Q4 2023 Identiv Inc Earnings Call

Good afternoon, welcome to add Dennis presentation of its fourth quarter and fiscal year 2023 earnings call. My name is John and I'll be your operator. This afternoon, joining us for today's presentation are the company's CEO, Steven Humphreys and CFO Justin Scarpa.

Operator: Good afternoon. Welcome to Identiv's presentation of its fourth quarter and fiscal year 2023 earnings. My name is John, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steven 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, and non-GAAP operating expenses. In addition, during the call, management will be making forward-looking statements. Any statement that refers to expectations, projections, or other characteristics of future events, including future financial results, future business and market conditions, strategic review, and However, actual results may differ materially from those expressed in these forward-looking statements.

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 included a non-GAAP adjusted EBITDA non-GAAP gross margin and non-GAAP operating expenses in.

In addition, during the call management will be making forward looking statements any statement that refers to expectations projections or other characteristics of future events, including future financial results future business and market conditions strategic review and future plans and prospects is a forward looking statement.

Actual results may differ materially from those expressed in these forward looking statements for more information. Please refer to the risk factors discussed in the documents filed from time to time with the S. E C, including the company's latest annual report on Form 10-K, and quarterly report on Form 10-Q, Identive assumes no obligation to update these forward looking.

Operator: For more information, please refer to the risk factors discussed in the documents filed from time to time with the SLC, including the company's latest annual report on Form 10-K and quarterly report on Form 10-Q. Identiv assumes no obligation to update these forward-looking statements, which speak as of today. I will now turn the call over to CEO Steven Humphreys for his comments. Sir, please.

Statements, which speak as of today 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.

Steven Humphreys: Thanks, Operator, and thank you all for joining us. Before we get into our business and financial comments, I need to acknowledge a mistake we just made in our process. We mistakenly put our earnings results up on our website shortly before the market closed. We pulled it down when we became aware of it and immediately contacted NASDAQ. This has never happened before, and we've already put in place very tight cross-check processes to make sure it never happens again.

Before we get into our business and financial comments I need to acknowledge a mistake, we just made in our processes.

We mistakenly put our earnings results up on our website shortly before the market closed we pulled it down and we became aware of it and immediately contacted Nasdaq.

This has never happened before and we've already put in place very tight crosscheck processes to make sure it never happens again.

Steven Humphreys: We pride ourselves on careful and complete disclosures and communications with our investors. Investors depend on our communications being available as expected, and only then. I personally apologize for this, and we will not let it happen again.

We pride ourselves on careful incomplete disclosures and communications with our investors investors depend on our communications being available as expected and only then.

I personally apologize for this and we will not let it happen again.

Steven Humphreys: Now, it's doubly unfortunate because it's a negative way to open comments about our business, where we're making some very good progress. So we'll address any questions you've got about this or anything else in the Q&A section, as always. But let me first get into our business update. 2023 finished with a fourth quarter that reflected our priorities of disciplined growth and balance sheet strengthening to position us for investment to accelerate our strategic position in both our RFID-enabled IoT and physical security businesses. Consistent with that strategy, in Q4, we kept our focus on high-margin revenue that supports our balance sheet and margins. Q4 net revenue was $29 million, while we drove balance sheet and working capital strength by reducing non-GAAP operating expenses below $10 million.

It's doubly unfortunate because its a negative way to open comments about our business, where we're making some very good progress. So we'll address any questions you've got about this or anything else in the Q&A section as always but let me first get into our business update.

2023 finished with the fourth quarter that reflected our priorities of disciplined growth and balance sheet strengthening to position us for investment to accelerate our strategic position in both our RFID enabled Iot and physical security businesses consistent with that strategy in Q4, we kept our focus on high margin revenue that supports our.

Balance sheet and margins.

Q4, net revenue was $29 million, while we drove balance sheet and working capital strength by reducing non-GAAP operating expenses below $10 million, our cash position was improved by $3 $6 million in free cash flow in Q4, the highest free cash flow quarter. Since Q4, 2020, reflecting a sequential $4 7 million.

Steven Humphreys: Our cash position was improved by $3.6 million in free cash flow in Q4, the highest free cash flow quarter since Q4 2020, reflecting a sequential $4.7 million swing from Q3 2023. In addition to driving revenue in the fourth quarter, we put in substantial efforts toward the future direction of the business. As discussed on recent earnings calls, our board initiated a strategic review to assess and execute the best strategy to maximize the value creation opportunities of our two growth businesses, IOT and physical security. Both require dedicated management focus and execution and have different capital needs to drive growth.

Swing from Q3 2023.

In addition to driving revenue in the fourth quarter, we put in substantial efforts towards the future direction of the business as discussed on recent earnings calls our board initiated a strategic review to assess and execute the best strategy to maximize value creation opportunities of our two growth businesses Iot and physical security.

Both require dedicated management focus and execution and have different capital needs to drive growth.

Steven Humphreys: As you'll note in our financial results, there are substantial expenses below the operating expense line, some of which are associated with activities related to making progress towards a strategic action to generate capital and focus. We certainly wouldn't be expending this cash unless we were making tangible progress. We're, of course, continuing this activity in Q1 and continue to expect completion in early 2024, as we said at the end of last year. In the near term, we expect to announce specific actions to create substantial investor value in three ways. First, by investing in our transformational growth opportunities.

As you'll note in our financial results Theres substantial expenses below the operating expense line, some of which are associated with activities related to making progress towards the strategic action to generate capital and focus we certainly wouldn't be expanding this cash unless we're making tangible progress.

We are of course, continuing this activity in Q1 and continue to expect completion in early 2024, as we said at the end of last year.

In the near term, we expect to announce specific actions to create substantial investor value in three ways.

First by investing in our transformational growth opportunities.

Steven Humphreys: Second, by strengthening our position in the verticals we've been strategically targeting, particularly healthcare and medical applications, but also across the category of specialty complex RF-enabled IoT solutions, which we call SCRI. And third, by bringing in world-class leadership to drive our strategy and execution to lead this major market opportunity. Now, before turning the call over to Justin to review our financial results, I'll review our business and operational updates for the fourth quarter, which we believe position us very well to leverage our next strategic steps, starting with the IOT segment of our identity business. In Q4, we focused on the strategic IOT verticals of healthcare, smart packaging, and logistics with margins remaining a key priority. Volume-wise, we shipped nearly 200 million units in 2023. We continue to build on our early leadership in SCRI.

By strengthening our position in the verticals, we have been strategically targeting particularly health care and medical applications, but also across the category of specialty complex RF enabled Iot solutions, which we call at Cri.

And third by bringing in World class leadership to drive our strategy and execution to lead in this major market opportunity.

Now before turning the call over to Justin to review, our financial results I'll review, our business and operational updates for the fourth quarter, which we believe position us very well to leverage our next strategic steps.

Starting with the Iot segment of our identity business in.

In Q4, we focused on the strategic Iot verticals of health care, Smart packaging and logistics with margins remaining a key priority.

Volume wise, we shipped nearly 200 million units in 2023, we continue to build on our early leadership in S. Cri.

Steven Humphreys: Though still in the early stage, this category is our strategic focus. Because of the leadership we've established, we're consistently getting R&D inquiries to develop solutions for new, potentially high-volume use cases. Our most important vertical for SCRI, healthcare, accounts for more than half of our NFC-based revenues. This reflects our drive over the past two years to focus on healthcare applications.

They're still in an early stage. This category is our strategic focus because of the leadership. We've established we're consistently getting R&D inquiries to develop solutions for new potentially high volume use cases.

Our most important vertical for our Cri health care accounts for more than half our NFC based revenues.

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

Steven Humphreys: Even at their current early-stage volumes, some of these healthcare applications carry gross margins in the 40% range, with more margin opportunity over time. In the healthcare vertical, we have ongoing pilot projects with Arthrex, Shriner, and over two dozen other healthcare companies. More broadly, we continue to focus on pilot programs, deploying innovative SCRI products. Based on the current TAMs in each of these specialized verticals of the healthcare market, we believe some of these applications could scale to $20 million annually or higher. Consistent with this focus, in a recent article in the RFID Journal, we announced 15 pilot programs in Europe for a Bluetooth-based solution we developed in collaboration with Energis and Williott. This solution is great for cold chain monitoring in warehouses and refrigerated trucks.

In the health care vertical we have ongoing pilot projects with arthritis trainer in over two dozen other health care companies.

More broadly we continue to focus on pilot programs deploying innovative S. Cri products based on the current terms in each of these specialized verticals of the health care market. We believe some of these applications could scale to $20 million annually or higher.

Consistent with this focus in a recent article in the RFID Journal, We announced 15 pilot programs in Europe for our Bluetooth based solution, we developed in collaboration with <unk> and William.

The solution is great for cloud cold chain monitoring and warehouses and refrigerated trucks, we announced one of the first adopters the logistics company RP outgroup. The initial feedback has been positive and we expect to see further pilots deployed through 2024 with actual deployments ramping up later this year.

Steven Humphreys: We announced one of the first adopters, the Logistics Company RPL Group. The initial feedback has been positive, and we expect to see further pilots deployed through 2024, with actual deployments ramping up later this year. Relatedly, our relationship with Williott remains strong.

Relatedly our relationship with Willie It remained strong our battery assisted tag as a finalist for best New product at next month's RFID Journal Awards, and we delivered nearly 14 million units to Willie It in Q4 as I mentioned before demand can fluctuate quarter to quarter in early stage applications like this at our understanding is it will it is undergoing a.

Steven Humphreys: Our battery-assisted tag is a finalist for the best new product at next month's RFID Journal Awards, and we delivered nearly 14 million units to Williott in Q4. As I mentioned before, demand can fluctuate quarter to quarter in early-stage applications like this, and our understanding is that Williott is undergoing a technology transition, so we expect a pause in shipments for the next two to four quarters. Fiscal year 23 revenue from Williott was substantial, so we'll be working to fill the temporary gap with alternative demand. Because of the multiple pilots and our close relationship with Williott and other leaders in the category of BLE-enabled RFID, we believe we're in a good position to offset some of this pause and to continue to lead the category.

Transition. So we expect a pause in shipments for the next two to four quarters fiscal year 'twenty three revenue from really it was substantial so we'll be working to fill the temporary gap with alternative demand because.

Because of the multiple pilots in our close relationship with Willie and other leaders in the category of BLE enabled RFID. We believe we're in a good position to offset some of this pause and to continue to lead the category. Another B L. A company next site is also a partner with a focus on connected retail products and we expect volumes from next site energy and others to <unk>.

Steven Humphreys: Another BLE company, Nexite, is also a partner with a focus on connected retail products, and we expect volumes from Nexite, Energis, and others to grow throughout 2024. Our technology, production, and process expertise also has encouraged two of the largest enterprise customers deploying BLE-enabled RFID to work directly with us for their next stage of technology deployment. In the consumer engagement part of our strategy, we've seen strong momentum for our Bitsi.io IoT cloud platform. Last week, we announced the release of Bitsi 3.0 with real-time visibility and traceability, making it an ideal solution for healthcare, pharma, medical devices, smart packaging, specialty retail, and industrial applications.

Throughout 2024, our technology production and process expertise also encouraged two of the largest enterprise customers deploying BLE enabled RFID to work directly with us for their next stage of technology deployment.

In the consumer engagement part of our strategy, we've seen strong momentum for our Betsy that Io Iot cloud platform.

Last week, we announced the release of Bitsy, three that O with real time visibility and traceability, making it an ideal solution for health care pharma medical devices, smart packaging specialty retail and industrial applications.

Steven Humphreys: A new Bitsi-related initiative is with Mazars, a leading international audit, tax, and advisory firm, on a new AI-enabled retail operation solution. This combines Mazars' ERP systems expertise with our Bitsi.io platform, NFC tags, and Microsoft Dynamics 365. We work directly with the Microsoft R&D team to integrate Microsoft AI Assistant Copilot with the data analytics enabled by Bitsi.

New bitsy related initiatives is it matters, a leading international audit tax and advisory firm on a new AI enabled retail operation solution. This combines masters ERP systems expertise with our bid C. I O platform NFC tags, and Microsoft dynamics 365, we work directly with the Microsoft R&D team.

To integrate Microsoft AI assistant co pilot with the data analytics enabled with busy at the recent National Retail Federation annual show in January the Masters team demo with their new total experience offering for retailers in the Microsoft Booth.

Steven Humphreys: At the recent National Retail Federation annual show in January, the Mazars team demoed their new total experience offering for retailers in the Microsoft booth. We're also co-hosting a virtual panel with Mazars and NFC Forum on March 28th on the story of the future. Now opening our Thailand production was another important step in 2023. As expected, our Thailand capacity for primary processes is 200 million units by end 2023.

We're also co hosting a virtual panel with Masters and NFC Forum on March 28th on the store of the future.

Now opening our Thailand production, whereas it was another important step in 2023.

As expected our Thailand capacity for primary processes is 200 million units exiting 2023.

Steven Humphreys: Early production results from this facility suggest the potential for even higher production margin gains than we originally expected. We've now also leased the adjacent building, securing our ability to expand efficiently. So now, let me talk about our premise of security.

Early production results from this facility suggests the potential for even higher production margins gains than we originally expected. We've now also leased the adjacent building securing our ability to expand efficiently.

So let me now talk about our premises security segment.

Steven Humphreys: After a very strong Q3, where we set a new record for segment revenues in a quarter, we saw normal seasonality. Our core PAX business was up 9% for 2023, with underlying faster growth partly offset as we transition our legacy video products into sales of our new Velocity Vision and Vision AI platform. Now, product releases late in 2023 included the full launch of our cloud-first small-to-medium business product, Primus, along with a totally new edge controller, our EG2, and our Primus mobile app, setting the standard for high-security cloud offerings in the SMB space. We also launched Vision AI, our video intelligence solution that's now a standard feature in all of our video offerings, and Scramble Factor, our new multi- This is more than a product. It's the next generation of our iconic scramble pad with biometrics and a state-of-the-art LCD touchscreen keypad, creating a flexible access point with multiple authentication methods.

After a very strong Q3, where we set a new record for segment revenues in the quarter, we saw normal seasonality our core <unk> business was up 9% for 2023 with underlying faster growth, partly offset as we transition our legacy video products into sales of our new velocity vision envision AI platform now.

Now product releases late in 2023 included the full launch of our cloud first small to medium business product premise, along with a totally new edge controller, our EG too and our prime is mobile app setting the standard for high security cloud offering in the SMB space.

We also launched vision AI, our video intelligence solution. That's now a standard feature in all of our video offerings and scramble factor, our new multifactor intelligent reader. This is more than a product. It's the next generation of our iconic scramble pad with biometrics in a state of the art LCD touch screen keypad, creating a flexible access.

With multiple authentication methods, we've designed it to easily expand to mobile and frictionless access video audio and other entry point capabilities to support the next generation of infrastructure light cloud based access control platforms.

Steven Humphreys: We've designed it to easily expand to mobile and frictionless access, video, audio, and other entry point capabilities to support the next generation of infrastructure-light cloud-based access control platform. Now, as you can tell from these major product launches across access, video, and intelligent reader infrastructure, from a product perspective, we came out of 2023 in a stronger position than we've ever been. Another metric of our progress is our high-margin software services and recurring revenues, which increased to over 20% of premises revenues. There's still a portion of revenues that are perpetual licenses, which we expect to convert to subscriptions. Now, this is a relatively near-term recurring revenue growth opportunity because it's grounded in our own customer base. Supporting our federal strength, the U.S. General Services Administration approved Identiv's Velocity 385 software, Hirsch hardware, and uTrust readers for listing on the GSA Approved Products List following rigorous testing led by the GSA APL FIPS 201 Evaluation Program.

Now as you can tell from these major product launches across access video and intelligent reader infrastructure from a product perspective, we came out of 2023 and a stronger position than we've ever been.

Another metric of our progress as our high margin software services and recurring revenues, which increased to over 20% of premises revenues. There's still a portion of revenues that are perpetual license, which we expect to convert to subscriptions. Now. This is a relatively near term recurring revenue growth opportunity because it's grounded in our own customer base.

Supporting our federal strength the U S. General services administration approved identity Identive is velocity 385 software Hirsch hardware and you trust readers for listing on the G. S. A approved products list. Following a rigorous testing led by the G. S. A a P L fits to all one evaluation program.

Steven Humphreys: Our fourth quarter also reflected progress in key strategic directions, including our OEM and federal sales, hospital and healthcare systems, and Velocity Vision Pilots. So, in summary, our premises business strengthened industry-wide, with software services and recurring revenues reaching well over 20% of premises revenues as we exited 2023, and positioned strongly with the product releases I described earlier across cloud, AI analytics, FMB, and next-generation sensors and biometrics. We focused our RFID business on SCRI applications, particularly in healthcare and consumer engagement, supported by continued progress developing our Bit-CIO data analytics platform. And from an investor perspective, in Q4, we strengthened nearly all aspects of the strategic foundation of our business. We continue to believe we're on track to complete our strategic review and actions early in 2024. So with that, I'll pass the call over to Justin to review our fourth quarter financial results in more detail. Justin?

Our fourth quarter also reflected progress in key strategic directions, including our OEM and federal sales hospital, and health care systems and velocity vision pilots.

So in summary, our premises business strengthened industry wide with software services and recurring revenues, reaching well over 20% of premises revenues as we exited 2023.

And physicians strongly with the product releases I described earlier across cloud AI analytics F N B and next generation sensors and biometrics, we focused our RFID business on S. E. R. I applications, particularly in health care and consumer engagement supported by continued progress developing our bid CIO data analytics platform.

And from an Investor perspective in Q4, we strengthened nearly all aspects of the strategic foundation of our businesses. We continue to believe we're on track to complete our strategic review and actions early in 2024.

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

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Thanks, Steve as Steve mentioned in 'twenty to 'twenty, three we were able to deliver revenue growth consistent margins controlled operating expenses and generate positive cash flow from operations. That's enabled us to maintain a strong working capital position.

Justin Scarpulla: Thanks, Steve. As Steve mentioned, in 2023, we are able to deliver revenue growth, consistent margins, controlled operating expenses, and generate positive cash flow from operations. This enabled us to maintain a strong working capital position. We achieved these results while focusing on driving disciplined growth in both our identity and premises businesses, including our new cutting-edge premises products, our focus on SCRI, and the continued build out of our operational Thailand facility, which positions the company to continue its growth momentum in 2024. Fourth quarter 2023 revenue was $29 million, in line with our previously announced guidance range and flat versus a comparable prior year period. Fiscal year 2023 was $116.4 million, a 3% increase compared to fiscal year 2022. Fourth quarter 2023 GAAP and non-GAAP adjusted gross margins were 35 and 37%, respectively, as compared to 36 and 38% in 2022. The year-over-year decline in margins versus the prior year period is attributable to the product mix between premises and identity segment sales.

We achieved these results while focusing on driving disciplined growth in both our identity and premises businesses, including our new cutting edge premises products, our focus on S. Cri and the continued build out of our operational Thailand facility.

Which positions the company to continue its growth momentum in 'twenty to 'twenty four.

Fourth quarter, one 'twenty three revenue was 29 million in line with our previously announced guidance range and flat versus the comparable prior year period.

Fiscal year, 2023 was $116 4, million% to 3% increase compared to fiscal year 'twenty to 'twenty two.

Fourth quarter, 2023, GAAP and non-GAAP adjusted gross margins were at 35, and 37%, respectively as compared to 36 and 38% in 'twenty to 'twenty two.

The year over year decline in margins versus the prior year period is attributable to the product mix between premises and identity segment sales.

Justin Scarpulla: Fiscal year 2023 GAAP and non-GAAP adjusted gross margins were 36 and 38 percent, respectively, which is consistent with 2022. GAAP and non-GAAP Adjusted Growth Margin reflect our continued focus on maintaining our margin profile in 2023, despite the rising cost of materials, while continuing to increase our investments in technology and manufacturing processes and equipment. We remain committed to a long-term non-GAAP-adjusted gross margin target of 40 to 45 percent. GAAP and non-GAAP adjusted operating expenses for the fourth quarter of 2023, which include research and development, sales and marketing, and general and administrative costs, totaled $11.8 million and $9.8 million, respectively, as compared to $10.2 million and $9.3 million in 2022. Fourth quarter 2023 GAAP operating expenses include $0.4 million in strategic review related costs.

Fiscal year 'twenty to 'twenty, three GAAP and non-GAAP adjusted gross margins were 36, and 38%, respectively, which is consistent with plenty of 'twenty two.

GAAP and non-GAAP adjusted gross margin reflect our continued focus on maintaining our margin profile in 2023, despite the rising cost of materials, 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%.

GAAP and non-GAAP adjusted operating expenses for the fourth quarter 'twenty to 'twenty, three which included research and development sales and marketing and general and administrative costs totaled $11 8 million and $9 8 million, respectively, as compared to $10 2 million and $9 3 million in 'twenty to 'twenty two.

Fourth quarter 2023, GAAP operating expenses include zero point $4 million and strategic review related costs.

Justin Scarpulla: GAAP and non-GAAP adjusted operating expenses for fiscal 2023 totaled $47.2 million and $41.3 million, respectively, as compared to $41.3 million and $37.1 million in 2022. Q4 gap net loss attributable to common shareholders was $1.9 million or $0.08 per share, compared to gap net income of $0.03 million in Q4 2022. Fiscal year 2023, the gap net loss was $6.8 million, or $0.29 per share, compared to a gap net loss of $1.6 million in fiscal year 2022, or $0.07 per share.

GAAP and non-GAAP adjusted operating expenses for fiscal 2023 totaled $47 2 million and 41 3 million, respectively, as compared to $41 3 million and $37 1 million in 'twenty to 'twenty two.

Q4, GAAP net loss attributable to common shareholders was $1 9 million or eight cents per share.

Compared to GAAP net income of 0.0 3 million in Q4 'twenty to 'twenty two.

Fiscal year 'twenty to 'twenty three GAAP net loss was $6 8 million or 29 cents per share compared to GAAP net loss of 1.6 million in fiscal year, 2022 or seven cents per share.

non-GAAP adjusted EBITDA for Q4, 2023, 0.9 million compared to $1 7 million in the prior year period for fiscal year 2023 non-GAAP adjusted EBITDA was $2 8 million compared to $5 4 million in fiscal year 'twenty to 'twenty two.

Justin Scarpulla: Non-Gap Adjusted EBITDA for Q4 2023 was $0.9 million, compared to $1.7 million in the prior year period. For Fiscal Year 2023, Non-Gap Adjusted EBITDA was $2.8 million, compared to $5.4 million in Fiscal Year 2022. This change in Non-Gap Adjusted EBITDA reflects our continued strategic investments in R&D, as evidenced by our new product launches, sales activities, and our expanding Thailand operations. 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 analyzes trends by segment, beginning with identity. In Q4 2023, revenue from our identity products totaled $17.5 million, or 60% of the company's net revenue, compared to $18.3 million, or 57% of net revenue in Q3 2023, and $16.8 million, or 58% of net revenue in Q4 2022. For fiscal year 2023, identity revenue was $68.1 million versus $67.4 million in fiscal 2022.

Change in non-GAAP adjusted EBITDA reflects our continued strategic investments in R&D.

Evidence by our new product launches sales activities, and our expanding Thailand operations.

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 in Q4, one in 'twenty three revenue from our identity products totaled $17 5 million or 60% of the company's net revenue compared to $18 3 million or 57% of net revenue in Q3 2023 at $16 8 million.

Or 58% of net revenue in Q4 2022.

For fiscal year 'twenty to 'twenty three identity revenue was $68 1 million versus $57 4 million in fiscal 'twenty to 'twenty two the year over year increase was primarily driven by our up enabled Iot products.

Which more than offset the decline in our legacy access cards.

Identity segment, GAAP and non-GAAP adjusted gross margins for Q4, 'twenty, 'twenty, three or 'twenty, two and 24% respectively.

Flat compared to Q4 'twenty to 'twenty two.

For the full year identity segment, GAAP and non-GAAP adjusted gross margins were 22, and 24%, respectively also flat compared to fiscal year 'twenty to 'twenty two.

Justin Scarpulla: The year-over-year increase was primarily driven by our RF-enabled IoT products, which more than offset the decline in our legacy access card business. Identity Segment Gap and Non-Gap Adjusted Gross Margins for Q4 2023 were 22 and 24 percent, respectively, flat compared to Q4 2022. For the full year, Identity Segment Gap and Non-Gap Adjusted Gross Margins were 22 and 24 percent, respectively, also flat compared to fiscal year 2022.

While quarter to quarter margins can fluctuate, 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 than our Singapore operations, We believe our focus on high value specialty Iot.

These solutions and strategic relationships with industry partners and suppliers could further strengthen our margin profile.

Justin Scarpulla: While quarter-to-quarter margins can fluctuate, 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. We believe our focus on high-value specialty IoT solutions and strategic relationships with industry partners and suppliers could further strengthen our margin profile. We remain committed to a long-term gross margin target of 35 to 40% in our identity. Now, turning to the premises segment, in Q4 2023, revenue from our premises products and services accounted for $11.5 million, or 40% of the company's net revenue, compared to $13.6 million, or 43% of net revenue in Q3 2023, and $12.2 million, or 42% of net revenue in Q4 2022. The sequential decrease in premises revenue was in line with our normal seasonality as Q3 coincides with the government's fiscal year-end.

We remain committed to our long term gross margin target of 35% to 40% and our identity business.

Now turning to the premises segment in Q4 'twenty to 'twenty three revenue from our premises products and services accounted for $11 5 million or 40% of the company's debt revenue compared to $13 6 million or 43% of net revenue in Q3, 2023, and $12 2 million.

Our 42% of net revenue in Q4 'twenty to 'twenty two.

The sequential decrease in premises revenue was in line with our normal seasonality as Q3 coincides with the government's fiscal year end.

For fiscal 'twenty to 'twenty three premises revenue was $48 3 million versus $45 5 million in fiscal 'twenty to 'twenty two.

The year over year increase was primarily driven by our physical access control systems offset in part by decreases in video products.

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

Premises segment GAAP gross margin for Q4, 2023 with 55%.

A decrease of 1% compared to Q4 'twenty to 'twenty, two primarily due to product mix.

Justin Scarpulla: For fiscal 2023, premises revenue was $48.3 million versus $45.5 million in fiscal 2022. The year-over-year increase was primarily driven by our physical access control systems, offset in part by decreases in video products. We continue to execute our go-to-market strategy by offering a comprehensive end-to-end security platform solution. Premises segment gap gross margin for Q4 2023 was 55%, a decrease of 1% compared to Q4 2022, primarily due to product mix. Premises Segment Non-Gap Adjusted Gross Margin for Q4 2023 was 57%, flat compared to Q4 2022. For the full year, premises gap and non-gap adjusted gross margins were 57 and 58%, respectively, flat compared to fiscal year 2022.

Premises segment non-GAAP adjusted gross margin for Q4, 'twenty to 'twenty three with 57%.

That compared to Q4 'twenty to 'twenty two.

For full year premises GAAP and non-GAAP adjusted gross margins were 57, and 58%, respectively flat compared to fiscal year 'twenty to 'twenty two.

We remain committed to our long term gross margin target of 55% to 60% in our premises business.

Now moving to our operating expense management.

Our non-GAAP operating expenses in the fourth quarter of 2023 adjusted to exclude restructuring strategic review and severance costs and certain noncash charges, consisting of stock based compensation and depreciation and amortization was 34% of revenue compared to 32%.

In Q4, 'twenty to 'twenty, two and 32% in Q3 2023.

non-GAAP operating expenses for fiscal year, 2023 was 35% of revenue compared to 33% in fiscal year 'twenty to 'twenty two.

Justin Scarpulla: We remain committed to a long-term gross margin target of 55 to 60% in our premises business. Now, moving to our Operating Expense Management, non-GAAP operating expenses in the fourth quarter of 2023 adjusted to exclude restructuring, strategic review, and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization with 34% of revenue compared to 32% in Q4 2022 and 32% in Q3 2023; non-GAAP operating expenses for fiscal year 2023 with 35% of revenue Now, turning to the balance. We exited Q4 2023 with $24.4 million in cash, cash equivalents, and restricted cash, an increase of $3.5 million from Q3 2023. In Q4, the increase in cash was a result of $4.8 million in cash from operating activities, while we used $1.1 million in investing activities, primarily related to capital expenditures, and $0.4 million in financing activities. Our working capital at the end of Q4 was $48.7 million, a decrease of $1.1 million from Q3. Inventory decreased by $0.7 million in Q4 as we continue to work through our inventory balance.

Now turning to the balance sheet.

We exited Q4, 2023 with $24 4 million in cash cash equivalents and restricted cash an increase of $3 5 million from Q3 2023.

Q4, the increase in cash was a result of $4 8 million in cash from operating activities. While we use the $1 1 million in investing activities, primarily related to capital expenditures and zero quite $4 million from financing activities. Our working capital exiting Q4 was $48 7 million a decrease of one.

$1 million from Q3 2023.

Inventory decreased zero point $7 million in Q4, as we continue to work through our inventory balances.

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

Our 10-K 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 todays earnings release, as Steve mentioned with the anticipated technology transition from one of our key RFID customers leaves US two unexpected Q1 revenue range of 22.

So $24 million.

This concludes the financial discussion I will now pass the call back to Steve.

Thanks, Justin.

<unk> 'twenty 'twenty four we expect to use cases and S. Cri to continue to grow and expand to new customers and premises we're positioned with the strongest refreshed product lineups to support growing 2024 revenues of our end to end platform with continuing margin strength and expanded recurring revenue software and services as we develop our competitive value in both.

Justin Scarpulla: As a result, we expect to continue rebalancing our working capital and anticipate repaying our revolver balance in 2024. In our 10-K 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 today's earnings release.

Our growth businesses will keep both our balance sheet and working capital strong.

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

In RFID applications for Iot, we build value three ways first by supporting pilots for technically complex SCR applications, particularly in the health care and consumer engagement verticals health care and medical devices are the most strategically important market for RFID Iot solutions, our focus is on delivering solutions that meet the.

Steven Humphreys: As Steve mentioned, with the anticipated technology transition from one of our key RFID customers, leading us to an expected Q1 revenue range of $22 to $24 million. This concludes the financial discussion. I'll now pass the call back to Steve. Thanks, Justin.

Steven Humphreys: Across 2024, we expect use cases in SCRI to continue to grow and expand to new customers. In premises, we're positioned with the strongest refreshed product lineup to support growing 2024 revenues of our end-to-end platform with continuing margin strength and expanded recurring revenues, software, and services. As we develop our competitive value in both of our growth businesses, we'll keep both our balance sheet and working capital strong. Let me start by addressing the identity business, particularly the RFID segment. In RFID applications for IoT, we build value in three ways.

<unk> technical requirements of our cri customers, which positions us to lead in entirely new categories.

Now health care projects move slowly theres progress quarter over quarter, but large scale ramps are hard to forecast. The NRA in pilot pipeline is healthy and we've been devoting more resources to the best near term production rollout revenue generating opportunities. Now. This is a key category for increased investment we're balancing relatively near term use cases like auto.

<unk> with the long term transformational market for medication compliance now this compliance category is possibly the health care industry's biggest opportunity to generate economic benefits as an indication of the scale of the opportunity nearly a quarter of all first time prescriptions aren't filled and if these almost half arent taken accordingly.

Steven Humphreys: First, by supporting pilots for technically complex SCRI applications, particularly in the healthcare and consumer engagement vertical. Healthcare and medical devices are the most strategically important market for our RFID IoT solutions. Our focus is on delivering solutions that meet the challenging technical requirements of our SCRI customers, which positions us to lead entirely new categories.

Administration protocol.

We believe RFID provides a unique platform to address this multi hundred billion dollar issue for the health care industry will focus more on this when we complete our strategic activities. Since this will take time focus and capital to realize the full potential of the opportunity, but the scale of the opportunity and our unique positioning to address it makes it well worth it.

Steven Humphreys: There's progress quarter over quarter, but large-scale ramps are hard to forecast. The NRE and pilot pipeline is healthy, and we've been devoting more resources to the best near-term production rollout revenue-generating opportunities. Now, this is a key category for increased investment. We're balancing relatively near-term use cases like auto-injectors with the long-term transformational market for medication compliance. Now, this compliance category is possibly the healthcare industry's biggest opportunity to generate economic benefits. As an indication of the scale of the opportunity, nearly a quarter of all first-time prescriptions aren't filled, and of these, almost half aren't taken according to their administration protocol.

Time and effort.

We also continued to support five different auto injector projects across four different companies with various a S p's ranging to over a dollar depending on the complexity of the solution.

In one case, the second phase of application testing for a project that received FDA approval is underway.

In another our largest auto injector customer has deployed about 10000 auto injectors and a controlled pilot with select physicians and patients evaluating usability and effectiveness.

This remains an exceptional category of opportunity that's continuing to progress, we'll keep sharing milestones since medical device timelines can be long anyone who's following the exploding use cases for auto injectors is aware of the extremely large volumes that pharmaceutical companies are projecting in what's becoming one of the largest and fastest growing categories in Medicaid.

Steven Humphreys: We believe RFID provides a unique platform to address this multi-hundred-billion-dollar issue for the healthcare industry. We'll focus more on this when we complete our strategic activities, since this will take time, focus, and capital to realize the full potential of the opportunity, but the scale of the opportunity and our unique positioning to address it make it well worth the time and effort. We also 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. In one case, the second phase of application testing for a project that received FDA approval is underway. In another trial, our largest auto-injector customer has deployed about 10,000 auto-injectors in a controlled pilot with select physicians and patients evaluating usability and effectiveness.

<unk> administration.

And consumer engagement, we're seeing expanding use cases, including a unique smart home electronics applications, which doubled sales quarter over quarter, we're continuing to see high end garment use cases, including our life and government applications. The master's application for retail users and many others.

The second way, we build value in Iot is by solidifying our reputation as a specialty applications provider and reinforcing our industry leadership as evidenced by our joint marketing and product initiatives. These include partners like NXP collect I D Willey at Masters and energies and deep engagement with institutions, including the axiom.

To do that in Michigan State and the NFC Forum, which are active in setting the standards for advanced RFID applications.

Steven Humphreys: This remains an exceptional category of opportunity that's continuing to progress. We'll keep sharing milestones, since medical device timelines can be long. Anyone who's following the exploding use cases for auto-injectors is aware of the extremely large volumes that pharmaceutical companies are projecting in what's becoming one of the largest and fastest-growing categories in medication administration.

This is a particularly active growth driver with pervasive use cases emerging such as the digital product passport, which was introduced by the European Commission within the circular economy action plan.

And third by expanding our lower cost high quality and technically advanced production in Thailand. Our initial capex in Thailand is essentially complete we expect the advantages of producing Iot devices in Thailand, lower production costs rent and labor shorter supply chains and access to highly skilled technical and production people.

Steven Humphreys: In consumer engagement, we're seeing expanding use cases, including the unique smart home electronics application, which doubled sales quarter over quarter. We're continuing to see high-end garment use cases, including our Life of Garment applications, the Mazda application for retail users, and many others. The second way we build value in IoT is by solidifying our reputation as a specialty applications provider and reinforcing our industry leadership, as evidenced by our joint marketing and product initiatives. These include partners like NXP, CollectID, Williott, Mazda, and Energis, and deep engagement with institutions, including the Axia Institute at Michigan State and the NFC Forum, which are active in setting the standards for advanced RFID applications.

So these are our value creation drivers in Iot for 2024, our business issue one business issue from prior years that we don't expect to be a factor in 2024 is supply chain.

Now, let me address the address our premises business and physical security, we accomplished our industry leadership goals in four ways.

First by offering a tightly integrated end to end physical security solution, including our recently announced scramble factor as well as our vision AI and velocity plus velocity vision single pane of glass security management platform here.

Steven Humphreys: This is a particularly active growth driver, with pervasive use cases emerging, such as the digital product passport, which was introduced by the European Commission within the Circular Economy Action Plan. And third, by expanding our lower-cost, high-quality, and technically advanced production in Thailand. Our initial CAPEX in Thailand is essentially complete.

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

Steven Humphreys: We expect the advantages of producing IoT devices in Thailand, lower production costs for rent and labor, shorter supply chains, and access to highly skilled technical and production people. So these are our value creation drivers in IoT for 2024. Our business issue, one business issue from previous years that we don't expect to be a factor in 2024, is the supply chain. Now, let me address our premises business. In physical security, we accomplished our industry leadership goals in four ways. First, by offering a tightly integrated end-to-end physical security solution, including our recently announced Scramble Factor, as well as our Vision AI and Velocity Plus Velocity Vision single pane of glass security management platform.

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

And this is one strategic category, where identity and premises segments overlap the physical security industry is embracing the convergence of identity management for logical as well as physical security a Gartner study in 2022 found that 41% of enterprises plan to converge parts of their cyber and physical security operations by 2025.

Up from 10% in 2020.

Our identity readers provide logical access as well as being used as enrollment in issuance systems to provision access control identities and we have deep technical roots cynosure authentication as well as a wide market presence our leadership in this market was demonstrated again earlier this year with a 2 million dollar order in January for identity readers to deploy <unk>.

Steven Humphreys: Here, the value proposition of our tightly integrated end-to-end system has clearly resonated with commercial customers. End users appreciate our complete solution, and integrators are an even more effective leverage point. It's more profitable for integrators to implement systems from fewer partners, which reduces their training costs, consolidates purchase order complexity, allows for faster, more efficient installations, and makes ongoing system maintenance easier and more profitable.

The wide across one of the world's largest online retailers.

Now our second security leadership driver is by growing our leading federal position and physical security solutions, including on premises and cloud based services.

Our federal customers, we've focused on expanding the agencies, we sell into as well as maximizing share of wallet.

Steven Humphreys: Now this is one strategic category where the identity and premises segments overlap. The physical security industry is embracing the convergence of identity management for logical as well as physical security. A Gartner study in 2022 found that 41 percent of enterprises plan to converge parts of their cyber and physical security operations by 2025, up from 10 percent in 2020. Our identity readers provide logical access as well as are used as enrollment and issuance systems to provision access control identities.

Both of these initiatives are reflected by our continued growth in federal up 9% in 2023, we expect federal to continue it to be a growth driver in 2024.

Our third industry leadership driver is bringing high security to the SMB market leveraging enterprise scale high security through our new Prime as cloud E. G. Two controller and encryption bridge platform.

This solution can also be used for customers with many locations as a cost effective option for uniform access control across distributed organizations already in 2024, we're seeing demand for EG twos ahead of our initial projections.

Steven Humphreys: Now we have deep technical roots in secure authentication as well as a wide market presence. Our leadership in this market was demonstrated again earlier this year with a $2 million order in January for identity readers to be deployed company-wide across one of the world's largest online retailers. Now our second security leadership driver is growing our leading federal position in physical security solutions, including on-premises and cloud-based services. Across our federal customers, we focused on expanding the agencies we sell into as well as maximizing share of wallet. Both of these initiatives are reflected by our continued growth in federal government, up 9 percent in 2023. We expect federal government to continue to be a growth driver in 2024. Our third industry leadership driver is bringing high security to the SMB market, leveraging enterprise-scale high security through our new Primus cloud, EG2 controller, and encryption bridge platform. This solution can also be used for customers with many locations as a cost-effective option for uniform access control across distributed organizations.

Fourth expanding our enterprise software services and recurring revenues by driving sales of Cirrus cloud across our existing enterprise installed base as well as new customers software and recurring revenues exited 2023, well over 20% of our premises revenues and we expect this trend to continue in 2024.

Driving recurring revenues is one of our most important initiatives for 2024. In addition to our serious enterprise cloud platform with Prime is cloud. We're piloting pricing models that we believe will accelerate ease of adoption for the channel enhancing recurring revenue growth.

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. We continue to tightly manage our expenses reflected in the sequential reduction in expenses, but still prioritizing investments in key growth initiatives. So as you can hear from our comments, we're very positive about the value creation and industry leading.

Our ship progress, we think we're making at both of our businesses from a business planning perspective, we expanded our next generation products technologies and production capacity.

Both of our businesses and markets are well positioned for strong 2024, following our investments in 2023, our product launches, Thailand production and other investments consumed capital and pressured our operating results, but they've positioned us well for 2024 and going forward.

Steven Humphreys: We're seeing demand for EG2s ahead of our initial projections. Fourth, expanding our enterprise software services and recurring revenues by driving sales of Cirrus Cloud across our existing enterprise install base as well as new customers. Software and recurring revenues exited 2023, well over 20 percent of our premises revenues, and we expect this trend to continue in 2024. Driving recurring revenues is one of our most important initiatives for 2024. In addition to our Cirrus enterprise cloud platform with Primus cloud, we're piloting pricing models that we believe will accelerate ease of adoption for the channel, enhancing recurring revenue growth.

For Q1, we are anticipating revenues in $22 million to $24 million range with continued strong contribution from our premises security and identity reader businesses. We expect our strategic efforts may have some effect on near term business as we focus on taking the right strategic steps to support long term value creation the.

The next major step for our business of course is the culmination of our strategic process. Our commitment is to maximize shareholder value by substantially investing in our growth opportunities and our strategic verticals and strengthening our leadership teams to execute our strategic plans as I mentioned earlier in the near term, we expect to take strategic steps in these areas.

Steven Humphreys: 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. We continue to tightly manage our expenses, reflected in the sequential reduction in expenses, but still prioritizing investments in key growth initiatives. 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. From a business planning perspective, we've expanded our next generation products, technologies, and production capacity. Both of our businesses and markets are well positioned for a strong 2024, following our investments in 2023. Our product launches, Thailand production, and other investments consumed capital and pressured our operating results, but they've positioned us well for 2024 and going forward. For Q1, we're anticipating revenues in the $22 to $24 million range with continued strong contribution from our premises security and identity reader businesses.

Consistent with the plan, we communicated at the end of last year.

So with that I'll now ask the operator to open the lines for questions operator.

Yeah.

Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question comes from Craig Ellis with B Riley. Please proceed.

Thanks for taking the questions and all the information guys, Steve I wanted to follow up on a couple of things and just clarify.

Revenue items so one.

It sounds like given what's happening with Willie had strong production in the fourth quarter, but a period of digestion upcoming so so that would impact the.

The identity business sequentially Q1and then you mentioned as you closed out your prepared comments that there might be some near term impacts on the business from strategic efforts and I'm wondering if there was any additional allowance are factored into our headline revenue guide.

Steven Humphreys: We expect our strategic efforts may have some effect on near-term business as we focus on taking the right strategic steps to support long-term value creation. The next major step for our business course is the culmination of our strategic process. Our commitment is to maximize shareholder value by substantially investing in our growth opportunities and our strategic verticals and strengthening our leadership teams to execute our strategic plans.

Or anything you would expect in either segment that we should look to in the first quarter potentially the second quarter on on that matter.

Operator: As I mentioned earlier, in the near term, we expect to take strategic steps in these areas consistent with the plan we communicated at the end of last year. So with that, I'll now ask the operator to open the lines for questions. Operator?

Yes, thanks for the question Greg.

I think those cover it in terms of the headwinds and there are a number of tail wins in all of these areas.

Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

But we.

We want to be very careful.

That we're setting ourselves up to to meet what we put out there and so I think that's exactly the way to characterize it theres a couple of things that were offsetting.

Operator: You may press start, too, if you'd like to remove your question from the... For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. The first question comes from Craig Ellis. Please be Riley.

But we also are seeing good momentum and we talked about the consumer electronic company. That's growing some of the other health care areas are growing nicely.

Craig Andrew Ellis: Thanks for taking the questions and all the information, guys. Steve, I wanted to follow up on a couple of things and just clarify. Your revenue items, so one, It sounds like, given what's happening with Williott's strong production in the fourth quarter, but a period of digestion upcoming, so that would impact the identity business sequentially in one cue. And then you mentioned as you closed out your prepared comments that there might be some near-term impacts on the business from strategic efforts. And I'm wondering if there was any additional allowance factored into headline revenue guidance or anything you'd expect in either segment that we should look to in the first quarter, potentially the second quarter on that matter. Yes, thanks for the question, Craig. I think those cover it in terms of the headwinds, and there are a number of tailwinds in all these areas, but we want to be very careful that we're setting ourselves up to meet what we put out there, and so I think that's exactly the way to characterize it.

And physical security with all the product launches are going well and I also mentioned the identity reader order that we had in the first quarter.

Which was it was pretty substantial so it's got frozen cons pushing it but we wanted to be sure to get the kinds out there as well and you identified are the ones that we wanted to highlight.

Got it and just on the revenue point, Steve Yeah, we have a very challenging macro that lingers for at least from them. In fact, we put together how are you feeling about the business as forecast stability on the top line now is it is it starting to lock in is it still a little bit difficult just given the crosscurrents from the macro can.

Give us a sense for how you're feeling about the visibility that you have and the ability to forecast for each segment of business overall in the top line.

Steven Humphreys: There's a couple of things that we're offsetting, but we also are seeing good momentum, and we talked about the consumer electronics company that's going. Some of the other healthcare areas are growing nicely, and physical security with all the product launches is going well, and I also mentioned the identity reader order that we had in the first quarter, which was pretty substantial. So, it's got pros and cons pushing it, but we wanted to be sure to get the cons out there as well, and you identified the ones that we wanted to highlight. Got it.

Yes, thanks for that all so we're feeling good about the visibility and Thats why we wanted to be granular about.

What the forces are positive and that are creating things that we have to overcome.

We don't think there are many.

You know in the old phrase of unknown unknowns, we think we've got a.

Line of sight to the factories that are that are driving our opportunity. So we think we've got pretty good predictability actually quite good predictability.

Craig Andrew Ellis: And just on the revenue point, Steve, yeah, we have a very challenging macro that lingers, at least from the mosaic we put together. How are you feeling about the business's forecastability on the top line now? Is it starting to lock in? Is it still a little bit difficult just given the cross currents from the macro?

Got it on that note I'll flip it over to Justin Justin on gross margins can you give us some help with the Gibson cakes, just beyond volume for the first quarter from the level that we hit in the fourth quarter I think at least versus my model gross margins for lighter mostly due to.

Steven Humphreys: Can you give us a sense for how you're feeling about the visibility that you have and the ability to forecast each segment of business overall on top? Yes, thanks for that. Also, we're feeling good about the visibility. And that's why we wanted to be granular about what the forces are, the positive ones, and that are creating things that we have to overcome. We don't think there are many, you know, in the old phrase of unknown unknowns. We think we've got a line of sight to the factors that are driving our opportunity.

A significant mix shift towards identity from premises, but but what are the Gibson takes rep first quarters gross margin place.

Yes, we do see a bounce back it's primarily going to be mix in Q1.

When we do anticipate about back to premises on that side. So we'll see a slight bump in <unk>.

Margins for Q1 off of.

Closing out what we did.

Probably not to go too granular, but yes, we should see a rebalancing in that in Q1.

Craig Andrew Ellis: So we think we've got pretty good predictability, actually, quite good predictability. Got it. On that note, I'll flip it over to Justin.

Okay, and then lastly are you talked last year about.

Improving <unk>.

Justin Scarpulla: Justin, on gross margins, can you give us some help with the gives and takes just beyond volume for the first quarter from the level that we hit in the fourth quarter, I think, at least versus my model gross margins? Relight is mostly due to a significant makeshift towards identity from premises, but what are the gives and takes with the first quarter's cross-margin? Yeah, we do see a bounce back. It's primarily going to be mixed in Q1. When we do anticipate a bounce back to premises on that side, so we'll see a slight, closing out what we did before. We'll try not to go too granular, but yeah, we should see a rebound. Okay, and then lastly, you talked last year about improving cash generation with better work in capital management. It does seem like that came through strongly in the fourth quarter.

Cash generation with better working capital management. It does seem like that came through strongly in the fourth quarter. The question is how much of that is still ahead of you in.

And what can we expect with cash from operations over the next couple of quarters and for debt pay down what they are in the air what linearity should we expect through the year or is it kind of be first half weighted ratable more back half weighted thank you.

Yeah, I think it'll be more back half weighted I think as you saw in our.

Q4 press release, we had some pretty significant costs related to that strategic transaction. Then those will be cash that's going out the door and thats going to continue.

And the 2024 as well so we did from my prior guidance that we do have some pressure on cash with the strategic review and other items that we're working on so.

Craig Andrew Ellis: The question is, how much of that is still ahead of you, and what can we expect with cash from operations over the next couple of quarters and for debt paydown? What linearity should we expect through the year? Is it gonna be first half weighted, rateable, more back half weighted?

So it will be a little bit more back half weighted than we had originally anticipated.

Alright, guys. Thank you I'll hop back in the queue.

Thanks, Greg.

The next question comes from Anthony Stoss with Craig Hallum. Anthony. Please proceed.

Justin Scarpulla: Thanks. Yeah, I think it'll be more backup weighted. I think, as you saw in our Q4 press release, we had some pretty significant costs related to that strategic transaction, and those will be cash that's going out the door, and that's going to continue into 2024 as well. So I know from my prior guidance that we do have some pressure on cash with the strategic review and other items that we're working on. So it will be a little bit more in the back half. All right, guys. Thank you. I'll hop back.

Thanks, guys.

Stephen Your Blow-by really an explanation pretty fast in your prepared remarks is it purely an inventory digestion or did I hear you say the move into the next generation technology and also the user guide lower in Rev. How much of that was related to.

So it is a technology transition even more so than in inventory topics.

I'll, let that they need to address that but that but we wanted you to address it as well.

Craig Andrew Ellis: Thank you. This next question comes from Anthony Stoss with Craig Hallam. Thanks, guys. Steven, you were blown away by the Williott explanation pretty fast in your prepared remarks. Is it purely an inventory digestion, or did I hear you say they're moving to next-generation technology? And also, the guide lower in revs, how much of that was related to Williott?

And that's.

The major factor there what was the second part of your question Tony how.

How much of the reduction or the down sequential revenues can you attribute to really it didn't have the reduction for Q1.

Or ballpark it's of that order are they were they were a couple of million dollar at quarter customer. So way that that's that that's material that we expect to offset a chunk of it but we want to be careful about how much how fast.

Anthony Joseph Stoss: So it is a technology transition, even more so than an inventory topic. Again, I'll let them address that, but we wanted to address it as well. And that's the major factor there.

Steven Humphreys: What was the second part of your question, Tony? How much of the reduction or the down sequential revenues can you attribute to half the reduction for Q1? It's of that order.

Got it and then just bigger picture you guys use a Friday yourselves and a lot of health care related design wins in a lot of health care revenue, which typically isn't cyclical or are you now seeing more.

Steven Humphreys: They were a couple million dollars a quarter customer, so that's material that we expect to offset a chunk of it, but we want to be careful about how much we exceed. Got it. And then just the bigger picture, you guys used to pride yourselves on a lot of healthcare related design wins, a lot of healthcare revenue, which typically isn't cyclical. Are you now seeing more? cyclical nature, even from your health care customers. Good question.

Our second nature, even from your health care customers.

Good question. The answer is no. There there is a there is some seasonality to different health care use cases.

We find when there is different for example, we use them a lot of surgical instruments and at ICU devices and is there are there is some seasonality to them.

Steven Humphreys: The answer is no. There is some seasonality to different health care use cases that we find when there's different, for example, we do some, a lot of surgical instruments and ICU devices, and there is, there is some seasonality to, you know, how busy those categories are. But it's not like, you know, the federal government where, you know, you have a big bump in the third quarter, you know, and a sick cow that you see there.

And how busy those categories are.

But it's not like federal government, where you know you have big bump in the third quarter.

And the cyclicality you see there so it's more product specific than it is macro seasonality in health care that we're seeing because as you say aggregate for health care is it's not a cyclical business.

Steven Humphreys: So it's more product specific than it is macro seasonality in health care that we're seeing because, as you say, aggregate demand for health care is, it's not a sick cow. Got it. And then lastly, for me, Justin, just when you look at kind of the starting point for Q1, and the nature of just really gonna pause for two to four quarters, help us understand, to me, it looks like 2024 rats are probably going to be low 2023 rats. We typically try not to give full-year guidance.

Got it and then lastly from me Justin just when you look at kind of the starting point for for.

For Q1.

And the nature of just really <unk> going to pause for two to four quarters.

Just to understand to me it looks like 2024 reps are probably going to be low 2023 range.

We typically try not to give full year guidance, we're getting away from that we're going quarterly at this point, but we don't think it'll be less than 2023 now.

Anthony Joseph Stoss: We're getting away from that. We're going quarterly at this point, but we don't. Less than Now.

Okay I appreciate it.

Thanks.

Justin Scarpulla: Okay, appreciate it. Thanks. Okay, our next question comes from Jaeson Schmidt with Lake Street. Yes, thanks for taking my questions. Understanding sort of the dynamics with Williott, I think on last call, you mentioned seeing some kind of order push-outs across the board. Just curious if you're still seeing that occur.

Okay. Our next question comes from Jason Smith with Lake Street, Jason. Please proceed.

Hey, guys. Thanks for taking my questions understanding sort of the dynamics with Willie I think last call you mentioned seeing some kind of order push outs across the board just curious if you're still seeing that occur.

In terms of related to really a per se or other category just wanted to be sure I'm answering the right thing.

Jaeson Allen Min Schmidt: In terms of related to Williott per se or any other category, just want to be sure I'm answering the right thing. Yeah, just within the RFID business. No, we're not seeing pushouts in RFID in terms of delays or people having oversupply or something.

Yeah, just with them the RFID business.

No we're not seeing push outs in RFID in terms of delays or people, having oversupply or something it's a it's much more project specific.

Steven Humphreys: It's much more project-specific, like I was mentioning, whether it's the healthcare products and their project cycles or with the BLE applications or any of the others, it's very much project-specific. Got it. And then, just as a follow-up, Justin, how should we think about OPEX trending throughout this year? I think what we're looking at. Are you talking about non-GAAP or GAAP or both?

Yeah like I was like I was mentioning whether it's the health care products and their project cycles or.

Or with the BLA applications or any others is very much project specific.

Got it and then just as a follow up just on how should we think about opex trending throughout this year.

I think what we're looking at.

Are you talking about non-GAAP, our GAAP or both.

non-GAAP.

Jaeson Allen Min Schmidt: Yeah, directionally, it'll go up a few percent. Basically, we have a merit increase here in April that will be throughout the organization that will be upping it a little bit, but not a significant uptick, but slightly up from 25%. Okay, that's helpful. Thanks a lot, guys. You got it. This question comes from Michael Piccolo with Imperial Capital. Michael, please proceed.

Yeah, Directionally it'll go up a few percent.

Basically we have a merit increase here in April.

That will be throughout the organization that'll be upping, it a little bit, but not a significant uptick but slightly up from 2023.

Okay. That's helpful. Thanks, a lot guys.

You got it.

The next question comes from Michael Piccolo with Imperial capital Michael. Please proceed.

Justin Scarpulla: Hi guys, thanks for taking my question. And I appreciate you taking the time to chat. One statistic stood out to me in the presentation; I wanted to get a better sense of how it's changed is the percentage of recurring revenue and premises. I think you guys said it was above 20% in 2023. I'm not sure if you guys have disclosed it before, but just curious what that percentage may have been in the one or two years prior, and how high of a percentage of revenue Do you think that could go on a longer term basis, like, you know, the next few years? So I'll take that from a couple of angles and then Justin, just jump on in if you want.

Hi, guys. Thanks for taking my question and I. Appreciate you taking the time to chat one statistics stood out to me in the presentation I wanted to get a better sense of how it's changed as the percentage of recurring revenue and premises. I think you guys said it was above 20% in 2023 I'm not sure. If you guys have disclosed it before but just curious.

What that percentage may have been in the one or two year prior and how high of a percentage of revenue do you think that could go on a longer term basis like you know our tears.

So all the way.

Take it take it from a couple of angles and adjusting to just jump on and if you want that number had been under 15% a year ago and in fact now I'd say, we wanted to be roughly round, but it's around 24%, so it's well over 20%.

Michael Piccolo: That number had been under 15% a year ago. And in fact, now it's, we want it to be roughly round, but it's around 24%. So it's well over 20%. And where we expect that to go is we wanna drive it in the physical security business, to be clear. We wanna drive that to be the majority of the revenue base there. It's gonna take a five to seven year transition, but when we talk about the Primus Cloud and our Cirrus products, those are all driving towards a recurring revenue model which we wanna become the core business model for the business. And just one follow-up on that, I think you mentioned that it was a shift in contracts, that they were changing the terms. I think you had said, forgive me if I misunderstood, that most of our market opportunity near-term is selling to current customers and transitioning them from an on-prem solution to a cloud solution. That's certainly the case for commercial velocity customers. In federal, we've got our FedRAMP cloud solution, and then with Primus, with SMB, there's a predisposition towards the cloud, and that's very much a cloud natural product. So it really is across the board.

And where we expect that to go that we want to drive it in the physical security business to be clear.

We want to drive that to be the majority of the revenue base there that's going to take a.

Five to seven year transition, but when we talk about.

That debt private cloud and our Cirrus products those are all driving towards a recurring revenue model, which we want to become the core business model for the business.

And just one follow up on that I think you mentioned that it was a shift in contracts that they were changing the terms I think you had said forgive me forgive me if I misunderstood.

That most of our market opportunity near term is is selling to current customers and transitioning them from an on Prem solution to a cloud solution. That's certainly the case for commercial velocity customers in federal we've got our fed ramp.

A cloud solution and then with prime Miss with SMB, there's a predisposition towards cloud and that's it that's very much a cloud natural <unk>.

Products. So so it really is across the board, but what I was referring to was velocity commercial and velocity federal where the vast majority of current customers are.

Steven Humphreys: But what I was referring to was velocity commercial and velocity federal, where the vast majority of current customers are perpetual licensed customers, and they're the lowest-hanging fruit for conversion to recurring revenue. Okay. That was very helpful. Thank you. Okay, we have a follow-up coming from Craig Ellis with B. Reilly. Craig, please.

For petrol license customers and they're the lowest hanging fruit for conversion to recurring revenues.

Got it that was very helpful. Thank you.

Sure. Thanks.

Thanks, Michael.

Okay, we have a follow up coming from Craig Ellis with B Riley Craig. Please proceed.

Craig Andrew Ellis: Yeah, thanks for taking the question. Steve, it seems like the Thai facility is having a really nice ramp. And my understanding from past conversations with the team is that that is a location where we were working on Williott's production. So, one, can you confirm that that's where that production was based? And two, as we think about the Williott pods, what does it mean for utilization in that facility as we look out at that facility and then just overall for identity segment gross margins in 2020 and 2024? So, actually, Willia production was in Singapore.

Yeah. Thanks for taking the question.

Steve It seems like the Thai facility is having a really nice ramp in and my understanding from past conversations with the team is that that is a location where we.

We were working on really at production. So one can you confirm that that's where that production of its space and two as we think about the way a pause what does it mean for utilization in that facility as we look out about.

That facility and then just overall for identity segment gross margins in 2020 'twenty 'twenty four.

So actually the really a production was in Singapore.

We balanced that technology. So we can do it in both locations now, but that that's actually a new a new event there and.

Steven Humphreys: We've balanced the technology so we can do it in both locations now, but that's actually a new event there. And you're right to point out the Thai facility. It's been very much a highlight that when we did our, we have now done our first COGS qualification run because we reset our standard costing on a regular basis. The cost of operation in Thailand was actually lower than we had originally done when we did our ROI calculation on it.

And you're right to point out the Thai facility, it's it's Ben.

Very much a highlight that when we did our we've now done our first Cogs qualification runs because we reset our standard our standard costing on a regular basis and the cost of operation at Thailand was actually lower than we had originally done when we did our ROI calculation on it. We've also found is really a production.

Steven Humphreys: We've also found, really production being an example, that we can move higher technology process capabilities faster into Thailand than we expected. So we think we can move there faster and get some gross margin advantage out of it. And then your last question, I think, is around overhead absorption on gross margins. And that's something we're constantly balancing.

An example that we can move a higher technology process capabilities faster into Thailand than we expected. So we think we can move there faster and get some gross margin advantage out of it.

And then your last question I think is around overhead absorption on on gross margins.

That's something we're constantly balancing that's one of the things that does keep us taking some of the lower margin business because it absorbs capacity and therefore liquidate your overheads. So we're balancing to keep that but it is certainly possible that there will be some but.

Steven Humphreys: That's one of the things that does keep us taking some of the lower margin business because it absorbs capacity and therefore liquidates your overheads. So we're balancing to keep that, but it's certainly possible that there will be some pressure on margins for operational overhead absorption offset by moving more of the production to Thailand versus Singapore, where we have a better gross margin. That's very helpful.

Some pressure on margins for Pops overhead absorption offset by moving more of the production to Thailand versus Singapore, where we have better gross margins.

That's very helpful and is it possible to quantify the mix of production you just like the team to achieve out of Thailand, as we look out.

Craig Andrew Ellis: And is it possible to quantify the mix of production you'd like the team to achieve out of Thailand as we look out over the next 12 months and maybe 24 months? Are there some milestones that you have, whether it's getting to 30, 50, whatever percent of total production given that significant cost advantage that you have there? Yes, so there are two factors in that.

Over the next 12 months and maybe 24 months or are there. Some milestones that you have whether it's getting to a 30 50 whatever percent of October production given that significant cost advantage that you have there.

Yes, so there's two factors in that there is that as.

Steven Humphreys: There's, as you say, just the scale of production, and then there's the processes. And actually, with the progress we've made, we have accelerated moving some of our higher-end processes into Thailand. We took advantage of the Chinese New Year when there was some shutdown to move equipment faster over to Thailand. You know, I'd love to see more than 50 percent of our production out of Thailand go out of the year. We, of course, have to balance that quality and, you know, production times and run times and what the sales folks bring in and what we can balance. But I think that would be a good goal to have 50 percent there.

As you say Theres just the scale of production and then there's the processes and actually with the progress. We've made we accelerated moving some of our higher end processes.

Into India, Thailand, and we took.

The advantage of Chinese new year, when there was some shutdown to move equipment faster over to Thailand.

I'd love to see more than 50% of our production out of Thailand going out of the year.

We of course have to balance that.

Quality and production times, and run times and depth, where the sales folks bring in and how we can balance but I.

I think that would be a good goal to have 50% there. What we have learned is there's really no technology limitation.

Steven Humphreys: What we have learned is there's really no technology limitation. The workforce in Thailand is well able to manage the technical capabilities, both at the engineering and the production level. And the costs, of course, are lower.

The workforce in Thailand is is well able to manage that.

Capabilities, both at the engineering and <unk>.

Production level.

And the costs of course are lower so as you can tell and the fact that we lease the additional building right next to our current building means we can expand it a really efficient footprint.

Steven Humphreys: So, as you can see – and the fact that we leased the additional building right next to our current building means we can expand in a really efficient footprint. If we'd let that building go, you know, the second expansion spot would have been a distance away, and you'd have been in a trucking logistics situation instead of clean flow production. So, we're – I think Thailand's going to be a competitive advantage for the foreseeable future. Very helpful, thank you. Thanks Craig. Okay, we have no further questions in queue. I'd like to turn the floor back to management for any closing remarks. Okay, thanks.

If we let that building go you know the the second expansion spot would have been Ah.

Distance away and you'd have been at it trucking logistics situations instead of clean flow production. So we're I think Thailand is going to be a competitive advantage for this foreseeable future.

Very helpful. Thank you.

Thanks, Greg.

Okay. We have no further questions in queue I'd like to turn the floor back to management for any closing remarks.

Okay. Thanks, Thanks, operator, and thank you all for joining US today, we really appreciate the continued support of both our team and our shareholders and all of you who are listening to us.

Steven Humphreys: Thanks, Operator. And thank you all for joining us today. We really appreciate the continued support of both our team and our shareholders and all of you here listening to us. Anyone wanting to keep up with our business's progress, please join that Mazars webinar on March 28th that we mentioned. Also visit us in early April in Las Vegas. Both RFID Journal and ISC West are in the second week of April, both in Las Vegas. So you can visit us there in person for both parts of the business. And then, from an investor perspective, we'll also be holding an NDR with Lake Street Capital Markets in April, likely. And, of course, we'll be at the B. Riley Conference in May. So again, thank you all for joining us. And, of course, we look forward to communicating thoroughly as soon as we have a strategic action that can be shared. So thanks again, and have a good evening. Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Anyone wanting to keep up with our business progress. Please join that Macerich webinar on March 28 that we mentioned are.

Also visit US in early April in Las Vegas, both RFID Journal and ISC West are in.

By the second week in April both in Las Vegas. So he can visit there in person for both parts of the business and then we will also from an investor perspective to be holding in endear with Lake Street capital markets. Yeah in in April likely and of course, we'll be at the B Riley conference in May.

So again, thank you all for joining us and of course, we look forward to communicating thoroughly as soon as we have a strategic action that can be shared so thanks again and have a good evening.

Yes.

Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.