Identiv Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 12, 2024

There are 7 speakers on the call.

Operator

Good afternoon. Welcome to Identiv's presentation of its 4th Quarter and Fiscal Year 2023 Earnings Call. My name is John, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Stephen Humphries and CFO, Justin Skarpala. 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, strategic review and future plans and prospects, is a forward looking statement. Actual results may differ materially from those expressed in these forward looking statements. For more information, please refer to the risk factors discussed in the documents filed from time to time with the SEC, including the company's latest annual report on Form 10 ks and quarterly report on Form 10 Q.

Operator

Identiv assumes no obligation to update these forward looking statements, which speak as of today. I will now turn the call over to CEO, Stephen Humphries, for his comments. Sir, please proceed.

Speaker 1

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

Speaker 1

We pride ourselves on careful and complete disclosures and communications with our investors. Investors depend on our communications being available as expected and only then. I personally apologize for this and we will not let it happen again. That was doubly unfortunate because it's a negative way to open comments about our business where we're making some very good progress. So we'll address any questions you've got about this or anything else in the Q and A section as always.

Speaker 1

But let me first get into our business update. 2023 finished with the 4th quarter that reflected our priorities of disciplined growth and balance sheet strengthening to position us for investment to accelerate our strategic position in both our RFID enabled IoT and security businesses. Consistent with that strategy, in Q4 we kept our focus on high margin revenue that supports our balance sheet and margins. Q4 net revenue was $29,000,000 while we drove balance sheet and working capital strength by reducing non GAAP operating expenses below $10,000,000 Our cash position was improved by $3,600,000 in free cash flow in Q4, the highest free cash flow quarter since Q4 2020, reflecting a sequential $4,700,000 swing from Q3 2023. In addition to driving revenue in the 4th quarter, we put in substantial effort towards the future direction of the business.

Speaker 1

As discussed on recent earnings calls, our Board initiated a strategic review to assess and execute the best strategy to maximize value creation opportunities of our 2 growth businesses IoT and Physical Security. Both require dedicated management focus and execution and have different capital needs to drive growth. As you'll note in our financial results, there's substantial expense below the operating expense line, some of which are associated with activities related to making progress towards a strategic action to generate capital and focus. We certainly wouldn't be expending this cash unless we're making tangible progress. We're of course continuing this activity in Q1 and continue to expect completion in early 2024 as we said at the end of last year.

Speaker 1

In the near term, we expect to announce specific actions to create substantial investor value in 3 ways. 1st, by investing in our transformational growth opportunities. 2nd, by strengthening our position in the verticals we've been strategically targeting, particularly healthcare and medical applications, but also across the category of specialty complex RF enabled IoT solutions, which we call SCRI. And 3rd, by bringing in world class leadership to drive our strategy and execution to lead in this major market opportunity. Now before turning the call over to Justin to review our financial results, I'll review our business and operational updates for the Q4, which we believe position us very well to leverage our next strategic steps.

Speaker 1

Starting with the IoT segment of our identity business. In Q4, we focused on the strategic IoT verticals of healthcare, smart packaging and logistics with margins remaining a key priority. Volume wise, we shipped nearly 200,000,000 units in 2023. We continue to build on our early leadership in SCRI. Though still in early stage, this category is our strategic focus.

Speaker 1

Because of the leadership we've established, we're consistently getting R and D inquiries to develop solutions for new potentially high volume use cases. Our most important vertical for SCRI healthcare accounts for more than half of our NFC based revenues. This reflects our drive over the past 2 years to focus on healthcare applications. Even at their current early stage volumes, some of these healthcare applications carry gross margins in the 40% range with more margin opportunity over time. In the healthcare vertical, we have ongoing pilot projects with Arthrex, Shriners and over 2 dozen other healthcare companies.

Speaker 1

More broadly, we continue to focus on pilot programs deploying innovative SCRI products. Based on the current TAMs in each of these specialized verticals of the healthcare market, we believe some of these applications could scale to $20,000,000 annually or higher. Consistent with this focus, in a recent article in the RFID Journal, we announced 15 pilot programs in Europe for a Bluetooth based solution we developed in collaboration with Energous and WILIET. This solution is great for cold chain monitoring in warehouses and refrigerated trucks. We announced one of the first adopters, the logistics company RPL Group.

Speaker 1

The initial feedback has been positive and we expect to see further pilots deployed through 2024 with actual deployments ramping up later this year. Relatedly, our relationship with Willyette remains strong. Our battery assisted tag is a finalist for best new product at next month's RFID Journal Awards and we delivered nearly 14,000,000 units to WILIET in Q4. As I mentioned before, demand can fluctuate quarter to quarter in early stage applications like this and our understanding is that Williard is undergoing a technology transition, so we expect to pause in shipments for the next 2 to 4 quarters. Fiscal year 'twenty three revenue from Willyette was substantial, so we'll be working to fill the temporary gap with alternative demand.

Speaker 1

Because of the multiple pilots and our close relationship with WILIET and other leaders in the category of BLE enabled RFID, we believe we're in a good position to offset some of this pause and to continue to lead the category. Another BLE company, NexSight is also a partner with a focus on connected retail products and we expect volumes from NexSys, Energous and others to grow throughout 2024. Our technology production and process expertise also has encouraged 2 of the largest enterprise customers deploying BLE enabled RFID to work directly with us for their next stage of technology deployment. In the consumer engagement part of our strategy, we've seen strong momentum for our Bitsea. Io IoT Cloud Platform.

Speaker 1

Last week we announced the release of Bitsea 3.0 with real time visibility and traceability making it an ideal solution for healthcare, pharma, medical devices, smart packaging, specialty retail and industrial applications. A new BITSEA related initiative is with Mazars, a leading international audit, tax and advisory firm on a new AI enabled retail operation solution. This combines Mazars ERP systems expertise with our BitCIO platform, NFC tags and Microsoft Dynamics 365. We work directly with the Microsoft R and D team to integrate Microsoft AI Assistant Co pilot with the data analytics enabled with BitSee. At the recent National Retail Federation Annual Show in January, the MAZERS team demoed their new total experience Now opening our Thailand production was another important step in 2023.

Speaker 1

As expected, our Thailand capacity for primary processes is 200,000,000 units exiting 2023. Early production results from this facility suggest the potential for even higher production margin gains than we originally expected. We've now also leased the adjacent buildings securing our ability to expand efficiently. So let me now talk about our Premises Security segment. After a very strong Q3 where we set a new record for segment revenues in the quarter, we saw normal seasonality.

Speaker 1

Our core packs business was up 9% for 2023 with underlying faster growth partly offset as we transition our legacy video products into sales of our new Velocity Vision and Vision AI platform. Now product releases late in 2023 included the full launch of our cloud first small to medium business product Primus along with the totally new edge controller, our EG2 and our Primus mobile app setting the standard for high security cloud offering in the SMB space. We also launched Vision AI, our video intelligence solution that's now a standard feature in all of our video offerings and Scramble Factor, our new multi factor intelligent reader. This is more than a product. It's the next generation of our iconic Scramble Pad with biometrics and a state of the art LCD touchscreen keypad creating a flexible access point with multiple authentication methods.

Speaker 1

We've designed it to easily expand to mobile and frictionless access, video, audio and other entry point capabilities to support the next generation of infrastructure light cloud based access control platforms. Now as you can tell from these major product launches across access, video and intelligent reader infrastructure, from a product perspective we came out of 2023 in a stronger position than we've ever been. Another metric of our progress is our high margin software services and recurring revenues, which increased to over 20% of premises revenues. There's still a portion of revenues that are perpetual license, which we expect to convert to subscriptions. Now this is a relatively near term recurring revenue growth opportunity because it's grounded in our own customer base.

Speaker 1

Supporting our federal strength, the U. S. General Services Administration approved Identiv's Velocity 385 software, Hirsch hardware and Utrust readers for listing on the GSA approved products list following a rigorous testing led by the GSA APL FIPS201 evaluation program. Our Q4 also reflected progress in key strategic directions including our OEM and federal sales, hospital and healthcare systems and velocity vision pilots. So in summary, our premises business strengthened industry wide with software services and recurring revenues reaching well over 20% of premises revenues as we exited 2023 and positioned strongly with the product releases I described earlier across cloud, AI analytics, SMB and next generation sensors and biometrics.

Speaker 1

We focused our RFID business on SCRI applications particularly in healthcare and consumer engagement supported by continued progress developing our Bitsy IO data analytics platform. And from an investor strategic review and actions early in 2024. So with that, I'll pass the call over to Justin to review our Q4 financial results in more detail. Justin?

Speaker 2

Thanks, Steve. As Steve mentioned, in 2023, we are able to deliver revenue growth, consistent margins, controlled operating expenses and generate positive cash flow from operations. This enabled us to maintain a strong working capital position. We achieved these results while focusing on driving disciplined growth in both our identity and premises businesses, including our new cutting edge premises products, our focus on SCRI and the continued build out of our operational Thailand facility, which positions the company to continue its growth momentum in 2020 4. 4th quarter 2023 revenue was $29,000,000 in line with our previously announced guidance range and flat versus the comparable prior year period.

Speaker 2

Fiscal year 2023 was 116,400,000 dollars a 3% increase compared to fiscal year 2022. 4th quarter 2023 GAAP and non GAAP adjusted gross margins were 35 percent and 37%, respectively, as compared to 36% 38% in 2022. The year over year decline in margins versus the prior year period is attributable to the product mix between Premises and Identity segment sales. Fiscal year 2023 GAAP and non GAAP adjusted gross margins were 36% 38%, respectively, which is consistent with 2022. GAAP and non GAAP adjusted gross margin reflect our continued focus on maintaining our margin profile in 2023 despite the rising cost of materials, while continuing to increase our investments in technology and manufacturing processes and equipment.

Speaker 2

We remain committed to a long term non GAAP adjusted gross margin target of 40% to 45%. GAAP and non GAAP adjusted operating expenses for the Q4 of 2023, which include research and development, sales and marketing and general and administrative costs totaled $11,800,000 $9,800,000 respectively as compared to $10,200,000 $9,300,000 in 2022. 4th quarter 2023 GAAP operating expenses include $400,000 in strategic review related costs. GAAP and non GAAP adjusted operating expenses for fiscal 2023 totaled $47,200,000 $41,300,000 respectively as compared to $41,300,000 $37,100,000 in 2022. Q4 GAAP net loss attributable to common shareholders was $1,900,000 or $0.08 per share compared to GAAP net income of $300,000 in Q4 2022.

Speaker 2

Fiscal year 2023 GAAP net loss was $6,800,000 or $0.29 per share compared to GAAP net loss of $1,600,000 in fiscal year 2022 or $0.07 per share. Non GAAP adjusted EBITDA for Q4 2023 was $900,000 compared to $1,700,000 in the prior year period. For fiscal year 2023, non GAAP adjusted EBITDA was $2,800,000 compared to $5,400,000 in fiscal year 2022. This change in non GAAP adjusted EBITDA reflects our continued strategic investments in R and D as evidenced by our new product launches, sales activities and our expanding Thailand operations. In the appendix of today's presentation, we have provided a full reconciliation of GAAP to non GAAP financial information, which is also included in our earnings release.

Speaker 2

Our next slide further analyzes trends by segment. Beginning with identity, in Q4 2023, revenue from our identity products totaled $17,500,000 or 60% of the company's net revenue compared to $18,300,000 or 57 percent of net revenue in Q3 2023 and $16,800,000 or 58 percent of net revenue in Q4 2022. For fiscal year 2023, identity revenue was 68,100,000 dollars versus $67,400,000 in fiscal 2022. The year over year increase was primarily driven by our RF enabled IoT products, which more than offset the decline in our legacy access cards. Identity segment GAAP and non GAAP adjusted gross margins for Q4 2023 were 22% and 24%, respectively, flat compared to Q4 2022.

Speaker 2

For the full year, Identity segment GAAP and non GAAP adjusted gross margins were 22% 24%, respectively, also flat compared to fiscal year 2022. While quarter to quarter margins can fluctuate, we expect long term margins to trend upwards from current levels as we expand and deepen our existing customer and technology partnerships and increase production at our Thailand facility, which has lower manufacturing costs than our Singapore operations. We believe our focus on high value specialty IoT solutions and strategic relationships with industry partners and suppliers could further strengthen our margin profile. We remain committed to a long term gross margin target of 35% to 40% in our Identity business. Now turning to the Premises segment.

Speaker 2

In Q4 2023, revenue from our Premises products and services accounted for $11,500,000 or 40% of the company's net revenue compared to $13,600,000 or 43 percent of net revenue in Q3 2023 and $12,200,000 or 42 percent of net revenue in Q4 2022. The sequential decrease in premises revenue was in line with our normal seasonality as Q3 coincides with the government's fiscal year end. For fiscal 2023, premises revenue was $48,300,000 versus $45,500,000 in fiscal 2022. The year over year increase was primarily driven by our physical access control systems, offset in part by decreases in video products. We continue to execute our go to market strategy by offering a comprehensive end to end security platform solution.

Speaker 2

Premises segment GAAP gross margin for Q4 2023 was 55%, a decrease of 1% compared to Q4 2022, primarily due to product mix. Premises segment non GAAP adjusted gross margin for Q4 2023 was 57%, flat compared to Q4 2022. For full year, premises GAAP and non GAAP adjusted gross margins were 57% 58%, respectively, flat compared to fiscal year 2022. We remain committed to a long term gross margin target of 55% to 60% in our premises business. Now moving to our operating expense management.

Speaker 2

Our non GAAP operating expenses in the Q4 of 2023 adjusted to exclude restructuring, strategic review and severance costs and certain non cash charges consisting of stock based compensation and depreciation and amortization was 34% of revenue compared to 32% in Q4 2022 and 32% in Q3 2023. Non GAAP operating expenses for fiscal year 2023 was 35% of revenue compared to 33% in fiscal year 2022. Now turning to the balance sheet. We exited Q4 2023 with $24,400,000 in cash, cash equivalents and restricted cash, an increase of $3,500,000 from Q3 2023. In Q4, the increase in cash was a result of $4,800,000 in cash from operating activities, while we used $1,100,000 in investing activities, primarily related to capital expenditures and $400,000 from financing activities.

Speaker 2

Our working capital exiting Q4 was 48,700,000 dollars a decrease of $1,100,000 from Q3 2023. Inventory decreased $700,000 in Q4 as we continue to work through our inventory balances. As a result, we expect to continue rebalancing our working capital and anticipate repaying our revolver balance in 2024. In our 10 ks 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.

Speaker 2

As Steve mentioned, with the anticipated technology transition from 1 of our key RFID customers, leads us to an expected Q1 revenue range of $22,000,000 to $24,000,000 This concludes the financial discussion. I'll now pass the call back to Steve.

Speaker 1

Thanks, Justin. Across 2024, we expect use cases in SCRI to continue to grow and expand to new customers. In premises, we're positioned with the strongest refresh product lineup to support growing 2024 revenues of our end to end platform with continuing margin strength and expanded recurring revenue software and services. As we develop our competitive value in both of our growth businesses, we'll keep both our balance sheet and working capital strong. Let me start by addressing the Identity business, particularly focusing technically complex SCRI applications, particularly in the healthcare and consumer engagement verticals.

Speaker 1

Healthcare and medical devices are the most strategically important market for solutions. Our focus is on delivering solutions that meet the challenging technical requirements of our SCRI customers, which positions us to lead entirely new categories. Now healthcare projects move slowly. There's progress quarter over quarter, but large scale ramps are hard to forecast. The NRE and pilot pipeline is healthy and we've been devoting more resources to the best near term production rollout revenue generating opportunities.

Speaker 1

Now this is a key category for increased investment. We're balancing relatively near term use cases like auto injectors with the long term transformational market for medication compliance. Now this compliance category is possibly the healthcare industry's biggest opportunity to generate economic benefits. As an indication of the scale of the opportunity, nearly a quarter of all first time prescriptions aren't filled and of these almost half aren't taken according to their administration protocol. We believe RFID provides a unique platform to address this multi $100,000,000,000 issue for the healthcare industry.

Speaker 1

We'll focus more on this when we complete our strategic activities since this will take time, focus and capital to realize full potential of the opportunity. But the scale of the opportunity and our unique positioning to address it makes it well worth the time and effort. We also continue to support 5 different auto injector projects across 4 different companies with various ASPs ranging to over $1 depending on the complexity of the solution. In one case, the second phase of application testing for a project that received FDA approval is underway. In another, our largest auto injector customer has deployed about 10,000 auto injectors in a controlled pilot with select physicians and patients evaluating usability and effectiveness.

Speaker 1

This remains an exceptional category of opportunity that's continuing to progress. We'll keep sharing milestones since medical device timelines can be long. Anyone who's following the exploding use cases for auto injectors is aware of the extremely large volumes that pharmaceutical companies consumer engagement, we're seeing expanding use cases including the unique smart home electronics application which doubled sales quarter over quarter. We're continuing to see high end garment use cases, including our life of garment applications, the Mazders application for retail users and many others. The second way we build value in IoT is by solidifying our reputation as a specialty applications provider and reinforcing our industry leadership as evidenced by our joint marketing and product initiatives.

Speaker 1

These include partners like NXP, Collect ID, Williot, Mazars and Energous and deep engagement with institutions including the Axia Institute at Michigan State and the NFC Forum which are active in setting the standards for advanced RFID applications. This is a particularly active growth driver with pervasive use cases emerging such as the digital product Passport which was introduced by the European Commission within the Circular Economy Action Plan. And 3rd, by expanding our lower cost, high quality and technically advanced production in Thailand. Our initial CapEx in Thailand is essentially complete. We expect the advantages of producing IoT devices in Thailand, lower production costs for rent and labor, shorter supply chains and access to highly skilled technical and production people.

Speaker 1

So these are our value creation drivers in IoT for 2024. Our business issue, one business issue from prior years that we don't expect to be a factor in 2024 is supply chain. Now let me address our premises business. In physical security, we accomplished our industry leadership goals in 4 ways. 1st, by offering a tightly integrated end to end physical security solution, including our recently announced Scramble Factor, as well as our Vision AI and Velocity plus Velocity Vision single pane of glass security management platform.

Speaker 1

Here the value proposition of our tightly integrated end to end system has clearly resonated with commercial customers. End users appreciate our complete solution and integrators are an even more effective leverage point. It's more profitable for integrators to implement systems from fewer partners, reduces their training costs, consolidates purchase order complexity, allows for faster more efficient installations and makes ongoing system maintenance easier and more profitable. Now this is one strategic category where identity and premises segments overlap. The physical security industry embracing the convergence of identity management for logical as well as physical security.

Speaker 1

A Gartner study in 2022 found that 41% of enterprises plan to converge parts of their cyber and physical security operations by 2025, up from 10% in 2020. Our identity readers provide secure authentication as well as a wide market presence. Our leadership in this market was demonstrated again earlier this year with a $2,000,000 order in January for identity readers to deploy company wide across one of the world's largest online retailers. Now our second security driver is by growing our leading federal position in physical security solutions including on premises and cloud based services. Across our federal customers, we focused on expanding the agencies we sell into as well as maximizing share of wallet.

Speaker 1

Both of these initiatives are reflected by our continued growth federal, up 9% in 2023. We expect federal to continue to be a growth driver in 2024. Our 3rd industry leadership driver is bringing high security to the SMB market, leveraging enterprise scale high security through our new Primus Cloud EG2 controller and encryption bridge platform. This solution can also be used for customers with many locations as a cost effective option for uniform access control across distributed organizations. Already in 2024 we're seeing demand for EG2s ahead of our initial projections.

Speaker 1

4th, expanding our enterprise software services and recurring revenues by driving sales of Syrah's cloud across our existing enterprise install base as well as new customers. Software and recurring revenues exited 2023 well over 20% of our premises revenues and we expect this trend to continue in 2020 24. Driving recurring revenues is one of our most important initiatives for 2024. In addition to our Cirrus Enterprise Cloud Platform with Primus Cloud, we're piloting pricing models that we believe will accelerate ease of adoption for the channel enhancing recurring revenue growth. To continue to drive this growth, we're committed to keeping a strong balance sheet with healthy working capital to fund our strategic growth initiatives.

Speaker 1

We continue to tightly manage our expenses reflected in the sequential reduction in expenses, but still prioritizing investments in key growth initiatives. So as you can hear from our comments, we're very positive about the value creation and industry leadership progress we think we're making in both of our businesses. From a business planning perspective, we expanded our next generation products, technologies and production capacity. Both of our businesses and markets are well positioned for strong 2024 following our investments in 2023. Our product launches, Thailand production and other investments consumed capital and pressured our operating results, but they've positioned us well for 2024 and going forward.

Speaker 1

For Q1 we're anticipating revenues in $22,000,000 to $24,000,000 range with continued strong contribution from our premises security and identity reader businesses. We expect our strategic efforts may have some effect on near term business as we focus on taking the right strategic steps to support long term value creation. The next major step for our business course is the culmination of our strategic process. Our commitment is to maximize shareholder value by substantially investing in our growth opportunities and our strategic verticals and strengthening our leadership teams to our leadership teams to execute our strategic plans. As I mentioned earlier, in the near term we expect to take strategic steps in these areas consistent with the plan we communicated at the end of last year.

Speaker 1

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

Operator

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

Speaker 3

Steve, I wanted to follow-up on a couple of things and just clarify the revenue items. So one, it sounds like given what's happening with Willyette's strong production in the 4th quarter, but a period of digestion upcoming. So that would impact the Identity business sequentially in 1Q? And then you mentioned, as you closed out your prepared comments, that there might be some near term impacts on the business from strategic efforts. And I'm wondering if there was any additional allowance factored into headline revenue guidance or anything you'd expect in either segment that we should look to in the Q1, potentially the Q2 on that matter?

Speaker 1

Yes. Thanks for the question, Craig. I think those cover it in terms of the headwinds and there are a number of tailwinds in all these areas. But we want to be very careful that we're setting ourselves up to meet what we put out there. And so I think that's exactly the way to characterize it.

Speaker 1

There's a couple of things that we're offsetting, but we also are seeing good momentum and we talked about the consumer electronic company that's going, some of the other healthcare areas are growing nicely and physical security with all the product launches are going well. And I also mentioned the identity reader order that we had in the Q1, which was pretty substantial. So it's got pros and cons pushing it, but we wanted to be sure to get the cons out there as well. And you identified the ones that we wanted to highlight.

Speaker 3

Got it. And just on the revenue point, Steve, we have a very challenging macro that lingers at least from the Mosaic we put together. How are you feeling about the business' forecast stability on the top line now? Is it starting to lock in? Is it still a little bit difficult just given the crosscurrents from the macro?

Speaker 3

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

Speaker 1

Yes. Thanks for that also. We're feeling good about the visibility and that's why we wanted to be granular about what the forces are to the positive and that are creating things that we have to overcome. We don't think there are many in the old phrase of unknown unknowns. We think we've got line of sight to the factors that are driving our opportunity.

Speaker 1

So we think we've got pretty good predictability, actually quite good predictability.

Speaker 3

Got it. On that note, I'll flip it over to Justin. Justin, on gross margins, can you give us some help with the gives and takes just beyond volume for the Q1 from the level that we hit in the Q4, I think, at least versus my model gross margins were lighter, mostly due to significant mix shift towards identity from premises. But what are the gives and takes with the Q1's gross margin, please?

Speaker 2

Yes, we do see a bounce back. It's primarily going to be mix in Q1 when we do anticipate a bounce back to premises on that side. So we'll see a slight bump in margins for Q1 off of closing out what we did

Speaker 3

in Q4.

Speaker 2

We're trying not to go too granular, but yes, we should see a rebalancing in that in Q1.

Speaker 3

Okay. And then lastly, you had talked last year about improving cash generation with better working capital management. It does seem like that came through strongly in the Q4. The question is, how much of that is still ahead of you and what can we expect with cash from operations over the next couple of quarters and for debt pay down, what linearity should we expect through the year? Is it going to be 1st half weighted, ratable, more back half weighted?

Speaker 3

Thank you.

Speaker 2

Yes. I think it will be more back half weighted. Think as you saw in our Q4 press release, we had some pretty significant costs related to that strategic transaction and those will be cash that's going out the door and that's going to continue into 2024 as well. So we did from my prior guides that we do have some pressure on cash with the strategic review and other items that we're working on. So it will be a little bit more back half weighted than we had originally anticipated.

Speaker 3

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

Speaker 2

Thank you.

Speaker 4

Thanks, Craig. The

Operator

next question comes from Anthony Stoss with Craig Hallum. Anthony, please proceed.

Speaker 2

Thanks, guys.

Speaker 4

Steven, you're blow by the Willyette explanation pretty fast in your prepared remarks. Is it purely an inventory digestion? Or did I hear you say they're moving to next generation technology? And also the guide lower in revs, how much of that was related to Wilead?

Speaker 1

So it is a technology transition even more so than in inventory topics. Again, I'll let them they need to address that, but we wanted to address it as well. And that's the major factor there. What was the second part of your question, Tony?

Speaker 4

How much of the reduction or the down sequential revenues can you attribute to Willyette? Is it half the reduction for Q1

Speaker 1

or ballpark? It's of that order. They were a couple of $1,000,000 a quarter So that's material and we're we expect to offset a chunk of it, but we want to be careful about how much, how fast.

Speaker 4

Got it. And then just bigger picture, you guys, you surprised yourselves with a lot of healthcare related design wins, a lot of health revenue, which typically isn't cyclical. Are you now seeing more a cyclical nature even from your healthcare customers?

Speaker 1

Good question. The answer is no. There is some seasonality to different healthcare use cases that we find when there's different for example, we do some a lot of surgical instruments ICU devices. And there are there is some seasonality to how busy those categories are. But it's not like federal government where you know you have a big bump in the 3rd quarter and the cyclicality you see there.

Speaker 1

So it's more product specific than it is macro seasonality in healthcare that we're seeing because as you say aggregate for healthcare is it's not a cyclical business.

Speaker 4

Got it. And then lastly for me, Justin, just when you look at kind of the starting point for Q1, and the nature of just really going to pause for 2 to 4 quarters, help us understand, to me it looks like 2024 revs are probably going to be low 2023 revs.

Speaker 2

We typically try not to give full year guidance. We're getting away from that. We're going quarterly at this point, but we don't think it'll be less than 2023. No.

Speaker 4

Okay. Appreciate it.

Speaker 2

Yes. Thanks.

Operator

Okay. Our next question comes from Jaeson Schmidt with Lake Street. Jaeson, please proceed.

Speaker 5

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

Speaker 1

In terms of related to Williot per se or other category? Just want to be sure I'm answering the right thing.

Speaker 5

Yes, just within the RFID business.

Speaker 1

No, we're not seeing push outs in RFID in terms of delays or people having oversupply or something. It's much more project specific like I was mentioning, whether it's the healthcare products and their project cycles or with the BLE applications or any others, it's very much project specific.

Speaker 5

Trending throughout this year?

Speaker 2

I think what we're looking at are you talking about non GAAP or GAAP or both?

Speaker 5

Non GAAP.

Speaker 2

Yes. Directionally, it will go up a few percent. Basically, we have a merit increase here in April that will be throughout the organization that will be upping it a little bit, but not a significant uptick, but slightly up from 2023.

Speaker 5

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

Speaker 2

You got it. Thanks, Jamie.

Operator

The next question comes from Michael Piccolo with Imperial Capital. Michael, please proceed.

Speaker 6

Hi guys. Thanks for taking my question And I appreciate you taking the time to chat. One statistic stood out to me in the presentation. I wanted to get a better sense of how it's changed as the percentage of recurring revenue in Premises. I think you guys said it was above 20% in 2023.

Speaker 4

I'm not

Speaker 6

sure if you guys have disclosed it before, but just curious what that percentage may have been in the 1 or 2 year prior? And how high revenue do you think that could go on a longer term basis like out years?

Speaker 1

So I'll take that from a couple of angles and then Justin just jump on in if you want. That number had been under 15% a year ago. And in fact, now it's we wanted to be roughly round, but it's around 24%. So it's well over 20%. And where we expect that to go, we want to drive it in the physical security business to be clear.

Speaker 1

We want to drive that to be the majority of the revenue base there. It's going to take a 5 to 7 year transition. But when we talk about that Primus Cloud and our Cirrus products, those are all driving towards a recurring revenue model, which we want to become the core business model for the business.

Speaker 6

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

Speaker 1

That most of our market

Speaker 6

That most of our

Speaker 4

market opportunity near term

Speaker 1

is selling to current customers and transitioning them from an on prem solution to a cloud solution. That's certainly the case for commercial velocity customers. In federal, we've got our FedRAMP cloud solution. And then with Primus, with SMB, there's a predisposition towards cloud and that's very much a cloud natural product. So it really is across the board.

Speaker 1

But what I was referring to was velocity commercial and velocity federal, where the vast majority of current customers are perpetual license customers and they're the lowest hanging fruit for conversion to recurring revenues.

Speaker 6

Got it. That was very helpful. Thank you.

Speaker 2

Thanks, Michael.

Operator

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

Speaker 3

Yes. Thanks for taking the question. Steve, it seems like the Thai facility is having a really nice ramp. And my understanding from past conversations with the team is that, that is a location where we were working on Williot production. So one, can you confirm that that's where that production was based?

Speaker 3

And 2, as we think about the Williot Paws, what does it mean for utilization in that facility as we look out at that facility and then just overall for identity segment gross margins in 2024?

Speaker 1

So actually the Williad production was in Singapore. We balanced the technology, so we can do it in both locations now, but that's actually a new event there. And you're right to point out the Thai facility, it's been very much a highlight that when we did our we've now done our first COGS qualification run because we reset our standard costing on a regular basis, the cost of operation at Thailand was actually lower than we had originally done when we did our ROI calculation on it. We've also found really a production being an example that we can move higher technology process capabilities faster into Thailand than we expected. So we think we can move there faster and get some gross margin advantage out of it.

Speaker 1

And then your last question I think is around overhead absorption on gross margins. And that's something we're constantly balancing. That's one of the things that does keep us taking some of the lower margin business because it absorbs capacity and therefore liquidates your overheads. So we're balancing to keep that, but it's certainly possible that there will be some pressure on margins for ops overhead absorption offset by moving more of the production to Thailand versus Singapore where we have better gross margins.

Speaker 3

That's very helpful. And is it possible to quantify the mix of production you'd like the team to achieve out of Thailand as we look out over the next 12 months and maybe 24 months? Are there some milestones that you have, whether it's getting to 30%, 50%, whatever percent of total production given that significant cost advantage that you have there?

Speaker 1

Yes. So there's 2 factors in that. There's as you say, there's just the scale of production and then there's the processes. And actually with the progress we've made, we accelerated moving some of our higher end processes into Thailand. We took advantage of Chinese New Year when there was some shutdown to move a COVID faster over to Thailand.

Speaker 1

I'd love to see more than 50% of our production out of Thailand going out of the year. We of course have to balance that quality and production times and run times and what the sales folks bring in and what we can balance. But I think that would be a good goal to have 50% there. What we have learned is there's really no technology limitation. The workforce in Thailand is well able to manage the capabilities both at the engineering and the production level.

Speaker 1

And the costs of course are lower. So as you can tell and the fact that we leased the additional building right next to our current building means we can expand in a really efficient footprint. If we let that building go, the second expansion spot would have been a distance away and you'd have been in a trucking logistics situation instead of clean flow production. So we're I think Thailand is going to be a competitive advantage for this foreseeable future.

Speaker 3

Very helpful. Thank you, Steve.

Speaker 1

Thanks, Craig.

Operator

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

Speaker 1

Okay. Thanks, operator, and thank you all for joining us today. We really appreciate the continued support of both our team and our shareholders and all of you who are listening to us. Anyone wanting to keep up with our business' progress, please join that Mazars webinar on March 28 that we mentioned. Also visit us in early April in Las Vegas, both RFID Journal and ISC West are in the 2nd week in April, both in Las Vegas.

Speaker 1

So you can visit there in person for both parts of the business. And then we'll also from an investor perspective be holding an NDR with Lake Street Capital Markets in April likely. And of course, we'll be at the B. Riley Conference in May. So again, thank you all for joining us.

Speaker 1

And of course, we look forward to communicating thoroughly as soon as we have a strategic action that can be shared. So thanks again and have a good evening.

Operator

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

Powered by Quartr
Earnings Conference Call
Identiv Q4 2023
00:00 / 00:00