Identiv Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 8 speakers on the call.

Operator

Afternoon. Welcome to Identiv's presentation of its Second Quarter Fiscal 2023 Earnings Call. My name is Paul, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Stephen Humphries and CFO, Justin Scarpulla. Following management's remarks, we will open the call for questions.

Operator

Before we begin, please note that during this call, Management may be making references to non GAAP financial measures or guidance, including non GAAP adjusted EBITDA, non GAAP gross margin, non GAAP operating expenses and non GAAP free cash flow. In addition, during the call, management will be making Any statements that refer to expectations, projections or other characteristics of future events, including future financial results, future business and market conditions and future plans and prospects, is a forward looking statement. Actual results may differ materially from those expressed in these forward looking statements. For more information, please refer to the risk factors discussed and documents filed from time to time with the SEC, including the company's latest annual form on report 10 ks and quarterly report on Form 10 Q. Identiv assumes no obligation to update these forward looking statements, which speaks as of today.

Operator

I will now turn the call over to CEO, Stephen Humphreys for his comments. Sir, please proceed.

Speaker 1

Thanks, operator, and thank you all for joining us. Our Q2 continued our strong progress for the year with record revenues for Q2 gross margin expansion and positive free cash flow. We continue to deliver disciplined growth while strengthening our strategic position in both our RFID enabled IoT and physical security businesses and positioning our balance sheet to support our growth. Reflecting our commitment to balance sheet strengthening growth, in Q2 we delivered positive free cash flow And positive net operating cash, a positive swing in this last metric of over $5,000,000 from last quarter. Justin will comment on the details, but With a fully normalized supply chain and our position as the go to company for advanced RFID based IoT applications, especially in medical and specialty packaging, Q2 has kept us on track for 2023.

Speaker 1

Because we focus on specialty applications with nearly zero exposure to commodity UHF based retail tags, We've also outperformed some competitors who've struggled recently and our outlook seems to be in a better position even than some industry bellwethers in the RFID chip category. In our Security business, our Premises segment, where our focus has been on expanding our share of wallet with our comprehensive security platform Across video, access control, analytics credentials and readers, Q2 revenue was up 8% year over year. Now behind this aggregate growth, Our core Hirsch Velocity platform grew 23% year over year with controllers up 33% and access security readers up 37 Looking more closely at our business unit performance. In our RFID enabled IoT business, in the Q2 we shipped over 44,000,000 units. Our non recurring engineering roster remains strong and nearly 60 projects with more than half of these projects in our key medical healthcare and pharma vertical And our average unit prices were up about 17% sequentially.

Speaker 1

We also delivered 5,000,000 units to healthcare related customers. Our 5 auto injector projects progressed including the one going through FDA approvals, but we expect approval at the end of this year or early next. CVS and Envision America continue to support our prescription application for the visually impaired orthopedic surgery devices are shipping And the medical use cases we shared last quarter have all continued on track. Our webinar on RFID solutions for healthcare It was very well received. If you have any interest in the healthcare use cases for RFID, I'd really urge you to check it out.

Speaker 1

In Q2, we delivered 14,000,000 units of WILIET IoT pixels, up from the 10,000,000 units we delivered in Q1 and we started production of our 2nd large BLE RFID order. As you can tell from the sequential progression of 1,000,000,000, then 10,000,000, then 14,000,000 units across Q4, Q1 and Q2, BLE enabled RFID is on track pervasive platform for high value RFID applications. Another metric we tracked, in Q2 we continued to maintain 100% customer retention in RFID Except for low margin customers that were choosing to move wafer. This continues to be on plan and already factored into our projections. On the supply front, chip availability is normalized and as higher price components are consumed, we'll start deploying lower price components, which should create margin expansion opportunities.

Speaker 1

Despite the supply normalization, we're continuing with our supplier diversification. We've added a sign for sensor based ruggedized specialty UHF applications And are expanding our partnership with ProCure and STMicro for direct integration with our BitCIO SaaS platform for seamless tag commissioning. Also on the supply side for IoT, our new Thailand facility is now fully operational and producing at a rate of 5,000,000 units a month. Exiting 2023, we expect to have a primary production capacity of about 200,000,000 units a year in Thailand. This will expand capacity while also reducing our production costs.

Speaker 1

In addition to the structural cost advantages in Thailand, We also have efficiency projects underway across our production and supply chain operations to keep improving margins. Turning to our security business, our complete integrated video and access strategy encompassing cloud, on prem, hardware and all the related components needed for Security system is clearly getting traction from the product growth rates I covered earlier. That growth was partly offset by a decline in 1 video product line as we're deemphasizing our 3VR video product in favor of our integrated Velocity Vision platform. As Vision sales accelerate, We expect aggregate growth to reflect this higher growth in the overall platform. Commercial demand was also strong.

Speaker 1

In Q2, we saw particular strength in healthcare, K-twelve schools and higher education and airports on top of our core federal strength. Supporting continued federal growth, in Q2, we received FedRAMP listing, which is required by most federal customers to deliver cloud services making us one of only 4 physical security companies with this capability and the only major federal access control provider with it. Going into Q3, which is also the federal fiscal year end, keeping us on track for 2023. In IoT, our strategic initiatives in healthcare and with Williad grew very well, supported by our project management sales and technology strength. Our production in Thailand is fully up and running, supply chains for Critical chip categories have normalized and our product and organization investments are largely done and delivering results.

Speaker 1

In physical security, our industry leading converged platform And our ability to deliver it as a SaaS or systems solution positions us to keep taking market share. We're executing our strategy while also managing cash flows, Margins and inventories to strengthen both our business and our balance sheet. All of these support both our growth and our strategic positioning expectations for 2023, which I'll discuss after Justin covers our financial results. So Justin, over to you.

Speaker 2

Thanks, Steve. As Steve mentioned, in Q2 2023, we delivered record revenue for our fiscal second quarter, while improving year over year gross margins and a return to positive free cash flow. We believe these results paired with our focus on driving disciplined growth in our IoT and Physical Security businesses position the company to continue its growth momentum in the second half of twenty twenty three. 2nd quarter 2023 revenue was $29,600,000 in line with consensus estimates, up 6% versus the comparable prior year period and up 14% versus Q1 2023. 2nd quarter 2023 GAAP and non GAAP adjusted gross margin was 37% 38% above consensus estimates.

Speaker 2

Gross margin reflects our continued focus on maintaining our margin profile in 2023. In addition, We added $1,000,000 in cash and cash equivalents to our balance sheet, while continuing to increase our investment in technology and manufacturing processes and equipment. We remain committed to a long term non GAAP adjusted gross margin target of 40% to 45%. In the Q2 of 2023, our GAAP and non GAAP adjusted operating expenses, including research and development, Sales and marketing and general and administrative costs were $11,900,000 $10,600,000 respectively. This was consistent with Q1 2023 levels.

Speaker 2

As discussed in Q1, we were able to deliver on our plan to expand revenues quarter over quarter, while maintaining our operating expense levels. We continue to believe our current quarterly operating expense levels will enable us to meet our 2023 goals and we do not expect our remaining 2 quarters to vary significantly from this amount. Non GAAP adjusted EBITDA was $700,000 in Q2 2023, an increase of $1,600,000 versus Q1 while maintaining our operating expense profile. This was concurrent with our continued strategic investments in machinery and equipment. Our Q2 GAAP net loss was $1,100,000 or $0.06 per share, which was in line with consensus estimates.

Speaker 2

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, revenues from our Identity products totaled $17,700,000 or 60% of our total revenue in Q2 2023 as compared to $16,900,000 in Q2 2022, an increase of 5%. This reflects an increase in our IoT and legacy smart card reader sales, offset in part by a decline in our access card sales. Our Q2 2023 Identity segment GAAP and non GAAP adjusted gross margin was 23% 25%, consistent with Q2 2022.

Speaker 2

These reflect an increase of 2 percentage points as compared to Q1 2023. Quarter to quarter margins can fluctuate, but we expect long term margins to trend upwards from current levels As we expand and deepen our existing customer and technology partnerships and increase production at our Thailand facility, which has lower manufacturing costs, We remain committed to a long term gross margin target range of 35% to 40% in our Identity business. Now turning to the Premises segment. This segment accounted for 11.9% or 40% of our total revenue in Q2 compared to 10.9% in Q2 2022, an increase of 8%. The year over year increase in Premises segment revenue was across both federal and commercial businesses across many of the verticals Steve mentioned above.

Speaker 2

Increases in access control sales were partially offset by decreases in our video products as we transitioned from 3VR video product to our integrated VelocityVision platform. We continue to execute on our go to market strategy to offer a comprehensive end to end platform solution. GAAP and non GAAP adjusted gross margins for Premises in the Q2 of 2023 were 57% 58%, respectively, which is consistent with Q2 2022 and demonstrates our ability to maintain our margin profile. We remain committed to a long term gross margin target of 55% to 60% in our premises business. Moving now to our operating expense management.

Speaker 2

Our non GAAP operating expenses in the Q2 of 2023 adjusted to exclude restructuring and severance costs And certain non cash charges consisting of stock based compensation and depreciation and amortization was 36% of revenue compared to 41% of revenue in Q1 2023. As noted previously, we expect quarterly operating expenses as a percentage of net revenue to decrease in the remainder of 2023. Now turning to the balance sheet. We exited Q2 2023 with $22,200,000 In cash, cash equivalents and restricted cash, this was an increase of $1,000,000 from Q1 2023. In Q2, we generated $1,400,000 in cash from operating activities, dollars 900,000 from financing activities, offset in part by $1,200,000 in investing activities related to our capital expenditures.

Speaker 2

Our working capital exiting Q2 was $49,200,000 As Steve noted, Our supply chain outlook is improving and we expect to work through our inventory over the course of 2023. As a result, We expect to rebalance our working capital and repay our revolver balance in the second half of twenty twenty three. In our 10 Q filing, We will be providing a full reconciliation of the year to date cash flows. For completeness, we have included the full balance sheet in the appendix of this earnings release. In summary, our overall Q2 results were in line with expectations and we are reconfirming our 2023 outlook With expected revenues in the range of $125,000,000 to $130,000,000 normal seasonality is expected to continue.

Speaker 2

This concludes the financial discussion. I'll now pass the call back to Steve. Thanks, Justin.

Speaker 1

As we go into the second half of twenty twenty three, we're continuing to build on the work we put in during the first half of the year, as well as taking advantage of the industry position we've built as some of our less well positioned competitors face some headwinds. In IoT, we accomplished this in several ways. 1st, by winning NRE projects 3rd, increasing awareness of our solutions through customer facing initiatives like our new IoT product finder and IoT webinar series and 4th, In physical security, our complete platform is showing its competitive advantage. Through the first half of twenty twenty three, we've kept building out product, Sales and Sales Engineering, Tech Support Training and Systems. We've launched a range of new and refreshed products and our focus now is on leveraging our channels to bring our complete product range into all of our target market segments.

Speaker 1

For the second half of twenty twenty three and into 2024, Our focus continues to be expanding our competitive advantage in our businesses while strengthening our balance sheet. To drive cash flow, We'll keep working down the strategic inventory position we built when we had to manage supply shortages. We're optimizing expenses As you can see in our reduced GAAP expense levels quarter over quarter, this aligns with our financial plan to build our cash and working capital strength over the next few quarters. We're fully supporting our competitive strength while managing our working capital health. We're focusing on inventory turn improvements, AR collections and other healthy approaches to protect working capital using revolver debt only as incrementally needed.

Speaker 1

As we said last quarter, we expect revolver debt to be repaid within the next three quarters And we don't think we're overly constrained in our core strategic growth as we manage working capital. Looking at our specific business lines, In Q2, our IoT business delivered on its revenue plan, so we could focus on building pipeline for the next quarters, which we've largely done for 2023. For the second half of twenty twenty three and into 2024, we've got 4 advantages supporting our growth in IoT. I'll assess how each advantage is developing halfway through the year. Our first advantage is our strength in the broader medical and healthcare We already have several medical customers each forecast to be over $1,000,000 in annual revenues this year and a couple dozen NRE projects or customer samples and pilots in medical use cases with the potential for multimillion dollar recurring revenue levels.

Speaker 1

We think we'll expand our position for advanced medical applications, which is critical given that we've seen that medical applications take a long time to take off. We're expanding our healthcare presence continuously with activities Like the session at HIMSS, we participated in our webinar on healthcare applications for IoT, strategies guided by our board members from healthcare industry leaders and other healthcare initiatives. Our second advantage is our clear lead with BLE enabled RFID providers and integrators. I described the growth rate of production volumes earlier. IoT Pixels open use cases across multiple verticals, warehousing and logistics, supply chains, consumer experience, RTLS enabled retail, Product environment handling and an almost unlimited range of applications.

Speaker 1

In addition to Willyette themselves who are winning projects with some of the world's largest companies, We're engaging with BLE based solution providers going into even more use cases. These third parties multiply the volume and margin opportunities. We're seeing signs that the BLE enabled RFID category may create a whole class of new RFID applications. UHF RFID, which is not our core focus, Has always been limited by its extensive dedicated readers and the limited bandwidth and sensor capabilities of UHF chips and devices. NFC has excellent technology features and the ability to support a wide range of sensors, but is limited by its read range of a couple of centimeters.

Speaker 1

BLE solves both problems. Not only is every phone equipped as a Bluetooth reader much like NFC, but there are far more Bluetooth readers in the IoT including Bluetooth beacons, Laptops and tablets, smartwatches and fitness trackers, health monitoring devices, smart home devices and more. So passive BLE technology is the best of both worlds, Long range like UHF RFID with the ubiquitous readers and wide range of data and sensor capabilities like NFC. We're staying focused on current customers, But we're determined to keep in front of the broader BLE RFID category as it develops. So our 3rd advantage, Our specialty devices are used in sectors like healthcare, luxury brand engagement, supply chains, mobile devices and others, not low end retail loss prevention or similar use cases.

Speaker 1

Some of our competitors and even suppliers are exposed to the cyclicality and variability of the commodity retail market. Some have missed targets in Q2 and others have dropped their outlook. We have no significant exposure to the low end retail or pure UHF based loss prevention markets. As a result of the combination of our diverse use cases and not having that sick of downside low end retail Plus the tendency of our use cases to have consistent ongoing demand, we expect to continue on the business trajectory we projected at the beginning of the year. The 4th advantage is our in place customer base, which grows our volume as their use cases grow.

Speaker 1

A good example of this is a specialty consumer household product that we just started producing last year and is now at a $2,000,000 annual run rate. Customers like this and other specialty packaging and consumer engagement customers All drive our growth as they grow. In Smart Packaging, we're working closely with Collect ID and other leaders. We've kept our leadership and our relationships. We haven't lost a single customer or opportunity as far as we know.

Speaker 1

So as these markets grow, we have the same opportunity we've always had to grow with them. So with these competitive advantages of our IoT business, we think we're in a good position to deliver as planned in 2023 and we think it will position us for growth going into 24 as use cases and new technologies like VLE expand. To build customer awareness for our technical excellence and innovative IoT solutions, The feedback so far has been positive and we now have webinars confirmed with CollectID and NXP for later in Q3. Turning to our physical security business, We spent the first half of twenty twenty three building out our next generation product range and the best in industry teams I described earlier. Our Velocity ecosystem, which includes Velocity Access Control, Velocity Vision, Vision AI, Hyperconverged Velocity and Velocity Cloud, Combined with our touch secure readers and TS cards, we think is the most complete security platform in the industry.

Speaker 1

This complete solution is our core advantage in Security, which along with 3 other advantages we believe positions us to continue to grow faster than our market. So our second of those advantages is that customers need integrated systems to get the most benefit from each security touchpoint And to make this system easy for systems managers and security teams to manage. Security systems are higher performance, lower cost and more secure when they're integrated across hardware, firmware, software and cloud as well as across different security actions like access control, video and credentials. As a result, we think our platform offers customers the most tightly integrated security system from a single vendor. With our integrated system, adoption already is strong in Schools, state and local government, airports and federal agencies.

Speaker 1

We're now seeing interest across large enterprises, small businesses, hospitals, banks, first responders, Transit and other verticals with security needs, but always constrained budgets for security personnel and systems, especially in a cost conscious customer environment, Our ability to deploy only the needed parts, use existing infrastructure to keep costs low and then expand over time is winning share. There's also a technology refresh cycle that will drive growth over the next few years as server based systems go cloud, Separate access video and identity systems converge and an in place hardware running Windows 7 and other legacy systems need to be replaced. Our system can leverage in place cameras and infrastructure while enabling the technology and cybersecurity upgrades they need and creating a single pane of glass security system. Our third advantage is an opportunity created by industry dynamics that we're positioned to exploit. We think there's an opportunity for a new generation of market leaders to own enterprise scale highly secure systems and to extend the strength into the small and medium business market.

Speaker 1

Some leading enterprise security competitors are either For sale, recently sold or rumored to be for sale. Competitors trying to build high security enterprise scale systems by coming up from consumer scale Like Verkada or Ring are challenged both technically and from a go to market perspective. Our advantage is that our solutions are built on very high security hardware and software, which we then bring to all levels of the commercial and government markets. We believe our faster than market growth in the first half of twenty twenty three was partly due to this trend and everything we see so far shows the trends continuing in our favor. Our 4th advantage in physical Security is our technology depth and breadth across hardware, firmware, software, cloud, web and mobility.

Speaker 1

This enables us to bring complete secure products to market fast because we control all aspects. We mentioned last quarter that we're planning product launches pushing the edge of multi capability, very high performance hardware, supporting cloud enabled systems and features including biometrics, wireless infrastructure and mobile apps. We recently announced the launch of our new Primus SMB access system and EG2 Edge Gateway. Primus is fully cloud ready as well as being available as an on prem solution. The EG2 It's the first new gateway and controller hardware we've launched in several years.

Speaker 1

It's completely new from the ground up with a powerful quad core processor while also being very cost effective. We've architected it to be able to evolve to support everything the future holds at the edge across readers, access sensors, cameras, biometrics and intelligence at the edge. We built it on a Linux core with flexible modular software and responsive user interface that scales across administrative devices. Even with all these capabilities and aggressive pricing, we're sustaining our margins while deploying the technology to support our vision of upselling services and features into the platform over Now consistent with our technology depth, as a lot of the security industry is rushing to figure out AI, we already have an AI solution with our Vision AI product that we launched earlier this year. This brings AI enabled analytics to integrated video content They can be combined with access control events to create an environment that's dynamically secure even when managing complex threat situations.

Speaker 1

In the next phase, we expect AI will enable proactive threat response preparation for anticipated events. Our position as the provider of 1 of the industry's highest security systems gives us access to some of the most sensitive threat environments, which are likely to be the earliest adopters of AI enabled security such as federal court houses, intelligence community facilities and high sensitivity locations like the White House. With our proven product and technology strength, we're also OEMing our technology to leverage our engineering investment and to expand the reach of our technology platform. With our OEM platform, we're now selling our access readers through 2 of the top 3 physical security system vendors, creating an efficient channel to market And this is reflected in OEM reader sales more than doubling year over year in Q2. So with these competitive advantages in place, With tight focus on business model efficiency, solid Q2 progress in both our IoT and Physical Security businesses And new product and technology launches, our execution plan is clear.

Speaker 1

We know our immediate growth drivers as well as the strategic advantages we're building. This focus gives us confidence in our ability to manage working capital, be efficient with our expenses and build our long term competitive moats. So we continue to lead as these markets take off. Now Justin has already confirmed our 2023 revenue outlook. With the solid gross margins and cash flow from our business and Clearly known uses for working capital to support our growth, we have the resources to make it all happen.

Speaker 1

Now as I've discussed before, we have 2 strong businesses with strategic positions for the next growth stage of 2 very large markets. Last quarter, we described that with 2 strong businesses like these inside a Small company, as you'd expect, we're doing a strategic review to maximize the positions we've built and to realize the full business potential in these critical markets. So as part of that review, we have engaged a financial advisory firm and we're working closely with them to take the right steps to maximize value for our shareholders. So in Q2, we showed strength in our key IoT and security growth drivers, chip supply and production constraints are behind us And we have the capital we need to grow our business. With our progress in IoT across medical applications, BLE enabled RFID and our long tail specialty applications And with strategic leadership and physical security expanding in both key verticals, new products and share of wallet with our complete platform, There are several opportunities for upside.

Speaker 1

If these trends continue, we're positioned to accelerate growth and to expand EBITDA margins. We'll certainly keep you all updated as the year unfolds. So with that, I'll now ask the operator to open the lines for questions. Operator?

Operator

Thank you. At this time, we will be conducting a question and answer session. And the first question today is coming from by Craig Ellis from B. Riley. Craig, your line is live.

Speaker 3

Thank you for taking the question and congratulations on the relative performance to Other players in the IoT field, Steve, clearly doing a nice job with maintaining Your financial performance when others are deteriorating midyear. I want to start just by digging into the Williot commercial opportunity. Nice to see the progress year to date and starting on a follow on order. But Can you take a step back and just look out maybe towards next year and provide some broad parameters on what the Commercial potential could be for Bluetooth low power And help us understand how that might ramp up and what role Thailand might play in manufacturing?

Speaker 1

Yes, great question, Craig. And I'll try to keep it tight because we could talk about that almost all day. And thank you For noticing the performance relative

Speaker 2

to some others.

Speaker 1

We've as you know, we started Shifting to Williad just in December of last year and the takeoff has been Pretty impressive. And there are also other BLE enabled RFID companies now coming into play. So we're starting to see it as a category of technology. And as I said in my comments, you get the best of the both worlds That you've got the range of UHF and you've got the data intensity and capability of NFC, but Without the range constraints of NFC. So we're starting to see 3rd party integrators, solution providers Coming up with all kinds of new ideas enabled by passive BLE, which has never been possible before to actually get sufficient Power from the RF signal for a full BLE device.

Speaker 1

And of course, once Moore's loss starts kicking in, you start to get longer range, lower Our requirements and of course more data capabilities. So we certainly don't know exactly where it's going to go. But Willys themselves is on a continuing growth trajectory. I'll let them comment on their actual numbers, but Certainly substantially greater going forward. And then now we're starting to see others coming into the category And then that really can create an accelerating effect.

Speaker 1

Now to be clear, we're not talking about 2024 guidance or anything like that. But just in this category, there's a lot going on That and people starting to build applications and solutions around it. And then us coming in from the Perspective of technologists, we see that it's solving a couple of things that have been bottlenecks, both in the NFC and in the UHF category. So That's how I would categorize it. I know it's a little bit general, but does that give you a fair picture or should we go into some more detail?

Speaker 3

That's fair. Just comment on manufacturability, Steve, and what role Thailand could play as you get to that?

Speaker 1

Yes, good point. Because it is very complicated. I think we mentioned on the prior call that normally an RFID chip has A few touch points and these BLE chips tend to have a dozen and a half. So they're very complicated To produce when you're trying to manufacture 1,000 units an hour. But our Thailand facility Has all the capabilities that we have in Singapore and a very skilled workforce there that we've been able to hire Frankly, from some competitors and former competitors.

Speaker 1

So we think Thailand actually faster than we expected will be able to Cover most of the technology arc that are needed in our products. Now there's some customers who require that you manufacture in certain locations, so you can't move. But Thailand will be able to come online for most of our production capabilities. And actually we've got on the line here Both Amir Khosnjadi and Manfred. So let me ask Amir to comment on the BLE and Williot business And then I'll ask Matthew to comment on the production.

Speaker 4

Sure. And just building on the DLE aspects and Steve's point, It is the best of all worlds, because you are getting the supply chain visibility that you would get with traditional UHF. You're getting the consumer experience that you get with NFC and you get all the condition monitoring value add. So from that spectrum, early stage technology on a good ramp And we've announced in both the press releases that we are on the right trajectory with the current project expanding to the 2nd site for that large retailer. And so the project is progressing overall very well, very excited about the progress of the technology.

Speaker 1

And Manfred, do you want to comment on tie production?

Speaker 5

Absolutely, yes. So maybe on Also on the context of the Vileas deal, we are preparing the site For the next wave of BLE pixels, we've had some great learnings over the first 7 months of successful producing that type of new technology And some of the new equipment we are bringing in is also going to be tailor made to basically produce that type of application. So from that point of view, we have had a lot of learnings that are transitioned over into the new tie size plus New equipment that's coming in there. In general, we are rolling up production in Thailand. The first couple of million units are produced.

Speaker 5

The first one is already in the month of June. So for the opening we've had that. And we are ramping production. We are ramping people. And we are Getting ready for additional projects being taken on and if necessary transferring more from Singapore over to In order to take advantage of some of the improved production costs related to labor rates, Lower labor rates, lower overall costs in terms of lease rates and such.

Speaker 5

So from that point of view, We should be seeing that kicking in fairly soon.

Speaker 3

That's great guys. Thanks for all the color On Bluetooth Low Energy, I wanted to move on and inquire about the comments you made about supply, Steve. You sound more confident in supply than I think anything I've heard in a year. So can you comment on how broad based And then from a cost standpoint, since a lot of component costs Rose over the last 18 months throughout the supply chain. I suspect with Identiv, how How's the cost trends that you're seeing?

Speaker 3

And are we seeing decreases versus what you might have in inventory and things that would ultimately Help boost gross margin?

Speaker 1

Yes. And you're absolutely right. It's much more positive than we've been for probably 18 months plus. And as usual, it flips faster than you think, and that's happened in this case. So Costs have come down.

Speaker 1

Our purchase price variance that we were getting hit on a margin with last year has really come down. Freight also has come down substantially. And in some cases, airfreight, things like that can be down by a factor of 3 or 4. Lead times have also reduced. So that means you got to carry less you don't have to carry as much inventory.

Speaker 1

You can be more flexible in real time. And so all of that has moved in the right direction, so that it really feels Frankly, totally normalized now across all those dimensions. And then as you mentioned, there is still some inventory at some of the lower prices. Takes time to burn it all down and sometimes you have a tail of open POs at higher prices with providers. And so you have to burn those down even while you're doing the brass knuckle negotiations necessary to get it down faster.

Speaker 1

But as that burns down, then of course that naturally comes in and gives some margin room because our intention of course is the value of our products is the value And if the cost of input goes down, that should go to our gross margin line for the most part. So yes, It is a much better position than we've been in from a supply and lead time and COGS perspective than easily the last year and a half.

Speaker 3

That's great. And then lastly for Justin before I hop back in the queue. Justin, I think I heard you mentioned that you'd expect OpEx to be flattish through the rest of the year. Can you just talk about what the gives and takes are for gross margin as we look through the second half? Thanks guys.

Speaker 2

Sure. On the OpEx front, that's correct. We do anticipate flat OpEx for the rest of the year. We've Been pretty consistent. We were consistent last quarter as well that we put quite a bit of investment into OpEx Throughout 2022 and the Q1 of 2023.

Speaker 2

So we feel we have the workforce and the OpEx we need to meet our goals for the rest of 2023. So we expect some operating leverage there in the back half of twenty twenty three as revenue Resumes its cyclical nature in Q3 being fed year end and others. As far as gross margin with the mix that we have, we are We don't give specific gross margin guidance going forward, but we do expect gross margin profile to remain consistent with what we saw in

Operator

Thank you. Thank you.

Speaker 6

And the

Operator

next question is coming from Anthony Soss from Craig Hallum. Anthony, your line is live.

Speaker 6

Thank you. Hi, guys. Stephen, maybe I missed. Can you update us where you stand with your strategic review that was kicked off during the quarter? Is that still ongoing?

Speaker 6

And then maybe Amir, if you could take the mic. I'd love to hear if deals are taking longer, if pricing is holding up, Pretty incredible that half year NRE designs or engagements are related to Medical. I would assume that that's a higher ASP. So anything you could share would be helpful.

Speaker 1

So absolutely, the strategic review I did mention, we normally don't give Specifics in terms of the strategic review, there's so much investor interest and it is important. So we did say that we have appointed a financial advisor and we're working with them On the proactive process, you'd expect with such an engagement, the Board is working very closely with them. And that's in the comments I made. So that's moving forward, I'd say is the best way to say it. Mir, you want to comment on the business side that Tony was asking?

Speaker 4

Sure. Yes. So from an NRE perspective, Steve mentioned, it was 60 NREs, but I think the important thing to note here is our burn rate through those NREs is pretty consistent So as we're finishing out NREs, taking them to the engineering teams with the various customers, they're going into evaluation. The team is doing a really good job With the pipeline and advancing new NRE deals, so we have a very, very good probability of closing. And then also We understand that the sales cycles within healthcare and pharma and medical devices typically take longer.

Speaker 4

So we need more in To increase our probability of a lot of these taking off in a shorter timeframe. In addition to that, the price points are Holding well, because these are high value goods, they're justifying the higher price points. And then the chips themselves are a higher tier of chips. So they're Type 2s or Type 4s with added encryption around authentication, around capacity sensing. So it justifies the price point and holding the margin for them.

Speaker 4

So overall, I would summarize that the pipeline looks really good and our number one focus right now is continue putting more Within that pipeline, so a lot of these evaluations while they're being tested by the engineers and we're getting feedback, we have more in the queue to increase the probability and speed of these projects.

Speaker 6

Thanks for the color, Amir. Best of luck, guys. Thank you.

Speaker 2

Thanks, Tony.

Operator

Thank you. And the next question is coming from Jaeson Schmidt from Lake Street. Jaeson, your line is live.

Speaker 7

Hey, guys. Thanks for taking my questions. Just looking at Willyette, you've obviously started shipping against that follow on order. But when we think about unit shipments For Q3 and Q4, what sort of trajectory should we think about there?

Speaker 1

I don't think we've broken that out, but I think consistent levels would be we mentioned that the follow on order was of a similar magnitude to the initial order. And so I would be thinking in terms of consistent levels and when we get Yes, more of that upside going into 2024 that we were talking about will communicate that. Again, always constrained by Willyette themselves. There's some limitations to what they'll let us talk about and we fully respect that as a customer.

Speaker 7

Okay, got it. And then just as a follow-up, You called out some commercial wins in the premises business. When you look at the commercial opportunity within that segment, is it becoming a growing Portion of that business or how should we think about that opportunity longer term?

Speaker 1

Yes, the commercial part of the business Is growing. I mean, quarter by quarter it varies. This is federal year end. So federal will probably have Some seasonal strength to it, but we put a real effort into expanding commercial business and it's expanded as a portion of the business there. We've put in more regional sales managers and we've done some product launches.

Speaker 1

And then This product launch that I mentioned on the call, Primus, that in particular is focused at commercial and in particular Small need business in commercial. So I would expect that that commercial portion will continue to grow.

Speaker 7

Okay, perfect. Thanks a lot guys.

Speaker 4

Thanks, Jason.

Operator

Thank you. And there were no other questions. We would now like to move to closing remarks with Steve Humphreys. Steve?

Speaker 1

Okay. Thanks, operator, and thank you all for joining us today. As always, of course, we'll keep you all updated as our business And in Q3, we'll also be at the Rosenblatt Tech Conference in late August and the Lake Street Best Ideas Growth Conference in New York in mid September. We also have a couple more IoT webinars coming up, one with Collect ID and another Healthcare IoT webinar, this time together with NXP. So any of those that you'd like to access, please just contact IR and we can connect you into those.

Speaker 1

So with that, thank you all again for your time and support and have a good evening.

Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Identiv Q2 2023
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