Identiv Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 7 speakers on the call.

Operator

Good afternoon. Welcome to Identiv's presentation of its First Quarter 2024 Earnings Call. My name is Matthew, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Stephen Humphries CFO, Justin Scarpulla and President, IoT Solutions, Kirsten Newquist. Following the 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 the pending asset sale transaction, future business and market conditions and opportunities and future plans and prospects, including with respect to the transaction and Identiv's post closing business is a forward looking statement. Actual results may differ materially from those expressed in the forward looking statements. For more information, please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company's latest Annual Report on Form 10 ks and quarterly report on Form 10 Q.

Operator

Addition, risks related to the asset sale are included in the preliminary proxy statement filed with the SEC April 30, 2024, and our Q1 10 Q once filed and will be included in the definitive proxy statement once filed. Identiv assumes no obligation to update these forward looking statements, which speak as of today. I 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. The Q1 of 2024 was one of the most important in our company's history. We completed an extensive year long strategic review and took actions that we think will serve all of our stakeholders very well. We're divesting assets relating to our security and logical reader products for a cash price of $145,000,000 generating capital to invest in our IoT business. We also completed a thorough search for a new leader for our IoT business who will take over as CEO of the remaining Identiv business when the transaction closes.

Speaker 1

We believe we put Identiv on a path to realize its opportunity to create major value by investing in the growth of a key business that's increasingly central to the digital transformation of some of the world's largest industries. Now that's a big statement, but we believe it's accurate for three reasons: the scope of the market opportunity, our competitive advantages and soon our access to the capital and the focus and leadership to deliver on the opportunity. We'll go into details throughout the call, but first let me outline specifically what steps culminated in and around Q1. We undertook a strategic review of our business starting early last year. We looked at every combination of our business assets, including market opportunities and our competitive positioning with one criterion, what is the highest expected value creation opportunity available to us to deliver to our investors.

Speaker 1

We looked at divesting each part of our business, including divesting all of the business. We looked at each path for capital formation, value creation and ROI. We went in market to assess current values and competitive dynamics. We evaluated competitive companies both to assess their strategic directions and the effect on our value creation opportunity and to assess our opportunity to realize near term value for our assets. In consultation with our largest investor and with our financial advisor, Imperial Capital, we ultimately focused on the actions we announced last month, raised the maximum capital possible to invest in and focus on our Specialty IoT business, ensure a strong balance sheet for that business and bring on highly experienced leadership to direct this investment and navigate the company's future growth trajectory.

Speaker 1

We believe this transaction positions us to build an enduring leading IoT company that's core to enabling the digital transformation taking place in particular across healthcare, pharmaceuticals and medical devices, but also a critical enabler in other industries' digital transformations. In order to secure the investment for the IoT business, one of the requirements was that I join the buyer. So last year, we launched an executive search process to find a world class leader for our specialty IoT business to take over as CEO when the transaction closes. We needed the best possible leader to take advantage of our unique opportunity to be a linchpin technology provider in the digital transformation we're targeting. We found that leader in Kirsten Newquist.

Speaker 1

Kirsten is the ideal profile to lead the business to maximize our value creation opportunity. She spent 17 years at Avery Dennison, leading their medical business as well as in their SmartTrak RFID business, one of the strongest companies in the space. She deeply understands the key customers and influencers across the digital transformation of healthcare, while also knowing intimately the operations of RFID businesses. She's a pragmatic and disciplined business person who also sees strategic opportunities to transform industries. She has the rare ability to define a vision and then to build and execute plans to make the vision happen.

Speaker 1

We're convinced she's the right leader for the business and to realize Identiv's market opportunity. So, Kirsten will be speaking more about her background and why she chose to join Identiv after the financial review. Now, in the interest of time, we won't go through the details of our strategic assessments, executive recruiting and everything else. So for more details, please review the preliminary proxy statement we filed last week. We've put a lot of information into it, including a thorough description of the IoT business going forward, as well as the timeline and alternatives we assessed and the basis for the Board's decision to proceed on this path to maximize shareholder value.

Speaker 1

Today, we'll focus on Q1 and subsequent events as they relate to our business' future. Investors need clear visibility on the likelihood to close of the transaction and of the post close business going forward, so we'll focus on those topics. I'll go through relevant business results in Q1 and the status and outlook for the transaction. And then after Justin's comments, I'll turn the call over to Kirsten to discuss the IoT business, her near term priorities and long term vision for the business. So for Q1, our business continued on a solid footing, but there was some effect due to the ramp in activity on the transaction and recruiting our future CEO.

Speaker 1

We managed both activities, which involved key management and diligence meetings, as well as in CEO interviews and onboarding, and we couldn't disclose it at the time, but of course this was going on in Q4 as well as in Q1. So our overall business performance was consistent despite these distractions with total revenues within our guidance range at 22,500,000 dollars and solid gross margins. Our GAAP gross margin was 37% and non GAAP gross margin was 40%, our highest non GAAP gross margin since Q3 2020, reflecting margin strength in our Premises segment as well as within Identity readers. In Premises, we also had to contend with the Federal continuing resolution budgetary uncertainty. We've been pleased with the Premises business' strength, which we think puts us in a good position to continue strongly into Q2 and for the rest of 2024.

Speaker 1

Now notably, software services and recurring revenues grew to 27% of premises revenues in the Q1. This reflects 3 other trends we saw in Q1: strong interest in our Primus product line, cloud as an interest area in nearly all of our new business opportunities and high interest levels in video in the federal space as we deploy demo platforms of VelocityVision across 3 more federal agencies. We also continue to see growth from our newest integrators, from our smaller geographic regions, and in particular across K-twelve schools, utilities and transportation, especially in airports. Now our Identity business, which includes our access card and identity readers in addition to IoT, continued to perform consistently overall even with the internal demands of recruiting a new leader. Our IoT team continued to build our position as a specialty IoT leader with another successful presence at RFID Journal.

Speaker 1

We also joined the Axia Institute in Michigan State and we continued our webinar series with sessions shared with STMicro and another with NXP and AXIA Institute next week. We secured a new 2 year customer contract for a smart home application and we also shipped another 5,000,000 units to WILIET in Q1. Now as we said on our Q4 earnings call, we expect these to be the last WILIET unit for at least a few quarters as they work on producing their Gen 3 chip. This last batch for WILIET was produced in our new Thailand facility. It demonstrated our ability to rapidly ramp up even very complicated products in Thailand to take advantage of our lower costs there for nearly all of our production over time.

Speaker 1

Now competitively, as we've expected due to the large capacity buildups by some companies that we described on prior calls, we've seen a couple of companies become aggressive on pricing. Now this capacity was added mostly for UHF products, but some of it can be applied to HF applications. This affects some of our standard lower margin products, but doesn't affect our more complex specialty IoT devices. Then lastly, our logical access readers within our Identity segment performed very well. Our FIDO dual factor security keys expanded sales and pipeline opportunities, especially in Europe.

Speaker 1

In the Americas, our contactless readers are our main growth drivers, including our deployment company wide across one of the world's largest online retailers in Q1 and Q2, and this could continue into 2024 with further follow on orders. So, returning to our strategic transaction, in terms of timeline to close, we believe we're moving the process on the shortest possible timeline given the statutory requirements for a shareholder vote and other regulatory processes. In terms of certainty to close, clearance of these approvals and of course the stockholder vote are the only major terms needed to proceed. We believe we're on a good path both in terms of timing and certainty. We're on track for the Q3 close estimate we provided and should things progress smoothly, we have a decent shot at an early Q3 close date.

Speaker 1

That forms the foundation for our IoT business going forward. So after Justin's comments on our financial results, I'll turn the call over to Kirsten, so you can hear directly from her the path and opportunity we'll be focused on. Justin, over to you.

Speaker 2

Thanks, Steve. As Steve mentioned, in the Q1 of 2024, we were able to deliver revenue in line with our guidance range, increased company margins and continued control over our operating expenses. We achieved these results while focusing on both our identity and premises businesses, including our cutting edge premises products as well as our continued build out of our operational Thailand facility. Q1 2024 revenue was $22,500,000 a decrease of $3,500,000 versus Q1 2023. $1,700,000 of this decrease was from our premises segment and was primarily related to the federal government continuing resolution that wasn't resolved until March.

Speaker 2

The remaining $1,800,000 decrease in our identity segment was related to our RFID enabled IoT products, primarily from Williot, offset in part by an increase in our Identity Reader products. Q1 2024 GAAP and non GAAP adjusted gross margins were 37% 40%, respectively, as compared to 35% 37%, respectively, in Q1 2023, which included increases in both our Premises and Identity segment margins. Our Q1 2024 GAAP and non GAAP adjusted gross margins reflect our continued focus on our margin profile, while continuing to increase our investments in technology and manufacturing processes and equipment. GAAP and non GAAP adjusted operating expenses for the Q1 2024, which include research and development, sales and marketing and general and administrative costs totaled $12,600,000 $10,400,000 respectively, as compared to $11,900,000 $10,600,000 in Q1 2023. Q1 2024 GAAP operating expenses also included $1,000,000 in strategic review related costs.

Speaker 2

1st quarter 2024 GAAP net loss attributable to common shareholders was $4,800,000 or $0.21 per share compared to GAAP net loss of 3,000,000 in Q1 2023. Non GAAP adjusted EBITDA for Q1 2024 was negative $1,400,000 compared to negative $900,000 in the prior year period. This change in non GAAP adjusted EBITDA is primarily a result of our lower year over year identity revenues, which impacted the utilization of our Singapore and Thailand operations. In the appendix of today's presentation, we have provided a full reconciliation of GAAP to non GAAP financial information, which is also included in our earnings release. Our next slide further analyzes trends by segment.

Speaker 2

Beginning with Identity, in Q1 2024, revenue from our identity products totaled $12,800,000 or 57 percent of company's net revenue compared to $14,700,000 or 56 percent of net revenue in Q1 2023. Identity segment GAAP and non GAAP adjusted gross margins for Q1 2024 were 22% 26%, respectively, as compared to 21% 23%, respectively in Q1 2023. The year over year increase in gross margin was primarily attributable to an increase in identity, reader revenues and margin, offset in part by increased overhead expenses from our Thailand operations that came online in Q3 2023. Now turning to the Premises segment. In Q1 2024, revenue from our Premises products and services accounted for $9,700,000 or 43% of company's net revenues compared to $11,300,000 or 44 percent of net revenue in Q1 2023.

Speaker 2

Premises segment GAAP gross margin for Q1 2024 was 58%, an increase of 4% compared to Q1 2023. Premises segment non GAAP adjusted gross margin for Q1 2024 was 59% compared to 55% in Q1 2023. The increase in our premises segment related to decreases in inventory, freight and logistics costs. Moving now to our operating expense management. Our GAAP operating expenses in the Q1 of 2024 as a percentage of revenue was 56% compared to 46% in Q1 2023.

Speaker 2

The increase in GAAP operating expenses as a percentage of revenue is primarily related to our strategic review costs. Non GAAP operating expenses in the Q1 of 2024 adjusted to exclude restructuring, strategic review and severance costs and certain non cash charges consisting of stock based compensation and depreciation and amortization was 46% of revenue compared to 41% in Q1 2023. The increase in non GAAP operating expenses as a percentage of revenue is primarily related to the year over year decrease in revenue as operating expenses were relatively flat. Now turning to the balance sheet. We exited Q1 2024 with $22,400,000 in cash, cash equivalents and restricted cash, decrease of $2,000,000 from Q4 2023.

Speaker 2

In Q4, the decrease in cash was a result of $1,400,000 from operating activities, dollars 200,000 from investing activities and $400,000 from financing activities. Our working capital exiting Q1 was $45,600,000 a decrease of $3,100,000 from Q4 2023. As noted previously, our cumulative strategic review costs are $1,400,000 exiting Q1 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

This leads us to an expected Q2 revenue range of $23,000,000 to $25,000,000 This concludes the financial discussion. I'll now pass the call back to Steve.

Speaker 1

Thanks, Justin. As I mentioned in our opening comments, we believe we're on track to close our strategic transaction. Once closed, the infusion of capital will fortify our balance sheet to support the growth of our specialty IoT business into what we expect to be a key player in the healthcare industry and other high value end markets. With Kirsten Neuquist leadership and a singularly focused team, we're very confident in our opportunity to transform major industries and the value creation that will come from establishing that business position under her leadership. Now to be clear, transforming industries takes time, particularly a regulated industry like healthcare and requires a clear go to market strategic plan, laser focused execution and investment with a deliberate allocation of resources.

Speaker 1

Kiersten has been on board all of 3.5 weeks and she's been diving deeply into our IoT business. She's bringing in resources to build out a detailed plan, but as you'll hear, she already has a vision for strategic value creation and the path to get there from our current business position. Kirsten, welcome.

Speaker 3

Thank you, Steve, and good afternoon, everyone. I'm very happy to be with all of you today and speak with you about the opportunity we have in front of us for the IoT business. But first, I'd like to take a moment to provide some background about myself and why I joined Identiv at this pivotal moment in the company's history. As Steve mentioned, I came to Identiv after nearly 17 years with Avery Dennison, where I started out in corporate strategy analyzing new growth platforms, including RFID. I ultimately joined the Avery Dennison Medical Division, 1st as Vice President, Business Development and ultimately as Vice President and General Manager, which I led for 6 years with a focused and disciplined approach.

Speaker 3

During my tenure, I was able to double the sales and significantly increase the EBITDA of the business. I led the launch of many new innovative products, including wound dressings and surgical films containing active ingredients and components for wearable devices such as continuous glucose monitors, all utilizing complex coating, converting and finishing capabilities under the strict quality and regulatory standards required to produce finished medical devices. My last year at Avery Dennison was spent within the RFID division, Avery Dennison SmartTrak, where I led the healthcare strategy and market development efforts and provided leadership to the product management team. I was familiar with Identiv for my involvement in the RFID industry. My decision to join the company was driven by the opportunity to lead an entrepreneurial oriented public company with a strong portfolio of products and solutions in an exciting and growing IoT industry.

Speaker 3

Its primary focus on specialty IoT technologies utilizing HF, NFC, dual frequency, specialty UHF and BLE along with its multi component manufacturing capabilities, sets it apart from competitors who primarily serve high volume UHF based applications. Its focus and initial traction in the healthcare sector was particularly interesting given my background in this space. Having worked for many years with the major players involved in the medical device and healthcare industry, I understood and appreciated the position that Identiv has built up to this point. It is an area where there are large unmet needs ranging from medication non adherence to drug mix ups to pharmaceutical counterfeiting in which RFID can play an important role. The IMS Institute of Healthcare Informatics estimates that medication non adherence alone costs at least $105,000,000,000 in avoidable healthcare costs in the U.

Speaker 3

S. There are further compelling trends in health care such as the shift of care from hospital to the home, the growth in personalized medicine and the rise in large molecule drugs requiring careful temperature, moisture and location monitoring that collectively create a growing opportunity space. As the healthcare industry embarks on its digital transformation journey, we see many opportunities for RFID enabled solutions to become a critical asset in this transformation, including medication authentication and adherence, diagnostic test authentication, blood bag and sample tracking, smart labels for auto injectors and condition monitoring of critical drugs. Incorporating RFID into these products and processes provides a persuasive value proposition by reducing medical errors, enhancing patient engagement and ultimately increasing patient safety. Let me share with you 2 metrics to give you an order of magnitude on the opportunity space.

Speaker 3

There are over 5,000,000,000 prescriptions filled annually in the U. S. Today and over 16,000,000,000 syringes used worldwide each year. Initial market penetration in these areas represents a substantial opportunity for Identiv. We have already experienced interest from the industry and have built up an impressive pipeline of customer driven NRE projects across these applications.

Speaker 3

Furthermore, these specialty solutions command higher gross margins often in excess of 35%. While the opportunities in healthcare are vast and compelling, they tend to be longer term given the regulated nature of the healthcare industry. In fact, the industry is relatively nascent when it comes to RFID. Most of these customers are at the beginning of their digital journeys and need to go through several design iterations and run multiple pilots to optimize the technology and fully understand the benefits and ROI. Once the technology is proven out, it takes time to integrate the solution into their manufacturing processes due to the regulatory and quality requirements and then typically would be launched with a phased rollout.

Speaker 3

That said, once launched, it is usually very sticky business as the switching costs are high. We see this industry as a long term sustainable driver of Identiv's growth. In parallel, we will also be evaluating the opportunities in 3 other high value segments, specialty retail, smart packaging and smart home devices. As these industries do not have the same regulatory and quality hurdles, we expect their ability to adopt new solutions will be quicker than those we see in the Healthcare segment. Many of the technical requirements and design features that we develop for the healthcare applications can be leveraged in these markets and vice versa and also require custom design, rapid prototyping and often complex manufacturing processes.

Speaker 3

We are seeing growing interest for products that we have already developed for these segments. These include our embedded and highly secure authentication tags of consumables for smart home devices, our life of garment tags that withstand the stringent wash and dry cycle requirements for garments and footwear and our NFC enabled smart labels for packaging to enhance the consumer experience. In summary, we will proactively go after specific applications and use cases where we know there is strong volume potential and a realistic opportunity for sustainable and predictable higher margin recurring revenue. At the same time, we will continue to support the customers and industries that are at the core of our business today and where we see opportunities to optimize our cost structure and margin profile. 1 of our most critical short term initiatives is to accelerate the transition of the majority of our RFID production to our Thailand facility to capitalize on its much lower cost structure and we expect that effort to largely be complete by the end of quarter 1, 2025.

Speaker 3

After that, our primary manufacturing will occur in Thailand with a smaller R and D and engineering focused operation in Singapore to support new product development and any customers who require more time to requalify in Thailand. As part of this process, we've begun to exit some of our very low margin business that doesn't justify the expense of relocating to Thailand nor make financial sense to sustain once we've transitioned. The overhead incurred by maintaining dual manufacturing sites during this transition, coupled with exiting this low margin business, has and will continue to impact our revenue and margins into the first half of next year. However, we're confident that our move to Thailand and the reduction of this low margin business will ultimately result in a more streamlined and efficient operation with significantly improved direct margins. I am now in my 4th week with Identiv.

Speaker 3

I've enjoyed getting to know the team, delving into the company's product portfolio and absorbing the team's perspectives on the business' potential. The reasons why I joined Identiv are true, strong technology and engineering capabilities, a strategic position within the specialty IoT sphere and an array of compelling products in development. It's evident to me that we have a dedicated team fueled by a passion for the business. I also see an opportunity to streamline a very wide breadth of business opportunities with the disciplined processes and strategic clarity that are necessary to drive the business towards long term sustainable high margin growth. This will be crucial in realizing our long term goals.

Speaker 3

To date, the business has struggled to fully capitalize on its potential, both in terms of revenue and profitability. That said, what this team has been able to accomplish in developing its specialized products and building its opportunity pipeline with limited resources is commendable. Over the next several months, my priorities are to complete my onboarding and business deep dive and address 2 important topics, build a plan to drive business excellence and develop strategic clarity and focus along with a detailed growth and go to market plan. It is imperative that our core business is focused, disciplined and resourced appropriately, so it can provide a solid foundation to build upon the longer term opportunities we will be pursuing. To start, I'm bringing in industry specific resources with whom I've worked extensively in the past to bring in an outside perspective and complement our internal talent to drive the business excellent initiatives and our strategic process.

Speaker 3

These consultants are standouts in their respective industries. In addition, our Board Advisor Manfred Rietzler, the Founder of SmartTrak, one of the trailblazing companies in the RFID space will be participating in our strategic growth process as well our 2 board members, Doctor. Rick Kuntz, a Harvard trained and faculty cardiologist who previously was Chief Medical and Scientific Officer for Medtronic and Laura Angelini, who was previously a Senior Medtech Executive with Baxter Healthcare and Johnson and Johnson. I look forward to providing you with timely updates on the development of these plans and the key milestones as we execute against them. And finally, I want to emphasize that at present, we have no immediate plans to pursue M and A.

Speaker 3

Our primary objective is to gain strategic clarity and drive towards business excellence, so any future M and A will be built upon a strong business foundation and aligned closely with our strategic objectives. In closing, I'm looking forward to the opportunities ahead and to fully immerse myself in the business and my role and to meet with the Wall Street community in the coming months. With that, I'll turn the call back over to Steve.

Speaker 1

Thanks, Kirsten. As you all heard, Kirsten has a very clear vision for the business and firm understanding of our operations. With this clear vision, after just a few weeks on the job, you can see why we're so excited to have her leading Identiv going forward. I'm personally very thankful to have found such an excellent leader to take our business forward and realize the tremendous opportunity we have. Now before opening the call for discussion, I'd like to make a couple of personal comments.

Speaker 1

If we meet the schedule we aspire to, this may be my last earnings call for Identiv. If that turns out to be the case, I'd like to thank all of you, our investors, for your support of the business. I'd also like to thank all of our people and our customers and partners for everything we've built together. I'm confident that we've created a path for

Speaker 2

both of our businesses to thrive and grow with very exciting futures. Both

Speaker 1

and I believe we found the best path forward to reach that goal. In the case of the Physical Security business, we found terrific partners with Vita Protect and 72 who are aligned with our vision, our values and culture and our commitment to invest and grow the business. I'm very excited to work with them after the closing and especially looking forward to continue to work with and expand our amazing Identophysical and Logical Security team to build a truly world leading security business. I'll miss being part of the IoT business and working with our great people there, but Tiersten is an exceptional business leader. With her vision, passion and disciplined business approach and with the expected capital resources on the balance sheet to make it happen, I'm confident we'll realize our vision for Identiv IoT.

Speaker 1

So with that, I'd like to open the call for your questions. Operator, please open the question And also Matthew, I'd like to add that in addition to the speakers here, Kirsten, Justin and I, we also have Amir Khoshniyadi, Doctor. Manfred Mueller and our Chairman of the Board, Jim Owsley on the line. So any questions that are appropriate for them, we have everybody here to answer. So thank you again.

Operator

Certainly. Your first question is coming from Craig Ellis from B. Riley Securities. Your line is live.

Speaker 4

Yes. Thanks for taking the question. And Steve, if it does prove to be your last call then in a public forum, I'd like to say it was a pleasure interacting with you over the duration of the coverage. And I'll start with a question. Yes, you're welcome.

Speaker 4

I'll start with a question for you and then move on to Justin and Kirsten. So looking at revenues, we've got revenues that were inside the range of 1Q and 2Q. We're seasonal. When I look at the year on year trends down, I think in the low teens in the quarter, but in 2Q, I think we'll be down closer to higher teens. So can you just talk about the things that are happening inside of revenues, whether it be lingering cyclical impacts or some of the mix out items that might be happening or even maybe in premises some of the shift to recurring that might be impacting revenues?

Speaker 4

And do you think here in the Q2 were the cyclical bottom or still more effects of that to come?

Speaker 1

Yes. So taking those from the top, as you said, there is some rotation out of lower margin business. That's one we mentioned the continuing resolution on the premise aside that did have an effect as well as the shift to recurring. And then when you're a very small company like us and you take half of the executive team a little bit off the playing field, you have some attention focused shift there. But I think the main underlying on the premises side, the underlying trends will revert back to the norm.

Speaker 1

On the identity side, there are some of the transitions that Kirsten mentioned in her update that are core to how the business is going forward.

Speaker 4

Kirsten, do you want to

Speaker 1

add anything to that? Or

Speaker 3

No, I think you've answered it adequately.

Speaker 4

Okay. Moving on to more of a financial question for Justin. Justin, really impressive 10 quarter high gross margin in the quarter. Were there any one time items in either of the segment numbers and on OpEx, since there was deal costs that inflated 1Q at least in the GAAP numbers, do those mix out in 2Q? And how do we think about some of the intermediate trends for OpEx beyond just what we saw in 1Q?

Speaker 4

Thank you.

Speaker 2

Sure. I'll take that one from the top as well. From a margin perspective, there was not a one timer within either segment that boosted up our margins. We did start to see and we noted it in my commentary as well that Identity Readers was returning to a pretty healthy margin year over year and that is expected to continue. So that is not a one time item there.

Speaker 2

And I think that that's one of the largest drivers that we have for margin. And then on the OpEx side, you touched on strategic review costs. Those are ongoing as we continue to have proxy filings, our definitive proxy statement. Hopefully, we'll get files here shortly. And the amount of administrative and administration that we're doing up through the stockholder vote and getting through the approvals that we need from the government things.

Speaker 2

Those are ongoing into Q2 as well. So that was a one timer of about $1,000,000 that is included in our gross margin from a non GAAP perspective. Those are not included in non GAAP. From operating expenses going forward, I think you asked that was the last part of your question. We do have a new leader here with Kirsten and some of the outside consultants as she mentioned that would put slight upward pressure on OpEx going forward throughout the next couple of quarters.

Speaker 4

Got it. Thank you. And then, Kirsten, just a couple of questions for you. So one, in a public forum, welcome aboard. Nice to talk to you again.

Speaker 3

Thank you.

Speaker 4

You mentioned yes, you're welcome. You mentioned 2 things I wanted to follow-up on. Once more of a near term item and the other is a longer term item. In the near term, the intent to mix out some of the lower margin business by the first half of next year or into the first half of next year, Can you just talk about the size of that business presently and whether or not that impacts any medical business or if it's in other end markets and then related to the medical business. Can you just talk about what your vision is for how big that business would be in the next year or so?

Speaker 4

And what you think it could become, if not quantitatively, qualitatively in a 3 to 5 year period? Thank you.

Speaker 3

Yes. So certainly. So I think in the very short term, as we talked about exiting some of the low margin business, It is truly very low margin business. And as I said in my previous statements, it doesn't even justify the move into Thailand nor sustaining it long term. And this is not business in the medical market at all.

Speaker 3

So it's really that very, very low margin business. And quite frankly, as I've told the team here, we're not here to practice. We're actually here to make money. And so we don't want to take our resources and our budgets and move business that makes no sense for us to continue in for the long term. But it does not include any of the medical business for sure.

Speaker 3

And so I think in terms of longer term, there's definitely

Speaker 4

a lot of opportunity, as I

Speaker 3

said in my earlier statement in the major players, the major pharmaceutical companies, the major medical device companies starting to explore different opportunities. Some of them are small R and D projects, some of them are pilots that they're really trying to gain experience so that they can work it into a bigger launch. So we certainly see a lot of interest. We see a lot of potential. And it's hard to quantify exactly where we think it can go in the next 3 to 5 years.

Speaker 3

We'll be doing some work, some deep work over the next 4 to 5 months to quantify it for Identiv and get a little bit more clarity on that. But it definitely could be a significant opportunity just because when you see the volumes that exist in the different categories that we're contemplating, they're really, really large. And we definitely see the interest from the medical device and the pharmaceutical company today.

Speaker 4

Thanks for that color.

Operator

Thank Your next question is coming from Michael Pikulow from Imperial Capital. Your line is live.

Speaker 5

Hi, guys. Thank you for taking the question and congrats again on the transaction and Kirsten joining the team. Wanted to just get a little bit more clarity on the IoT business. On the call, you guys spoke about it in the proxy. You cited a gross margin potential in excess of 35%.

Speaker 5

And then I also understand Kiersten was saying there could be shorter term impacts from gross margin as you exit lower margin projects. We understand that 35% is a long term target, but can you talk about how we get there? Is it going to be lumpy in project based or more smoother increases over time?

Speaker 2

Yes. I think there's going to be a combination there as we talked about. Our increasing focus on healthcare as those start to play out and move to their next cycle. They are in their infancy today as far as where we are in their product lifecycle. So we know what we feel within our NREs and our new product initiatives that we have a strong base of healthcare projects that we feel will go to production level and get us to where we need to be.

Speaker 2

Our healthcare today, as I alluded to and I noted in Q4, our healthcare today, although a smaller percentage of our business is in that 30% to 35% range. So we feel we'll get there with a mix shift over to healthcare out of our kind of commodity and lower margin one. The second piece of that is going to be our shift from Singapore to Thailand. We've been talking about it for quite a while. And Kirsten noted in her analysis as well, the one we talked about it today that we're going to try to accelerate that out of Singapore and into Thailand.

Speaker 2

Between the overhead and the labor, we'll see significant savings there. It's going to take time and we'll have some short term bumps here because we'll be running both through 2023 sorry, through 2024 here through the next couple of quarters. But when we are in a longer term Thailand production facility, we should get some adequate margin points out of that as well. Previously, I think we said 5%, but our early numbers indicate it could be north of 5% on a long term basis being in Thailand only. So those 2 give us confidence that we'll hit our long term target.

Speaker 2

As I said, short term, I think it'll be a little bumpy, but in the longer term, those are a couple of the factors that are contributing to how we get up to the 35%.

Speaker 5

Got it. That's very helpful color. Thank you. Sure. And just kind of one follow-up to IoT business in terms of both, I guess, cash deployment expectations and organic investment areas.

Speaker 5

Can you talk a little bit more about, I guess, what you guys discussed in the proxy in terms of how you plan? I know I think Kirsten mentioned on the call that the M and A isn't a main priority right now. But I guess what is? And can we talk about what where the cash and how it's going to be deployed?

Speaker 3

Yes. So I think my first two priorities, as I said a little bit earlier, certainly, we got to do some work to ensure that we have strong business excellence and that we have the right processes, the right team, the right resources in place so that we have a really strong foundation to build for the future. So we'll be spending time developing that plan and moving that forward. Secondly, we want to make sure that we're super clear with our strategic focus. We talk about healthcare as being a great segment for us, but that is a very big segment with very many different use cases and different ways that we can play.

Speaker 3

We're going to be doing a lot of deep dive work, as I said, over the next 3 to 4 months, really going deep on the applications that we think we have a true competitive advantage and where we can really compete effectively and gain those margins. So we're going to get very clear with our focus. Obviously, we're looking at some non healthcare related segments as well, but we want to be really, really clear with where we want to proactively go. It doesn't mean that we won't look at other applications, but we want to know where we're going to be driving the market, where we're going to be going after and looking for business and we want to give ourselves time to do that. And part of that strategic process, obviously, we'll also be looking for opportunities to expedite the strategic plan and continue to build value beyond the inlay.

Speaker 3

I know there's always been a lot of work kind of on building a data management platform, which I think is great, But we need to be very, very clear with where we want to continue to expand it and do that. And so that's part of the strategic work. And coming out of that strategic work will be a lot more clear with how we want to invest the money and where we want to invest it.

Speaker 5

Great. Thank you for the color.

Operator

Thank you. Your next question is coming from Jaeson Schmidt from Lake Street. Your line is live.

Speaker 6

Hey guys, thanks for taking my questions. Just want to follow-up on sort of the commentary on the focus on higher margin business within the Identity segment going forward. So on a go forward basis, is it fair to assume that any new program you guys look at or take on has to clear a certain gross margin hurdle going forward for you to even look at it?

Speaker 3

Yes. We're going to be looking at 2 things. I think a gross margin hurdle and we'll be looking at it with kind of 2 different lenses. So obviously, if it's for a product that's already developed in a mature industry that's more competitive, that'll be one gross margin target. And as we look at the high value opportunities that require significant customization and that will also be investing ourselves to develop them, obviously those margin targets will be quite a bit higher.

Speaker 3

So we really will have different criteria for different types of products and depending on what the initial investment and effort it is to customize the product.

Speaker 6

Got it. And then just as a follow-up, you called out specialty retail, smart packaging and smart home devices. Obviously, you already have exposure in those today. But to early scale within each of those markets, do you think you need to build out the sales infrastructure in a significant way or do you have everything in house today?

Speaker 3

Yes. No, I think definitely and that's why once again, my initial priority is really getting clarity on our strategic focus. So we've definitely got some really intriguing projects already in those spaces. And so as we're looking at healthcare and the timeline for healthcare and some of the applications there, We definitely think we can pursue some of those other segments proactively as well, but we really have to balance it. And obviously to be able to go directly into those different segments, we want to build out a business development effort.

Speaker 3

Those business development efforts have to be tied specifically to the vertical itself. So we're going to have to be really careful with how many we take on, because obviously there'll be an investment on the business development side of it as we want to go deep into specific segments.

Speaker 6

Okay. That makes sense. Thanks a lot.

Operator

Thank you. That concludes our Q and A session. I'll now hand the conference back to CEO, Stephen Humphries for closing remarks. Please go ahead.

Speaker 1

All right. Thanks, operator, and thank you all again for joining us. We'll continue to update you all on the business progress and the KPIs as Kirsten laid out in her discussion and on our progress and timeline for closure of our transaction, of course. For details of the transaction and the business going forward, please do review our preliminary proxy that's already on file with the SEC. We expect to file our definitive proxy in the upcoming weeks.

Speaker 1

And at that point, we'll announce the date for our annual meeting and stockholder vote on the transaction. In terms of investor outreach, we'll be attending the B. Riley conference on May 22, and Craig Hallum is on track to set up a fireside chat session in early June. And we'll also share business updates following our shareholder vote, of course, and the AGM. And if you have any questions, please don't hesitate to reach out to Soapy and our Investor Relations team.

Speaker 1

So thank you all again and have a very good evening.

Operator

Thank you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
Identiv Q1 2024
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