Q3 2023 Identiv Inc Earnings Call

Speaker 1: Good afternoon. Welcome to Identiv's presentation of its third quarter fiscal 2023 earnings call. My name is Tom and I will be your operator.

Good afternoon, welcome to Identive presentation of its third quarter fiscal 2023 earnings call. My name is Tom and I'll be your operator. This afternoon, joining us for today's presentation are the company's CEO, Steve Humphreys and C F.

Speaker 1: Joining us for today's presentation are the company's CEO , Stephen Humphreys and CFO , Justin Scarpula.

Though justin's carpool.

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 are guidance, including non-GAAP adjusted EBITDA non-GAAP gross margin and non-GAAP operating expenses. In addition, during the call management will be making forward looking statements.

Speaker 1: Before we begin, please note that during this call, management may be making references to non-GAAP financial measures or guidance.

Speaker 1: including non-GAAP adjusted EDTA, non-GAAP gross margin, and non-GAAP operators.

Speaker 1: In addition, during the call, management will be making forward-looking statements.

Speaker 1: statement that refers to expectations, projections, or other characteristics of future events.

Statement 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 is a forward looking statement.

Speaker 1: including future financial results, future business and market conditions, and future plans and prospects.

Speaker 1: Actual results may differ materially from those expressed in these forward-

Actual results may differ materially from those expressed in these forward looking statements.

Speaker 1: 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 and quarterly report on Form 10-K .

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, and quarterly report on Form 10-Q.

Speaker 1: IDENT2 assumes no obligation to update these forward-looking statements.

Identive assumes no obligation to update these forward looking statements, which speak as of today.

Speaker 1: I will now turn the call over to CEO Stephen Humphreys for his comments.

I will now turn the call over to CEO, Steven Humphreys for his comments.

Sir Please proceed.

Thanks, operator, and thank you all for joining us.

Speaker 2: In Q3, we continued to focus on high-margin revenue growth in our strategic business lines to strengthen our balance sheet and our business growth. Our premises business grew 15% year-over-year to a record $13.6 million, and our video software revenues more than doubled year-over-year. This brought our software services and recurring revenues to a record over 20% of our total premises business.

In Q3, we continued to focus on high margin revenue growth in our strategic business lines to strengthen our balance sheet and our business groups. Our premises business grew 15% year over year to a record $13 $6 million and our video software revenues more than doubled year over year. This brought our software services and recurring revenues to a record over 20.

<unk> of our total premises business.

Speaker 2: However, in the identity business, mostly within the lower margin products of our RFID segment, we had a major revenue shortfall, coming in about $3 million below what we had planned.

However, in the identity business, mostly within the lower margin products of RFID segment, we had a major revenue shortfall coming in about $3 million below what we had planned.

Speaker 2: We'll talk about this in more detail later, but I wanted to address it early. We had three customers in particular push out orders in the library, packaging, and warehousing and logistics categories that delayed shipments, which we expect to recover by the end of Q1. We also had a design change in a logistics application that affected Q3 revenue.

I'll talk about this in more detail later, but I wanted to address it early we had three customers in particular push out orders and the library packaging warehousing and logistics categories that delayed shipments, which we expect to recover by the end of Q1. We also had a design change in logistics application that affected Q3 revenue.

Speaker 2: One action we're taking immediately from a planning and communication perspective, we're moving to quarterly revenue guidance. This way we can factor in every upside and downside and give clear projections as quickly and completely as possible to our investors and analysts tracking our business.

What actions, we're taking immediately from a planning and communication perspective, we're moving to quarterly revenue guidance. This way, we can factor in every upside and downside and give clear projections as quickly and completely as possible to our investors and analysts tracking our business.

Speaker 2: Now let me first address the RFID segment of our identity business.

Now let me first address the RFID segment of our identity business I want to be clear about one fact, our RFID strategy is intact and making progress the revenue Miss is very frustrating, but it does not harm our core business progress in high value specialty complex RF enabled Iot solutions or Cri this as a category.

Speaker 2: I want to be clear about one fact. Our RFID strategy is intact and making progress. The revenue miss is very frustrating, but it does not harm our core business progress in high value, specialty complex RF-enabled IoT solutions or SCRI.

Speaker 2: This is a category we're truly leading is happening, but it's still early stage.

We are truly leading is happening, but it's still early stage. This is a high margin business opportunity in the RFID segment. We now have over 50 customers in the $20000 revenue range, who have deployed new innovative SCRA products at the pilot stage, many coming from nonrecurring engineering engagements with us some of these.

Speaker 2: This is a high margin business opportunity in the RFID segment. We now have over 50 customers in the $20,000 revenue range who've deployed new innovative SCRI products at the pilot stage, many coming from non-recurring engineering engagements with us.

Speaker 2: Some of these applications can scale to $20 million annually or higher based on the market sizes for their end products. Now many of you are familiar with the NRE terminology we focused on for tracking early stage opportunities. We'll continue to update on NRE stage opportunities, but our business update focus going forward will be more targeted to pilot stage opportunities, which is the next stage past NRE. At the pilot stage, projects are typically poised to move into production scale based on the application success in their end market pilot.

<unk> get scaled the $20 million annually or higher based on the market sizes for their end products. Now. Many of you are familiar with the NRA terminology, we focused on for tracking early stage opportunities. We will continue to update on N. R E stage opportunities, but our business update focus going forward will be more targeted to pilot stage opportunities which is.

The next stage pass it already at the pilot stage projects are typically poised to move into production scale based on the application success in their end market pilot.

Speaker 2: Additionally, our most important vertical for SCRI healthcare now accounts for more than half of our NFC based revenue.

Additionally, our most important vertical for SCRA health care now accounts for more than half of our NFC based revenues.

Speaker 2: This reflects our drive over the past two years to emphasize large potential high-margin health care applications.

This reflects our drive over the past two years to emphasize large potential high margin health care applications, even at their current early stage volumes. Some of these health care applications carry gross margins in the 40% range, suggesting even more margin opportunity over time.

Speaker 2: Even at their current early stage volumes, some of these healthcare applications carry gross margins in the 40% range, suggesting even more margin opportunity over time.

Speaker 2: Because the demand push-outs in Q3 were in the lower margin part of our RFID business, and our higher margin projects are growing well, despite the revenue shortfall, we had our highest gross margins and highest adjusted EBITDA since Q3 2021.

Because the demand push outs in Q3 were in the lower margin part of our RFID business at our higher margin projects are growing well. Despite the revenue shortfall, we had our highest gross margins and highest adjusted EBITDA since Q3 2021.

Speaker 2: In the identity segment overall, margins declined primarily due to a year-over-year decline in gross margins in our identity reader product line. We expect identity reader margins to return to historical levels in the current quarter.

In the identity segment overall margins declined primarily due to a year over year decline in gross margins and our identity reader product line, we expect identity to read your margins to return to historical levels in the current quarter.

Speaker 2: Fundamentally, we clearly need more pipeline in our RFID segment, particularly in SCRI applications to offset surprises like this. It's a big impact. We've taken action on people and processes to keep it from happening. We're tracking demand carefully to avoid another revenue miss versus established expectations to make sure we're not seeing a more fundamental demand slowdown in some markets, particularly the categories that pushed out demand in the lower margin RFID applications in Q3.

Fundamentally we clearly need more pipeline in our RFID segment, particularly in S. E. R. I applications to offset surprises like this it has a big impact we've taken action on people and processes to keep it from happening we're tracking demand carefully to avoid another revenue miss versus established expectations to make sure we're not seeing them.

More fundamental demand slowdown in some markets, particularly the categories that pushed out demand and the lower margin RFID applications in Q3.

Speaker 2: Let me now talk about our premises business in the physical security sector. Premises overall revenue grew at more than double the industry's growth rate, while video and total software services and recurring revenues grew at an even faster rate. Commercial customer expansion with 14% revenue growth is on track with exciting potential based on many new product offerings and positive market dynamics.

Let me now talk about our premises business in the physical security sector premises overall revenue grew at more than double the industry's growth rate, while video and total software services and recurring revenues grew at an even faster rate.

Commercial customer expansion with 14% revenue growth is on track with exciting potential based on many new product offerings and positive market dynamics for federal customers. Normally Q3 is strong and this quarter was no exception with federal revenues growing 16% year over year.

Speaker 2: For federal customers, normally Q3 is strong and this quarter was no exception, with federal revenues growing 16% year over year. Federal growth was strong despite two short-term headwinds.

Federal growth was strong despite two short term headwinds.

Speaker 2: First is the continuing government budget confusion happening right during fiscal year end, which usually is the strongest buying period for federal customers.

First is the continuing government budget confusion happening right during fiscal year end, which usually is the strongest buying period for federal customers.

Speaker 2: Second was a ransomware attack that hit one of our largest federal integrators. This resulted in them being unable to issue new orders during their critical last weeks of the quarter, which have now resumed. Without these headwinds, our premises growth would have been more than a million and a half dollars stronger.

Second was a ransomware attack that hit one of our largest federal integrators. This resulted in them being unable to issue new orders during the critical last weeks of the quarter, which have now resumed without these headwinds our premises growth would have been more than a million and half dollars stronger.

Speaker 2: In premises among several exciting new products, we went into full launch of our cloud first small to medium business product Primus along with the totally new edge controller, our EG2 and our Primus mobile app. This is a big industry statement creating the standard for a high security cloud offering in the SMB space.

In premises among several exciting new products, we went into full launch of our cloud first small to medium business product premise, along with a totally new edge controller, our EG too and our private mobile app.

This is a big industry statements, creating the standard for a high security cloud offering in the SMB space.

Speaker 2: Additionally, we've released interphone 10.3, along with interphone mobile, creating materially more sales potential. And very importantly, we launched Vision AI, our video intelligence solution that's now a standard feature in all of our video offerings. Now, we'll elaborate further on the significant implications for these releases. But one notable metric of our progress is our high margin software services and recurring revenues, which increased over 16% sequentially from Q2 to Q3.

Additionally, we released an iPhone 10 dot three along with Interphone mobile, creating materially more sales potential and very importantly, we launched vision AI. Our video intelligence solutions. There's now a standard feature in all of our video offerings that will elaborate further on the significant implications for these releases, but one notable metric of our progress is our high Mark.

Software services and recurring revenues, which increased over 16% sequentially from Q2 to Q3.

Speaker 2: There's still a portion of revenues that are perpetual license revenues, which we expect to convert to subscription.

There's still a portion of revenues that are perpetual license revenues, which we expect to convert to subscriptions. This is a relatively near term recurring revenue growth opportunity because it's grounded in our own customer base.

Speaker 2: This is a relatively near-term recurring revenue growth opportunity because it's grounded in our own customer base.

Speaker 2: Now the premises business is taking advantage of several favorable trends in the physical security sector for which Identiv is exceptionally well positioned. To call out a few of these, physical security infrastructure is being used for other value generating objectives within the enterprise driving strong and rapid ROI for investors.

Now the premises business is taking advantage of several favorable trends in the physical security sector for which Identive is exceptionally well positioned to call out a few of these physical security infrastructure is being used for other value generating objectives within the enterprise driving strong and rapid ROI for investments.

Speaker 2: The big CRE PropTech trend, where identity, access control, and video technologies are critical to new business paradigms for how office space will be used and managed.

The big CRE prop tech trend, where identity access control and video technologies are critical to new business paradigms for how office space will be used and managed.

Speaker 2: Next generation cloud-based technology with recurring revenue models being deployed in physical security solutions, driving substantial customer upgrades and significant new market penetration. Now the physical security industry is late to this party, but the acceleration of this trend will be dramatic in the next several years.

Next generation cloud based technology with recurring revenue models being deployed in physical security solutions, driving substantial customer upgrades and significant new market penetration now the physical security industry late to this party, but the acceleration of this trend will be dramatic in the next several years.

Speaker 2: AI technologies deployed across physical security solutions dramatically enhancing efficacy and lowering total cost of operation. And finally, the convergence of cyber and physical security.

AI technologies deployed across physical security solutions dramatically enhancing efficacy and lowering total cost of operation and finally, the convergence of cyber and physical security.

Speaker 2: So in summary, premises growing at double the market's rate, growth is well balanced across commercial and federal. Video software doubled year-over-year and software services and recurring revenues grew to over 20% of premises revenue. These metrics position us as one of the strongest performers in the physical security industry.

So in summary premises is growing at double the market rate growth is well balanced across commercial and federal video software doubled year over year and software services and recurring revenues grew to over 20% premises revenue. These metrics position us as one of the strongest performers in the physical security industry.

Speaker 2: Now let me go into the dynamics in our RFID business in more detail before I turn the call over to Justin.

Now let me go into the dynamics in our RFID business in more detail before I turn the call over to Justin.

Speaker 2: In the identity segment, our RFID-enabled IoT business shipped 54 million units in Q3, up 18% year-over-year, and made strategic progress, especially in SCRI applications in healthcare, our most important vertical. We shipped a half-million units of prototype samples for an auto-injector project, which now has received FDA approval. As I mentioned earlier, healthcare now accounts for more than half of our NFC-based revenue.

In the identity segment, our RFID enabled Iot business shipped 54 million units in Q3 up 18% year over year and made strategic progress, especially in S. C. Our applications of health care, our most important vertical.

We shipped a half million units of a prototype samples for an auto injector project, which now has received FDA approval.

As I mentioned earlier health care now accounts for more than half of our NFC based revenues.

Speaker 2: This progress in SCRI products is also reflected in our production dynamics. We do over a dozen product changeovers on each production line over the course of the quarter, which is needed for production of early stage products. That's 100 changeovers across our eight primary process production lines that we did in Q3. None of our competitors can deliver as fast, flexibly, and with high quality despite the technical complexity and short runs they need to meet these demands. It's extra work, but we're confident that it'll pay off.

This progress in S. E. R. I products is also reflected in our production dynamics, we do over a dozen product changeovers on each production line over the course of the quarter, which is needed for production of early stage products. That's 100 changeovers across our eight primary process production lines that we did in Q3, none of our competitors can deliver as fast flexibly.

And with high quality, despite the technical complexity and short runs they need to meet these demands it's extra work, but we're confident that it'll pay off.

Speaker 2: As a result, we believe we're serving the majority of the industry's early adopters for SCRI, both at the design stage and in pilot production. Our competitors are focused on running hundreds of millions of commodity tags on a single production line nonstop. We are optimized for high end devices, eventually built into products and experiences as customers move beyond tags stuck onto them and thrown away.

As a result, we believe we are serving the majority of the industry's early adopters for S. Cri, both at the design stage and in pilot production. Our competitors are focused on running hundreds of millions of commodity tags on a single production line nonstop. We are optimized for high end devices eventually built into products and experiences as customers.

Moved beyond tag stuck gone to them and throw it away.

Speaker 2: We're the clear leaders both in engineering and in the flexible production these customers need. This is why we have Germany, Singapore and Thailand doing engineering and prototypes, flexible production and volume production. It's an exciting new category with a very large ham defined by the potential number of units of RFID enabled products in each of our customers use cases.

We're the clear leaders both in engineering and in the flexible production. These customers need. This is why we have Germany, Singapore, and Thailand doing engineering and prototypes flexible production and volume production is an exciting new category with a very large tam it's defined by the potential number of units RFID enabled products in each of our customers.

Cases.

Speaker 2: Now in another production related metric, in Q3 we delivered 11 million units of Willet IOT pixels down from the quarter prior level, partly because of a cost reduction process change we made. We had to revert to our prior process and the delay did affect about one and a half million units we could have shipped otherwise.

Now in it and other production related metric in Q3, we delivered 11 million units of Willeit Iot pixels down from the quarter prior level, partly because of the cost reduction process change. We made we had to revert to our prior process and the delay did affect about one and a half million units, we could have shipped otherwise.

Speaker 2: Now as we continue to focus on healthcare applications and specialty devices like these, demand can fluctuate quarter to quarter in early stage applications that haven't yet stabilized. However, it does not affect our strategy or market leadership in SCRI. Since we stayed disciplined and kept our high value focus, we fell short on revenues. But our overall company working capital strengthened, receivables are healthy, overall gross margins expanded, and our strategy is progressed.

Now as we continue to focus on health care applications and specialty devices like these demand can fluctuate quarter to quarter in early stage applications that haven't yet stabilized however.

However, it does not affect our strategy or our market leadership in S. E. R. I since we stayed disciplined and kept our high value focus we fell short on revenues, but our overall company working capital strengthened receivables are healthy overall gross margins expanded and our strategy is progressing.

Speaker 2: For example, as I mentioned, we're managing about 50 pilot projects, which is growing as we discussed earlier. We made the progress in healthcare that I described earlier, and we got a larger range of potentially large-scale SCRI use cases than ever. As a result, we're more excited about the prospects for this business segment than at any time in its history, given all the potential we can see for new dimensions of growth and profitability.

For example, as I mentioned were managing about 50 pilot projects, which is growing as we discussed earlier, we made the progress in health care that I described earlier and we got a larger range of potentially large scale S. T. R I use cases than ever.

As a result, we're more excited about the prospects for this business segment than at any time in its history given all the potential we can see for new dimensions of growth and profitability.

Speaker 2: So in summary, our premises business made the industry beating growth I mentioned, and our leadership in the RFID sector focused on SCRI applications also built a wider and stronger base.

So in summary, our premises business made the industry, beating growth I mentioned at our leadership in the RFID sector focused on S. T. R. I applications also built a wider and stronger base.

Speaker 2: From an investor perspective, it's important to know that the company's business model is strong enough to manage near-term revenue shortfalls and keep driving our core business objectives as our strategic business units build stronger competitive positions in Q3.

From an investor perspective, it's important to note that the company's business model is strong enough to manage near term revenue shortfalls and keep driving our core business objectives as our strategic business units built stronger competitive positions in Q3.

Speaker 2: We're also committed to strategically acting so that we optimize our value creation potential across both of our larger strategic business units.

We're also committed to strategically acting so that we optimize our value creation potential across both of our larger strategic business units.

Speaker 2: Our board led strategic alternatives review process was a major focus and activity in Q3 and will continue to be in Q4. I can't comment in detail, but as we've said before, we have two great growth businesses with excellent value creation opportunities. We're exploring very interesting prospects for each business unit and the businesses a whole. Each business unit has different capital needs and both need aggressive management execution focus, but they're materially different business.

Our board led strategic alternatives review process was a major focus and activity in Q3 and will continue to be in Q4.

I cant comment in detail, but as we've said before we have two great growth businesses with excellent value creation opportunities, we're exploring very interesting prospects for each business unit and the business as a whole.

Each business unit has different capital needs and both need aggressive management execution focus, but theyre materially different businesses. We're working this thorough strategic review process led by our board at the same time, we put intensive efforts in managing these businesses now timelines can never be totally predicted but my personal assessment is it will be successful with.

Speaker 2: We're working this thorough strategic review process, led by our board, at the same time we put intensive efforts into managing these businesses.

Speaker 2: Now, timelines can never be totally predicted, but my personal assessment is it will be successful with a meaningful strategic action sometime in the beginning of 2024. We have exciting businesses with huge potential. We're going to make sure we optimize this opportunity for our shareholders. So with that, I'll pass the call over to Justin to review our third quarter financial results in more detail.

A meaningful strategic actions sometime in the beginning of 'twenty 'twenty four.

We have exciting businesses with huge potential we're going to make sure we optimize this opportunity for our shareholders.

So with that I'll pass the call over to Justin to review, our third quarter financial results in more detail.

Justin.

Speaker 3: Thanks, Steve. As Steve mentioned, despite a revenue shortfall in RFID, in Q3 2023, we were able to deliver record revenue for a fiscal third quarter, while also expanding sequential and year-over-year gross margins and EBITDA to their highest levels in eight quarters. We also continue to maintain a strong working capital position.

Thanks, Steve as Steve mentioned, despite a revenue shortfall in RFID in Q3, 2023 we were able to deliver record revenue for our fiscal third quarter, while also expanding sequential and year over year gross margins and EBITDA to their highest levels in eight quarters. We also continued to maintain a strong working cap.

Little position.

Speaker 3: We believe these results paired with our focus on driving discipline growth in both our identity and premises businesses, including our new cutting edge premises products, our focus on SCRI and build out of our Thailand facility position the company to continue its growth momentum in the fourth quarter of 2023.

We believe these results paired with our focus on driving disciplined growth in both our identity and premises businesses, including our new cutting edge premises products. Our focus on S. T R I and Buildout of our Thailand facility positioned the company to continue its growth momentum in the fourth quarter of 2023.

Speaker 3: Third quarter of 2023 revenue was $31.8 million, lower than our expectations as previously noted. This represents a 3% increase versus the comparable prior year period and an 8% increase versus Q2 2023.

Third quarter 2023 revenue was $31 8 million lower than our expectations. As previously noted this represents a 3% increase versus the comparable prior year period, and an 8% increase versus Q2 'twenty to 'twenty three.

Speaker 3: Third quarter 2023 gap and non-gap adjusted gross margin was 37 and 39%. Both above consensus estimates as we're able to expand margins in our premises segment often in part by decline in margins in our identity segment related to product mix particularly in the identity reader product.

Third quarter, 2023, GAAP and non-GAAP adjusted gross margin was 37 and 39% both above consensus estimates as were able to expand margins in our premises segment offset in part by a decline in margins in our identity segment related to product mix, particularly in the identity reader product line.

Speaker 3: Gap and non-gap adjusted gross margin reflect our continued focus on maintaining our margin profile in 2023 while continuing to increase our investments in technology and manufacturing processes and equipment.

GAAP and non-GAAP adjusted gross margin reflect our continued focus on maintaining our margin profile in 'twenty to 'twenty three while continuing to increase our investments in technology and manufacturing processes and equipment.

Speaker 3: We remain committed to a long-term non-GAAP adjusted gross margin target of 40 to 45 percent.

We remain committed to our long term non-GAAP adjusted gross margin target of 40% to 45%.

Speaker 3: In the third quarter of 2023, our GAAP and non-GAAP adjusted operating expenses, including research and development, sales and marketing, and general and administrative costs were $11.6 million and $10.3 million respectively.

In the third quarter of 2023, our GAAP and non-GAAP adjusted operating expenses, including research and development sales and marketing and general and administrative costs were $11 6 million and $10 3 million respectively.

Speaker 3: A decrease from Q2 2023, marking the second consecutive quarter, we were able to expand our operating leverage by delivering expanded revenues in excess of our operating expenses. We expect this trend to continue in Q4 2023.

The decrease from Q2, 2023 marking the second consecutive quarter, we were able to expand our operating leverage by delivering expanded revenues in excess of our operating expenses. We expect this trend to continue in Q4 2023.

Speaker 3: Our Q3 gap net loss attributable to common shareholders was $0.3 million or $0.01 per share compared to gap net income of $0.2 million in Q3 2022 and a gap net loss of $1.5 million in Q2 2023.

Our Q3, GAAP net loss attributable to common shareholders was 0.3 million or one cent per share compared to GAAP net income of zero point $2 million in Q3, 2022 and a GAAP net loss of $1 5 million in Q2 2023.

Speaker 3: Non-GAAP-adjusted EBITDA was $2.2 million in Q3 2023, an increase of $0.1 million versus the comparable prior year period, and $1.5 million versus Q2 2023, as we are able to increase revenue and expand our GAAP and non-GAAP-adjusted gross margins while maintaining our operating expense profile.

Speaker 3: This was consistent with our continued strategic investments in R&D evidenced by our new product launches in the premises business and in capital equipment for our Thailand facility in our identity.

Speaker 3: In the appendix of today's presentation, we have provided a full reconciliation of gap to non- GAAP financial information, which is also included in our earnings release.

Speaker 3: Our next slide further analyzes trends by segment, beginning with identity revenue from our identity products totaled 18.3 million or 57% of our total revenue in Q3 2023.

Speaker 3: compared to $17.7 million, or 60% of our total revenue in Q2 2023, and 62% of our total revenue in Q3 2022.

Speaker 3: This reflects an increase in RFID and legacy smart card reader sales, offset in part by a decrease in our access card sales.

Speaker 3: Our Q3 identity segment gap and non-gap adjusted gross margins were 21 and 23 percent, respectively, a decrease of 2 percent and 1 percent, respectively, as compared to Q3 2022. The decrease in gross margins is primarily due to product mix and our legacy smart card retail.

Speaker 3: 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 increase production at our Thailand facility, which has lower manufacturing costs than our Singapore operation.

Speaker 3: We remain committed to a long-term gross margin target of 35 to 40% in our identity business.

Speaker 3: Now turning to the premises segment, this segment accounted for $13.6 million or 43% of our total revenue in Q3 2023 compared to $11.8 million in Q3 2022, an increase of 15%.

Speaker 3: The year-over-year increase in premise-to-segment revenue was across both federal and commercial businesses, including many of the verticals Steve mentioned earlier. We saw increases in both our access control and video product lines, and software, services, and recurring revenue.

Speaker 3: We continue to execute our go-to-market strategy by offering a comprehensive end-to-end security platform solution.

Speaker 3: Gap and non-gap adjusted growth margins for premises in the third quarter of 2023 were 60% and 61% respectively, an increase of 2% compared to Q3 2022, and demonstrate our ability to expand our margin profile.

Speaker 3: we have achieved and remain committed to a long-term gross margin target of 55 to 60% in our premises business. Moving now to our

Moving now to our operating expense management, our non-GAAP operating expenses in the third quarter of 2023, adjusted to exclude restructuring and severance costs and certain noncash charges, consisting of stock based compensation and depreciation and amortization was 32% of revenue compared to 31%.

Speaker 3: Our non-GAAP operating expenses in the third quarter of 2023 adjusted to exclude restructuring and severance costs, and certain non-cash charges consisting of stock-based compensation and depreciation and amortization was 32% of revenue, compared to 31% in Q3 2022 and 36% in Q2 2023. As noted previously, we expect quarterly operating expenses to remain at their current level.

In Q3, 2022 and 36% in Q2 2023 as noted previously we expect quarterly operating expenses to remain at their current levels.

Speaker 3: Now turning to the balance sheet, we exited Q3 2023 with $20.9 million in cash and cash equivalents and restricted cash, a decrease of $1.3 million from Q2 2023. In Q3, the decrease in cash was a result of $0.3 million in cash used in operating activities, $0.6 million in investing activities primarily related to capital expenditures, and $0.2 million from financing activities.

Now turning to the balance sheet, we exited Q3 'twenty to 'twenty, three with $20 9 million in cash and cash equivalents and restricted cash a decrease of $1 3 million from Q2 2023 in Q3. The decrease in cash was a result of zero point $3 million in cash used in operating activities 0.6 million.

Investing activities, primarily related to capital expenditures and zero point $2 million from financing activities.

Speaker 3: Our working capital exiting Q3 was $49.8 million, an increase of $0.6 million from Q2 2023. Notably, inventory decreased $1.7 million in Q3 as we worked through our strategic inventory balance.

Our working capital exiting Q3 was $49 8 million an increase of 0.6 million from Q2, 2023, notably inventory decreased $1.7 million in Q3, as we work through our strategic inventory balances.

Speaker 3: As a result, we expect to continue rebalancing our working capital and anticipate repaying our revolver balance in 2024.

As a result, we expect to continue rebalancing, our working capital and anticipate repaying our revolver balance in 2024.

Speaker 3: In our 10-Q filing, we will be providing a full reconciliation of the year-to-date cash flow.

In our 10-Q filing we will be providing a full reconciliation of the year to date cash flows for.

Speaker 3: For completeness, we have included the full balance sheet in the appendix of today's earnings release.

For completeness, we have included the full balance sheet in the appendix of today's earnings release.

Speaker 3: As Steve mentioned, considering our recent quarterly variations as a result of demand push outs in some of our lower margin RFID categories, along with the persistent macroeconomic uncertainty, we have decided to move to quarterly revenue guidance.

As Steve mentioned, considering our recent quarterly variations as a result of demand push outs and some of our lower margin RFID categories, along with the persistent macroeconomic uncertainty we have decided to move to quarterly revenue guidance consistent with our normal revenue seasonality Q3 is our strongest quarter for the fiscal year.

Speaker 3: Consistent with our normal revenue seasonality, Q3 is our strongest quarter for the fiscal year, and there is a dip in revenues from Q3 to Q4. Given our Q3 revenue level of $31.8 million, this implies a Q4 below the $31 million rate.

Here and there was a dip in revenues from Q3 to Q4 <unk>.

Given our Q3 revenue level of $31 8 million. This implies a Q4 below the $31 million range.

Speaker 3: Factoring in a conservative view of lower margin RFID customer demand leads us to an expected Q4 revenue range of 29 to 31 million.

Factoring in a conservative view of lower margin RFID customer demand leads us to unexpected Q4 revenue range of $29 million to $31 million.

Speaker 3: This concludes the financial discussion, and I'll now pass the call back to Steve.

This concludes the financial discussion and I'll now pass the call back to Steve.

Thanks, Justin.

Speaker 2: As we go into the end of 2023 and into 2024, we expect the shortfall that we had in Q3 in our lower margin RFID products will be behind us, although we're watching very carefully the customer segments that pushed out demand.

As we go into the end of 2023 and into 2024, we expect the shortfall that we had in Q3 and our lower margin RFID products will be behind us, although we're watching very carefully the customer segments that pushed up demand. Despite these concerns we expect our high margin use cases in S. CRA will continue to grow and expand to new customers and premise.

Speaker 2: Despite these concerns, we expect our high-margin use cases in SCRI will continue to grow and expand to new customers. In premises, we expect to continue the growth, margin strength, and recurring revenue expansion.

We expect to continue the growth margin strength in recurring revenue expansion.

Speaker 2: As a result, we expect to keep our balance sheet and working capital strong as we build our competitive value in both of our businesses.

As a result, we expect to keep our balance sheet and working capital is strong as we build our competitive value in both of our businesses. Let me start by addressing the identity business, particularly focusing on the RFID segment.

Speaker 2: Let me start by addressing the identity business, particularly focusing on the RFID segment.

Speaker 2: In RFID applications for IoT, we build value three ways. First, by supporting NRE projects and subsequent pilots for technically complex applications which sustain higher margins and give us an edge for full-scale production orders for our SCRI applications.

The RFID applications for Iot, we build value three ways first by supporting at our projects and subsequent pilots for technically complex applications, which sustained higher margins and give us an edge for full scale production orders for our S. T. R. I applications second by solidifying our reputation as a specialty applications provider reinforcing.

Speaker 2: Second, by solidifying our reputation as a specialty applications provider, reinforcing our industry leadership as evidenced by our joint marketing and product initiatives with partners like NXP, Williott, and CollectID, and our R&D lab expansion that can support the entire range of customer profiles.

Our industry leadership as evidenced by our joint marketing and product initiatives with partners like NXP, Willeit and collect I D and our R&D lab expansion that can support the entire range of customer profiles and third by expanding our lower cost production footprint in Thailand, giving us the scale and flexibility to be the best provider to the growing demand.

Speaker 2: And third, by expanding our lower cost production footprint in Thailand, giving us the scale and flexibility to be the best provider to the growing demand for RFID IoT solutions, while simultaneously lowering our production costs, enhancing our cost competitiveness, and supporting gross margin expansion.

For RFID Iot solutions, while simultaneously lowering our production costs enhancing our cost competitiveness and supporting gross margin expansion.

Speaker 2: Now, let me now address our premise as business. In physical security, we accomplish our leadership goals in five ways. First, by offering a tightly integrated, end-to-end physical security solution that goes from identity provisioning to all facets of access control through to integrated video surveillance, all enhanced with analytics-based intelligence throughout with a single pane of glass interface for control supervision.

Now, let me now address our premises business and physical security, we accomplish our leadership goals in five ways first by offering a tightly integrated end to end physical security solution that goes from identity provisioning to all facets of access control through the integrated video surveillance, all enhanced with analytics based intelligence throughout with our single pane of.

Alas interface for controls supervision.

Speaker 2: We do this with our complete suite of Velocity, Primus, TouchSecure, TS Credentials, and uTrust products, differentiating ourselves from other vendors who specialize in only one or two aspects of a complete physical security solution.

We do this with a complete suite of velocity premise touch secure T. S credentials and you trust products differentiating ourselves from other vendors, who specialize in only one or two aspects of a complete physical security solution.

Speaker 2: Second, by growing our leading position in federal physical security product sales with solutions that protect and modernize federal government systems, including FICAM compliant solutions and FedRAMP solutions for the fast expanding move to cloud based services.

Second by growing our leading position in federal physical security product sales with solutions that protect and modernized federal government systems, including Phi Cam compliant solutions and fed ramp solutions for the fast expanding move to cloud based services.

Speaker 2: Third, by bringing high security and our trusted brand to the SMB market, leveraging our market-leading expertise in enterprise-scale high security into our new Primus Cloud, EG2 controller and encryption bridge offerings.

Third by bringing high security and our trusted brand to the SMB market leveraging our market leading expertise in enterprise scale high security into our new premise cloud E G Jus controller and encryption bridge offerings.

Speaker 2: thus making a complete high-security solution available to millions of smaller businesses in a reasonable price-performance formula.

Thus, making a complete high security solution available to millions of smaller businesses in a reasonable price performance formula.

Speaker 2: Fourth, expanding our presence in the enterprise market with our complete solution approach, but importantly focusing on sales of our Cirrus Cloud offering to our existing enterprise install base and new logo sales potential. With a particularly large enterprise install base, the potential here is truly meaningful.

Fourth expanding our presence in the enterprise market with our complete solution approach, but importantly, focusing on sales of our cirrus cloud offering to our existing enterprise installed base and new logo sales potential with a particularly large enterprise installed base the potential here is truly meaningful.

Speaker 2: And fifth, consistent with all four of the objectives above, working to drive a higher mix of high-margin recurring revenue, carrying 80% plus margins across the business.

And fifth consistent with all four of the objectives above working to drive a higher mix of high margin recurring revenue carrying 80% plus margins across the business.

Speaker 2: To continue to drive this growth, we're committed to keeping a strong balance sheet with healthy working capital to fund our strategic growth initiatives.

To continue to drive this growth we're committed to keeping a strong balance sheet with healthy working capital to fund our strategic growth initiatives.

Speaker 2: We continue to tightly manage our expenses, reflected in the sequential reduction in expenses, but still prioritizing investments in key growth initiatives.

We continue to tightly manage our expenses reflected in the sequential reduction in expenses, but still prioritizing investments in key growth initiatives now.

Speaker 2: Now to discuss the specific drivers in each of our business segments in more detail, let's start with the identity business, particularly focusing on the RFID segment.

Now to discuss the specific drivers in each of our business segments in more detail, let's start with the identity business, particularly focusing on the RFID segment.

Speaker 2: SCRI offerings, notably in healthcare and medical devices, are the most strategically important market for our RFID IoT solution.

S C R I offerings, notably in health care and medical devices are the most strategically important market for RFID Iot solutions, whereas our competitors business models are fundamentally focused on low margin commodity products, our emphasis on delivering solutions that meet the challenging technical requirements of our CRA customers positions us to generate.

Speaker 2: Whereas our competitors' business models are fundamentally focused on low-margin commodity products, our emphasis on delivering solutions that meet the challenging technical requirements of our SCRI customers positions us to generate stronger gross margin.

Stronger gross margins now it bears repeating that health care projects move slowly theres progress quarter over quarter, but large scale ramps are difficult to forecast. Many are in evaluation with our existing customer pilots and we have more inquiries for high quality health care and our <unk> projects than we can reasonably support the NRT and pilot pipeline is healthy and we.

Speaker 2: Now, it bears repeating that healthcare projects move slowly. There's progress quarter over quarter, but large-scale ramps are difficult to forecast. Many are in evaluation with our existing customer pilots, and we have more inquiries for high-quality healthcare NRE projects than we can reasonably support. The NRE and pilot pipeline is healthy, and we've been devoting more resources to the best near-term production rollout revenue-generating opportunities.

<unk> been devoting more resources to the best near term production rollout revenue generating opportunities.

Speaker 2: We continue to support five different auto-injector projects across four different companies with various ASPs ranging to over a dollar, depending on the complexity of the solution. This remains an exceptional category of opportunity.

We continue to support five different auto injector projects across four different companies with various asp's ranging to over a dollar depending on the complexity of the solution. This remains an exceptional category of opportunity.

Speaker 2: Sales of our SpokenRx prescription pill bottle solution remain steady. We continue to see a big opportunity with the ever-expanding prescription medication market, but near-term issues with the pharmacy channel have created a modest challenge. In smart packaging, we're seeing more traction with our life-of-garment applications that can be embedded in apparel and accessories. In Q3, several European football clubs have launched CollectID-enabled merchandise for the current 2023-24 season.

Sales of our spoken Rx prescription pill bottle solution remained steady we continue to see a big opportunity with the ever expanding prescription medication market, but near term issues with the pharmacy channel have created a modest challenge in smart packaging, we're seeing more traction with our life of government applications that can be embedded in apparel and accessories in Q3.

Several European football clubs have lunch collect idea enabled merchandise for the current 2023 to 24 season.

Speaker 2: We've also partnered with Eon, a global leader in product digitization for the new Coachtopia sub-brand from Coach. Our solution supports the sustainable, circular business model objective of Coachtopia, and we see sustainability applications to be a long-term growth driver for IoT.

We've also partnered with E on a global leader in product Digitization for the new coach Toby a sub brand from coach our solution supports the sustainable circular business model objective of coach Tokyo, and we see sustainability applications to be a long term growth driver for Iot.

Speaker 2: On the chip supply side, we remain in a good position. NXP continues to be a strong partner. A healthcare-focused marketing event we co-hosted with NXP in mid-September was well received, and in recent joint business planning sessions, they've communicated that we are expanding our position as the most technically capable and most responsive for high-end specialty applications of NFC-based RFID devices.

On the chip supply side, we remain in a good position NXP continues to be a strong partner a health care focused marketing event, we co hosted with NXP in mid September was well received and in recent joint business planning sessions, they've communicated that we're expanding our position as the most technically capable and most responsive for high end specialty applications.

Of NFC based RFID devices, NXP remains our key technology and channel partner, but we're also continuing to diversify our revenue by chip type, including SD micro assign T I and others.

Speaker 2: NXP remains our key technology and channel partner, but we're also continuing to diversify our revenue by chip type, including STMicro, Assign, TI, and others.

Speaker 2: Finally, we continue to expand our low-cost production capacity in Thailand. Our initial CapEx in Thailand is essentially complete, and we have more equipment on order for delivery through 2024 to continue scaling capacity. We expect the advantages of producing IoT devices in Thailand, lower production costs for rent and labor, shorter supply chains, and an advantageous tax status to improve cost competitiveness and further drive margin expansion.

Finally, we continued to expand our low cost production capacity in Thailand. Our initial capex in Thailand is essentially complete and we have more equipment on order for delivery through 2024 to continue scaling capacity.

We expect the advantages of producing Iot devices in Thailand, lower production costs were in labor shortage supply chains, and an advantageous tax status to improve cost competitiveness and further drive margin expansion.

Speaker 2: So let me now continue with the premises business, specific growth drivers and physical security.

So let me now continue with the premises business specific growth drivers and physical security.

Speaker 2: In the premises business, security solutions are becoming central to every business leader and CIO's planning, and the CISO in most all enterprise businesses are significantly more important today.

In the premises business security solutions are becoming central to every business leader and CIO is planning and the C. I S. O in most all enterprise businesses are significantly more important today.

Speaker 2: In both commercial and government organizations, this is one of the few non-controversial, non-partisan areas of investment. This is in part because the functionality for the security system infrastructure provides value well beyond security in business intelligence, marketing, safety and compliance, operations management, and beyond.

In both commercial and government organizations. This is one of the few noncontroversial nonpartisan areas of investment. This is in part because the functionality for the security system infrastructure provides value well beyond security and business intelligence marketing safety and compliance operations management and beyond.

Speaker 2: Investments in upgraded security infrastructure can have a very rapid and strong ROI. We benefit from a broad base of recession-resistant customers, particularly focused on higher security across federal and local government, education across K-12 and higher ed, hospitals, airports, banks, utilities, and more.

Investments in upgraded security infrastructure can have a very rapid and strong ROI, we benefit from a broad base of recession resistant customers, particularly focused on higher security across federal and local government education across K, 12, and higher Ed hospitals airports banks utilities and more.

Speaker 2: The value proposition of our tightly integrated end-to-end system is clearly resonated with commercial customers.

The value proposition of our tightly integrated end to end system has clearly resonated with commercial customers and users appreciate our complete solution, but integrators are an even more effective leverage point, it's significantly more profitable for integrators to implement systems from fewer partners and reduces their training costs consolidates purchase order complexity allows for.

Speaker 2: End users appreciate our complete solution, but integrators are an even more effective leverage point. It's significantly more profitable for integrators to implement systems from fewer partners. It reduces their training costs, consolidates purchase order complexity, allows for faster and more efficient installations, and makes ongoing system maintenance easier and more profitable.

Faster and more efficient installations, and makes ongoing system maintenance easier and more profitable now.

Speaker 2: Now some of our competitors have recently created opportunities for us by either actively reducing their integrator channel or even circumventing them and going directly to end users. This might look attractive in the near term, but ultimately harms scalability and growth leverage and ultimately profitability.

Now some of our competitors have recently created opportunities for us by either actively reducing their integrator channel or even circumventing them and going directly to end users. This might look attractive in the near term, but ultimately harms scalability and gross leverage and ultimately profitability.

Speaker 2: Especially with the migration to a more recurring revenue-focused solution model, we believe a strong channel base is critical to success. Competitors undermining their channel and integrators' search for progressive and profitable solutions to deploy has created a meaningful market share opportunity for us.

Especially with the migration to a more recurring revenue focused solution model. We believe a strong channel base is critical to success competitors undermining their channel and integrators search for progressive and profitable solutions to deploy has created a meaningful market share opportunity for us in the channel.

Speaker 2: In addition to these opportunities in the commercial market, our federal business is strong with great potential for expansion. We focused on maximizing share of wallet with federal customers, reflected by our continued strong growth in federal billings of 16% year over year in Q3. As we mentioned, were it not for the turmoil in Congress at the end of September , our federal sales could have been even higher.

In addition to these opportunities in the commercial market our federal business is strong with great potential for expansion, we focused on maximizing share of wallet with federal customers reflected by our continued strong growth in federal billings of 16% year over year in Q3, as we mentioned were it not for the turmoil in Congress at the end of September our federal.

Sales could have been even higher.

Speaker 2: As we also mentioned earlier, video software sales more than doubled year over year. Videos included in any complete security solution these days, and our Velocity Vision was designed to encompass all of the components of a full-range enterprise-class video system, including an analytics offering with Vision AI as a standard feature.

As we also mentioned earlier video software sales more than doubled year over year videos included in any complete security solution. These days at our velocity vision was designed to encompass all of the components of our full range enterprise class video system, including an analytics offering with vision AI as a standard feature.

Speaker 2: This also supports our integrator strategy I just mentioned and gives customers truly best of breed across identity, access, and video.

This also supports our integrator strategy I, just mentioned and gives customers truly best of breed across identity access and video ads.

Speaker 2: Adding high-performance video analytics gives us both a high security foundation and leading-edge AI technology for our most progressive customers.

Adding high performance video analytics gives us both a high security foundation, and leading edge AI technology for our most progressive customers.

Speaker 2: Another growth driver is Primus, our new SMB market product suite. We can leverage our enterprise-level technology expertise used in some of the most highly secure locations in the world and offer that high-level security at a cost-effective price point for millions of small and medium-sized organizations. We demoed our Primus products at the recent GFX show and had great feedback from both integrators and prospective end-users.

Another growth driver is premise, our new SMB market product suite, we can leverage our enterprise level technology expertise used in some of the most highly secure locations in the world and offer that high level security at a cost effective price point for millions of small and medium sized organizations, we demo to our premise products at the recent G. S X show and had great feed.

Back from both integrators and prospective end users.

Speaker 2: Complementary to Primus is the EG2 Edge Controller, a resilient smart controller that allows door access management from anywhere. This solution can also be used for customers with many locations for a cost-effective option to have uniform access control across distributed organizations.

Implemented did premise is the EG to edge controller, a resilient smart controller that allows door access management from anywhere.

This solution can also be used for customers with many locations for a cost effective option to have uniform access control across distributed organizations.

Speaker 2: With Primus Cloud, we're piloting pricing models that we believe will accelerate ease of adoption for the channel-enhancing recurring revenue growth.

With private cloud, we're piloting pricing models that we believe will accelerate ease of adoption for the channel enhancing recurring revenue growth.

Speaker 2: This is made possible by the high margins we have in our Edge Gateway and Encryption Bridge devices.

This is made possible by the high margins, we have in our edge gateway and encryption bridge devices.

Speaker 2: An additional trend the physical security industry is embracing is the convergence of identity management for logical as well as physical security.

And additional trend the physical security industry is embracing is the convergence of identity management for logical as well as physical security.

Speaker 2: A Gartner study in 2022 found that 41% of enterprises participating in Gartner's physical security emerging trends survey plan to converge parts of their cyber and physical security operations by 2025. And this is up from just 10% in 2020.

Gartner study in 2022 found that 41% of enterprises participating in gardens physical security emerging trend survey planned to converge parts of their cyber and physical security operations by 2025, and this is up from just 10% in 2020, Identive is especially well positioned to lead this emerging market demand our identity.

Speaker 2: Identify is especially well positioned to lead this emerging market demand. Our identity readers, which are in our identity segment, provide logical access as well as being used as enrollment and issue in state systems to provision access control identities. We have deep technical roots in secure authentication as well as a wide market presence.

<unk>, which are in our identity segment provide logical access as well as being used as enrollment in issuance state systems to provision access control identities, we have deep technical roots and secure authentication as well as a wide market presence.

Speaker 2: For example, we believe we provide the vast majority of identity readers for DOD personnel to log into their networks and laptops, which as a reference use case shows a reputation and technical capabilities. We've extended this technical depth into sensitive use cases such as payment terminals, gaming machines, Fido keys, and secure tokens used by one of the largest German defense manufacturers in their military products.

For example, we believe we provide the vast majority of identity readers for D. O D personnel to log into their networks and laptops, which is our reference use case shows a reputation and technical capabilities. We've extended this technical depth into sensitive use cases, such as payment terminals gaming machines, Fido keys and secure tokens used by one of the largest German <unk>.

Hence manufacturers and their military products.

Speaker 2: As a secure identity and data access requirements converge with physical security, we believe Identif's technical expertise and product range is another advantage that none of our mainstream competitors can match. We're well positioned and even ahead of this trend.

As a secure identity and data access requirements converge with physical security, we believe identive technical expertise and product range is another advantage that none of our mainstream competitors can match, we're well positioned and even ahead of this trend.

Speaker 2: Now let me summarize thoughts on the business as a whole. As you can hear from our comments, we're very positive about the value creation and industry leadership progress we think we're making in both of our business.

Now, let me summarize thoughts on the business as a whole as you can hear from our comments, we're very positive about the value creation and industry leadership progress. We think we're making in both of our businesses. We have the metrics to show it and industry participants and customers are acknowledging it from a business planning perspective, we're expanding our next generation products, we're moving to higher.

Speaker 2: We have the metrics to show it, and industry participants and customers are acknowledging it. From a business planning perspective, we're expanding our next generation products, we're moving to higher margin recurring revenue based business models, and we're expanding our channel, but at the same time putting more focus on our best integrators, all of this while investing carefully only in high ROI initiatives.

Arjun recurring revenue based business models, and we're expanding our channel, but at the same time, putting more focus on our best integrators all of this while investing carefully only in high ROI initiatives.

Speaker 2: We've got a recession-resistant set of markets for our medical and other high-value RFID solutions, with the potential for significant growth. In physical security, it is by its nature a solid performer through different economic cycles, but it's uniquely positioned for extraordinary growth, given the growth drivers we've outlined.

We've got a recession resistant set of markets for our medical and other high value RFID solutions with the potential for significant growth in physical security. It is by its nature, a solid performer through different economic cycles, but it's uniquely positioned for extraordinary growth given the growth drivers we've outlined.

Speaker 2: We have challenges we can manage while we continue to focus on growing our business.

We have challenges we can manage while we continue to focus on growing our business. Some of our RFID business can fluctuate with economic cycles, especially lower margin in cyclical categories like libraries, consumer products and logistics and warehousing products, our customers only deferred revenues, but these lower margin and cyclical categories need to be watched closely.

Speaker 2: Some of our RFID business can fluctuate with economic cycles, especially lower margin and cyclical categories like libraries, consumer products, and logistics and warehousing products. Our customers only deferred revenues, but these lower margin and cyclical categories need to be watched closely. Additionally, products for one of our largest customers are shipped to Israel before going onwards to end users. We have to be realistic that shipments could be disrupted in that part of the world, affecting our business, but again with potentially little impact on EBITDA.

Additionally, product for one of our largest customers are shipped to Israel before going onwards to end users we have to be realistic that shipments could be disrupted in that part of the world affecting our business, but again with potentially little impact on EBITDA.

Speaker 2: We currently have alternative demand to offset most of these risks, but we're watching them closely.

We currently have alternative demand to offset most of these risks but were watching them closely.