Identiv Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

There are 6 speakers on the call.

Operator

Good afternoon. Welcome to Identiv's presentation of its Q3 2024 Earnings Call. My name is Tom, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Kirsten Newquist CFO, Justin Scarpulla and Board Chairman, James Owsley. 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 and non GAAP operating expenses. In addition, during the call, management will be making forward looking statements. Any statement that refers to expectations, projections or other characteristics of future events, including future financial results, future business and market conditions and opportunities and future plans and prospects is a forward looking statement. Actual results may differ materially from those expressed in these forward looking statements. For more information, please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company's latest annual report on Form 10 ks and quarterly report on Form 10 Q as well as our Q3 10 Q once filed.

Operator

Identiv assumes no obligation to update these forward looking statements. I will now turn the call over CEO, Kirsten Newquist for her comments. Ms. Newquist, please proceed.

Speaker 1

Thanks, operator, and thank you all for joining our earnings call, my first as CEO of Identiv. On September 6, we completed the sale of our physical security business to Vida Protect. Identiv has now transitioned to focus solely on building our IoT business and developing and supplying specialty RFID and Bluetooth low energy solutions to our customers. The transaction net proceeds are anticipated to be approximately $135,000,000 after taxes, transaction costs and other one time costs. The proceeds significantly strengthen the company's financial position and also allow us to fund future organic and M and A driven growth of our specialty IoT business.

Speaker 1

With the closing of the transaction, we made significant progress on the development of our strategic growth plan in the Q3. We have finalized our strategy and go to market plan, while we continue to focus on strengthening our relationship with our channel customers and partners in the core business. After I discuss our Q3 results, I will be introducing our strategic framework and the key focus areas for driving long term growth. Turning to our Q3 results. Our quarter 3 net revenue was $6,500,000 slightly above our previously announced guidance.

Speaker 1

Pressure on gross margins remained due to the dual manufacturing overhead costs that we are carrying during the transition from Singapore to Thailand. As previously discussed, the transition of RFID and BOE production from Singapore to our state of the art facility in Thailand remains a key near term priority. Our highly experienced operations team is making great progress towards this objective as we continue to move machines and add headcount in Thailand. We expect nearly 3 quarters of our current volume will be transitioned to Thailand by year end. For 3 of our customers, we expect production will continue in Singapore into the first half of twenty twenty five as additional time is needed for qualification and regulatory requirements before making the transition.

Speaker 1

2 of those customers are expected to move their production in the first half of twenty twenty five. Discussions with the 3rd customer are ongoing. This particular customer represents roughly 10% of our volume, but has historically been one of our lowest margin customers. We continue to assess whether the transfer of those products to Thailand is

Speaker 2

justifiable from both the business and

Speaker 1

the long term margin perspective. Ifiable from both a business and a long term margin perspective. We continue to anticipate the non GAAP gross margin of our core business to almost double reaching 26% to 28% once all production has been transferred to Thailand and the team achieves full productivity. In the long term, our goal is to achieve a non GAAP gross margin of 35%. One of the aspects about Identiv that is exciting to me is our ability to innovate and design technically sophisticated IoT devices.

Speaker 1

To that end, our new product development pipeline, MPD, remains robust. We are currently supporting numerous active projects, both customer driven and internally driven in response to market needs. In the Q3, we added new projects such as highly specialized BLE inlays to support cold chain monitoring for logistics and compliance, NFC Smart Labels for pharma and medical devices and UHF sensing inlays for aviation. Additionally, projects that we have previously discussed continue to advance such as authentication solutions for surgical consumables, smart labels for auto injectors and smart labels for top shelf liquor brands. An important aspect of growing our core channel business is developing and maintaining strong partner relationships.

Speaker 1

Many of our partners bring new opportunities like our chip suppliers NXP, STM and EM and industry groups such as the NFC Forum, Axia Institute and AIM are driving knowledge and adoption of RFID solutions and our participation enhances our visibility in the market. We recently announced a new strategic partnership with Inplay, a wireless chip provider for BOE based solutions. The initial focus of this collaboration will be cold chain monitoring for maintaining temperature compliance in the food and logistics industries. Future applications may expand to industrial automation and health care. We see BOE technology as an important next generation technology enabling new and more complex IoT applications fueled by the growth in BOE devices.

Speaker 1

Through our relationships with WILIET and now in play, we have developed design and production expertise to be a market leader in the BLE category. In summary, the Q3 was transformative for Identiv. We successfully concluded the asset sale transaction and now have a strong cash position to drive future growth. We have a clear vision of where we are driving the business and a strategic plan for how we are going to grow. The transition of production to Thailand is on track and our NPD pipeline remains strong.

Speaker 1

I'll now hand over the call to Justin to provide the details of our Q3 financials.

Speaker 3

Thanks, Kirsten. As Kirsten mentioned, the Q3 of 2024 was pivotal for Identiv. We were able to complete the sale of our physical security business providing significant working capital. This is key as it allows management to focus solely on building our IoT business. Concurrently, in Q3, we were able to make significant progress towards our strategic growth plan and the transition of production from Singapore to Thailand.

Speaker 3

3rd quarter 2024 revenue was $6,500,000 $400,000 above the upper range of our guidance and a decrease of $5,200,000 compared to the prior year period. The decrease in GAAP revenue year over year was primarily the result of lower sales of BLE transponder and mobile products. 3rd quarter GAAP and non GAAP gross margin in Q3 2024 was 3.6% and 9.3 percent respectively compared to GAAP and non GAAP gross margin of 11.2% and 14% respectively in Q3 2023. The decrease in gross profit margins was primarily attributable to lower sales as previously discussed, which resulted in the underutilization of our production facilities in Southeast Asia. As Kirsten also mentioned, by focusing our growth efforts on higher margin opportunities in Healthcare and other high value segments, we believe we can achieve a long term 35% non GAAP gross margin.

Speaker 3

GAAP and non GAAP operating expenses for the Q3 of 2024 including research and development, sales and marketing and general and administrative costs totaled $9,800,000 $5,100,000 respectively as compared to $4,600,000 $4,100,000 respectively in Q3 2023. 3rd quarter GAAP operating expenses included $3,600,000 in strategic transaction related costs and $1,100,000 in stock based compensation. 3rd quarter GAAP net loss from continuing operations was $9,300,000 or $0.40 per basic and diluted share. Compared to GAAP net loss from continuing operations of $3,700,000 or $0.17 per basic and diluted share in the Q3 of 2023. The year over year increase in our net loss was primarily related to our strategic review costs and an increase in stock based compensation costs incurred in Q3 2024.

Speaker 3

Non GAAP adjusted EBITDA loss for Q3 2024 was $4,500,000 compared to $2,300,000 in the Q3 of 2023. The increase was primarily the result of our lower year over year IoT revenues, which also resulted in the underutilization of our production facilities in Southeast Asia. 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. Turning to the balance sheet. We exited Q3, 2024 with 145 point $7,000,000 in cash, cash equivalents and restricted cash, an increase of $121,400,000 since December 31, 2023.

Speaker 3

During the 9 months ended September 30, 2024, the increase in cash was a result of $143,400,000 from investing activities, primarily as a result of our strategic transaction, offset in part by $11,700,000 used in financing activities, which included $10,000,000 for the repayment of our credit facility and $1,600,000 in taxes paid on the settlement of RSU releases and $10,400,000 used in operating activities. Our working capital exiting Q3 2024 was $147,000,000 We strengthened our balance sheet, positioning us to pursue our organic and inorganic growth initiatives. Kirsten will be discussing our overall capital allocation framework, including our $10,000,000 share repurchase program announced today. As of September 30th, our expected net operating cash use over the next 12 months is in the range of $14,000,000 to $16,000,000 excluding an estimated tax payment of $7,000,000 related to our asset sale and any share repurchase activity. In our 10 Q filing, we will be providing a full reconciliation of the year to date cash flows.

Speaker 3

For completeness, we have included the full balance sheet in the appendix of today's earnings release. Lastly, our financial outlook. For Q4 2024, we currently expect revenue from our IoT business to be in the range of $6,000,000 to $6,300,000 This concludes the financial discussion. I'll now pass the call back to Kirsten.

Speaker 1

Thanks, Justin. So with that financial context, I'd like to dive into our new growth strategy and why we believe Identiv is uniquely positioned execute this strategy. Underpinning our strategy are several strong macro trends that are driving demand for RFID and next generation technologies like BLE. These include digitization and IoT expansion, enhanced security and anti counterfeiting, regulatory compliance and safety, and sustainability in the circular economy. The digital identification of products through RFID and BOE helps link physical assets with digital systems, which provides users with compelling benefits such as real time tracking and visibility, enhanced product security and authentication, and engaging customer experiences.

Speaker 1

Furthermore, the data generated by RFID is being integrated into advanced analytics and artificial intelligence models, which enables improved decision making across industries, increasing RFID's value proposition. As the number of RFID enabled applications multiplies, these emerging use cases often demand new and more complex solutions to ensure their success and ultimately strong market adoption. We believe Identiv is uniquely positioned to support these types of complex requirements with our industry leading innovation in highly engineered inlay design, rapid prototyping capabilities and strong multi component engineering and manufacturing capabilities. To allow us to fully capitalize on the opportunities across multiple verticals, we will deploy our new Perform, Accelerate and Transform growth strategy to drive revenue and EBITDA expansion. Perform, Accelerate and Transform is a framework that we will implement beginning in quarter 1 2025 to strengthen and optimize the performance of our core channel business, accelerate our growth and ultimately transform the business.

Speaker 1

1st, Perform is focused on strengthening, optimizing and growing our core channel business. The objective of Perform is to grow our market share and increase our profitability in the channel. We will focus on higher margin opportunities with our existing customers and channel partners, expand gross margins by completing the transition to Thailand, execute our NPD projects with discipline and delight our customers with excellent customer support and timely product delivery. We are implementing a stage gate process to carefully manage our NPD project pipeline, which is designed to focus our time and R and D resources on the projects with the highest probability of success and discontinue those that we deem financially or technically unviable. We will be implementing clear metrics to monitor our progress with our core business performance.

Speaker 1

We plan to disclose several new metrics on our quarter 4 earnings call. 2nd, Accelerate is focused on specific initiatives to spur accelerated growth each with a compelling return on investment. We have identified 3 distinct initiatives to accelerate growth: 1 related to developing business within health care a second related to developing business within 3 high value applications outside of health care and a third related to expanding our BOE and multi component technology platform. Our health care growth initiative will be led by a market and business development team to pursue end customers directly as opposed to through the channel. This team will focus on 3 priority areas: medication adherence for home use drug delivery devices consumable authentication for medical devices and diagnostic pest equipment, and condition monitoring for biologics and clinical specimens.

Speaker 1

We have confirmed through primary and secondary market research that each of these areas have significant unmet needs and a meaningful addressable market that can be addressed through RFID and BLE solutions. For example, medication non adherence has been cited at up to 40% to 50% in chronic conditions in the U. S. Causing nearly $100,000,000,000 in preventable medical costs per year. Collectively, across these three priority areas, the total addressable volume is over 10,000,000,000 units annually or roughly $1,500,000,000 to $2,000,000,000 in RFID and BLE inlay sales.

Speaker 1

The second growth initiative will focus on non healthcare high value segments. We intend to address 3 specific use cases: inventory management for plastic pallets and bins to support recycling initiatives mandated by retailers smart packaging for luxury products to combat counterfeiting and home device consumable authentication to reduce counterfeiting and ensure proper assembly and use. Through our channel partnerships, we have early traction in each of these use cases and can see the value that RFID and BOE provides. The EU's forthcoming digital product passport regulations also provide some significant tailwinds for growth in these areas. Similar to the health care initiative, a segment specific market and business development team will be established to secure new partnerships and serve end customers.

Speaker 1

The 3rd growth initiative is expansion of our BOE and multi component technology platform. BOE is a next generation technology for IoT, providing benefits for certain applications that are challenging to address with traditional RFID technologies. Gartner recently named Ambient Invisible Intelligence made possible by BLE as one of the top tech trends for 2025. We intend to continue expanding our BLE capabilities and technologies through our current NPD projects such as the ongoing pilot programs with Energous utilizing the Williot BLE technology, our new partnership with Inplay, Williot's go to market efforts with big box retailers as well as our own go to market strategy within healthcare. As with Perform, we plan to disclose Accelerate specific metrics for tracking progress on these three growth initiatives on our quarter 4 2024 earnings call.

Speaker 1

The third part of our strategic framework is transform. This pillar focuses on driving significant business expansion and capability growth through M and A. M and A is an important component of our growth strategy and is intended to enable us to expedite achieving EBITDA breakeven. We are assessing potential tuck in M and A opportunities that fit our growth strategy and acquisition guidelines. We intend to focus on targets that not only bring scale, but are also accretive financially and bring strong synergies, additive talent and complementary products.

Speaker 1

In a nutshell, our ideal tuck in target is a company with $5,000,000 to $30,000,000 in annual revenue that's EBITDA positive, ideally with EBITDA margins greater than 10% and has a valuation of less than 10 times EBITDA post synergies and between 1 to 2 times revenue depending on profitability, Adding scale and capabilities and increasing utilization of our state of the art cotton facility are our near term priorities. Moving on to capital allocation. Our capital allocation plan is designed to utilize a portion of our transaction proceeds for targeted investments that align with our Perform, Accelerate and Transform strategic framework and will drive our future growth. As I stated earlier, our total net proceeds from this transaction are approximately $135,000,000 Our first priority is to invest in organic growth. Our current plan is to allocate 25% to 30% of the net proceeds for investing in our core business and key growth initiatives, the perform and accelerate parts of our PAT framework.

Speaker 1

We are currently targeting 35% to 40% for strategic M and A, the transform part of our strategic framework and 25% to 30% is currently targeted for future working capital purposes. And the final component as announced today is a $10,000,000 stock repurchase program. I'd like to now turn the call over to our Chairman, Jim Alsley, for an overview of our share repurchase program as well as the Board's recommendations for updating Identiv's corporate governance. Jim, over to you.

Speaker 4

Thank you, Kirsten. Given the significant transformation underway at Addictive, the Board of Directors have decided this was the appropriate time to review our corporate governance policy to better align with the company's new strategic direction and the interest of our shareholders. Pending final approval, the Board intends to recommend the following updates to Identiv's corporate governance policies and procedures. 1st, solicit stockholder approval at the 2025 annual meeting to eliminate our classified Board structure. Secondly, in uncontested elections, the board would consider the resignation of any director who does not receive a majority vote.

Speaker 4

And 3rd, amend our equity compensation plan to eliminate the ability to reprice options without prior stockholder approval. We are taking 2 additional important actions. We are actively recruiting Board of Director candidates with deep additive expertise that will be valuable in guiding us through this transition. And lastly, the Board of Directors has approved a share repurchase program, authorizing the company to purchase up to $10,000,000 of its common stock. This strategic move reflects the Board's confidence in the new growth strategy and the strong conviction that Identiv's current share price is undervalued relative to its long term opportunity.

Speaker 4

We think these corporate governance changes are in the best interest of Identiv and our stockholders. We look forward to providing you much more detail in the future. I will now turn it back to Kirsten. Thank you.

Speaker 1

Thanks, Jim. In conclusion, we have been and continue to see strong macro trends that are driving robust demand for RFID and next generation technologies. This demand provides iDENIS the tailwinds to grow and reach profitability. Identis' long track record of innovation is widely recognized. We have the right capabilities and RFID related technology required for emerging applications across several high value verticals.

Speaker 1

And we now have ample financial resources that we believe will allow us to execute our perform, accelerate and transform strategy and drive meaningful returns and shareholder value. The leadership team has taken significant steps towards transforming Identiv and we believe the company is well positioned to capitalize on the exciting opportunities ahead. With that, I'd like to open the call for your questions. Operator, please open the question queue.

Speaker 2

Thank you. At this time, we will be conducting a question and answer

Speaker 1

Thanks, operator, and thank you all again for joining us today. We appreciate the continued support of our employees, partners and shareholders. In the coming months, we will be prioritizing investor outreach meeting with existing and prospective investors present our new growth strategy and capital allocation plan and objectives. For today's Q and A, in addition to Justin and me, we have our Chairman of the Board, Jim Ousley Amir Khoshnayati and Manfred Mueller. So operator, let's please proceed with questions.

Speaker 2

Absolutely. Thank you. The first question comes from Craig Ellis with B. Riley Securities. Please proceed.

Speaker 5

Hi. This is Stacy Cho on for Craig. And thanks for taking the question. Tristan, congratulations on the great Q1 without the PRIMSYS business. And I just have a quick question about how do you think about when we think about the near term confidence in attaining the 27% plus or 25% plus non GAAP gross margin in mid-twenty 25, if that timeline has changed since the last time?

Speaker 5

Thank you.

Speaker 1

Yeah. No. So as I mentioned, we're making great progress with the transition of our production from Singapore to Thailand. The team is working really hard. Our customers are partnering with us to make sure that we can qualify the new site and get their production moved.

Speaker 1

So it's going very smoothly. So as I said, we anticipate about 75% to be transitioned by the end of this year. We have a couple of remaining customers that will go into the first half of next year. So we're feeling very confident that we'll be all the way through the transition for sure by the end of 2025. Now of course, we need to give our team there a little bit of time to get up to speed to learn all the ins and outs of the production.

Speaker 1

But as soon as they've reached their full productivity, we feel confident in the 26% to 28% non GAAP gross margin range.

Speaker 5

Got it. Thank you. And if I can have a follow-up question on maybe the cash burn intensity that we discussed before. When we think about the trajectory of the fiscal 1 year of $15,000,000 or the following year $25,000,000 Is that still within our plan? And how do we think about that when we're trying to discuss the pass through profitability for the company?

Speaker 3

This is Justin. Happy to answer the question. Can you rephrase what you meant when you said $25,000,000 I wasn't following that. We did put out just to answer your quick question, I think that we did put out $14,000,000 to $16,000,000 over the next 12 months. We feel pretty strongly that that is a good number and similar to what we had said last quarter as well.

Speaker 3

So we're confident in the $14,000,000 to $16,000,000 for the next 12 months, but I wasn't sure if you meant by the $25,000,000 that you referenced.

Speaker 5

Yes. It's just the following year if that's within the range that you're thinking about the $25,000,000

Speaker 3

Well, we don't give guidance post we wouldn't give cash burn guidance after the next 4 quarters. But no, it would not be $25,000,000 in the following year. So I think that is too high.

Speaker 5

Okay. Okay. Got it. Yeah. Okay.

Speaker 5

And if I can just squeeze in one more. Thank you, Justin. And so when we thank you for breaking down the capital allocation. It's very helpful. When we think about during the M and A, is there a potential acquisition timing that you think could help you get to the $65,000,000 in revenue?

Speaker 1

Yes. I mean, we are actively looking at potential acquisition targets now. And obviously, that is one of our 3 strategic pillars. And definitely, we're doing that assessment now. So it is a priority.

Speaker 1

We don't have any specific timing or timeline in place at this point, but it is something that we are actively looking at.

Speaker 5

Got it. Thank you.

Speaker 2

Okay. We have a follow-up coming from Craig Ellis with B. Riley. Please proceed.

Speaker 5

Hi, guys. Sorry, I guess I just have one more. So can you talk about the any potential large pharmaceutical companies penetration within the medical and given the strong relationship that Identiv has had previously and given Kirsten's strong background coming from the area?

Speaker 1

Yes. So certainly pharmaceutical is definitely an interesting area for us. We have active NPD projects underway. They're still in the NPD process, so new product development process and we're working collaboratively to come up with solutions. We also this is an area that is an area of focus for us as we are building our new business development and marketing development team.

Speaker 1

So it's definitely an area that we're going to also look for additional opportunities. So definitely a strong area of interest and we have a decent amount of activity underway working on projects to support that area.

Speaker 5

Got it. Thank you.

Speaker 2

Okay. I'd now like to turn the floor back to management for any closing remarks.

Speaker 1

Well, thank you again for joining us. We really do appreciate it. As I mentioned before, we will be prioritizing investor outreach and we have coming up the Craig Hallum Alpha Select Conference in New York in November. We'll be at the Imperial Capital Security Investors Conference in December. And we're definitely looking forward to speaking and meeting many of our investors in the coming months.

Speaker 1

Thank you all very much.

Speaker 2

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

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Identiv Q3 2024
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