Identiv, Inc. (NASDAQ:INVE) Q1 2024 Earnings Call Transcript May 8, 2024
Identiv, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Welcome to Identiv’s presentation of its First Quarter 2024 Earnings Call. My name is Matthew, and I’ll be your operator this afternoon. Joining us for today’s presentation are the company’s CEO, Steven Humphreys; CFO, Justin Scarpulla; and President, IoT solutions, Kirsten Newquist. [Operator Instructions]. 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 the pending asset sale transaction, future business, and market conditions and opportunities, and future plans and prospects, including with respect to the transaction and Identiv’s post-closing business, is a forward-looking statement.
Actual results may differ materially from those expressed in the forward-looking statements. For more information, please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company’s latest annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, risks related to the asset sale are included in the preliminary proxy statement filed with the SEC on April 30, 2024 and our first-quarter 10-Q once filed and will be included in the definitive proxy statement once filed. Identiv assumes no obligation to update these forward-looking statements, which speak as of today. I’ll now turn the call over to CEO, Steven Humphreys, for his comments. Sir, please proceed.
Steven Humphreys: Thanks, operator, and thank you all for joining us. The first quarter of 2024 was one of the most important in our company’s history. We completed an extensive year-long strategic review and took actions that we think will serve all of our stakeholders very well. We’re divesting assets relating to our security and logical reader products for a cash price of $145 million, generating capital to invest in our IoT business. We also completed a thorough search for a new leader for our IoT business, who will take over as CEO of the remaining Identiv business when the transaction closes. We believe we put Identiv on a path to realize its opportunity to create major value by investing in the growth of a key business that’s increasingly central to the digital transformation of some of the world’s largest industries.
Now that’s a big statement, but we believe it’s accurate for three reasons: the scope of the market opportunity, our competitive advantages, and soon, our access to the capital and the focus and leadership to deliver on the opportunity. We’ll go into details throughout the call. But first, let me outline specifically what steps culminated in and around Q1. We undertook a strategic review of our business starting early last year. We looked at every combination of our business assets, including market opportunities and our competitive positioning with one criterion, what is the highest expected value creation opportunity available to us to deliver to our investors? We looked at divesting each part of our business including divesting all of the business.
We looked at each path for capital formation, value creation, and ROI. We went in market to assess current values and competitive dynamics. We evaluated competitive companies both to assess their strategic directions and the effect on our value creation opportunity and to assess our opportunity to realize near-term value for our assets. In consultation with our largest investor and with our financial advisor, Imperial Capital, we ultimately focused on the actions we announced last month, raised the maximum capital possible to invest in and focus on our specialty IoT business, ensure a strong balance sheet for that business, and bring on highly experienced leadership to direct this investment and navigate the company’s future growth trajectory.
We believe this transaction positions us to build an enduring leading IoT company that’s core to enabling the digital transformation taking place in particular across healthcare, pharmaceuticals, and medical devices, but also a critical enabler in other industry’s digital transformations. In order to secure the investment for the IoT business, one of the requirements was that I join the buyer. So last year, we launched an executive search process to find a world-class leader for our specialty IoT business to take over as CEO when the transaction closes. We needed the best possible leader to take advantage of our unique opportunity to be a linchpin technology provider in the digital transformation we’re targeting. We found that leader in Kista.
Nucryst Pearson is the ideal profile to lead the business to maximize our value creation opportunity. She spent 17 years at Avery Dennison leading their medical business as well as in their smart track RFID business, one of the strongest companies in the space. He deeply understands the key customers influencers across the digital transformation of healthcare, while also knowing intimately the operations of our FID. businesses, she’s a pragmatic and disciplined business person who also seize strategic opportunities to transform industries. She has the rare ability to define a vision and then to build and execute plans to make division happen. We’re convinced she’s the right leader for the business and to realize identified market opportunity.
So Kishore will be speaking more about her background and why he chose to join Identive after the financial review. Now in the interest of time, we won’t go through the details of our strategic assessments, executive recruiting and everything else. So for more details, please review the preliminary proxy statement we filed last week. We put a lot of information into it, including a thorough description of the IoT business going forward as well as the time line and alternatives we assessed and the basis for the Board’s decision to proceed on this path to maximize shareholder value. Today, we’ll focus on Q1 and subsequent events as they relate to our business and future investors need clear visibility on the likelihood to close the transaction and the post close business going forward.
So we’ll focus on those topics. I’ll go through relevant business results in Q1 and the status and outlook for the transaction. And then after Justin’s comments, I’ll turn the call over to Kirsten to discuss the IoT business for near term priorities and long-term vision for the business. So for Q1, our business continued on a solid footing, but there was some effect due to the ramping activity on the transaction and recruiting our future CYO. We manage both activities which involve key management and diligence meetings as well as NCEO. interviews and onboarding. And we couldn’t disclose it at the time. But of course, this was going on in Q4 as well as in Q1. So our overall business performance was consistent despite these distractions, with total revenues within our guidance range at $22.5 million and solid gross margins.
Our GAAP gross margin was 37% and non-GAAP gross margin was 40%. Our highest non-GAAP gross margin since Q3 2020, reflecting margin strength in our Premises segment as well as within identity readers in premises. We also had to contend with the federal government’s continuing resolution budgetary uncertainty. We’ve been pleased with the premises business strength, which we think puts us in a good position to continue strongly into Q2 and for the rest of 2024. Now, notably, software services and recurring revenues grew to 27% of premises revenues in the first quarter. This reflects three other trends we saw in Q1, strong interest in our premise product line cloud as an interest area and nearly all of our new business opportunities and high interest levels in video in the federal space as we deployed demo platforms of velocity vision across three more federal agencies.
We also continue to see growth from our newest integrators from our smaller geographic regions and in particular across K-12 schools, utilities and transportation, especially in airports. Now our identity business, which includes our access card and identity readers, in addition to IoT continued to perform consistently overall, even with your internal demands of recruiting a new leader, our IoT team continued to build our position as a specialty IoT leader with another successful presence in RFID Journal. We also joined the Axia Institute in Michigan State, and we continued our webinar series with session shared with ST Micro and another with NSPNXY. Institute. Next week, we secured a new two year customer contract for a smart home application, and we also shipped another 5 million units to really in Q1.
That was we said on our Q4 earnings call. We expect these to be the last really units for at least a few quarters as they work on producing our Gen three chip. This last batch for really it was produced in or in our new Thailand facility. It demonstrated our ability to rapidly ramp up even very complicated products in Thailand to take advantage of our lower costs there for nearly all of our production over time. Now competitively, as we’ve expected, due to the large capacity build-outs by some companies that we described on prior calls, we’ve seen a couple of companies become aggressive on pricing, and this capacity was added mostly for UHF. products, but some of it can be applied to age of applications. This affects some of our standard lower margin products, but doesn’t affect our more complex specialty IoT devices.
And lastly, our logical access readers within our Identity segment performed very well. Our Fido dual factor security keys, expanded sales and pipeline opportunities, especially in Europe. In the Americas. Our contactless readers are our main growth drivers, including our deployment company-wide across one of the world’s largest online retailers in Q1 and Q2, and this could continue into 2024 with further follow on orders. So returning to our strategic transaction in terms of time line to close, we believe removing the process on the shortest possible time line, given the statutory requirements for a shareholder vote and other regulatory processes in terms of certainty to close clearance of these approvals. And of course, the stockholder vote are the only major terms needed to proceed.
We believe we’re on a good path, both in terms of timing and certainty. We’re on track for the Q3 close estimate we provided and should things progress smoothly. We have a decent shot at an early Q3 close date that forms the foundation for our IoT business going forward. So after Justin’s comments on our financial results, I’ll turn the call over to Kirsten, so you can hear directly from her the path and opportunity we’ll be focused on. Justin, over to you.
Justin Scarpulla: Thanks, Steve. As Steve mentioned, in the first quarter of 2024, we were able to deliver revenue in line with our guidance range, increases, company margins and continued control over our operating expenses. We achieved these results while focusing on both our identity and premises businesses, including our cutting edge premises products as well as our continued build-out of our operational Thailand facility. First Quarter 2024 revenue was $22.5 million, a decrease of $3.5 million versus Q1 2023. 1.7 million of this decrease was from our Premises segment and was primarily related to the federal government continuing resolution that wasn’t resolved until March. The remaining $1.8 million decrease in our Identity segment was related to our RFID-enabled IoT products, primarily from Lilly, offset in part by an increase in our identity reader products.
First Quarter 2024 GAAP and non-GAAP adjusted gross margins were 37% and 40% respectively, as compared to 35% and 37%, respectively in Q1 2023, which included increases in both our premises and Identity segment margins. Our Q1 2024 GAAP and non-GAAP adjusted gross margins reflect our continued focus on our margin profile while continuing to increase our investments in technology and manufacturing processes and equipment. GAAP and non-GAAP adjusted operating expenses for the first quarter 2024, which includes research and development sales and marketing and general and administrative costs totaled $12.6 million and 10.4 million, respectively, as compared to 11.9 million and $10.6 million in Q1 2023. First Quarter 2024 GAAP operating expenses also included $1 million in strategic review related costs.
First Quarter 2024 GAAP net loss attributable to common shareholders was $4.8 million or $0.21 per share compared to GAAP net loss of $3 million in Q1 2023. Non-GAAP adjusted EBITDA for Q1 2024 was negative $1.4 million compared to negative $0.9 million in the prior year period. This change in non-GAAP adjusted EBITDA is primarily a result of our lower year-over-year identity revenues, which impacted the utilization of our Singapore and 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 Q1 2024, revenue from our identity products totaled 12.8 million for 57% of company’s net revenue compared to $14.7 million or 56% of net revenue in Q1 2023 Identity segment GAAP and non-GAAP adjusted gross margins for Q1 2024, we’re at 22% and 26% respectively, as compared to 21% and 23%, respectively in Q1 2023.
Year-over-year increase in gross margin was primarily attributable to an increase in identity reader revenues and margin, offset in part by increased overhead expenses from our Thailand operations that came online in Q3 2023. Now turning to the Premises segment. In Q1 2024, revenue from our premises products and services accounted for 9.7 million or 43% of company’s net revenues compared to $11.3 million or 44% of net revenue in Q1 2023 Premises segment. GAAP gross margin for Q1 2024 was 58%, an increase of 4% compared to Q1 2023 Premises segment non-GAAP adjusted gross margin for Q1 2024 was 59% compared to 55% in Q1 2023. The increase in our Premises segment related to decreases in inventory, freight and logistics costs moving now to our operating expense management.
Our GAAP operating expenses in the first quarter of 2024 as a percentage of revenue was 56% compared to 46% in Q1 2023. The increase in GAAP operating expenses as a percentage of revenue is primarily related to our strategic review. Non-GAAP operating expenses in the first quarter of 2024 adjusted to exclude restructuring, strategic review and severance costs and certain noncash charges consisting of stock-based compensation and depreciation and amortization was 46% of revenue compared to 41% in Q1 2023. The increase in non-GAAP operating expenses as a percentage of revenue is primarily related to the year-over-year decrease in revenue as operating expenses were relatively flat. Now turning to the balance sheet. We exited Q1 2024 with $22.4 million in cash, cash equivalents and restricted cash, a decrease of $2 million from Q4 2023 in Q4.
The decrease in cash was a result of $1.4 million from operating activities, $0.2 million from investing activities and 0.4 million from financing activities. Our working capital exiting Q1 was $45.6 million, a decrease of $3.1 million from Q4 2023. As noted previously, our cumulative strategic review costs are $1.4 million exiting Q1 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, and this leads us to an expected Q2 revenue range of 23 to $25 million. This concludes the financial discussion. I’ll now pass the call back to Steve.
Steven Humphreys: Thanks, Justin. As I mentioned in our opening comments, we believe we’re on track to close our strategic transaction once closed. The infusion of capital will fortify our balance sheet to support the growth of our specialty IoT business into what we expect to be a key player in the health care industry and other high-value end markets with cures to Nucryst leadership and a singularly focused team. We’re very confident in our opportunity to transform major industries and the value creation that will come from establishing that business position under her leadership. Now to be clear, transforming industries takes time, particularly a regulated industry like healthcare and requires a clear go-to-market strategic plan, laser-focused execution and investment with a deliberate allocation of resources.
Pearson has been onboard all of 3.5 weeks, and she has been diving deeply into our IoT business. She’s bringing in resources to build out a detailed plan. But as you’ll hear, she already has a vision for strategic value creation and the path to get there from our current business position. Kirsten, welcome.
Kirsten Newquist: Thank you, Steve, and good afternoon, everyone. I’m very happy to be with all of you today and speak with you about the opportunity we have in front of us for the IoT business. But first, I’d like to take a moment to provide some background about myself and why I joined IdentiPHI at this pivotal moment in the Company’s history. As Steve mentioned, I came to Identive after nearly 17 years with Avery Dennison, where I started out in corporate strategy, analyzing new growth platforms, including RFID. I ultimately joined the Avery Dennison medical division first as Vice President Business Development and ultimately as Vice President and General Manager, which I lead for six years with a focused and disciplined approach.
During my tenure, I was able to double the sales and significantly increase the EBITDA of the business. I led the launch of many new innovative products, including wound dressings and surgical films containing active ingredients and components for wearable devices such as continuous glucose monitors, all utilizing complex coding, converting and finishing capabilities under the strict quality and regulatory standards required to produce finished medical devices. My last year at Avery Dennison was spent within the RFID division, Avery Dennison and Smartrac right led the healthcare strategy and market development efforts and provided leadership to the product management team. I was familiar with Identive from my involvement in the REIT industry.
My decision to join the Company was driven by the opportunity to lead an entrepreneurial oriented public company with a strong portfolio of products and solutions and an exciting and growing IoT industry. Its primary focus on specialty IoT technologies utilizing HSNFC. dual frequency, specialty UHF and BLE, along with its multi-component manufacturing capabilities, sets it apart from competitors who primarily serve high-volume UHF based applications, its focus and initial traction in the health care sector was particularly interesting. Given my background in this space, having worked for many years with the major players involved in the medical device and healthcare industry. I understood and appreciated. The position that Identive has built up to this point is an area where there are large unmet needs, ranging from medication non-adherence to drive mix ups.
So pharmaceutical counterfeiting and with RFID. can play an important role. Now I am this Institute of Health care informatics estimates that medication non-adherence alone costs, at least 105 billion in avoidable healthcare costs in the US. There are further compelling trends in health care, such as the shift of care from hospital to the home. The growth in personalized medicine and the rise in large molecule drugs requiring careful temperature, moisture and location monitoring that collectively create a growing opportunity space as the healthcare industry embarks on its digital transformation journey. We see many opportunities for RFID enabled solutions to become a critical asset in this transformation, including medication authentication and adherence diagnostic tests to authentication, blood bag and sample tracking smart labels for auto-injectors and condition monitoring of critical drugs.
Incorporating RFID into these products and processes provides a persuasive value proposition by reducing medical errors, enhancing patient engagement and ultimately increasing patient safety. Let me share with you two metrics to give you an order of magnitude on the opportunity space. There are over 5 billion prescriptions filled annually in the U.S. today and over 16 billion syringes used worldwide each year. Initial market penetration in these areas represents a substantial opportunity for Identive. We have already experienced interest from the industry and have built up an impressive pipeline of customer-driven NRE projects across these applications. Furthermore, these specialty solutions command higher gross margins often in excess of 35%, while the opportunities in health care are vast and compelling.
They tend to be longer term given the regulated nature of the health care industry. In fact, the industry is relatively nascent when it comes to RFID most of these customers are at the beginning of their digital journeys and need to go through several design iterations and run multiple pilots to optimize the technology and fully understand the benefits and ROI. Once the technology is proven out, it takes time to integrate that solution into their manufacturing processes due to the regulatory and quality requirements and then typically would be launched with a phased rollout. That said, once launched, it is usually very sticky business as the switching costs are high. We see this industry as a long-term sustainable driver of identity growth.
In parallel, we will also be evaluating opportunities in three other high-value segments, specialty retail, smart packaging and smart home devices. As these industries do not have the same regulatory and quality hurdles. We expect their ability to adopt new solutions will be quicker than those we see in the health care segment. Many of the technical requirements and design features that we developed for the healthcare applications can be leveraged in these markets and vice versa and also require custom design, rapid prototyping and often complex manufacturing processes. We are seeing growing interest for products that we have already developed for these segments. These include our embedded and highly secure authentication tags of consumables for smart home devices, our latest Garmin tags that withstand the stringent wash and drive cycle requirements for garments and footwear, and our NFC enabled smart labels for packaging to enhance the consumer experience.
In summary, we will proactively go after specific applications and use cases where we know there are a strong volume potential and a realistic opportunity for sustainable and predictable, higher margin recurring revenue. At the same time, we will continue to support the customers and industries that are at the core of our business today and where we see opportunities to optimize our cost structure and margin profile. One of our most critical short-term initiatives is to accelerate the transition of the majority of our FID. production to our Thailand facility to capitalize on its much lower cost structure. And we expect that effort to largely be complete by the end of Q1 2025. After that, our primary manufacturing will occur in Thailand with a smaller R&D and engineering focused operation in Singapore to support new product development and any customers who require more time to requalify in Thailand.
As part of this process, we’ve begun to exit some of our very low margin business. It doesn’t justify the expense of relocating to Thailand nor make financial sense to sustain once these transitions the overhead incurred by maintaining dual manufacturing sites during this transition, coupled with exiting this low-margin business has and will continue to impact our revenue and margins into the first half of next year. However, we’re confident that our move to Thailand and the reduction of this low-margin business will ultimately result in a more streamlined and efficient operation with significantly improved direct margins. I am now in my fourth week with Identive, I’ve enjoyed getting to know the team delving into the company’s product portfolio and absorbing the team’s perspective on the business’s potential.
The reasons why I joined Identive our true strong technology and engineering capabilities, a strategic position within the specialty IoT sphere and an array of compelling products in development. That’s evident to me that we have a dedicated team fueled by a passion for the business. I also see an opportunity to streamline a very wide breadth of business opportunities with the disciplined processes and strategic clarity that are necessary to drive the business towards long-term sustainable, high-margin growth. This will be crucial in realizing our long-term goals. To date, the business has struggled to fully capitalize on its potential, both in terms of revenue and profitability. That said, what this team has been able to accomplish in developing its specialized products in building its opportunity pipeline with limited resources is commendable over the next several months.
My priorities are to complete my onboarding and business deep dive and address two important topics, though the plan to drive business excellence and develop strategic clarity and focus along with a detailed growth and go to market plan it is imperative that our core business is focused, disciplined and resourced appropriately so we can provide a solid foundation to build upon the longer term opportunities we will be pursuing to start, I’m bringing in industry specific resources with whom I’ve worked extensively in the past to bring in an outside perspective and complement our internal talent to drive the business excellence initiatives and our strategic process. These consultants are standouts in their respective industries. In addition, our Board adviser, Manfred Rechler, the founder of SmartTrack, what are the trailblazing companies in the RFID space we’ll be participating in our strategic growth process as well.
Our two Board members, Dr. Rick Kunes, a Harvard trained and faculty cardiologist, who previously was Chief Medical and Scientific Officer for Medtronic and Laura Angelini was previously a senior medtech executive with Baxter health care and Johnson & Johnson. I look forward to providing you with timely updates on the development of these plans and the key milestones as we execute against them. And finally, I want to emphasize that at present, we have no immediate plans to pursue M&A. Our primary objective is to gain strategic clarity and drive towards business excellence. So any future M&A will be built upon a strong business foundation and aligns closely with our strategic objectives. In closing, I’m looking forward to the opportunities ahead and to fully immerse myself in the business and my role and to meet with the Wall Street community in the coming months.
With that, I’ll turn the call back over to Steve.
Steven Humphreys: Thanks, Kirsten. As you over Houston has a very clear vision for the business and firm understanding of our operations with this clear vision after just a few weeks on the job, you can see why we’re so excited to have her leading Identive going forward. I’m personally very thankful to have found such an excellent leader to take our business forward and realize the tremendous opportunity we have. Now before opening the call for discussion, I’d like to make a couple of personal comments. If we meet the schedule we aspire to this may be my last earnings call for Identive. If that turns out to be the case, I’d like to thank all of you, our investors for your support of the business. I’d also like to thank all of our people and our customers and partners for everything we built together.
I’m confident that we’ve created a path for both of our businesses to thrive and grow with very exciting features both businesses needed capital and focus to achieve their potential. And I believe we found the best path forward to reach that goal in the case of the physical security business, we’ve found terrific partners with Vital protection, seven to who are aligned with our vision, our values and culture and our commitment to invest and grow the business. I’m very excited to work with them after the closing and especially looking forward to continue to work with and expand our amazing Identive physical and logical security team to build a truly world-leading security business. I’ll miss being part of the IoT business and working with our great people there, but Pearson’s exceptional business leader with their vision, passion and disciplined business approach.
And with the expected capital resources on the balance sheet to make it happen, I’m confident we’ll realize our vision for Identive IoT. So with that, I’d like to open the call for your questions. Operator, please open the question queue.
Operator: [Operator Instructions].
Steven Humphreys: Matthew, I’d like to add that in addition to the speakers here care suggested and I we also have Amir cushioning ID document for Mueller and our Chairman of the Board, Jim Owsley on the line so any questions that are appropriate for them. We have everybody here to answer. So thank you again.
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