Q2 2019 Earnings Call
Good afternoon.
Welcome to <unk> second quarter 2019 earnings calls.
My name is cloud, yet and I will be your operator does afternoon.
Joining us joining us for todays presentation are the Companys CEO , Steve Humphreys and Cfos Sandra wallet.
Following management's remarks, we will open the call for questions.
Before we begin please note that during this call management may be making references to non-GAAP measures or projections, including adjusted EBITDA.
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 financial projections and future market conditions is a forward looking statement.
Actual results may differ materially from those expressed in these forward looking statements.
For more information please refer to the risk factors discussed in documents filed from time to time with the FCC, including the company's latest annual report on Form 10-Q .
[noise] Identive assumes no obligation to update these forward looking statements, which speak as of today.
I will now turn the call over to CEO , Steve Humphreys for his comments.
Sir Please proceed.
Thanks, operator, and thank you all for joining us and especially thanks for joining us for this particular business discussion today.
With the second quarter, our business has turned the corner on virtually every business metric.
We had the first positive quarterly EPS from business operations since 2007.
Positive cash flow from operations and increased cash balance improved working capital accounts and most importantly strong business progress across the board.
Historically, we've consistently had a substantially stronger second half than our first half and the underlying business strength makes us confident that would be the case again this year.
With an expanding revenue line steady or improving gross margins and controlled costs. We expect the progression of earnings and positive cash flow will continue for the balance of the year.
As I'll discuss in more detail later, our software and services revenue grew 47% year over year.
In addition to this absolute dollar growth in software and services. It's now 12% of revenues up as a proportion of our revenues of about 9% a year ago.
Now our recurring revenues, which makes up the majority of our software and services are now consistently a meaningful portion of our revenues currently running at about 8% of revenues. So we're going to start to break out our recurring revenues and track progress there going forward.
In addition to tracking the numbers will report on the business activities that we think are going to expand our recurring revenues, which include the launch of our cloud based subscription services platforms for our freedom velocity and SMB access products.
We've had them in pilots and even generating revenues for a few of our select partners in pre release, but we'll be launching formal releases over the next several weeks and months.
So the overall business strength in gross prospects clearly are broad based and hitting scale to generate profitability and cash flow.
Now looking at the segments premises grew 21% over the quarter a year ago, as we continued to generate growth and take market share.
The strength of our total solution is really proving out now if you look at the top 10 customers four of the top 10 are primarily customers of our three VR video analytics platform. This is up from zero of the top 10, a year ago and remember we acquired three VR over a year and a half ago. So these are all customers who have grown into this top 10 position as part of our total solution not just bought into that position.
The addition of the freedom Liberty and Interphone product lines from by Count have really rounded out our solution. So we're now clearly the only company in the security industry that brings direct customers full access control systems access readers our own access cards video analytics mobility, RF, I'd and smartcard readers to use to Kurt secure credential for data access.
Now I'll go into more details of the competitive advantages and business model advantages. This brings us in the later part of the discussion, but its really showing in our customer mix and in the wins, we're getting as well as the expanding strengths of the financial model. That's created by having our uniquely complete security platform, among our otherwise fragment and often frankly subscale competitors.
On the identity side, our smart card readers grew 11% year over year, partly offset by an expected reduction in access card sales, where we focused on our higher margin Ts cards, and my fair cards and tightened up on our lower margin third party products.
Now you can see the beneficial effect of this in our increased margins for these products.
In line with the identity segment itself, our RF I'd products were up about <unk> percent for the quarter, but our pipeline and recent wins in RF I'd give us great confidence that we will see a return to the 30% to 40% growth range for the second half of the year in RF I'd.
For example, one of the wins during the quarter was a multi year agreement with Schreiner group.
To provide our RF I'd solutions for device level authentication for onetime use medical devices in hospitals.
This win really showed our leadership in I O T solutions and showed that we're winning worldwide.
Ill give some more examples in my later comments, but this is the sort of multi year high value when that underpins our confidence in the expanding growth for RF I'd.
One more RF industry event that I want to highlight from the second quarter is the launch of Mattel's Hot wheels I'd now this puts an NFC RF I'd device in every hot wheels, I'd card, which then creates a unique identity for each car and lets you track your car's performance.
Race remotely against friends and even transfer your car's real world performance into virtual races in games.
This converging of the physical and digital World is we've been positioning our business for and Hot wheels. I'd is really a great example of leading companies deploying exactly the vision we have had.
Just as I mentioned companies in the physical security space are adopting more and more of our complete digital software defined platform in the premises segment, we're seeing leading companies in the RF I'd space adopting our vision for where that technology can take their products and their experiences and their engagement with our customers and therefore their monetization of their business model.
So you can see how our second quarter results showed the inflection point weve reach for our business.
This is because the scale, we've reached as well as the underlying business momentum and entrenched competitive advantages we have.
This is why I said at the beginning I was especially looking forward to this business discussion today.
We think we're at the point of a profitable positive cash flow competitively defensible and long term growth business opportunity as our entire industry transforms. We think this is going to be a multi year transformation that we're at the front desk and the second quarter results really reflect our position at the front of the cycle and our establishment of a leveraged business model right now that that transformation is hitting.
Overall, the second quarter really showed or our momentum and business model as well as how we've controlled costs done accretive acquisitions and positioned ourselves to win from our industry's transformation.
So after Sandra goes through the financial highlights I'll go into some more of our business execution industry dynamics and the outlook for the rest of the year. So let me turn this over to Sandra now.
Thanks, Steve before we dive into our Q2 financials here are a few key metrics that we think are important and analyzing the progress and performance of our business.
The first one is growth as represented by our second quarter 2019 revenue, which is up 10% compared to the second quarter 2018.
Organic and inorganic growth.
Drove the increase.
This brings our first half 2019 growth rate to 13%.
Over the first half 2018, and our trailing 12 month growth rate to 21%. It's also important to note that our Standalone software and services business has increasingly become a bigger component of our revenue, enabling us not only to expand on our growth, but become more consistent and our results and drive higher margins as well. This part of our business grew to 12% in the current quarter, 13% on a trailing 12 month basis, and a 417 basis point increase over the prior trailing 12 month period.
Our GAAP and non-GAAP gross profit margins have steadily increased over comparable periods based on our stronger sales of higher value add solutions.
With the second quarter, 2019, and trailing 12 months non-GAAP adjusted profit margins steady at 46%.
Up 482 basis points over the prior prior to a trailing 12 month period.
In addition, based on our strong growth profile shift to higher margin mix and consistent Opex management. This will be the 12 straight positive non-GAAP adjusted EBITDA quarter in a row.
This quarter, our trailing 12 month period, non-GAAP adjusted EBITDA margin hit 10%.
Over double our comparable trailing 12 month.
In addition, we delivered our first quarter of positive EPS.
Since the fourth quarter of 2007 with the exception of Q4 2012, where the company recorded a GAAP net income of zero point $2 million as a result of a nonrecurring 1.4 million benefit for income taxes, mainly related to impairment charges taken earlier in 2012.
We are also highlighting our second consecutive quarter of generating positive free cash flow a key metric in our ability to operate the company efficiently.
And generate additional cash to provide optionality for company grow.
Our next slide our revenue in the second quarter was $22.2 million.
A 10% increase compared with $20.3 million in the second quarter of 2018.
And a 14% sequential increase compared with $19.5 million in the first quarter of 2019.
Our premises segment generated 48% of our total second quarter 2019 revenue or $10.7 million.
An increase of 21% from the second quarter 2018, and an increase of 14% from the first quarter of 2019.
Total first half revenue generated a 23% increase.
From the first half of 2018.
Comparative quarterly increase was primarily driven by sales of freedom Liberty and Nfone mesh products and services. Following the acquisition of account in January 2019.
Higher sales of video technology, and analytics software products and related support services as well as higher sales of physical access control solutions and software sales.
The quarterly sequential increase was primarily attributable to higher physical access control solutions as well as higher software sales.
Revenue from our identity products, which includes the sale of physical access credentials smart card readers reader modules transponder and mobile security products was 11.6 million in the second quarter 2019, or 52% of our total revenue.
This increase this represents an increase of 1% from $11.5 million in the second quarter of 2018, and an increase of 13% from $10.2 million in the first quarter of 2019.
The first half total revenue generated a 6% increase from the first half 2018.
The comparative quarterly increase was driven primarily by sales on all products offset by a reduction in revenue from our lower margin access cards segment as we discussed in prior periods.
The shift in access cards as you will see actually contributed to higher gross margin rate and more absolute GAAP gross margin dollars for the segment.
Versus comparable quarter 2018.
The sequential quarterly increase was primarily due to higher sales of smart card readers access cards and transponder products. This increase was partially offset.
By and large bulk order of mobile security leaders to the US Navy reserve in the first quarter of 2019.
Now turning to our GAAP, our gross margin our GAAP gross profit margin was 44% in the second quarter of 2019.
Compared with 45% in the first quarter of 2019 and 40% in the second quarter of 2018.
Our buy segment, our GAAP gross profit margins continued to be strong and stable.
Promises.
At 56% Q2 2019 versus 47%.
In the prior quarter, where we had previously disclosed a nonrecurring charge related to inventory valuation.
And 55% in the comparable quarter of 2018.
Identity at 34% in Q4 2019.
Versus 42% sequentially, where we previously disclosed on a nonrecurring bulk shipment of Thursday software solutions, and 2019 and 29%.
Comparable in Q2 of 2018.
On a non-GAAP basis, excluding certain non cash items, our gross profit margin was 46% in the first and second quarters of 2019, compared with 42% in the comparable quarter.
Second quarter 2018.
The comparative increase in both GAAP and non-GAAP gross profit margins was primarily attributable to product mix.
If we turn to the full income statement for the earnings release, our GAAP net income attributable to Identive Inc. for the second quarter 2019 was zero point $4 million compared with a net losses zero point $8 million in the first quarter 2019.
And a net loss of $2.7 million in the second quarter of 2018.
We are recognizing the dividends on the series B preferred stock quarterly.
Which reduces the net income attributable to common stockholders, bringing it to zero point $2 million or positive ones and one cents per share compared with the second quarter 2018 loss of 18 cents per share.
We have provided here and full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release.
There are a few items worth noting at this point.
Interest expense is lower at approximately zero point $2 million for the second quarter of 2019, compared with zero point $3 million for the first quarter of 2019, and zero point $5 million for the second quarter of 2018 noncash stock based compensation remains at approximately zero point $7 million in the first and second quarters of 2019, compared with zero point $6 million for the second quarter of 2018.
Depreciation and amortization increased to approximately zero point $9 million for the first and second quarters of 2019, compared with zero point $8 million for the second quarter of 2018. This increase was primarily related to the amortization of acquired intangible assets associated with the acquisition of Thursday and by count assets.
Now moving to our operating expense management, which is included in the next graphic on the webcast presentation.
Underlying the continued management of non-GAAP operating expenses as a percentage of revenue is a relatively flat expense base, which we have managed through normal seasonality and multiple acquisition.
For the second quarter of 2019 per our earnings release, our total GAAP operating expenses were $9.1 million comparable with the first quarter 2019, and a decrease of zero point $1 million as compared with the second quarter 2018, our total non-GAAP operating expenses adjusted to exclude restructuring and severance costs and certain noncash items normally excluded from our non-GAAP results.
Such as stock based compensation depreciation and amortization as well as additional non-GAAP items, consisting of acquisition related transaction costs were flat at $7.8 million in the second quarter of 2019, and 2018 as compared with $7.9 million in the first quarter 2019. The graph shows the continued integration and leverage we are achieving.
With delivering topline growth.
And steady operating expenses.
On a non-GAAP basis, our R&D expenses for the second quarter 2019 were $1.9 million compared with $1.8 million in the first quarter of 2019 and $1.6 million in the second quarter 2018, representing 9% of total revenue.
non-GAAP sales and marketing were $4.1 million in the second quarter of 2019, compared with $3.9 million in the first quarter 2019, and $3.8 million in the second quarter 2018, representing 18% of total revenue.
And lastly, our non-GAAP DNA expenses for second quarter, 2019, or $1.9 million compared with $2.2 million in the first quarter 2019, and $2.4 million in the second quarter 2018, representing 8% of total revenue.
Bringing all the pieces back together, given our strong growth profile and ongoing cost management, our non-GAAP adjusted EBITDA gain was approximately $2.4 million in the second quarter of 2019, two times the $1.2 million in the first quarter of 2019, and three and a half times, the zero point $7 million in comparable quarter in 2018.
We believe that our business model is positioned to continue to accelerate towards generating positive and profitable growth.
Now if I could turn to the balance sheet, we will be comparing our position at June 2019 to the position one quarter ago at March 2019, and the prior quarter ended June 2018.
Cash at June 2019 was $11.1 million compared with $8.9 million at March 2019.
The 2.1 million net increase in cash for the quarter was primarily comprised of a source of 2.1 million cash driven by our net income excluding noncash items.
A 1.1 million cash used in operating assets and liabilities.
With the Diminimus amount of capital expenditures, our free cash flow generated was zero point $9 million.
This trend reinforces our ability to effectively run the company and generate cash for future uses while retaining excess availability on the line of credit of up to $20 million if needed for spread capacity.
Under financing activities, we had $1.2 million net cash generated by a $1.4 million net increase in borrowings under our east West Bank revolver, offset by 0.2 million tax payments related to the RSU releases.
And lastly, there was a small 0.1 million impact of foreign currency fluctuations.
In our 10-Q filings, we will be providing a full reconciliation of the quarter and cash flows for completeness. We have included the full reconciliation of non-GAAP adjusted results to GAAP and the full balance sheet for the earnings release in the appendix.
In the context of our target business model, we've delivered what we set out to do.
Grow and achieve non-GAAP adjusted EBITDA profitability for 12 quarters in a row.
And we achieved net income profitability for our stockholders ahead of expectations and for the first time since quarter four of 2007 with the exception of Q4 2012, when the company recorded GAAP net income of zero point $2 million, which was a result of a nonrecurring 1.4 million benefit for income tax or let mainly related to the impairment charges taken earlier in 2012.
As we head into the third quarter 2019, we expect to exhibit many of our target metrics within select quarters of 2019.
Today, we are reconfirming guidance for the consolidated results of the company for fiscal year 2019.
With that I will conclude the financial discussion and pass it back to Steve.
Thanks, Andrew.
As you can hear from the financial results and from my opening comments, we're at the inflection point for profitability and sustained positive cash flow.
Now the question any investor will have is how defensible as our position have leveraged and scalable and what's the size of the opportunity.
I'd like to focus on defensibility here, because that's where long term growth and an attractive business model it come from.
On the other two points, though we've demonstrated the leverage we get and our ability to control costs, while driving growth and expanding margins.
And anyone who follows and invest in our industry knows the massive scale of the market opportunity as the entire physical security World transforms and security becomes digital software defined and irrelevant for every individual place every person and everything.
So back to Defensibility why do we think we win.
What's our defensible competitive advantage.
The answer is the total solution platform, we've built and our ability to deploy it on conventional infrastructure in hybrid modes and as a fully cloud based mobile enabled software defined solutions.
Customers know they need to get from here to there they want all the benefits, but they need to solve today's problems today position for Tomorrow's solutions and do it with a 100% reliability throughout the transformation.
Our strategy is to provide all the key components of the security solutions and to make sure they work seamlessly.
But also leverage standards and integrations, so we can manage heterogeneous environments.
This last part is really critical to integrate with the customer's physical security and with their existing infrastructure.
This is a major change security like video surveillance access control key cards and all the rest of the security infrastructure has stood to decide mostly making sure. It didnt touch the ITC and broader organizations infrastructure.
Those days are gone and that transition is the huge disruption in the industry that were really best positioned to take advantage of.
So why do I keep saying we are best positioned.
Think about our product line.
From freedom and Liberty for pure IP biotech based access control through our Hirsch velocity access control platform, both enterprise level and cloud enabled.
Our touch secure range of access readers Rts cards with compatibility across every card standard our three VR video analytics are interphone entry and audio intercom systems. Our series B mobility applications are secure log in smart card readers and our secure our if I devices.
Every customer uses virtually every one of these capabilities.
Another usually cobbled together from a half dozen vendors.
The result is a very expensive to managed system very hard to maintain security protocols and no leverage from the huge investments they've already made in their own information infrastructure.
Our vision is a seamlessly interrupt rating highly manageable all with secure platform that leverages, an augment the existing physical security infrastructures.
From the product range, we put together we've got the solutions already.
So let me try to make this concrete.
Think about where you are right now whether you're in an office an airport or anywhere else you will always see those door readers, let you into a door.
Theres always an access system behind those readers to open the doors or keep unlocked.
You probably used a key card to get into one of those doors and you probably see video cameras around you or you know there is some are nearby with analytics behind them.
If you came into the building you might have used an intercom building system to get in if you it's not your building.
If you're part of a progressive organization, you'll probably have mobility solutions to get into the doors of mobile apps and to get to your critical data from your phone.
And wherever you are if you look closely enough, you'll see RF I'd devices connected hundreds of things around you and securing them.
For example, access cards themselves, which I mentioned earlier as well as those door readers, they're all RF I'd devices.
So the point is virtually every customer needs every one of our products.
There is a buyer for all the components of the infrastructure I just ran down.
But right now if they buy from any of our competitors. They have to go to multiple ones and then they have to manage multiple ones.
Our industry grew up so proprietary so silos that no other vendor that we know of provides all the parts of the solutions I just described which we have.
And yet when an industry is getting so much more complicated customers want solutions that just work very apple like.
At a minimum if you're selling a customer one part of the solution. If you have other parts of it you always get a look from your customers for your other products.
Trusted relationships are so precious that we all want to buy more from the people we already trust so for selling our velocity freedom Nfone smartcard readers Thursday mobility, three be our analytics Ts access readers or anything else the customers already using any one of our products will give serious consideration to our other products.
So let me give a quick recent example of this in our own marketplace. We were recently involved in a deal with the U.S. Army for their new health clinic, which will be part of the US Army Medical command.
The Army is looking for one company to provide a complete physical access control systems solution for 100 door clinic.
They decided to deploy our hirsch velocity software for security management.
Our MX edge controllers, and our Fi Cam certified Ts government leaders.
Now they're planning future security infrastructure to include our three VR Vms analytic solution for channel surveillance.
Now. Additionally, this the DRD facility. So our smartcard readers are already being used for secure log in to the laptops and desktops.
Now, we haven't gotten Ts cards, and Interphone systems adopted into this account yet, but you can be sure since we're on the inside already as a partner for so much of the solution will have the opportunity to keep on sharing the benefits of our mobility and identity solutions and the intercom solutions.
Also as they think about transforming their infrastructure to cloud based mobile enabled software defined either on a systems or services basis, we're there with velocity cloud freedom and freedom cloud, our mobile and web apps and these are all solutions, they can migrate to seamlessly and at the pace and budget they want.
So you can see how our total Ranger solutions gives us huge advantage.
This is what we've been building and are now seeing adoption across all of our verticals.
I could give you a dozen examples like this that are well underway and several dozen that were lining up for demonstrations of the one identive solution.
Most importantly customers are asking us what additional parts of their needs. We can help them with and we have the total solution ready for them, which they can then adopt when where and with what budget they choose.
We'll be showcasing our entire suite of solutions at the Global Security Exchange Conference next month.
That you might know GSX by its former name as is which is one of the biggest events in our industry like IC West, which was a huge showcase for us the significant majority of customers that attend aren't just interested in one or two of our solutions, but virtually all of them.
Especially now that we've built out the portfolio with freedom Liberty Nfone and some of our recent product launches, we are getting even stronger traction than we had when we showcased the beginning of the platform last year.
So customers are really starting to see us as the one stop shop trusted provider of Aiotv platforms for all things identity and physical security across access video analytics RF I'd mobility you name it.
And their actions are starting to show up in our financial results.
We're seeing our vision of cloud based software centric and mobile enabled digital access becoming a solution customers are demanding.
When they investigate vendors capabilities. They find that we really are the only company. They can turn to for control over the total solution and clean integration with their infrastructure.
So the second quarter was a major step forward for Identive as we continued our topline growth and margin expansion, while reaching GAAP profitability on a shareholder level for the first time in over a decade.
More importantly, frankly is the integration of freedom Liberty in Nfone, along with a growing cross selling pipeline and customer adoption that were seeing.
This is the foundation for our growth going forward and it's also the core reason our software and services grew that 47% rate and that our customers are now comfortable committing to recurring revenues in their relationships with us.
As we drive our cloud subscription services more aggressively going forward and as more of the total solution becomes available as a service. We think we'll see continued strength in recurring revenues software and services.
The growth in recurring revenues are critical in themselves, but now in particular, they really drive our business model as we are reaching scale driving margins and growing our profitability.
Q2 is a great example of these factors coming together.
We continue to see a long runway for growth margin expansion and EPS accretion as we move closer to our target model.
Now about the target model as you might recall, we move past what we used to have as our near term model passed our medium term model and now we're on a clear path to what used to be our long term target model and now it's just our target model, but as you can see with the numbers we are rapidly converging that model.
So from a business perspective, we have the most complete solution the progressive architecture, the customer base and customers demanding complete integrated platforms, all of which are driving our business forward.
As a result, we think we're on track to deliver our financial guidance for the year as Andrew mentioned.
Particularly with the government's fiscal year end this quarter, we think our Hirsch Ts reader Thursday, and smart card reader products are positioned for near term strength.
The increasing endorsement across all of our verticals of these products as well as our freedom access cards, RF I'd and three VR video analytics gives us strong momentum in both our business segments for the rest of the year.
So to wrap up you can see the solid competitive advantages, we have built with virtually all of our verticals undergoing a massive transformation. This the convergence of physical and logical security.
We have strengthened our people products technology and channel to aggressively go. After these opportunities the results are showing across every metric.
You can see the progress of our strategy, helping us get better visibility through recurring revenues scale, the business accelerate our growth and drive higher profitability.
So with that I will turn it over to the operator to open up the call for questions.
Operator.
Thank you.
We will now take questions to join the question queue. You May Press Star then one on your telephone keypad.
You will hear a tone and knowledge in your question.
If you are using a speakerphone please pick up your handset before pressing any Keith.
So with that all your question. Please press Star then too.
We will pause for a moment as callers join the queue.
Our first question is from Mike Latimore with Northland Capital markets. Please go ahead.
Craig Congratulations on an excellent quarter there.
Thanks, Mike.
Thank you just.
Thinking about the second half of the year.
Sometimes your fourth quarter has been higher than your third time third higher than fourth how are you thinking about of this year.
We think there will be a little bit of our usual seasonality with government year end, so third would be a little higher than fourth but.
Fairly fairly close because fourth should be strong, particularly with the RF I'd pipeline we've got.
Great great.
And.
In terms of the.
Yeah, you have to sort of a full product portfolio now.
One quick one identive.
So sometimes when you try to sell everything to a customer the sales cycle can flow, but it sounds like in the like with healthcare example, that you're able to kind of sequencing, but how should we think about I guess, one sales cycle selling kind of the full portfolio into what is kind of the uplift per customer in terms of value. If you can kind of tell everything.
Yes really good question.
And this is where the fragmentation of the market kind of helps US is typically the customer is really targeting to buy one part of the solution.
Like like like the army they were looking for access control.
And then with access control came the readers and Thats, great and then we were able to position three VR as their next deployment phase. So it didnt slow down because the contract officer was with letting the RF fiber access control. So it doesn't seem to be slowing things down.
And you're right, we want to make sure we don't end up turning it into boil the ocean sales activity that is get your rifle shot.
Have the rest of the portfolio would you all need but usually they're turning over parts of the infrastructure a different times, it's rare that there will be turning over access and video and I'd cards and.
And cyber access at the same time, so we think we can spread it out that way and then in terms of the the value of the customer single customer.
It's hard to quantify but.
You know the goals in the profiles look like you know instead of a customer being worth anywhere from half a million to a couple of million dollars, we should be able to double the value of each customer adds of that magnitude.
Okay great.
And then just last question.
You talked about I think Hurst Ts reader RF I'd.
The strength in the second half in those areas any other areas that you are seeing strength or weakness in the second half.
So so.
Hersha Ts readers and.
And third is to be particularly because of the government exposure.
Freedom.
With more of the commercial fourth quarter strength that you see there as well as RF I'd with both third and fourth quarter Thats much more pipeline, driven then than any particular seasonality. So.
There is there is there is pipeline strength across the board, but the first couple of because of the the federal government's I would add and of course, the smartcard readers are generally strong in the third quarter because of the the Deca Tech readers cycle.
Great I'll begin my I'll have Mike had one of those Mattel I'd cards for Christmas This year.
They are super cool, if you havent seen them on Youtube.
They are they're very cool.
Okay.
Thanks, a lot.
Thanks.
Our next question is from Jeff Kessler with Imperial capital. Please go ahead.
Thank you.
With regard to your defensible position you do have one major from one major competitor out there, who probably would take issue with the but they made but they may be lagging in a couple of areas I'm just wondering.
Are you finding that.
That the the end users are talking to you.
In a different way than they are talking to your to your competitor in what I'm trying to get to is.
Are you be are you able to show your value proposition.
To the extent that.
You are convincing customers to use you and not a larger company.
Yes, so so actually that I'd love to hear you think good who you think might have the the full range we have.
But.
There will be the competitor to accompany I'm about to ask you about a mix so.
Okay fair enough fair enough.
Because we really don't see somebody who has it all even HIV who is the closest.
They don't video solution, then everybody needs video and they don't really have an access control solution, they got panels, and a mercury panels, but but but they don't have the full solution in a lot of spaces.
So anyway back to your question, yes customers are turning to us for two reasons.
One is the full solution and it's getting so complicated in particular when you are trying to maintain your security protocols, you've got to manage all of your endpoint devices and all of your attack surfaces and if you got five vendors that you're trying to run patches outboard, it's much more complicated than if they go to us and say okay have all the patches for the latest warmer virus has been pushed out.
And then the other aspect is we are we are progressive in our architecture, we aren't trying to tie them into a panel based hardware system.
Yes, and no path forward.
We've got.
Software enabled architectures, we've got edge devices.
We've got to cloud solutions, and we are getting to the point.
Of having fully containerized apps that can even run on infrastructure. So they see the direction, we're going we're not trying to tie them up.
Yes, and we're not beholden to.
Making numbers because we're part of some multinational company, we're trying to drive the industry and grow our business.
And that's our absolute focus and I think customers see that in fact I was just before this call I was at a major tech customer here in.
Here in the Silicon Valley and.
They they have exactly that vision and exactly that problem with some of their legacy infrastructure.
Do you see we're finally seeing the end of proprietary technologies and the and the beginning of a of a world in which everything has to be has to be open for for both size and even because it does cut down on margins in the view of some people.
But it it obviously helps the company like you. If you if you can offer on multi a multi multiplicity of solutions.
So I, absolutely see that path and its and its irreversible then it's going to happen.
Yes to be clear, we're pragmatic and this is very similar to when telephony went from pbxs to IP infrastructure and now to Twilio type infrastructure. So that was the 30 year process I think it's going to be a 10 year process before you've got more than half. The revenues that are that are of the more software defined architecture takes a long time to change things, but I think everybody who's investing capital. These days any major corporation doing an analysis.
They are already thinking about this in their planning for the future, but theres still stuck with yes, but but today I've got 10000 of these panels deployed worldwide and I cant rip them all out, but they're all talking to us about how can we migrate and how we can get from here to there.
Okay. One final question about.
A couple of months ago, you announced the integration or at least the lesion or and you announced an integration of some of the of some of the slate.
Of some of the slag wireless locks today that they have that they have out there.
Does this does this open up a because since leg is so involved in in spec writing and architects.
Does this open up a new market to you that.
That you had been perhaps not been able to capture before.
Yes, there's two aspects to it and flag has been.
Allegion has been a tremendous partner both the individual people and the team that technology and two aspects. One is the partnership they've got almost 300 salespeople for wireless lock infrastructure, and they're very supportive and proactive that way and the other part is wireless more and more is going to go wireless and as their new wireless protocols that that really pervade, we're putting more wireless capabilities into all of our infrastructure, whether its edge devices or the door readers.
And I think they are they're at the head of the curve as well.
This whole information transformation wireless is going to be a fundamental part of it of course the city to wireless you've got to have the security right you really got to have PK I infrastructure, because that's the only way.
To secure wireless infrastructure properly so.
It's been a really good partnership.
If you'll permit me to just one last question.
And I promise I'll get off.
They had all of these shows the issue that you discussed whether it's well whether it's as is or whether its limited size C.
Companies have been talking about integration comes with a lot of different products have been talking about integration and unification now for about four or five years.
And really there's still there's still some some clues crude units with.
Being able to put these things together there the again, mostly as a loss or very large companies with large product portfolios that they're trying to convince people that.
They can put together that an integrator can put it in for them and you are saying that you believe that your product your product and services capabilities are are fully unified and integrated at this point.
There is always more you can do in terms of integration for sure.
Across the range I mean, I'd I'd love to see more of our RF I'd technology integrated into our security platform and infrastructure and we're not that far along on that front.
But when you talk about video and access.
And and obviously readers and cards.
And even cyber security integrated.
It really is quite integrated and one of the important integration parts is 80 integration active directory integration right. Its with the infrastructure that you got to be seamless with and and again I was just having this conversation to the customer this morning that it's not.
Or download a bunch of data from a d. and then bounce against that data and then upload another image of it it's actually interact with the infrastructure of.
Of the organization, you're working with on a transaction by transaction basis, and then you've got an integrated system and that part we do have a net and that in part we have been built from the beginning so.
Yes, I don't want to overstate it because there is always a lot of integration to do but we really are quite far along there and when our corporate customers in particular look at it they're impressed that it's an integrated architecture approach, we've been taking versus the silo that just kind of reaches out and leverages. Thanks.
Okay, great. Thank you very much and congratulations on getting profitable. Thank you.
All right. Thanks, a lot Jeff.
Our next question is from they held chalk sheet with Maxim Group. Please go ahead.
Yes, Thank you and.
Thanks to the results thanks for the.
Color there regarding the components of the 10% year over year growth.
Both comes from organic and inorganic.
I guess.
One of the things that you describe describe season was them.
No more qualitative way that youre seeing strong evidence.
Of.
A good return on the acquisitions that have been made by signing that.
Some of your three VR and by count customers have grown into a top 10 customer.
Right and any way to provide a little bit more of a quantitative assessment as far as what has been the actual return that youve gotten on these investments.
I would imagine that might be quite material given that.
These were not large acquisitions in terms of dollar amounts.
Yes, it's hard to quantify them, specifically, but you know, but but in terms of the nature that they've been very positive. Yeah. You just need to look at the acquisition prices we paid for each.
You know kind of in that five ish, plus or minus million range for each of them.
And three VR you can clearly see the contribution there that that they've already returned.
A multiple of that on the top line.
And and similarly with Thursby, we're right in the fourth quarter in the first quarter, we had pretty substantial.
Contracts multimillion dollar revenue.
Recognition coming through.
And by Count.
It has it has been performing above our expectations already heard me talk about freedom Liberty Nfone.
So so I'm not trying to avoid it it's just very hard to quantify it specifically.
But the performance of the businesses themselves and the cross selling opportunities that each of them have brought.
And the credibility and scale that it gives us with their customers is actually beyond what.
Would we thought they'd contribute they've they've really been.
Really been winters, I mean execution is hard and we certainly had plenty of challenges and lots of working with people at an individual level.
But now that we've got a few quarters behind our belt for all of them by grant being the most recent.
We really see the benefit both in just the raw business they brought in but in the complete solution and the cross selling.
Okay, Great and then on the software and services, maintaining very high growth rates here.
Looks like there is some seasonality, though as I believe it was down to Q.
Is that correct can be what's the driver of that seasonality and then how should we think about the seasonality going forward.
So actually.
The.
Standalone software and services as a percentage of revenue in Q2 was down on a percentage of revenue, but thats just because our revenue went from 19.5 million to 22.2, so on an absolute basis. It's growing it's just a smaller percentage of the total for that as we are ramping through the second half of the year.
And then in terms of your seasonality question, yes, there really isn't seasonality in it. It just we're still small enough you know at that 20 to 25 million a quarter that that a couple of deals can can drive the absolute dollars in any given quarter, but.
It it's we think it's growing.
On a on a sequential basis overall and as a presented as a portion of our business.
Okay great.
And then my last question is.
Let's see.
I was wondering are any within the quarter poses for that.
Well, we are a tech company. So we always have.
Some back ending to it.
And the third quarter, there's always some backend need because the federal government year end is the end of the quarter and you know it is what it is so it's always back ended somewhat.
On the other hand, we got a lot of visibility going into the quarter, we end up.
Pretty close to where we expect to end up because we've got long term pipe pipeline and contracts.
We've got as I mentioned, the recurring revenue portion thats growing.
And then we have.
Long term programs and projects as we talked about the won't be a contract per se, but we know a government agency for example is rolling out.
Several hundred sites over several quarters. So we got a lot of visibility there so.
You know it's.
It's certainly a bit back ended.
But that doesnt reduce our rep, our visibility into the quarter.
Well I guess I should ask the question how is linearity in the quarter relative to a year ago relative to what a typical Q2 represents.
Good question I don't I don't know that it certainly wasn't out of the ordinary if that's what you're getting at has it flattened out a lot over the period.
You know over the years.
I wouldn't say so.
It's more driven by sometimes we'll have a larger deal come in sooner.
And we will fulfill it.
But.
Yes, the linear he hasn't changed too much I've asked about I'm trying to make sure I am I am I answering the question you're trying to get at.
Yes, I think you have.
Ill come out.
What I'm actually trying to get out now so dsos was.
Up year over year accounts receivable was up 7% to 70% year over year versus revenue being up 10% year over year that being said I think that your Q2 18 was a relatively low dsos. So dust oils firming up that question to understand this it was indeed, if Q2 18 was indeed.
Little bit better Dsos for whatever reason there might have been weather was linearity within the quarter or related to some how some of the deals basically time down to the payables terms associated with maybe some larger deals.
Yes, we've had I'd have to go back and then Sanders flipping back a little bit right now we'd have to go back and look at it that might have been a quarter in which we had a big reader deal.
Early in the quarter, but I'm, we'll look at it and we'll we'll get you some some more data.
Okay Sentry C thats it from me no.
Got you just so.
We have the Dsos. So Q2 2018 was 55 days.
And Q2 2019 was.
58 days, so it's not shifted materially.
We are seeing some longer term as we get into these multi year agreements or we are in with these larger enterprises.
That we've talked about.
That's driving a little bit of AR aging that's in receivables, but we haven't seen a significant shift in DSL.
Okay, great. Thank you.
Our next question is from William Gibson with Roth Capital Partners. Please go ahead.
Thank you Steve you.
Gave us guidance that our fiveg picks up 30%, 40% in the second half now was that on orders already booked it sounded like it was.
So that we see.
Large orders and now.
In the second half is that additive to that.
It's a bit of both so I mentioned the shrine Irwin and there have been a couple of others that are multi year contracts that that are providing the base of that and then its pipeline that.
Yes adds more to it but yes because of the lead times is an RF I'd.
Most of it has to be either under contract or very close if it's if it's going to be hitting in.
The third and fourth quarter.
Okay, and secondly, could you give us a little color on the video analytics business and I'm speaking of a competitively priced while we've got a lot of relatively small competitors out there.
Are you picking up share from cross selling aurs.
Just new orders coming in that area.
Yeah. It's a good question, it's a bit of both our approach to analytics with three VR with our event cards, whereby we pre index. The medidata out of the camera and so you don't have to ship around as much data.
It's a lot lower costs to store, which people are really starting to run into as a problem, especially if they're storing it up on the cloud and they're getting charged for it.
And it's a lot faster to do the case management aspect of it. So the case management positioning we've got for three VR and the managing the data, which means you don't have to store as much which means is lower cost to operate.
Our really advantages that are resonating, we're seeing that in cross selling.
And and we're seeing that in in Greenfield sales were.
Especially the the case management when an event happens.
We're looking at some sales into some major sports venues and if something happens in a stadium they want to immediately identify it grabbed the video rapid injury case get it over to law enforcement.
And three VR is really designed specifically for that so we're seeing some advantages there there is some cooler with your machine learning all singing all dancing facial recognition.
But but the real use cases that that real security people have to deal with is the one I just described and and Thats were particularly good at and then the last thing of course is the the made in America benefits. This with some cross selling in a lot of our federal government and regulated industry customers.
Thank you.
Our next question is from Robert Hello, with KC capital. Please go ahead.
Hi, guys. Thanks for taking my question I know, we're running up on an hour, but great results and.
My My main question is around.
The defense information systems.
Agency in their release of the strategic plan recently.
And I think that was posted in early July about a week later there was an article detailing that I think the Navy has decided to rollout a customized version of that Theres be sub rose said to there.
For the Navy reserve is that Yep.
Yes can you guys just comment on that is that how should we think about that rolling out.
Over the next.
For the.
Six quarters and.
Is that is that for all the reservists or or just summer.
Any color on that and then.
And then to the extent you have any color on on the other departments within the DRD that'd be really helpful as well thanks.
Yes.
Sure Rob Thanks for the question. So yes. The Navy reserves has rolled out about half of their 60000 reservists.
So so there is there is still activity there been also.
We're looking at additional capabilities.
Which are which you were asking about is the Rts app the ready to serve App, which if you.
Anybody googles that Theres some great you tubes about how our two s. works.
Which is basically theres be software, we designed the our two s. app and and designed into the reserves specs.
And so they have their you why in splash screens on it.
And of course, there their E mail and web sites. They one of the reserve is to access.
So that's really just the beginning.
What what the D. ODC Io is assessing right now, which which this as part of his.
What should be the mobility architecture going forward and.
Third is b and related apps like our two S.
Are the only ones that are currently being deployed in volume for pure B Y on the web and email access and so the various users of it of course are putting up fourth as the right architecture for overall doesn't DMD.
And there is.
I certainly don't want to go into specific departments or anything but there are several departments is assessing it.
And we already disclosed that the air force.
Hi has deployed a similar number two reserves across various air force wings and they've consumed.
All was 31000 of the licenses.
The data initially contracted for so.
We think it's a marketplace is going to have a lot of a lot of runway for us.
That's a really great to hear.
And then.
So then.
You also mentioned earlier in the call that the three VR backlog.
Well you had mentioned that there are several customers top 10 customers that are now from the three that we are in that.
I think you mentioned that the backlog for the second half.
Is looking healthy can you just give us a little.
Okay can you contextualize those comments around where you're seeing success and how we should think about that.
Evolving over the back half of the year.
So in terms of three VR is you've got to write that customers are coming into our top 10, which means of course, they're growing.
Substantially I don't think we specifically comment on backlog.
Related to specific product lines.
This is Andrew and I don't think it was more about.
The comfort level going into the strong third and fourth yes exactly.
Right. That's what we did exactly what we did comment on is our second half.
Is is almost always stronger than our first half and we certainly don't see anything that would cause us to feel differently about that we feel we feel like we'll have our our typically strong second half and maybe even a little bit stronger than the normal because we're we're going into it with strength across the board and a fair amount of cross selling opportunities.
I think that was the that was the extent of how much we commented externally on about but I'm happy to go and any other aspects of that you want Rob.
Great.
Thats helpful. And then and then my last question then I'll sign off.
So you did mention that.
From an R&D and product pipeline perspective that you guys are still pursuing the cloud products.
I think a SaaS product focus on SMB.
Can you just talk about the timeline to roll that out and then.
What channels, you think you'll start pushing that out into.
And kind of how you view the uptake potential within the market and thank you, thanks, again and great quarter.
Okay, Yes, thanks, Rob and enters a couple aspects to that question. So we actually already are operating in pilot and some of our dealers are actually taking on revenue on a SaaS basis.
For our for our access control products.
And we'll be rolling that out, but I think I said over the next few weeks and months. So it's not a long period of time, it's and it's not a technology issue at this point as the go to market issue 'cause some dealers want to have it operated.
On their cloud and as their service branded as that dealers servers was that's great. We're happy to enable them to do that all day long others want to have it done as an Identiv service, but they also don't want to lose control of the customer some of our competitors have gone to cloud, notably Bravo.
Thanks, very much dealers now its our customer and Thats really created friction in adoption and so we're going to go to market both ways. If a dealer wants us to manage the customers. That's great. If they wanted to manage the customers that is fine and indeed, if they want to.
Put up their own branding on our cloud service, we are happy to do that as well so.
That's what will be phased out over the next.
Several months is as we launch various go to markets for our cloud architecture, and then we're going to start out with access with velocity and freedom.
And then drive video cloud and then of course the converged solution.
Our next question is a follow up from Mike Latimore with Northland Capital markets. Please go ahead.
Great well that was really my question on international demand by cloud so.
I guess.
Just to be clear the.
<unk> the end target, it's a small business is that right or is it more varied than that.
Oh, yeah, good clarification, no more very varied than that definitely in fact.
By the.
The most.
Progressive movers were seeing are in the medium and larger enterprises.
So.
So what I mentioned SMB.
We actually repositioning as specific product for SMB.
To target that environment for that for the four to seven door.
And two to five camera environment.
But but our early wins because it probably is because the nature of our customer base and our dealer channel that deals with larger organizations, we tend to be exposed to that first.
Okay got it and then.
To the extent there hardware involved here in the total solution would you recognize that.
As a onetime upfront sale when you sell cloud or would would have good bundled into the cloud itself for an overall subscription fee.
Yes, very good question and it goes back to my comment on go to market.
Some customers and dealers want to do it on the subscription basis, all the way talk to bottom, which frankly, we like the most.
Because if the frankly, because our hardware lasts for a very long time, and we'd rather get some recurring revenue out of that.
But others dealers for example, they are wrestling with.
You know I do an installation in the system and I got to pay my people and my business model is based on.
Charging a couple of thousand Bucks a door.
For the hardware and for the installation I guess, we'll get the installation of a how do I cover the costs that I used to cover with the income from the hardware and so for those dealers will make it available on a.
Pay for the hardware basis, and then services going forward.
And then for for other dealers you on a pure services basis, we want to go to a pure.
Services, you know no upfront cost.
Adoption, because we think that will be the lowest friction.
But different parts of the market are going to go different ways.
And I know, it's still early but what is the catalyst.
For a customer to go to the cloud I mean, when I think about like the phone system market. You know you have these.
Nine year old Pbxs, and they'll get ready to go to the cloud as their kind of end of life. Those things are they fully amortizing we're depreciate them.
Like what are you seeing as a catalyst to move to the cloud and this kind of market.
As you say with that it's almost always economics of some sort its.
You know my maintenance fees have gotten so high on my hardware guys that that it almost make you know I can shift over to a full cloud and my monthly rates hardly go up or.
My hardware no longer supports the latest windows operating system and patches and so even though it works I've got to transition.
Or.
Yeah.
Weve merged with another company and now we have heterogeneous systems and really going to have to invest in a whole bunch more hardware to have a homogenous system or pull it all out and go to cloud. So there is usually some sort of.
You know transition event that drives them to assess and then they assess buying a whole bunch of hardware most of which is proprietary.
Or going onto a service basis.
Yes, yes.
Thanks.
Thanks, Mike.
Our next question is a follow up from Jeff Kessler with Imperial capital. Please go ahead Mr. just quickly on the same in the same vein. You've just described part of what is going to be your recurring revenue can you just define what you US what you are how do you can you define how you define recurring revenue so that when we talk about it in the future well no. It's part of it's going to be cloud and SaaS related to cloud what other what other items will be will be inside of recurring revenue.
Yes, great Great question, So obviously, it will be SaaS and cloud.
Our software services agreements that typically are three year agreements entered therefore, our predictable recurring.
And our services agreements that are multi year with some of the government agencies and same thing multi year recurring.
We will be in there.
Okay great.
Thank you.
Thank you.
At this time. This concludes the company's question and answer session. If your question was not taken you may contact I didn't this investor relations team had I and C E at Gateway IR Dot com.
Now, let's turn the conference back over to Mr. Humphreys for his closing remarks.
Alright, thanks, very much operator, and thank you all for joining US sorry, we've gone a little bit over the hour here.
But please do join if any of you can.
The Gateway conference, we'll be in San Francisco in the first week of September .
And then at GSX as I mentioned, a couple of times in the second week in September in Chicago, If you want to see all of the Identiv solution and the way we present it we'll have it there.
And then right after that we'll be at the Lake Street Big ideas Conference also in New York.
Thank you for joining US today you may now disconnect. Thank you.
No.