Edited Transcript of INVE earnings conference call or presentation 30-Jan-20 10:00pm GMT – Yahoo Finance

SANTA ANA Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Identiv Inc earnings conference call or presentation Thursday, January 30, 2020 at 10:00:00pm GMT

Identiv, Inc. - CFO & Secretary

Identiv, Inc. - CEO & Director

Good afternoon. Welcome to Identiv's presentation of preliminary Q4 and fiscal year 2019 results. My name is Savis, and I will be your operator this afternoon.

Joining us for today's presentation are the company's CEO, Steve Humphreys; and CFO, Sandra Wallach. Following management's remarks, we will open the call for questions.

Before we begin, please note that during this call, management may be making references to non-GAAP measures or projections, including adjusted EBITDA and free cash flow.

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 financial projections and future market conditions, 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-K. Identiv assumes no obligation to update these forward-looking statements, which speak as of today.

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

Steven Humphreys, Identiv, Inc. - CEO & Director [2]

Thanks, operator, and thank you all for joining us today. As you all have seen, today, we announced our preliminary results for the fiscal year and fourth quarter 2019 as well as our updated outlook for 2020.

Now in 2019, we established our complete security platform across access systems, video analytics, mobility, credentials and RFID. In the fourth quarter of 2018 and the first quarter of 2019, our Thursby business had $1 million-plus deployments. In the third quarter of 2019, our Premises products grew 38% year-over-year. And in our most recent quarter, our RFID products grew 62% year-over-year. So clearly, there's strength in every product line and in the total solution.

But this last quarter, our revenues came in well below what we expected. Usually, we've been able to balance quarter-to-quarter fluctuations in one area of strength than others, but that fell far short in the fourth quarter and really interrupted the path we've built towards profitability and consistent growth. And despite that, we continue to see strength in our markets and our products, so we're confident we're positioned for long-term growth, but as a public company, we can't tolerate unpredictability on the top line while we're getting to scale. We, as a team, are very disappointed that it happened. Our responsibility to our investors, our customers and our people is to build predictable, profitable growth and to create a very valuable, strategically positioned company.

We fell behind on that commitment last quarter, and we've taken the lessons from the quarter and are applying them to get back on a predictable, profitable business path. So today, I'll address 3 topics. What happened and why? What are we doing about it? And what does this mean for our business in the short and long term?

So first, what happened and why did it happen? Our fourth quarter revenues were impacted in 4 areas. First, the federal government fell behind on their acquisition plan because of the continuing resolution that carried right up to the end of the year. As a result, about $1 million of Thursby software deals and about $3 million of federal government Premises business didn't close as we expected. Now none of the business was lost as far as we know, but with the federal government churn, the budget churn, we overestimated how quickly business would close.

A second factor just came up in the last couple of weeks. One of our major customers in Mexico has been affected by the slowing Mexican economy. As they've indicated to us concerns about their ability to pay invoices, we decided to remove a large order from our accounts to make sure there's no collectibility issue in the future, and this pulled down revenues by an additional $0.5 million.

The third factor that slowed closes is right at the end of the year. We launched 2 new recurring revenue initiatives late in the quarter, our Velocity Cirrus cloud-based SaaS security platform and our subscription-based mobile app for digitally encrypted PDF signing for the Defense Department. Now these are both very positive for our business in the long run, but with Thursby in particular, instead of the large, upfront licensing deals we had in the fourth quarter of 2018, we're now receiving monthly and annual subscription revenues. And this model is great for our ongoing business and customers love the ease of adoption, but it means we didn't have a big contributor to both revenues and gross margin like the 20,000-plus onetime Thursby licenses we delivered in the fourth quarter of 2018. Similarly, in the Premises business, some of our customers saw the launch of Cirrus and wanted to assess it. We think we're getting through that, but it all impacted the fourth quarter.

Now another example of this effect is the win we announced just last week to provide cloud-based emergency electronic mustering via our Freedom Cloud Access Control as a Service platform for a large Canadian pipeline project. This, again, is cloud-based RMR, the right platform for our business and for growing recurring revenues, but in the near term, it takes a major system sale and spreads the revenues over time.

And the fourth challenge we ran into was not expanding our sales team as fast as we planned. Our goal was to nearly double our sales team, but we fell behind on hiring while also driving the business because it's particularly hard to get good salespeople at year-end. And once they finish out their year and get year-end payouts, they get much more willing to move. So we've made 0.5 dozen offers just in the past 2 weeks, but we were behind on sales hiring throughout the fourth quarter.

This revenue shortfall is particularly frustrating because growing our monthly RMR is exactly where we want to go, we're building our sales team to drive growth, and our results clearly don't reflect the strength across the business. For example, year-over-year, we expanded non-GAAP adjusted EBITDA by 17% even with lower-than-expected revenues. We delivered positive non-GAAP free cash flow for the full year as well. Our backlog has increased going into this year, 36% from the same time last year and 80% from the same time in 2018. And we've already capitalized on some of this operating momentum, including booking more than $2 million of new business in the first week of January alone.

Now what it all this adds up to is our need to get to great scale. The more we scale the business, the more resilient we become to seasonality and differing growth rates in our product segments. We made progress with our 3 acquisitions a year ago, but the shortfalls at the end of 2019 clearly showed that we're not at the level we need to deliver consistent results and to balance the transition to more recurring revenues.

So that's what happened and why. Before I go into more detail about what we've done to address these issues and why we're positive about the business' future, I'm going to turn the call over to Sandra to walk us through the financial details so there's more context for the actions we're taking and for our outlook. Sandra?

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Sandra Wallach, Identiv, Inc. - CFO & Secretary [3]

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Thanks, Steve.

Based on preliminary, unaudited results, we expect total revenues for the fiscal year 2019 to range between $83.5 million and $83.6 million. This revenue range includes a reserve of $0.5 million related to a 3VR shipment in Q4 2019 to a Mexican-based financial institution, which lowered our revenue for Q4 and total year 2019. Last week, we received new information from this customer regarding their anticipated economic uncertainty, and we have, therefore, fully reserved their shipments until there's more clarity from the customer. This range compares to total revenues of $78.1 million for the total year 2018. This represents a 7% growth year-over-year. Additionally, without the 23% reduction in our Access Cards business as we have continued on our previously disclosed strategy to lower -- to exit lower-margin third-party products, our consolidated growth was up 14% year-over-year.

Standalone software and services revenue comprised 13% of total revenue in 2019, up 207 basis points over 2018. Recurring revenue accounted for 9% of total revenue in 2019, up 117 basis points over 2018.

GAAP gross margin for the year 2019 is expected to be 44% compared with GAAP gross margin of 43% in 2018. GAAP net loss attributable to Identiv, Inc. for the 2019 year is expected to range between negative $1.5 million and $1.4 million or negative $0.15 to negative $0.14 per basic and diluted share. This compares to GAAP net loss attributable to Identiv, Inc. of negative $4.7 million or negative $0.35 per share basic and diluted for 2018.

Non-GAAP adjusted EBITDA for 2019 is expected to range between $6.6 million and $6.7 million. This compares to non-GAAP adjusted EBITDA of $5.7 million for 2018.

We expect positive cash flow from operations for the full year 2019 to range between $0.5 million and $0.6 million and non-GAAP free cash flow for the same period to range between $0.2 million to $0.3 million, an improvement from negative non-GAAP free cash flow of negative $6.5 million in 2018. 2019 represents the first full year in over a decade where we were able to generate non-GAAP free cash flow.

Now turning to the fourth quarter. Based on preliminary unaudited results, we expect total revenues for the fourth quarter of 2019 to range between $18.7 million and $18.8 million. The fourth quarter revenue includes the reserve of $0.5 million related to a 3VR shipment during Q4 2019, as discussed earlier. This compares to total revenues of $21.3 million in the fourth quarter of 2018.

GAAP gross margins for the fourth quarter of 2019 are expected to be 39%. This compares to GAAP gross margin of 48% in the fourth quarter of 2018. This change in gross margin was primarily driven by differences in segment mix as well as a $2.5 million deployment of Thursby software solutions with gross margins in excess of 70%, which was recognized in Q4 2018.

GAAP net loss attributable to Identiv, Inc. for the fourth quarter of 2019 is expected to range between negative $2.2 million and negative $2.1 million or negative $0.14 to $0.13 per basic and diluted share. This compares to net income attributable to Identiv Inc. of $0.6 million or negative $0.01 per share basic and diluted in the fourth quarter of 2018.

Non-GAAP adjusted EBITDA for the fourth quarter of 2019 is expected to range between $0 million and $0.1 million. This compares to non-GAAP adjusted EBITDA of $3.1 million in the fourth quarter of 2018.

We have not yet completed the preparation of our financial statements for the quarter or year ended December 31, 2019, nor has the audit of our financial statements been completed. The preliminary, unaudited financial results included in our press release and referenced on this call are based on current expectations and are subject to adjustment. Actual results may vary materially from those disclosed in our press release and referenced on this call. Complete audited financial results for the fourth quarter and year ended December 31, 2019 will be released in March 2020.

In addition, we have entered into our 12th amendment of our loan and security agreement with East West Bank. This amendment to the agreement retains the total credit of $20 million, but it includes a $4.5 million term loan component for a 12-month period and lowers the revolving credit line to $15.5 million. The composition of the loan and security agreement was modified to provide us with additional flexibility to fund our short-term growth. Additional details of the amended loan and security agreement are included in a Form 8-K, which was filed today.

With top line results for 2019, we believe it's prudent to update our guidance for the full year 2020. We now expect total revenues to range between $86 million and $90 million, which would represent an increase of 5% comparing the midpoint of both the company's updated guidance and preliminary results for 2019. Additionally, without the 8% reduction projected in our Access Card business as we have continued on our strategy previously disclosed to exit the lower-margin third-party products, our total growth assumed in our new guidance is expected to be 7% year-over-year.

Non-GAAP adjusted EBITDA is expected to range between $10 million and $11 million, which would represent a minimum increase of 58% comparing the midpoint of both the company's updated guidance and preliminary results for 2019. Included in our updated guidance is our commitment to keep expenses relatively flat year-over-year. This will be achieved by strategically shifting resources to our higher-growth, customer-facing areas.

GAAP net income attributable to Identiv, Inc. is expected to range between $2 million and $3 million and earnings per basic share to range between $0.06 and $0.12. We also anticipate being non-GAAP cash -- free cash flow positive for the full year of 2020.

With that, I'll turn it back over to Steve.

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Steven Humphreys, Identiv, Inc. - CEO & Director [4]

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Thanks, Sandra. So despite our underlying business strength, we clearly came in well short of where we expected. So what are we doing about it?

First, we've already taken out a layer of sales management across the board to focus our sales investment on direct, quota-carrying salespeople. As a result, communication from our individual salespeople now goes directly to our business leaders who all report directly to me. So now every direct salesperson throughout the company is only one step from the CEO. This helps keep expectations aligned with reality and also brings resources to bear more quickly to move business through the sales cycle faster. And we took these actions in the first 2 weeks of this month.

Second, we're reorganizing our sales teams to have smaller regions and more focused product responsibilities. This will help drive both SaaS and system sales. The result is that even while taking expense actions, which I'll go through in a moment, we're nearly doubling our sales and SE team and structuring them to be more focused to drive growth.

The third, as I just mentioned, we're implementing cost-alignment measures while continuing the aggressive hiring in sales. And we've got the products and infrastructure to a good point so we can be more efficient in operations, G&A and engineering. As a result, when we finish our cost-realignment actions, we expect to have implemented about $4 million of cost savings on an annualized basis.

So to be clear, we're reducing total expenses while substantially increasing the size and focus of our sales team. Within this expanded sales team, we're specializing. Selling SaaS services is different from selling systems. Selling the full value of video also needs focus. So on our expanded sales team, we're building in specialization to make sure we're aggressively selling all of our products and services.

We've also brought on a Sales Operations Director, whose team is supporting the field sales team and coordinating revenue forecasting, planning, tracking and management daily. This team is also launching demand-generation programs, tracking dealer and channel coverage and managing pipelines across all of our business.

So we've already taken action to improve our pipeline and forecasting. However, to accelerate growth and profitability, we've got to get more scale. As we mentioned in the press release, the independent directors of the Board have launched a Board initiative to explore strategic alternatives to enhance stockholder value. They started a process to retain an independent financial adviser to help look at strategic alternatives to help us get to scale and maximize shareholder value. So we're not where we wanted to be, but the market is very strong and our position leading and taking share in the market remains solid.

Even in the face of the challenges we've just had, we're building our business stronger than ever. We're expanding and specializing our sales force. We've launched our SaaS cloud platforms for Velocity and Freedom. We've launched our first subscription-priced mobile app. We're launching our Bluetooth reader and frictionless mobile app. And there's more, but this gives you an idea of how aggressively we're going after the market, all while we're tightening expenses and getting more EBITDA leverage from our top line.

So additionally, to show our commitment and our belief in the company's opportunity and also to minimize uses of cash, of course, as described in our 8-K filing, I will be taking all of my take-home pay in stock only. Now I'm sure of the opportunity here, so it's not altruism to take my compensation in stock. I think it's a great value. Similarly, all of our independent directors are doing the same, taking their Board compensation all in shares.

So despite a rough fourth quarter, we know what happened and we've taken actions to address the root causes and to put the business on a stronger footing. The opportunities ahead of us remain strong. We exited 2019 with our RFID business up 62% for the quarter and our Premises business up 20% for the year. Our EBITDA is up 17% year-over-year and we're projecting an additional 58% growth in EBITDA for 2020 with solidly achievable targets. We've entered 2020 with a strong backlog, a focus on recurring revenue launches and sales expansion, and our interests are completely aligned with our shareholders and other stakeholders to drive the business forward predictably and profitably to create and realize our business' full value.

So with that, I'd like to open the discussion to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Latimore with Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [2]

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Great. So Steve, just on the federal government. Was the -- were the delays there sort of across the board? Or was there one agency in particular? And then kind of how do you think about the effects of kind of continuing resolutions as we head into 2020 year?

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Steven Humphreys, Identiv, Inc. - CEO & Director [3]

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Yes, good question. It was several agencies. It wasn't one in particular. And it was our integrators, which, of course, is where we get the orders directly from, Johnson Control and companies like that. And it was slow-moving through them as well as the agency demand.

I think the government is going to be catching up at least for several more months. I hope there won't be uncertainty caused by the election and budget processes there, but we'll just have to wait and see on that. But we see it getting back on a more normal basis but still definitely playing some catch-up at least for a little while.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [4]

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And then the backlog comments being up 36%, I guess can you remind us -- I guess, one, is I assume that is affected somewhat by the delays here perhaps, but also, can you remind us like how much does backlog matter in terms of, like, an upcoming quarter?

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Steven Humphreys, Identiv, Inc. - CEO & Director [5]

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Yes. So we typically come into the quarter with about 1/4 of our quarter in backlog. So obviously, that's indicating that we're stronger than that in this case. And then typically -- I won't walk you through all the gory details again, but then typically, another 50% of our revenues is from long-term contracts, long-term deployments. They're not officially backlog, but they're things we have visibility to. Hence, the 25% remaining that we have to fund and close. But some of the shortfall was related to both of those second categories, some of them that were ongoing contracts and deployments that came through contracting slower and then also the new deals in closing.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [6]

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Got it. And then just on the EBITDA guidance for '20, obviously growing a lot faster than revenue. I think you talked about $4 million -- focused $4 million reduction. Is that -- I didn't quite pick it up. Is that across the board? Is that more in R&D? Where is that focused?

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Steven Humphreys, Identiv, Inc. - CEO & Director [7]

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It's more in the non-sales and marketing and then -- and noncustomer-facing -- not more. It's only in noncustomer-facing functions. So no effect on tech support, sales, SEs, professional services, any of that.

And to be clear, we had planned growth in our overall expenses. And now basically, we'll be holding them flat to a little bit down. So it's not like we're doing -- not like we have to do a major deep cut in there. We can do a lot of things that we should do anyway to properly align resources and focus on customers and do some redeployment, which is, as I mentioned, we're already doing in sales.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [8]

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Got it. And just last question, you may not want to give it now in the preliminary results here, but revenue segments, do you have Premise versus Identity in the quarter?

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Steven Humphreys, Identiv, Inc. - CEO & Director [9]

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In terms of the revenue numbers? We do.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [10]

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Yes. Those 2 segments in the quarter, yes.

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Steven Humphreys, Identiv, Inc. - CEO & Director [11]

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Edited Transcript of INVE earnings conference call or presentation 30-Jan-20 10:00pm GMT - Yahoo Finance