Q2 2023 Identiv Inc Earnings Call
[music].
Good afternoon, welcome to identify presentation of its second quarter fiscal 2023 earnings call. My name is Paul and I will be your operator this afternoon.
Joining us for today's presentation are the company's CEO , Steve Humphreys and CFO Justin Scarpulla.
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 financial measures or guidance, including non-GAAP adjusted EBITDA non-GAAP gross margin non-GAAP operating expenses, our non-GAAP free cash flow. In addition, during the call management will be making forward looking statements.
Any statements that refers to expectations projections or other characteristics of future events, including future financial results future business and market conditions and future plans and prospects are forward looking statements.
Actual results may differ materially from those expressed in these forward looking statements for more information. Please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company's latest annual form on report 10-K and quarterly reports on Form 10-Q.
Identive assumes no obligation to update these forward looking statements, which speaks as of today.
Now I'll turn the call over to CEO , Steven Humphreys for his comments Sir.
Sir Please proceed.
Thanks, operator, and thank you all for joining us our second quarter continued our strong progress for the year with record revenues for Q2 gross margin expansion and positive free cash flow, we continue to deliver disciplined growth, while strengthening our strategic position in both our RFID enabled Iot and physical security businesses.
And positioning our balance sheet to support our growth.
Selecting our commitment to balance sheet strengthening growth in Q2, we delivered positive free cash flow and positive net operating cash a positive swing in those last metric of over $5 million from last quarter.
Justin will comment on the details, but since these results reflect our focus on disciplined growth and working capital strength, it's worth noting in the business overview.
With a fully normalized supply chain and our position as the go to company for advanced RFID based Iot applications, especially in medical and specialty packaging Q2's kept us on track for 2023.
Because we focus on specialty applications with nearly zero exposure to commodity UHF based retail tags. We've also outperformed some competitors who have struggled recently at our outlook seems to be in a better position, even though some industry bellwethers in the RFID chip category.
In our security business, our premises segment, where our focus has been on expanding our share of wallet with our comprehensive security platform across video access control analytics credentials and readers Q2 revenue was up 8% year over year now behind this aggregate growth our core Hirsch velocity platform grew 23% year over year with controllers.
<unk> up 33% and access security readers up 37%.
Looking more closely at our business unit performance.
Our RFID enabled Iot business in the second quarter, we shipped over 44 million units are nonrecurring engineering roster remained strong at nearly 60 projects with more than half of these projects and our key medical health care and pharma vertical and our average unit prices were up about 17% sequentially.
We also delivered 5 million units to healthcare related customers are five auto injector projects progressed, including the one going through FDA approvals, where we expect approval at the end of this year or early next Cvs and envision America continue to support our prescription application for the visually impaired orthopedic surgery devices are shipping and then the medical use cases, we share.
Last quarter have all continued on track.
Our webinar RFID solutions for health care was very well received do you have any interest in the health care use cases for RFID I really urge you to check it out.
In Q2, we delivered 14 million units of Willie Iot pixels up from the 10 million units. We delivered in Q1, and we started production of our second large BLE RFID order.
As you can tell from the sequential progression of one then 10, then 14 million units across Q4, Q1 and Q2.
L. A enabled RFID is on track to be an industry transforming application.
We will talk later about our expectations for the BLA enabled RFID category, which we're increasingly convinced will become a pervasive platform for high value RFID applications.
Another metric we track in Q2, we continued to maintain 100% customer retention in RFID, except for low margin customers that were choosing to move away from this continues to be on plan and already factored into our projections on.
On the supply front chip availability has normalized and as higher price components are consumed will start deploying lower priced components, which should create margin expansion opportunities. Despite the supply normalization, we're continuing with our suppliers diversification. We've added assigned for sensor based ruggedized specialty UHF applications and are expanding our par.
And the ship with procure and S. T micro for direct integration with our <unk> SaaS platform for seamless tag commissioning.
Also on the supply side for Iot, our new Thailand facility is now fully operational and producing at a rate of 5 million units a month exiting 2023, we expect to have a primary production capacity of about 200 million units a year in Thailand. This will expand capacity, while also reducing our production costs. In addition to the structural cost.
Vantages in Thailand, we also have an efficiency projects underway across our production and supply chain operations to keep improving margins.
Turning to our security business are complete integrated video and access strategy encompassing cloud on Prem hardware and all the related components needed for security system is clearly getting traction from the product growth rates I covered earlier.
That growth was partly offset by a decline in one video product line as we are deemphasizing, our three via our video product in favor of our integrated velocity vision platform.
As vision sales accelerated we expect aggregate growth to reflect this higher growth in the overall platform.
Commercial demand was also strong in Q2, we saw particular strength in health care, K 12 schools and higher education and airports on top of our core federal strength supporting continued federal growth in Q2, we received fed ramp listing which is required by most federal customers to deliver cloud services, making us one of only four physical security companies with this capability.
Ability and the only major federal access control provider with it.
Going into Q3, which is also the federal fiscal year, and we think we're in a good position for recurring revenue opportunities for our federal solutions.
So to summarize in Q2, both Iot and physical security made solid progress keeping us on track for 2023.
Iot our strategic initiatives in health care and with Willie It grew very well supported by our project management and sales and technology strength, our production in Thailand is fully up and running supply chain for critical chip categories have normalized and our product and organization investments are largely done and delivering results in physical security our industry leading converged.
That form and our ability to deliver it as a SaaS or system solution positions us to keep taking market share. We're executing our strategy. While also managing cash flows margins and inventories to strengthen both our business and our balance sheet. All of these support both our growth and our strategic positioning expectations for 2023, which I'll discuss.
After adjusting covers our financial results.
Justin over to you.
Thanks, Steve.
Steve mentioned in Q2 2023, we delivered record revenue for our fiscal second quarter, while improving year over year gross margins and a return to positive free cash flow.
We believe these results paired with our focus on driving disciplined growth in our Iot and physical security businesses position. The company to continue its growth momentum in the second half of 2023.
Second quarter 2023 revenue was $29 6 billion in line with consensus estimates up 6% versus the comparable prior year period and up 14% versus Q1 2023.
Second quarter, 2023, GAAP and non-GAAP adjusted gross margin was 37%, 38% above consensus estimates.
GAAP and non-GAAP adjusted gross margin reflects our continued focus on maintaining our margin profile in 2023.
In addition, we added $1 million in cash and cash equivalents to our balance sheet, while continuing to increase our investments in technology and manufacturing processes and equipment.
We remain committed to our long term non-GAAP adjusted gross margin target of 40% to 45%.
In the second quarter of 2023, our GAAP and non-GAAP adjusted operating expenses, including research and development sales.
Sales and marketing and general and administrative costs were $11 9 million and $10 6 million respectively.
This was consistent with Q1 2023 levels.
As discussed in Q1, we were able to deliver on our plan to expand revenues quarter over quarter, while maintaining our operating expense levels.
We continue to believe our current quarterly operating expense levels will enable us to meet our 2023 goals and we do not expect our remaining two quarters to vary significantly from this amount.
non-GAAP adjusted EBITDA was <unk> 7 million in Q2, 2023, an increase of $1 $6 million versus Q1 2023, as we were able to increase revenue expand our GAAP and non-GAAP adjusted gross margins, while maintaining our operating expense profile.
This was concurrent with our continued strategic investments in machinery and equipment.
Our Q2, GAAP net loss was $1 1 million or <unk> <unk> per share, which was in line with consensus estimates.
In the appendix of today's presentation, we have provided a full reconciliation of GAAP to non-GAAP financial information, which is also included in our earnings release.
Our next slide further analyzing trends by segment.
Beginning with identity revenues from our identity products totaled $17 7 million or 60% of our total revenue in Q2 2023 as compared to $16 9 million in Q2 2022, an increase of 5%.
This reflects an increase in our Iot and legacy smartcard reader sales.
All set in part by a decline in our access card sales.
Our Q2 2023 identity segment, GAAP and non-GAAP adjusted gross margin was 23% and 25%.
<unk> with Q2 2022.
These reflect an increase of two percentage points as compared to Q1 2023.
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 and increased production at our Thailand facility, which has lower manufacturing costs.
We remain committed to our long term gross margin target range of 35% to 40% and our identity business now turning to the premises segment. This segment accounted for 11, nine or 40% of our total revenue in Q2 compared to $10 nine in Q2 2022, an increase of 8% the.
The year over year increase in premises segment revenue was across both federal and commercial businesses.
Across many of the vertical Steve mentioned above.
Increases in access control sales were partially offset by decreases in our video products as <unk> transitioned from <unk>, our video product to our integrated velocity vision platform.
We continue to execute on our go to market strategy to offer a comprehensive end to end platform solution.
GAAP and non-GAAP adjusted gross margins for premises in the second quarter of 2023, or 57%, 58% respectively.
Which is consistent with Q2 2022 and demonstrates our ability to maintain our margin profile.
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 second quarter of 2023, adjusted to exclude restructuring and severance costs and certain noncash charges, consisting of stock based compensation and depreciation and amortization was 36% of revenue compared to 41% of <unk>.
Revenue in Q1 2020 is great.
As noted previously we expect quarterly operating expenses as a percentage of net revenue to decrease in the remainder of 2023.
Now turning to the balance sheet. We exited Q2 2023 was $22 2 million in cash cash equivalents and restricted cash.
This was an increase of $1 million from Q1 2023.
In Q2, we generated $1 4 million in cash from operating activities zero point $9 million from financing activities offset in part by $1 2 million in investing activities related to our capital expenditures.
Our working capital exiting Q2.
Was $49 2 million.
As Steve noted our supply chain outlook is improving and we expect to work through our inventory over the course of 2023 as a result, we expect to rebalance, our working capital and repay our revolver balance in the second half of 2023.
And our 10-Q filing 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.
In summary.
Our overall Q2 results were in line with expectations and we are Reconfirming, our 2023 outlook with the expected revenues in the range of $125 million to $130 million.
Normal seasonality is expected to continue.
This concludes the financial discussion I will now pass the call back to Steve.
Thanks, Justin.
As we go into the second half of 2023, we're continuing to build on the work we've put in during the first half of the year as well as taking advantage of the industry position, we built and some of our less well positioned competitors face some headwinds in Iot. We accomplish this in several ways first by winning NRA projects for strategic technically complicated applications.
Second building our industry leadership in key verticals as the Goto solutions provider third increasing awareness of our solutions through customer facing initiatives like our new Iot product Binder, and Iot Webinar series and fourth expanding at a Thailand for cost competitiveness and capacity expansion to meet growing demand for Iot solutions, while simultaneously.
Reducing our production input costs.
In physical security our complete platform is showing its competitive advantage through the first half of 2023, we've kept building out product engineering sales and sales engineering Tech support training and systems, we've launched a range of new and refreshed products and our focus now is on leveraging our channels to bring our complete product range into all of our target market segments.
<unk>.
For the second half of 2023, and then into 2024, our focus continues to be expanding our competitive advantage in our businesses, while strengthening our balance sheet to drive cash flow, we'll keep working down the strategic inventory position. We built when we had to manage supply shortages. We're optimizing expenses as you can see in our reduced GAAP expense levels quarter over quarter.
<unk>.
This aligns with our financial plan to build our cash and working capital strength over the next few quarters, we're fully supporting our competitive strength, while managing our working capital health, we're focusing on inventory turn improvements AR collections and other healthy approaches to protect working capital using revolver debt only has incrementally needed as we said last quarter, we expect.
Revolver debt to be repaid within the next three quarters, and we don't think were overly constrained and our core strategic growth as we manage working capital.
Looking at our specific business lines in Q2, our Iot business delivered on its revenue plan. So we could focus on building pipeline for the next quarters, which we've largely done for 2023.
For the second half of 2023 and in 2024, we've got four advantages supporting our growth in Iot.
That's how each advantage is developing halfway through the year.
Our first advantage is our strength in the broader medical and healthcare vertical we already have several medical customers each forecast to be over $1 billion in annual revenues. This year and a couple of dozen NRA projects or customer samples in pilots in medical use cases with the potential for multimillion dollar recurring revenue levels. We think we will expand our position for advanced medical.
Applications, which is critical given that we've seen that medical applications take a long time to take off.
We're expanding our health care presence continuously with activities like the session at HIMSS, we participated in our webinar on health care applications for Iot strategies guided by our board members from health care industry leaders and other health care initiatives. Our second advantage is our clear lead with BLE enabled RFID providers and integrators I describe the growth rate of production.
Volumes earlier, Iot pixels open use cases across multiple verticals warehousing and logistics supply chains consumer experience or tls enabled retail product environment handling and an almost unlimited range of applications. In addition to Willie it themselves who are winning projects with some of the world's largest companies, we're engaging with BLA based solution providers.
Going into even more use cases, these third parties multiply the volume and margin opportunities.
We're seeing signs that the BLA enabled RFID category may create a whole class of new RFID applications.
Hey, Jeff RFID, which is not our core focus has always been limited by its expensive dedicated readers and the limited bandwidth in sensor capabilities of UHF chips and devices NFC has excellent technology features and the ability to support a wide range of sensors, but is limited by its read range of a couple of centimetres BLE solves both problems now.
It only is every phone equipped as a Bluetooth reader much like NFC, but they are far more Bluetooth readers in the Iot, including Bluetooth beacons, laptops, and tablets smart watches and fitness trackers health monitoring devices smart home devices and more so passive BLE technology is the best of both worlds long range like UHF RFID with the ubiquitous readers and <unk>.
Wide range of data and sensor capabilities like NFC, we're staying focus on current customers, but we are determined to keep in front of the broader BLE RFID category as it develops.
So our third advantage our specialty devices are used in sectors like healthcare electric brand engagement supply chains mobile devices and others not low end retail loss prevention or similar use cases, some of our competitors and even suppliers are exposed to the cyclicality and variability of the commodity retail market. Some have missed targets in Q2 and.
Others have dropped their outlook, we have no significant exposure to the low end retail or pure UHF based loss prevention markets.
As a result of the combination of our diverse use cases, and not having that cyclical downside low end retail plus the tendency of our use cases to a consistent ongoing demand. We expect to continue on the business trajectory, we projected at the beginning of the year.
The fourth advantage is our in place customer base, which grows our volume is their use cases grow a good example of this is a specialty consumer household product that we just started producing last year and is now at a $2 million annual run rate customers like this and other specialty packaging and consumer engagement customers all drive our growth as they grow.
Smart packaging, we're working closely with collect IV and other leaders, we've kept our leadership and our relationships, we havent lost a single customer or opportunity as far as we know so as these markets grow we have the same opportunity we've always had to grow with them.
So with these competitive advantages of our Iot business, we think we're in a good position to deliver as planned in 2023, and we think it will position us for growth going into 2024 as use cases, and new technologies like BLA expand.
To build customer awareness for our technical excellence and innovative Iot solutions, We recently launched our Iot Webinar series and the new Iot product advisor tool, which covers our entire Iot product portfolio. The feedback. So far has been positive and we now have webinars confirmed with collect that NXP for later in Q3.
Turning to our physical security business. We spent the first half of 2023 building out our next generation product range and the best in the industry teams I described earlier, our velocity ecosystem, which includes velocity access control velocity vision vision, AI hyper converged velocity and velocity cloud combined with our touch secure readers and Ts cards.
We think is the most complete security platform in the industry.
This complete solution is our core advantage and security, which along with three other advantages, we believe positions us to continue to grow faster than our market.
So our second of those advantages is it customers need integrated systems to get the most benefit from each security touch point and to make the system easy for systems managers and security teams to manage security systems are higher performance lower cost and more secure when they are integrated across hardware firmware software and cloud as well as across different security.
Actions like access control video and credentials as a result, we think our platform offers customers. The most tightly integrated security system from a single vendor.
With our integrated system adoption already has strong and schools state and local government airports and federal agencies. We're now seeing interest across large enterprises small businesses hospitals banks first responders transit and other verticals with security needs, but always constrained budgets for security personnel and systems, especially in a cost conscious.
<unk> environment, our ability to deploy only been needed parts use existing infrastructure to keep costs low and then expand over time is winning share.
There's also a technology refresh cycle that will drive growth over the next few years as server based systems go cloud separate access video and identity systems converge and has in place hardware running windows seven and other legacy systems need to be replaced our system can leverage in place cameras and infrastructure, while enabling the technology and cyber security.
Upgrades, they need and creating a single pane of glass security system.
Our third advantage is an opportunity created by industry dynamics that we're positioned to exploit.
We think theres an opportunity for a new generation of market leaders to own enterprise scale highly secure systems and to extend this strength into the small and medium business market.
Some leading enterprise security competitors are either up for sale recently sold are rumored to be for sale competitors trying to build high security enterprise scale systems by coming up from consumer scale systems like Mercado, a ring or challenge, both technically and from a go to market perspective.
Our advantage is that our solutions are built on very high security hardware and software, which we then bring to all levels of the commercial and government markets. We believe are faster than market growth in the first half of 2023 was partly due to this trend and everything we see so far shows the trends continuing in our favor.
Our fourth advantage in physical security is our technology depth and breadth across hardware firmware software cloud web and mobility.
This enables us to bring complete secure products to market fast because we control all aspects, we mentioned last quarter that we're planning product launches pushing the edge of multi capability very high performance hardware supporting cloud enabled systems and features including biometrics wireless infrastructure and mobile apps, we recently announced the launch of our new premise SMB.
Access system and EG to edge gateway.
<unk> is fully cloud ready as well as being available as an on Prem solution.
<unk> is the first new gateway and controller hardware, we've launched in several years, it's completely new from the ground up with a powerful quad core processor, while also being very cost effective we've architected it to be able to evolve to support everything the future holds at the edge across readers access sensors cameras biometrics and intelligence at the edge we built.
It analytics core with flexible modular software and responsive user interface that scales across administrative devices, even with all these capabilities and aggressive pricing, we're sustaining our margins while deploying the technology to support our vision of Upselling services and features into the platform over time.
Now consistent with our technology depth and a lot of the security industry is rushing to figure out AI, we already have an AI solution with our vision AI product that we launched earlier this year.
This brings AI enabled analytics to integrated video content that can be combined with access control events to create an environment. This dynamically secure even when managing complex threat situations in the next phase we expect AI will enable proactive threat response preparation for anticipated events, our position as the provider of one of the <unk>.
<unk> highest security systems gives us access to some of the most sensitive threat environments, which are likely to be the earliest adopters of <unk> enabled security such as federal courthouses intelligence community feels facilities and high sensitivity locations like the Whitehouse.
With our proven product and technology strength, we're also Oems our technology to leverage our engineering investment and to expand the reach of our technology platform with our OEM program. We're now selling our access readers through two of the top three physical security system vendors, creating an efficient channel to market and this is reflected in OEM readers sale.
<unk> more than doubling year over year in Q2.
So with these competitive advantages in place with tight focus on business model efficiency solid Q2 progress in both our Iot and physical security businesses, and new product and technology launches. Our execution plan is clear we know our immediate growth drivers as well as the strategic advantages. We are building. This focus gives us confidence in our ability.
Managed working capital be efficient with our expenses and build our long term competitive moats. So we continue to lead as these markets take off.
Justin has already confirmed our 2023 revenue outlook with a solid gross margins and cash flow from our business and clearly known uses for working capital to support our growth we have the resources to make it all happen.
Now as I've discussed before we have two strong businesses with strategic positions for the next growth stage of two very large markets last quarter. We described it with two strong businesses like these inside a small company as you would expect we're doing a strategic review to maximize the positions, we built and to realize the full business potential in these critical markets. So as part of that.
Reviews, we have engaged a financial advisory firm and we're working closely with them to take the right steps to maximize value for our shareholders.
So in Q2, we showed strength in our key Iot and security growth drivers chip supply and production constraints are behind us and we have the capital we need to grow our business with our progress in Iot across medical applications BLA enabled RFID and our long tail of specialty applications and with strategic leadership and physical security.
Pending in both key verticals, new products and share of wallet with our complete platform. There are several opportunities for upside. If these trends continue we are positioned to accelerate growth and to expand EBITDA margins. We will certainly keep you all updated as the year unfolds, so with that I'll now ask the operator to open the lines for questions operator.
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Have a question at this time, one moment, while we poll for questions.
And our first question today is coming from Craig Ellis from B Riley Craig Your line is live.
Thank you for taking the question and congratulations on the relative performance to.
Other players in the Iot field, Steve clearly.
Doing a nice job.
With with maintaining.
Maintaining your financial performance when another shirt deteriorate or mid tier.
I wanted to start just by digging into the Willeit commercial opportunity nice to see the progress year to date and starting.
On a follow on order.
Can you take a step back and just look out maybe towards next year and provide some broad parameters on what <unk>.
Commercial potential could be for.
For Bluetooth.
Low power.
And help us understand how that might ramp up and what role Thailand might play in manufacturing.
Yes, great Great question, Greg and Al.
I'll try to keep it tight because we can talk about that almost all day and thank you for.
Four.
I noticed in the <unk>.
The performance relative to some others.
But.
As you know we started shipping to Willie in these just in December of last year.
And and.
Take off has been pretty.
Pretty impressive.
And there are also other BLE enabled RFID companies now coming into play so we're starting to see it as a category of technology and as I said in my comments you get the best of both worlds.
That that you've got the range of UHF and you've got the data intensity and capability of NFC, but without the range constraints of NFC. So we're starting to see third party.
The integrators.
Our solution providers coming up with all kinds of new ideas.
Enabled by passive which has never been possible before you actually get sufficient power from the RF signal for a full BLA device.
And of course, once Moore's law starts kicking in.
You start to get longer range.
Our lower power requirements and and of course more data capability. So.
We certainly don't know exactly where it's going to go but we'll eat themselves is on a continuing growth trajectory I'll, let them comment on their actual numbers, but certainly.
Substantially greater going forward and then now we're starting to see others coming into the category and then that really can create an accelerating effect now to be clear.
We're not talking about 'twenty for guidance or anything like that but just in this category. There is a lot going on.
That and people starting to build applications and solutions around it.
And then us coming in from the perspective of technologists, we see that it's solving a couple of things that have been bottlenecks both in the NFC and in the UHF category. So that's that's how I would categorize it I know, it's a little bit general, but does that does that give you a fair picture or should we go into some more detail.
That's fair just comment on manufacture ability, Steve from what Raul, Thailand could play and should get to that flow.
Yes, good point.
Because it is very complicated I think we mentioned on the prior call that normally at RFID chip has.
No.
<unk> touch points.
And these BLE chips tend to have a dozen and a half.
So they're very complicated to produce when you're trying to manufacture a 1000 1000 units in hour.
But R R.
Our Thailand facility has all the capabilities that we have in Singapore and a very.
Skilled workforce there.
We've been able to hire and frankly from from some competitors in former competitors. So we think Thailand actually faster than we expected we will be able to cover most of the technology arc.
That are needed in our product and now theres. Some theres some customers who require that you manufactured center locations.
Can't move, but but Thailand, we'll be able to come online.
For most of our production capabilities.
And actually we've got on the line here, both EMEA and <unk> and Manfred so.
Let me asking me here to comment on.
On the BLA and really a business and then I'll ask Matt to comment on their production.
Sure and just building on the DLA aspects.
Steve's points.
It is the best of all worlds because you are getting the supply chain visibility that you would get with traditional UHF, we're getting the consumer experience that you get with NFC and you'll get all the condition monitoring value add so from that spectrum.
Early stage technology on a good ramp.
And we've announced in both the press releases that we are on the right trajectory with the current project expanding to the second site for that large retailer and so the project is progressing overall very well very excited about the progress of the technology.
Okay.
And Mike do you want to comment on type production.
Absolutely, yes, so maybe.
Also in the context of the affiliates deal.
We are preparing we are preparing the site tour.
The next and the next wave of <unk> E pixels.
Pixels.
We've had some great learnings over the first seven months of successful producing.
Thats type of new technology, and some of the new equipment. We are bringing in is also going to be tailor made to basically produce that type of that type of application. So from that point of view. We have had a lot of learnings that are transitioned over into the new tie side plus we recruitment.
It's coming in there in general we are rolling up production in Thailand.
The first couple of million units are produced the first one is already in the month of June so for the opening we've had that.
And we are ramping production, we're ramping people and we are basically getting ready for additional additional projects being take long and if necessary transferring more from Singapore over to Thailand in order to take advantage of some of the.
Improved production cost related to <unk>.
Labor rates.
Lower labor it slow lower overall costs in terms of lease rates and such so from that point of view, we should be seeing that kicking in fairly soon.
That's great guys. Thanks for all the color on.
Bluetooth low energy.
I wanted to move on them and acquire by the comments you made about supply Steve are you sound more confident in supply then I think anything I've heard in a year or so can you comment on how broad based improved availability is and then from a cost standpoint.
A lot of.
Lot of component cost rose over the last 18 months throughout the supply chain I suspect with.
With identity how.
How does the cost trends.
That you are seeing and are we seeing decreases versus what you might have in inventory and things that would ultimately help boost gross margin.
Yes, and Youre, absolutely right its a much more positive than we've been for for probably 18 months plus.
And as usual.
Lips faster.
When you think.
That's happened in this case so.
Costs have come down our purchase price variance that we were getting hit on margin with last last year.
Really come down right also has come down substantially.
And in some cases air freight things like that can be down by a factor of three or four.
Lead times have also reduced so that means you've got to carry less you don't have to carry as much inventory that you can be more and more flexible in real time.
And so.
All of that is moved in the right direction, so that it really feels.
Frankly totally normalize now.
Across all those dimensions.
And then as you mentioned there is still some inventory at some of the lower prices. It takes time to burn it all down and sometimes you have a tail of open pose at at higher prices with providers and so you have to burn those down even while you're doing the brass knuckle negotiations necessary to get it down faster.
That brings down that of course that naturally comes in and give some margin room because.
Our intention of course is the value of our products and the value of our products and if the cost of input goes down.
That should go to our gross margin line for the most part so yes. It is.
It is a much better position than we've been in it for me.
Supply in lead time, and Cogs perspective, then.
Easily last year and a half.
That's great and then lastly for just 10 before I hop back in the queue. Justin I think I heard you mentioned that you would expect opex to be flattish through the rest of the year can you just talk about the gives and takes are for gross margin as we look to the second half thanks guys.
Sure on the Opex front, that's correct, we do anticipate flat opex for the rest of the year, we've been pretty consistent we were consistent last quarter as well that we put.
Quite a bit of investment into opex throughout 2022 in the first quarter of 2023. So we feel we have the.
The workforce and the Opex, we need to to meet our goals for the rest of 2023. So we expect some operating leverage there in the back half of 2023 as revenue.
Resumes its cyclical nature in Q3 being fed year end and others as far as gross margin with the mix that we have we are.
We don't give specific gross margin.
Guidance going forward, but we do expect.
Gross margin profile to remain consistent with what we saw in Q2.
Okay.
Thank you. Thank you.
And the next question is coming from Anthony Stoss from Craig Hallum. Anthony Your line is live.
Thank you hi, guys.
David maybe I missed it can you update us where you stand with your strategic review that was kicked off during the quarter is that still ongoing and then.
Maybe a mirror.
Could take the Mike I'd love to hear if deals are taking longer if pricing is holding up.
Pretty incredible that happier.
Designs, our engagements are related to medical I would assume that thats a higher ASP. So anything you could share would be helpful.
So absolutely the strategic review I did mentioned.
We normally don't give specifics in terms of the strategic review there is so much investor interest and it is important. So we did say that we have appointed a financial advisor and were working with them.
On the on the proactive process, you would expect that with such an engagement and the board is working very closely with them.
And.
That's in the comments I made so.
So moving forward I would say is the best way to say it.
Mary you want to comment on the business side that Tony was asking.
Sure Yeah, so from a from the NRG perspective.
Mentioned with <unk>, but I think the important thing to note here as are our burn rate through those and are pretty consistent stream. So as we're finishing out <unk> taken them to the engineering teams of the various customers theyre going into evaluation team is doing a really good job with the pipeline and advancing new <unk> deals. So we <unk>.
Have a very very good probability of closing and then also we understand that the sales cycles within.
Within health care, and pharma and medical devices typically take longer so we need more in the Q2 increase our probability of a lot of these taking off.
And in a shorter timeframe.
In addition to that the price points are holding well because these are high value goods.
The adjusted find a higher price point and then the kits themselves are a higher tier of kits. So they are type twos are typed floors with added encryption around authentication, rather capacitive sensing so that justifies the price point in holding the margins for that so overall I would summarize that the pipeline looks really good in our number.
One focus right now is to continue putting more within that pipeline. So a lot of these evaluations while they are being tested.
<unk> tested by the engineers and we're getting feedback we have more in the Q2 increase the probability and speed of.
Of these projects.
Thanks for the color mirror best of luck guys. Thank you.
Thanks, Tony.
Thank you and the next question is coming from Jason Schmidt from.
<unk> from Lake Street, Jason Your line is live.
Hey, guys. Thanks for taking my questions just looking at will it you've obviously started shipping against that follow on order, but when we think about unit shipments.
Q3, and Q4, what sort of trajectory should we think about there.
I don't think we've broken that out, but I think you had consistent levels. It would be that we mentioned that the follow on order was of a similar magnitude.
Two the initial order.
And so I would.
Be thinking in terms of consistent levels and when we get more of that upside going into 24 that we were talking about will we will communicate that again always constrained by really it themselves.
There is.
There's some limitations to what they'll let us talk about and we fully respect that as a customer.
Okay got it and then just as a follow up you called out some commercial wins in the premises business. When you look at the commercial opportunity within that segment is it becoming a growing proportion of that business or how should we think about that opportunity longer term.
Yes, the commercial part of the business is.
<unk> is growing.
By quarter. It varies this is federal year end, so federal will probably have some some seasonal strength to it.
But we put a real.
Effort into expanding commercial business and its expanded as a proportion of the business. There we put in more regional sales managers and we've done some product launches and then this product launch that I mentioned on the call premise that in particular is focused at commercial and in particular small knee business.
In commercial so I would expect that that commercial portion will continue to grow.
Okay perfect. Thanks, a lot guys.
Thanks, Jason.
Thank you.
Sure.
There were no other close there with no other questions.
To move to closing remarks, with Steve Humphreys Steve.
Okay. Thanks, Thanks, operator, and thank you all for joining us today.
As always of course, we will keep you all updated as our business progresses and in Q3 will also be at the Rosenblatt Tech conference in late August and the Lake Street Best ideas growth Conference in New York in mid September . We also have a couple of more Iot webinar is coming up one with collect I'd and another health care Iot Webinar. This time together with NXP.
So any of those that you'd like to access it. Please just contact IR and we can connect you into those so with that thank you all again for your time and support and have a good evening.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.