequential and year over year changes were primarily due to product mix, we remain committed to our long term gross margin target of 55% to 60% in our premises business.
Moving now to our operating expense management, our non-GAAP operating expenses in the third quarter of 2022, adjusted to exclude restructuring and severance costs and certain noncash charges, consisting of stock based compensation and depreciation and amortization was 31% of revenue compared to 33% in Q2, 2022 and 28%.
In Q3 2021. This resulted in our third consecutive quarter of positive non-GAAP adjusted EBITDA.
In summary, we continued to deliver a consistent gross margin profile and tight controls over operating expenses and our business, while reinvesting for growth within our current cost structure.
Now turning to the balance sheet, we exited Q3, 2022 with $21 9 million in cash and cash equivalents and restricted cash.
We spent $2 9 million and strategic inventory purchases and $1 4 million in capital expenditures, we remain debt free and we have maintained strong working capital position.
And our 10-Q filings, we will be providing a full reconciliation of the year to date cash flows for completeness. We have included the full balance sheet in the appendix of this earnings release.
As we move to the fourth quarter, our total backlog for all future shipments were $36 $9 million exiting Q3, 2022 up 31% versus Q3 2021.
Which provides visibility into the current business momentum, we anticipate coming through 2022.
Even though we delivered record quarterly revenues built a strong backlog and reported a positive momentum in our transformational categories. The current environment, we outlined delayed customer orders shifting supply chain availability and production related challenges combined with today's difficult macroeconomic conditions impacted our <unk>.
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Therefore, we are updating our full year 2022 guidance range today with expected revenue between 112 and 118 million.
We're updating our 2023 guidance to 20% to 25% year over year revenue growth.
Seasonality is expected to continue with that I will conclude the financial discussion and pass the call back to Steve.
Thanks, Justin.
As we look to Q4 2023 and beyond the clearest indicator of future business is backlog.
Total backlog was up 31% year over year and backlog for delivery in the fourth quarter. It was up 42% year over year behind this backlog our RFID business is driven by NRT and transformational projects in our premises business is driven by our product and channel strength already reflected in our growth market share gains in gross margins.
To support these strengths of our business can grow and lead our markets. We have to do a much better job anticipating supply shortages and economic cycles.
In a few minutes I will go into the pressures we see in exactly how we'll contingency plan. So shortfalls like Q3 never happen again.
Let me first update our transformational opportunities then I will go into our contingency planning.
As I mentioned in the opening comments, we now have key projects starting to ramp in Q4 really has placed an initial $25 million unit order of which we expect to deliver about 10 million units in Q4 carrying the rest into Q1.
He is projections for 2023 are above that 25 million unit per quarter run rate and the price points are in the high 20 range.
Our mobile customer has resumed volumes in Q4 that we know they could be affected by the economy. So we're watching their indicators closely and forecasting volumes carefully.
In specialty retail or project for Smart Casino chips has confirmed to the vendor and has made progress in consumer engagement, we're continuing to work with collect idea on new applications, we deliver to NFC enabled immersive fan experience for German football club, where our NFC tags were embedded in the special team scarves letting fans get into the stadium without a premium ticket and.
And then during the match users' got real time digital content offers and rewards our tags authenticated and gait each fan a personalized experience and we're working with collect I need to bring this to other football clubs across Europe .
As I mentioned earlier for the cannabis market, we're going to produce over 1 million units of our multi frequency RFID devices supporting our largest msos in the U S as well as potentially CB and in Canada.
We worked with leaders in the cannabis industry developed three multi use smart tamper seal designs that were deployed into the market. This year.
We and our partners think there'll become standard across the cannabis supply chain and core to the user experience for cannabis customers.
Last but still the most important long term category in healthcare and particularly auto injectors I mentioned that we now have active projects with four of the top five global auto injector companies and one has placed an order for a <unk> 5 million units for 2022.
Based on market analysis from our customers. We're still convinced this will develop into a multi 100 million unit category for RFID enabled Iot medical devices.
The prescription pill bottle category now as consolidated under one of our partners Envision America, resulting in four of the top six pharmacy chains in the U S. Now active with spoken Rx projects supported by our RFID devices. We're prioritizing this category for shipments in Q4 to make up about $600000 that we didn't manage to ship in Q2.
Three.
Now our commitment to the health care market also is reflected in our two most recent board appointments I won't restate the profiles of Lora Angiolini anyway, koons, but they are both highly experienced in managing disciplined global operations for multinational health care companies and integrating new technology in the medical products and healthcare operational processes.
Their expertise will be very valuable to our growth plans in this important market.
I'd like to take a moment to thank our former directors Neenah Shapiro and Admiral Robyn Braun who's contributions over the past several years helped us build our business strengths in our key markets.
So transformational categories are making progress in a couple of starting production scale volumes.
We're also in the process of finalizing and launching our Iot solutions platform that will provide our customers with a bundled solution for devices and software. This SaaS platform includes device management services consumer experiences data and analytics and Apis building on our <unk> coating services. This manages Iot devices in the data not only digital trigger.
But as intelligent monitoring and sensing devices throughout their life cycles.
With this progress were confident that these categories will happen in the market scale opportunity is there.
Now there are also three headwinds related to timing.
Their supply chain, the economy and customer adoption time for complex technology like our specialty RFID devices.
Now I've talked enough about supply, we're being far more careful in our projections and in our contingency planning even with orders on the books for over $300 million RFID chips were still seeing some documents and inconsistent allocation from component suppliers. So were projecting based on committed deliveries or in house inventory.
The economy is another reality, we had been resilient too, but it caught us in Q3, so we have to factor it in.
Our customers are getting more cautious and some are seeing lower demand as happened with one in Q3.
Even in recession resistant categories, we have to plan for customers to be more conservative in their ordering and forecasting.
The third reality is that our specialty devices are a big step in our customers' products, we've done well with a very wide technical project pipeline shown in our <unk>.
But the adoption time can be long and an uncertain economies new product launches delay in ramp up is less aggressive, especially because they usually need capital, which gets tight in tough economic times.
Our leadership position is solid and the categories are intact, but we have to be realistic that some companies are going to be slower to deploy and ramp.
As a result, despite growing pipeline backlog and industry leadership, we now expect base predictable shippable RFID growth of about $20 to 25% in 2023 as Justin mentioned.
Now to be clear this is risk adjusted for the issues above for example, it includes only about 10% of the demand. We know will you would expect at full scale will it would add 15% to 20 percentage points to this growth rate pushing at above 40%.
Not going to project that until we know demand and supply chain is certain.
Similarly, we assume economic slowdowns could impact customers, even if only in their planning.
So in a recessionary in supply constrained environment, we're still expecting 20% to 5% growth.
Now, we realize that with our MS last quarter, even though it will be doubted we're confident we'll make it happen and then we will deliver on the things we are excluding from our core base, but we know we will have to prove it one now.
Turning to premises. It's also a picture of strong demand in this case a supply chain that we can manage reasonably well, we expect growth to continue well above the industry growth rate, we've managed supply chain, even though partway through the quarter. We had shortages that could have impacted shipments of over $1 million. We worked every line item and ultimately had less than half a million dollars. It wasn't.
Shippable combined with strong demand that kept us solidly on plan and premises.
Now one key difference between premises in RFID as did in premises were dealing in thousands of units not millions by sourcing chunks of hundreds of units of parts on the spot market, we're able to close the gaps on most shortages. This is also much better than our competitors HIV is still telling the market that they are multi month lead time will continue far into next year.
We're shipping in a few weeks lead time and usually within a few days.
As a result, we're taking share from HIV and others. This gives us confidence in premises growth this year and continuing throughout 2023.
The other reason is the strength of our premises products, our support and our selling channels just as physical security demand is becoming top of mind for every business and institution. We built out what we think is the most complete platform in the industry as well as one of the most secure with great reference customers from the U S Secret service to San Diego Airport, we're positioned us.
The secure trusted complete and cost effective solution.
And this with much of our final production to be done in the U S and being available immediately plus our investment in our sales and channel and you can see why we expect continued solid growth around 20% for 2023.
So we've got solid demand in both parts of our business, we expect to manage supply chain and premises such revenues grow with demand essentially unconstrained by supplier production and then identity to plan realistically for supplies matched to our expected shipments.
With RFID shipments growing more than 25% year over year in 2022 premises growing in the mid teens, both partly offset by our legacy identity readers declining this year as we discussed last quarter for 2022 for Identive overall, we're expecting around 10% to 12% growth.
With RFID growth continuing at the same rate in 2023 with continuing supply constraints and with the premise is growing 20%, 25%, we expect 20% to 5% growth overall for Identive in 2023 with solid gross margins.
This 2023 growth doesn't incorporate some end user demand growth in RFID, like <unk>, and others, which would add well over $20 million in 2023. In addition to our current projections, if we can get supply and if the demand all comes through even as the economy softens.
So despite our disappointing Miss in Q3, our strategy in business is solid we're in major markets, where it can be a clear leader we're committed to much better predictability. So we build investor confidence, while we continue to build our business and serve strategic customers, who are the engines driving our long term success and business value.
So with that I'll ask the operator to open the lines for questions operator.
Thank you we will now take your questions. If you have a question or comment. Please indicate so by pressing star one on your Touchtone phone.
Pressing star to remove you from the queue should your question to be answered and lastly, while posing your question. Please pickup your handset of listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
Okay. The first question is coming from Mike Latimore with Northland Capital markets. Your line is live.
Alright, great. Thank you.
Yes, Steve.
The supply chain comments.
Remedy there.
Sort of the customer order reliability can you dig into that a little bit more.
Are there particular verticals are there customers that are canceled outright or they just kind of lowering volume a little more clarity there would be great.
Yes, and I'll give you as much clarity as I can.
<unk> tried to communicate also.
We had more clarity of what's going on but.
It was the pushout.
Nominally but.
They buy they told us that we just have to be careful about any projections going forward.
I communicated years.
And I want to be careful about identifying any individual customers there, but ultimately the consumer related products.
From one of our larger customers.
And they are usually very reliable and they usually ride through things like recessions.
And when we see them get get soft on a short term basis. The attributed it to moving supply chains as they said and they're moving some things to India versus China.
But we're skeptical that that some of it is actually end user demand.
Happy to fill in any more of that than you want but.
The main thing that told US is we just have to be careful.
In end use demand because even if people arent seeing softer demand there might just soften their orders drawdown inventories of their own and that affects us as well that's why we're taking a cautious step on the cautious approach to <unk>.
Economics, and forecasts from really any of our major customers.
So how much of a jet engine.
Yes, I guess, how much of the change in growth rates in fiscal 'twenty. Three I think you went to 20% to 25% from 30% to 35%.
How much that changes demand concern versus supply chain concerns.
Okay, Yes, fair clarification, honestly, I'd say at 90% supply chain $80 to 90%.
Yeah.
Versus 20%.
Economics.
So it's more heavily the ability to get applied the demand I mean, if you just look at our backlog growth you can see the demand is there.
Right in.
Right and the backlog growth.
And I think that is valid demands.
So that's how I would weight it I'd weighted more heavily towards towards supply chain and frankly as you know.
We were fairly confident about supply chain up through the middle of the year.
And we.
We've been.
Yeah, we didn't plan well enough or supply chain continuing to be.
Very surprising and that's what the that's what given the most pause here and that's also why I tried to break out yes, if we could fill fulfill the willeit demand and some other demand growth would be substantially higher but we don't want to project that.
Until we're certain that we can fulfill it from a supply perspective.
Got it and just.
How should we think about cash flow from operations in the fourth quarter.
That's a negative.
Let me, let me hand that over to Justin Brown.
Hey, Mike we do have some capex coming through Q4 for some of our.
Larger projects, but I would anticipate cash.
Relatively flat to down a little bit.
Okay got it.
Alright, thanks very much.
Yes.
Thank you Mike.
Okay.
Okay. The next question is coming from Craig Ellis with B Riley Your line is live.
Hi, This is Michael Mani on behalf of Craig Ellis, Thanks for letting us ask a few questions.
My first question is just to characterize the sort of maybe demand side risk that we could see on the next few quarters you mentioned.
The potential weakness in the tumors, but how would you characterize the risks across our other verticals like health care specialty retail et cetera.
<unk> ramp push outs and potential volume reductions anything you'd want to call out there and what kind of levers or protections you have in place to offer downside mitigation in that case.
Yes, yes, the best downside mitigation, let me hit that first is we do have strong demand.
Amir coach Neon.
<unk> General manager of that business has built a really.
Very effective sales team and I want to be clear the demand side.
Has been.
Fairly strong in terms of broad base as we've talked about the NRI and everything else.
Large customers, making making single choices are the things that can affect us and what we're now doing is weekly we're holding meetings to look at all the alternatives, we could do to fill in so if we have a big gap happening we might have to fill it with five or six smaller orders.
And I'll actually ask Amir to comment on that in a minute, but but just to fill that fill in for you.
That's how we're mitigating the demand side to your first part of your question on verticals and others are verticals.
And the companies themselves.
We think are pretty recession resistant and economic cycle resistant.
We're worried about is if they just get more conservative.
Medical devices, you would think you still have to have injections in debt.
Fill prescriptions and everything else.
But if they get more conservative in their ordering because from a corporate perspective, they're told to Titan tightened.
<unk> tightened expenses and beef up the balance sheet.
We're worried about that and then for new projects when they launch which would also be on the demand side and especially on the growth demand side.
It takes investment for a new product to launch and sometimes capital investments. If you have it in your supply chain and again, they haven't been telling it happening we are anticipating it because because we have to stay ahead of it.
That they may get into.
Mandates coming from.
Large.
Med Tech company, getting a mandate coming down, saying, Hey, we're going to tighten up on capital expenses were getting late in product launches and then that hits US. We just can't have that happen anymore. We have to set a base that we can absorb all that with.
All the rest of our base demand.
Then and then make sure yes, we.
We are being more conservative than is the case that we can build to the upside on that.
Amir do you want to add anything on the demand side.
Sure just just building on that is our strategy has always stayed in line and it continues to stay in line that we've been building a global team that.
That's not only regionally split out, but they're really splits on winning new business and new logos across the board what that does is it diminishes, our risk and having one elephant customer that really pull through demand.
They end up slowing something down it has ultimate down effects as a result.
So the team is building the NRA show the right progression of 38 to now 66 through Q3.
They are starting to get smaller engagements our product mixes.
All time high as well.
And as we accelerate through this quarter and into next year.
The strategy is really to go deeper into these accounts.
I'll just take away a lot of the pressure from the bigger customers and if we do start to see slowdowns from them, we can offset it with these growing customer bases that we're putting into the mix here. So that strategy has stayed strong and we're continuously putting more pressure there is for the smaller engagements can pick up much faster.
And I just also wanted to calibrate a little bit of Mir Amir mentioned elephant accounts to be clear, we don't have any 10% customers were even terribly close to that.
But for us.
1 million $5.
Which which whatever that is as a percentage of $30 million.
Is is a lot to cover when you have expectations set and we're expecting to grow.
As aggressively as we are so we need to be sure that every chunk.
And a half or something of that nature.
We can fill in which as I said on the premises side, we had a $1 million pressure on supply chain and we were able to fill it in half with supply with.
Scrabbling for parts and half with <unk>.
Excess demand and then fill it in so.
We've got to be positioned in all aspects of our business to fill in any any turbulence that happens in any of the accounts.
Got it thank you for all the color.
For my next question I, just wanted to turn to gross margin. So when you think about.
The trajectory for the segment gross margin expansion over the next few quarters with these both supply side and demand crosscurrents, how should we think about that pace of <unk>.
Expansion or maybe potential delays there.
Could start to see maybe more of an upturn towards the kind of higher 20% segment levels that we'd hope to see.
Excuse me, yes, we are projecting margins, let's say roughly flat right now I think in today's environment.
It's the right call for us to make and we have to.
With supply chain and all of the unknowns here and the macroeconomic environment that we're talking about today, we are projecting those just to stay flat for now.
Okay.
Got it.
That's helpful. Thank you and for my final question.
<unk>.
Will it deal and the potential for ups.
Upside next year, well aware that youre not.
Building that into your forecast at all but could you just call out to investors.
And thus what the potential milestones and kind of catalyst would be for you to see that upside.
How that might play out throughout the year so to capture the full I think you mentioned.
<unk> points of growth.
Yes, and really it themselves have been very open about this so we can talk openly as well and you can diligence at all on their own website. They placed an order for 25 million units, which they would love right in the fourth quarter ramping up from a standing start both from a process perspective, and a supply perspective.
It.
It can be we're not going to get to $25 million. So as I said, we're aiming for $10 million in the fourth quarter. They have publicly said that that first order $25 million quarterly run rate.
It is below the run rate that they expect given the demand that they're seeing.
It will it would happen relatively quickly and frankly, the proof points would be in the results.
As we deliver because the demand is clearly going to be there.
And so we're going to build both from a process.
Development perspective, and a supply perspective as fast as we can on it we are.
We're aiming for those deliveries in the fourth quarter and as I again, I said very explicitly what they'd like us we take whatever we don't roll.
<unk> produced in the first quarter in the fourth quarter, sorry, and roll that on top of what would be a similar volume in the first quarter and as I mentioned those are high.
Hi, <unk>.
Unit items so.
If we're talking about $10 million in the fourth quarter and $25 million plus in the first quarter. You can that you can see the scaled with that depth.
What that means for us.
<unk>.
Given our scale.
It's not responsible of us to project that into our base until we know that we are delivering and that we have.
The supply in order to deliberate otherwise it totally skews our expectations, even for the near term, but it.
In this case.
It's certainly not up to us the name of the customer behind it that's.
Entirely up to will it but it is.
It's a customer who can very easily support that.
That kind of volume and that kind of growth so.
We certainly believe the business is going to happen.
And we refer you over to Willie to talk to them about confidence in the.
In timing and volumes, but.
Certainly.
They are very confident in it we just need to be careful about what we put in our numbers.
The next question is coming from Jason Schmidt with Lake Street Capital markets. Your line is live.
Thanks, guys for taking my questions just wanted to follow up on Crows margin I know you mentioned sorry, the revenue shortfall was due to identity. Obviously the percentage of the revenue composition was flattish. So just curious if you could quantify the impact from the supply chain on gross margin and I guess as a tight.
Into this I mean did you expect premises to have a stronger sequential stronger sequential growth in Q3.
Yeah.
Premises in Q3 is there the federal government.
Fiscal year end. So we do anticipate that premises goes up in Q3 normal seasonality year over year as far as your comment on <unk>.
The entity in gross margins there.
We typically don't try to go to that level of detail but.
It was a.
Gross margin was was relatively flat quarter over quarter went down a little bit of an identity, but that was what we were expecting when we came in right at.
Our margin guide for Q3 was really 37.
The consensus estimates total company was 37, three and Thats right, where we landed so we're really happy from a margin perspective.
Okay, and then just looking at the Willy Ed just to clarify sort of this $25 million or 25 million unit order that relates to a single customer and program and then any potential upside would that still be coming from a single customer program or are you anticipating the potential.
For additional customers and programs.
So really it of course is our customer and I would defer to them to talk about what customers behind that it certainly is predominantly driven.
Bye bye a single major customer bad debt, but I really don't want to speak to their business.
Overly much they've shared what's behind it and giving us confidence in that.
Yep Yep Yep.
And they're very acceptable I'm sure there'll be happy to answer any questions you got about there.
Originating demand.
Okay, and then just moving to the auto injector market.
Can you provide some clarity on how we should think about the ramp there.
Yes and.
<unk> ramped thinking I would put there is again when I talk about new product.
And time to launch.
That debt things like that can take time, and we've always tried to be careful about.
The auto injector timing and time to market.
There are now.
As we pointed out in five different projects across four different companies and some of them might happen sooner rather than later and some of them are less.
Intrusive technology and so they can be adopted more easily.
But.
We're certainly not going to specifically call a ramp time on auto injectors per se.
But over the next the next few quarters, I think youll see more and more we already have the first half million dollars.
And.
I think you will see growth over time, but I am.
That cautious about setting a specific quarter on that.
Amir you want to give some more color on auto injector timing.
You can be a little more proactive with it then I can because I don't want to step on any of your customers does.
Sure and then just keeping confidentiality in place here, we've had very good progress on the first one we finished Q2 with a joint IP that had two work streams with that leading medical device Pharma company and then what we also had in Q2 was we secured the first.
With the second customer that's their competitor and during Q3, we were able to produce the two.
Two different designs for them and actually deliver that so we're in a very strong position now going into the following quarter with with the actual prototypes in their hand for them to test it get some results and then give that tangible data back to us. So we can go into the next round. So that the first customer very good progression on the on the IP.
We are going to go into the applicator tests with a 500000 units they're going to be.
Solidifying that into their production runs so that they can get the kinks out and make it more efficient and then with the second and third streams. We're also going with the community and our design and we're going to get some feedback during the following quarter.
So very good progress, but again to Steve's point, we're really at.
At their timing on how quickly they want to ramp them, what the next phase looks like.
Okay. Thanks, a lot.
Thanks, Jason.
The next question is coming from Anthony Stoss with Craig Hallum. Please proceed.
Hi, Steve I just wanted to also follow up on <unk>. So if I understand this correctly.
25 million units in Q4, you're going to ship, maybe $10 million to roughly 40%.
When you gave your a reduced your guide for next year is roughly $30 million less revenues.
Did I hear you correctly that youre going to only assume.
Roughly 10%.
So if they need a 25 million units per quarter 100 million units.
<unk> is almost $30 million in revenue, but youre assuming 10%.
I understand everything correctly.
That is correct that's exactly correct that.
That's how we back that we projected it.
Okay. So the rest of the business.
Must be down quite a bit or do you expect it to be down year over year. If you are at least getting 10% from Williams.
Well no because we're talking about 20% to 25% growth in the overall business really it will contribute as you said at about 10% of $30 million will contribute about three so the rest is indeed growing.
Pretty well and frankly.
You would expect with something like that.
Somehow something happens in that one big.
Hi.
That order one big customer, we can't be exposed to that though we have resilience in our mirrors pipeline to offset that three as well.
Is there a risk that Ed.
Customer.
It gets upset if they're only getting 40% of what they need.
We're less than 40%.
Yes, very fair question and a mere can answered that as well more directly because you've got very close related but no we've talked with them.
Yes, very openly about.
Disorder.
Just came in.
Right at the end of the quarter and they are asking for that kind of step up and you've got to get product, that's growing and you've got to get supply growing and so it was clear we weren't going to get to 25, and we talk to them about hey are you going to be disappointed if we do this or that or the other thing and they said no. We fully get it. We just want you to get running we want you to have the magnitude of the scale of what we're.
Get done here, so just ramp up and go but we're going to be satisfied.
Fill a portion of it in Q4 Amir you wanted to talk a little bit more about that topic in particular.
We're saying, we're not going to get all the way to 25 million units is that going to jeopardize the future.
Relationship.
So absolutely the partnership is very strong and it's been transparent from day, one that as we're producing that expectation on the production is going to be rolling through today and customer here and it is a very notable retailers. So they are going to they have the same understanding that as it ramps and as we get the process theyre going to work with US we also have been.
Very transparent with them that it's not just the production side and the ramp. It's also the supply chain and the other materials that go into the complexity of this product because it is not just a commoditize product that we're delivering so if there is any other supply chain issues. Hindering. This really has been very open with us and we've been open with them on those risks so that ran.
Is very sequential and then it has a lot of upside, but we've been very conservative in what we're delivering right now and then what the next phase looks like.
It is a follow up I think in the past you've been using three different primary components suppliers into.
Are all three falling down or.
Nearly before this order came in you were having supply chain issues and if you've got this great visibility on this potential 100 million unit.
Annual order.
Okay.
Is there no way you can iron things out over the next quarter or two is just going to go on as.
As it seems you would suggest all throughout 2023 the shortages.
Yes.
So.
I thought it would be ironing out more and it's gotten.
Crazier.
It is the first part of the question.
Is mostly coming from one supplier and I'm not going to name them because that doesn't help anybody.
As you would expect I've talked to.
Friends.
Competitors in the industry about this and they're all running into the same thing.
Yes, we haven't we haven't factored into our numbers, but dealt.
Just call on the drop of a hat and say what 10 million units aren't going to arrive because we're having some problem with 12 inch wafers in a fab over here and you'll see them in March and that's just.
And I've got four or five colleagues in the industry, who are experiencing the same things we call each other and say what are you seeing so.
It is yes.
It is happening and it sounded like at least through first and second quarter of next year.
There are things that seem to be affecting their supply chain and their ability to supply.
So we just we just have to take that risk.
Risk out in case of <unk>.
They do they have their own supply.
And their own chips and so they can be much more reliable on that supply.
But that said, we still have to confirm because thats coming up a big ramp for them as well.
Got it and then one for Justin.
Opex side of things.
Clearly you've got demand you've got the supply side issues.
Are you planning to ratchet down or keep opex relatively flat or are you just going to still go full throttle.
There was a logjam breaks.
Yes were going to ratchet it down a little bit.
In 2023.
If you're.
If youre looking at it.
Relatively flat when I say that right, we had a pretty strong growth there in 2022 and Opex right. So exiting Q4, having a full year impact for 2023, you might see a little bit of an increase but I think we're set on.
Any significant or material opex increases from head count or anywhere else I think we're in pretty good shape there.
Got it that's all my questions. Thanks, guys.
Perfect.
Thanks Donna.
Once again, if you have a question or comment please indicate so by pressing star. One next we have Brian <unk> with Imperial capital. Your line is live.
Yes. Thank you very much a couple of quick questions to dig down into cash generation a little bit in 2023.
Ebay has been kind of asking around the edges trying to understand where cash flow is going to what youre looking at in 2023.
Maybe you can help fill in some of the blanks and generally should cash flow be.
Yes up from 2022 levels.
It should be number one and number two is there anything that our cash cash generation should mimic like net income in 2023 or should it be something less than net income.
Yes to answer the first question.
Have spoke previously about our upcoming build out and but Tom or Indonesia, and we're taking a look at that that's going to be planned for 2023, and we do have some pretty significant.
Machinery purchases that we're going to be doing on some machinery equipment some mobile our machine.
<unk> already seen a little bit in Q3, where we get a couple of the down payments for those.
And those are coming so with 2023 being kind of an operational build out for us we do anticipate cash coming down.
Slightly in Q2.
23.
But I think that like we stated in the past the cash we have on hand, we're very comfortable with and we were supporting.
We still have over $50 million working capital exiting Q3, so I think hopefully that answers. Your question that we expect it to on a bit.
A bit in Q3 in 2023, but not too significant.
Okay perfect.
Helpful Second question real quick.
In terms of personnel changes you.
Mentioned in several.
Can you maybe give us a little bit.
Just numbers did you actually.
Terminate anyone during this process, our west just moving positions.
No we had some people leave the company if that.
To be direct.
Got it.
We're growing and skill sets change.
As no critique of one person or another but the skills you need.
At $200 million are different from the skills at at 100 and below.
Great. Thank you very much.
Thanks, Brian .
Okay, we have a follow up coming from Mike Latimore with Northland Capital markets. Mike Your line is live.
Great. Thanks.
Yes, Steve.
Backlog tied to premises I think Dave I just didn't get it.
Yes, the backlog tied to premise this was about three.
The backlog going into Q4 was about $3 million.
And I think the portion of total backlog is probably pretty close to that because premises tends to not have extremely long backlog. There was maybe another million dollars in.
In the longer tail backlog.
The.
The $36 nine which is total backlog.
Probably for four and a half of that was premise is now I'm just.
I'm just estimating that.
Yes.
Core backlog was definitely 3 million was premises in the Q4 backlog.
The $16 six and then as you think about I mean, you kind of gave some guidance for next year and premises, 20% to 25%, which is an acceleration. So how are you thinking about the visibility there and factoring in sort of economic uncertainty in that category.
Yes really good question.
I don't want to overstate confidence, but we've got quite good visibility in that category, both from from channel awareness and customer awareness. The way we built out the sales team and are continuing to build it out.
And some of the product launches we have and then also the federal base gives us good predictability as well there.
They are continuing their investment.
In physical security so.
We know what those budget.
Growth area is going to be and commercial as we get into bigger customers when you're talking about.
San Diego Airport is actually in our commercial category versus federal because it's.
Regional airports.
So.
Customers like that plan.
We're going through all of their.
Their terminals and they are building a new terminal three and they are building a new administration building and that will go all the way through 2023, so we get good visibility into that the other part is we have.
In 2022, we launched our video product lines and that is growing as increased share of wallet for existing customers as well when you go from access control into access plus video. So we've got a fair bit of visibility into <unk> into.
The growth drivers for that business for 2023.
Okay. Thanks.
Sure Mike.
At this time. This concludes the company's question and answer session. If you have a question and it was not taken you may contact Identics Investor Relations team at <unk> at Gateway IR Dot Com I would now like to turn the call back over to Mr. Humphreys for his closing remarks.
Okay.
Alright, Thank you operator, and thank you all for joining us as you can tell we're really focusing everything we have on building our business for the long term and especially on delivering on our near term commitments regardless of any of the external factors. We've talked a lot about how we're trying to mitigate all of that.
And for sure out of all of this in addition to supporting our customers predictability.
Is our is our top priority. So we will keep updating our investors either an individual calls or will be at Craig Hallum in New York on November 17th B.
B Riley Fireside chat on December 6th.
The Imperial Capital Conference in New York on December 15th and other Investor events of course coming up in the new year. So thank you all again.
Have a good evening.
Thank you for joining US today, you may now disconnect.