Identiv, Inc. Q4 FY2020 Earnings Call

Good afternoon and welcome to Identiv's Presentation of its Fourth Quarter and Fiscal Year 2020 Earnings Call. My name is Catherine and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, Steven Humphreys, and CFO Sandra Wallach. Following Management's remarks, we will open the call for questions. Before we begin, please note, during this call, management may be making references to non-GAAP measures or projections, including adjusted EBITDA and free cash flow. In addition, during this call, management will be making forward-looking statements. Any statements that refer to expectations, projections or other characteristics of future events including financial projections or 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 your CEO, Steven Humphreys for his comments. Sir, please go ahead.

Thank you, Operator, and thank you all for being here today. In our preliminary results, we mentioned that we anticipated exceeding the ambitious growth targets we established in November. Today, we can confirm that we surpassed those expectations. In the fourth quarter, we achieved over 30% growth year-over-year, while our RFID revenue more than doubled year-over-year for the second consecutive quarter. We ended the year with a backlog for the first quarter of 2021 that was over twice as large as the same period last year. The driving force behind this growth is the rapid expansion of the RFID market. Significant advancements in chip capabilities at very low costs, coupled with Apple's full support of NFC in its iPhone 12 and iOS 14, have opened new opportunities for product engineers to integrate RFID into their offerings, enhancing customer experiences, reliability, and performance. As the market reached this pivotal point, we expanded our capacity and technical leadership, which propelled growth in RFID and positioned us for even faster expansion in 2021 thanks to our new product launches and a broadened customer base. The momentum we generated in the latter half of the year, growing 30% compared to the first half, indicates that 2020 marked a turning point for our business. Let me highlight some key growth metrics that are propelling us into 2021. We shipped over 130 million units in our RFID business in 2020, doubling our RFID volumes in the second half compared to the same period in 2019. Our average unit prices also increased by 20%, demonstrating that the strongest growth is occurring with more advanced products. With over 150 active RFID customers, we are collaborating with some of the most advanced early adopters, and in 2020, we solidified our reputation as a leading partner for sophisticated RFID devices. We track additional growth indicators in RFID, including customer launches, design wins, and new technology introductions. Here are some noteworthy examples from 2020. While we typically cannot disclose customer names, we can discuss product categories with customer launches. One notable launch is in the pharmacy sector, involving prescription pill bottles that communicate their contents for the visually impaired, with potential to extend to all prescriptions. Another launch pertains to accessories for mobile devices, highlighting the need for accessories that interact with mobile phones, enhancing their functionality without cumbersome wires. This is a promising area where we designed and launched products expected to drive significant volumes. We also supported a customer launch involving medical consumables, ensuring that items like disposable breathing tubes are authentic and compatible with the specific ventilators they accompany. This implementation is critical, and we anticipate broader application of RFID in medical device consumables to guarantee authenticity and proper usage. There are more customer launches to discuss, but these illustrate significant opportunities. Moving on to design wins in 2020, these projects are still in development phases. Personal transportation companies, including those focusing on bikes, scooters, and e-bikes, have strongly engaged with RFID in both Europe and the Americas. We’ve applied our patented tags on metal RFID technology for authenticity, tracking, and customer engagement in this domain. We're also exploring tags on metal designs to monitor tire pressure, allowing users to easily tap their phones to wheels for readings instead of using traditional pressure gauges. In addition, we have a design win related to rapid blood analysis systems, which will utilize consumable cartridges to validate testing systems and assure the authenticity of blood test assays. These designs are set for ramp up in 2021. Existing customers are also part of our design win strategy; we continuously innovate to leverage new chip features and price performance from suppliers like NXP, Impinj, and TI. For a key customer, we shipped three different designs in 2020 and developed three additional designs, with at least two expected to scale and enter the market in 2021. As we aggressively ramped up for these customers in the second half of 2020, we invested in technologies aimed at enhancing processes, quality, and automation. Although these investments impacted margins, they have fortified our competitive stance. Consequently, despite the increase in volumes, we adhered to stringent schedules with quality levels that exceeded customer expectations, providing us with competitive advantages that we can apply across all customers and prospects. We believe that any margin compression we experience will be temporary and will ultimately foster faster growth due to the competitive advantages developed. Our ability to secure design wins is underpinned by our top-tier engineering and production capabilities. Ultimately, our progress relies on the innovative technologies we are continually integrating to provide new capabilities for our customers. In 2020, we introduced an extensive array of new technologies and chips. The key launch technology involved passive temperature sensors and patches that allow for tracking temperatures without large batteries. One particularly exciting launch included capacitive sensors integrated into our RFID devices, which can detect fluid levels even through glass or other materials—ideal for monitoring medication in syringes and serum bottles. Additionally, we launched designs featuring integrated strain gauges for tracking the flex and stress of various materials, including metal and concrete. Another influence will come from our multi-frequency devices. While NFC and high-frequency offer limited read ranges, ultra high-frequency devices extend that range but come with cost and data rate drawbacks. In 2020, we introduced combination RFID devices that integrate both UHF and HF capabilities. We've also developed products featuring newer chips from manufacturers like NXP, Impinj, and others. Overall, we made significant business advancement in RFID during 2020 in terms of customer launches, design wins, and technology innovations. Regarding other aspects of our business, we also bolstered our operational strength alongside our financial results. Our federal sales rose 30% year-over-year, propelled by our technology expertise and the demand for work-from-home solutions. Notable deployments occurred at various government offices, including the Department of Energy, Treasury, NIST, FBI, and others. We also focused on recurring revenues and customer retention, launching subscription services for our entire physical security product line, including offerings like Velocity Cirrus and Freedom Cloud for access control as a service, as well as our 3VR Prime video surveillance service and Mobile SID for mobile identities. Notable customers who adopted our service platforms in the fourth quarter include EastWest Bank and La Loma Medical Center. In summary, our financial growth reflects our strength, and equally important, we secured a wide range of customer and design wins along with new technology launches that position us strongly for 2021 and beyond. We will continue concentrating on our RFID leadership, federal market expansion, and building recurring revenue through customer retention. Before discussing our expectations for this year, I will now turn the call over to Sandra for a review of the fourth quarter and fiscal year 2020 highlights. Sandra?

Thanks. As Steve mentioned, our financial results reflect our business strength exiting 2020 and have us on track for double-digit growth in 2021 and beyond. These results are all in range of the preliminary results announced February 9 with revenue, non-GAAP adjusted EBITDA, and GAAP cash flow from operations at the high end of the ranges and GAAP net loss within $0.1 million of the range provided. We closed out the fourth quarter of 2020 with $24.8 million in revenue, up 31% compared with the fourth quarter of 2019, and flat with the third quarter of 2020 which reflects strength versus our normal seasonality exiting 2020. Our full-year 2020 revenue was $86.9 million, well within the original guidance issued in January of 2020 before COVID-19 altered the world economies. Exceptional growth in RFID more than offset temporary revenue declines in premises as compared to our original pre-COVID guidance. For the fourth quarter of 2020, our GAAP and non-GAAP adjusted gross profit margins were 35% and 36% respectively compared to 40% and 42% in the fourth quarter of 2019. For the full year 2020, our GAAP and non-GAAP adjusted gross profit margins were 39% and 40% respectively compared to 44% and 45% in 2019. Gross profit margin changes resulted primarily from investments in technology and manufacturing processes and systems to meet the short and long-term growth profiles of our customers and also by the mix of products. As Steve has previously said, we expect margins to revert to historical levels. Specifically, we ramped high growth RFID customers in the second half of 2020 and made investments in technology to drive new processes, more automation, and even higher manufacturing speeds, consistent with our already industry-leading quality and performance. These investments have already contributed and will continue to contribute to growth in the current year and years ahead, because of the competitive advantages created as a result. Our non-GAAP adjusted EBITDA margin was 6% in the fourth quarter and 5% in the full year 2020. Our Q4 net loss was $1 million or a loss of $0.05 per share compared with a loss of $2.1 million or a loss of $0.12 per share in Q4 2019. Our full year GAAP net loss was $6.2 million or a loss of $0.34 per share compared with a loss of $0.13 per share in 2019 or a loss of $2.2 million. And our cash flow from operations was positive $3.6 million even after our investment of $0.6 million in capital expenditures; non-GAAP free cash flow was $2.9 million positive in the fourth quarter alone. Because of our operating leverage on the expense line and because we manage working capital prudently, we achieved our commitment to shareholders to deliver positive non-GAAP free cash flows exiting Q4 2020. We have provided in the appendix today a full reconciliation of GAAP to non-GAAP information, which is also included in our earnings release. Our next slide further analyzes trends by segment. Beginning with premises, the segment accounted for $9 million or 36% of our total revenue in Q4, representing an increase of 5% from Q4 2019. This reflects the recovery of this segment delivered exiting 2020, leading the way against the backdrop of total year results. For 2020, our Premises segment generated 39% of our full year revenue or $34.2 million, a decrease of 19% from 2019. The quarterly and annual changes in revenue from the Premises segment were due to fluctuations in sales of various product lines as customers adapted to the pandemic and other macro factors. GAAP margins for Premises in the fourth quarter were 56% compared to 52% in Q4 2019. For the full year, Premises GAAP margins were 55% compared to 53% in 2019. Turning to the Identity segment, revenue from our Identity products totaled $15.8 million or 64% of our total revenue in Q4 2020, a 53% increase from Q4 2019. Our Identity segment generated 61% of our full-year 2020 revenue, or $52.7 million, an increase of 25% from 2019. Identity revenues in both the full-year and the fourth quarter were primarily driven by higher sales of RFID transponder products as well as higher sales of smart card readers. Our Q4 2020 Identity segment GAAP margins were 22% compared to 29% in Q4 2019, and our full-year 2020 Identity segment GAAP margins were 28% compared to 35% in 2019. As previously mentioned, due to very rapid growth of customers in the early stages of their RFID deployment strategies, which are driving our higher proportion of RFID revenues. Now moving to our operating expense management. Our GAAP operating expense for the fourth quarter was $8.9 million, a decrease from $9.3 million in Q4 2019. Our non-GAAP operating expenses for the quarter totaled $7.5 million or 30% of total revenue compared to $7.7 million or 40% of total revenue in Q4 2019. For the full year, our total GAAP operating expenses were $37.1 million, an increase of $0.4 million from 2019. Our non-GAAP operating expenses for the full-year were $30.7 million or 35% of revenue compared with $31.3 million or 37% of total revenue in 2019. We held our non-GAAP operating expenses flat during 2020 by successfully re-investing for growth within our current cost envelope and do not expect to increase non-GAAP operating expenses for 2021. As we've discussed on prior calls, we strongly believe that we have the capacity to support at least 20% more revenue within our current operating cost structure. Bringing all the pieces back together, our non-GAAP adjusted EBITDA was $1.4 million in the fourth quarter of 2020, a $1.2 million increase compared to Q4 2019. For the full year 2020, our non-GAAP adjusted EBITDA was $4.4 million. Turning to the balance sheet. We exited Q4 2020 with $11.4 million in cash, a net decrease of $0.9 million from Q3 2020 and a $2 million increase from Q4 2019. The key drivers of our cash activity for the last quarter were $3.6 million of positive GAAP net cash flows generated from operations, $0.6 million in capital expenditures invested in our Singapore manufacturing plant, under financing activities we used $4.1 million in cash, $3.3 million was used to pay off the term loan facility, $1.2 million to reduce the promissory note, and $0.3 million was used for tax payments related to licensing. And lastly, there was a small $0.3 million positive impact of foreign currency fluctuation to reconcile to our GAAP cash flow. In our 10-K filings, we will be providing a full reconciliation of the year-to-date cash flows. For completeness, we've included the full balance sheet per the earnings release in the appendix. Due to the operational momentum exiting the fourth quarter of 2020, today, we're updating the guidance previously issued on November 10, 2020 for the full year 2021. With total new orders booked in 2021 as of mid-February exceeding $16 million or a 60% increase over the comparable period in 2020, we are updating the lower end of expected revenues for Fiscal 2021 to $100 million, up from $96 million. Because the adoption of RFID technology and consumables accessories and short life technology products is in its initial stages early in the year, it's difficult to forecast a potential upper end of the range. As we develop better visibility into the second half of the year, we will be able to more accurately assess that number and we will provide updated guidance as appropriate. Normal seasonality is expected to continue with momentum building quarter-over-quarter and we continue to have strong confidence in our guidance for 20% to 25% revenue growth in the first half of 2021 over the first half of 2020. We are also confident that our double-digit growth expectations are on track and we believe that full-year revenue guidance may still be somewhat conservative considering the current business momentum. With the strength from operations and limited capital expenditures required to scale for growth, we expect to stay non-GAAP free cash flow positive for 2021. This concludes the financial discussion and I'll pass it back to Steve.

Thanks, Sandra. As our revenue growth, cash flow, and backlog clearly show, we've got strong momentum setting us up for 20% to 25% revenue growth in the first half of 2021 and a strong year overall. We expect our growth this year to be driven by the same three strategic priorities that drove our growth in late 2020. Our strength is the premier provider of sophisticated NFC-enabled RFID products, federal government expansion, and improving predictability by increasing recurring revenues and expanding customer retention. Now, RFID is the main growth engine for 2021, and it's the core technology underneath most of our products, so I'll focus primarily on it in this call. The key thing to understand is exactly why did our RFID business double year-over-year in both Q3 and Q4 2020 versus 2019. Is this sustainable from a market perspective? And can we keep our leadership and market share growth? The main reason for the huge growth is that the market itself is growing explosively and it's just at the beginning. We shared the vision with NXP, Impinj, Nvidia, and others that every physical thing on the planet will have a digital existence. RFID is the way this happens. Tiny low-cost chips with highly tuned and optimized antennas, system software, and security that are embedded in everything we interact with. This is software reaching every physical thing on the planet, and RFID enables it. So, syringes can track if the exact right amount of medication is built into them and dispensed into the patient. Your refrigerator can tell you when the filter needs to be replaced and make sure it's an authentic replacement that's put in and working. Your running shoes can sense how many steps you've taken. Your phone accessories can work together intelligently with your phone to create experiences and applications we've never had. Governments can track the quality and authenticity of products for compliance, especially for tax collection. Every temperature-sensitive medicine can be tracked and made sure it stayed within safety parameters and not spoiled. And every blood test assay is authentic and matched with the right blood sample. These are examples and some of the ones I mentioned earlier that give you a sense of the market scale. Over 30 billion syringes used annually worldwide; 20 billion prescription bottles annually; over 5 billion consumables used in major appliances annually; 6 billion athletic shoes sold annually; 1 billion packets of products sold annually in just one country; 13 billion phone accessories; over 15 billion temperature-controlled medical shipments and over 20 billion automated blood test assays used annually. In a few sentences, that's potentially well over 100 billion units annually. Now, I won't take more time on more examples, but just obvious other use cases get to a market size of hundreds of billions of units. Competitive pressures will force adaptation across every sector as technology gets better and costs drop until nearly every physical thing has a sensor or augmented integrated digital existence. RFID makes this happen. So why is Identiv winning? Because we enable the amazing digital capabilities of the chips to work in the messy analog world of antennas, power harvesting, data conversion, and security. They have to go on shoe, in a syringe, embedded in the hair of a doll, then they have to communicate through RF and harvest power from the radio signal over the phone or reader to run the chip. They have to do this totally reliably while the thing is dropped, washed, stuffed in pockets, and generally exposed to the real world. We make that part work. We design the systems, the antennas, software security, and physical form that connects the chips, accesses their incredible capabilities, manages the RF communications and power conversion and creates the platform for the digital experience, all in harmony with the physical experience of the product. We're the bridge that brings digital chip capabilities to all the product engineers trying to get the benefits of RFID and embedded sensors into their products. We make this happen with our huge library of designs with patents like tag on metal and with trade secrets we've developed working with the most advanced early adopters in their industries. We deepen our value and competitive edge by providing both the devices themselves and the readers and programmers to personalize and read the RFID devices. Whether it's in a pharmacy or any other place where RFID is read or programmed, our readers are among the most widely deployed for NFC and high frequency RFID programming and reading. This gives us both credibility with our customers' engineers and the flexibility to add features and software value that providers of just RFID devices can't add. We then work closely with our customers' engineers and with the chip vendors to build a very tricky analog bridge and system to make it all work across RF. With very high reliability, high data security, and optimized power transfer, the end user gets a delightful engaged interaction. Our designs make the difference between an inconsistent awkward interaction and almost magical totally reliable and durable experience. Then because we own our own production facilities, we go directly to prototypes, pilot runs, ramp up production, and deliver with extremely high quality even for the most complicated devices. But almost always happens next is the customers' engineers want to improve the product either from what they've learned or because our chip partners come out with new chips, new features, new price points. So we run another design prototype pilot production process. Now, we'll keep leading it because in this market of thousands of designs and hundreds of billions of units, there are huge first mover advantages. We have a unique design through production and redesign platform that keeps customers with us as they drive more capabilities and better performance into their customer experiences. This will keep accelerating driven by the chip vendors, Moore's Law speed advances and by competitive pressures created when any digitally enabled product is launched, it will pressure others to keep up or lose their market. So with that perspective on the core driver of our growth, let me close with a couple of specific metrics to watch and comments across our business. In RFID, we'll keep updating on customer launches and design wins and the use cases that we can replicate across an industry. These are the core drivers of growth in our continued market leadership. In the area of federal government expansion, we expect the 30% growth in our federal business to continue as the new administration emphasizes physical security and cybersecurity. With our product superiority, we expect to continue to grow our share even in a healthy spending federal government market. Among recent wins in the federal government, we're securing the Secret Service headquarters, field offices, and all the places here. Our security leadership also is behind some rather urgent delivery orders we recently received for the U.S. House of Representatives in the capital. And we'll share more wins and expansions throughout 2021. The third strategic priority for 2021 is increasingly predictable revenue. I mentioned the full range of recurring revenue products we've launched in our Premises product lines. In RFID, most products are either consumable or short life technology products, so the key to revenue predictability is getting designed in and then very high customer retention. Our orders recur as consumables are consumed and needed again or as technology products turnover for new technologies. Now the best metric here is customer retention and in RFID in 2020, we had 100% customer retention. Developing products for our RFID customers can take years, so we have great visibility into the scale of these projects in their long-term growth. Our pipeline of designs is at record levels with particular interest in tag on metal, our passive temperature patches, and devices for expensive consumables across everything from appliances, medical assays, and even coffee and vaping pods. All need authenticity but also calibration and data integrity matching for medical and other sensitive applications. So to wrap up, here are some metrics from just the last few weeks. As Sandra mentioned, we're now over $16 million in new bookings, up 60% from the same time last year. We have designs underway with over a dozen RFID customers, several with multi-million unit potential. We've launched cross-industry marketing programs to replicate solutions in medical devices, luxury beverages, pharmaceuticals, hospitals, schools, and the military. For example, in addition to our first customer in the pharmacy space, a second customer of similar scale is deploying our devices for prescriptions for the visually impaired. Now in an industry moving this fast, every week we're hitting new milestones and cross-leveraging new opportunities, which we will keep communicating so you can track our progress in these transformational markets. With that, I'll open it up for questions and discussion.

Thank you. We will now take questions. Your first question comes from Jaeson Schmidt from Lake Street. Your line is live.

Hey guys, thanks for taking my questions. I just wanted to start with the RFID business. Can you share what percentage of your revenue RFID is in 2020 and then where do you think that can go for 2021?

Sandra, do you want to take that? I'll take that as a no. So RFID is within our identity business, Jason, as you know. And we haven't traditionally broken that out, but it's over half the Identity business. Then of course, it's the most rapidly growing. So it will certainly be in the range of two-thirds to three-quarters of the Identity business by the time you go out of this year.

Okay. That's really helpful. And then along those lines, obviously with that momentum, it's going to compress gross margin here in the near term. How should we think about gross margin trending for this year with sort of the different dynamics within each segment?

Yes. We mentioned earlier that there were two main factors affecting this. The primary factor was during the growth ramp-up in the second half of 2020 when we invested in new equipment and technologies to meet specific customer requirements. These investments mainly contribute to the cost of goods sold, impacting our gross margins in the short term. However, we expect gross margins to recover to the 40% range within the next quarter or two. Additionally, both parts of the business are growing steadily, leading us to anticipate further improvements in gross margins over time. Longer term, we also plan to enhance our software offerings, which will contribute to increased value and push gross margins even higher than the 40% range. That's essentially how it will progress. Does that make sense?

Yes, that's really helpful. And then just a last one from me and I'll jump back into queue. You indicated updating guidance once you have more visibility. Just curious if that's based more on just general macro visibility improving or specific customer orders? Just trying to get a sense of what are the dynamics that could potentially drive upside to the current range?

Yes, that's a great question. The key customers driving RFID volumes are large, and while I've mentioned some of the completed design wins, the decision to launch a product can vary from this quarter to the next or even later, depending on their strategy and timing. As we gain clearer insight into specific launches, the timing becomes crucial. For our company, the timing of these major clients can shift by a quarter, which impacts our outlook. Therefore, we aim to gain more visibility to ensure we understand both the scale and timing; ultimately, it’s primarily about timing.

Okay that makes sense. Thanks a lot guys.

Thanks, Jason.

Your next question is coming from Jeff Kessler from Imperial Capital. Your line is live.

Thank you. Can you hear me?

Yes, we can hear you, Jeff. You're a little vague.

Okay. Let me see if I can just set this. Is this better?

Much better.

My first question is about the Premises side. It seems that some of the larger suppliers of physical security equipment, particularly those focusing on access control and visitor management, are viewing the second half of 2021 as a potential turning point for an industry that has been struggling since last March. What discussions are you having with companies that have been unable to operate on premises and generate significant revenue growth? While you saw a 5% increase, now seems like an appropriate time to begin exploring the software and analytics programs that access control providers might be interested in adopting once the market recovers. Could you share your insights on the stakes involved and the key factors you consider indicating that the business is poised for recovery in terms of top-line growth?

Yes, great question. And there are two aspects to the physical security business for us. Federal government, as you pointed out, has stayed strong and grew 30% and there is no sign that that's going to slow down; in fact, it should accelerate with some of the priorities of the new administration, so that will keep us growing regardless. And then on the commercial resurgence, as you say, it's a question of timing there; we're doing a lot of training on our recurring revenue products. As I mentioned, we launched basically recurring revenue versions of all of our premises product line through 2020, so we're hitting the ground with those, as well as we'll have another pretty substantial video-related launch in the second quarter of this year. So, we'll be very lined up from a year customer training perspective, a dealer training perspective; we're already seeing some bounce back on the commercial side in places like schools and transportation, other areas like retail and hotels are still going to be wait and see but the thing you were focusing on right now, frankly, is on the federal side because that is growing very nicely, and we think that's going to continue. And then as commercial bounces back, we think we're going to be in a really good position with a range of products to take advantage of it.

You've previously mentioned a $25 million per quarter inflection point for the company's margins. Considering the developments in your identity division, is there a specific inflection point for margins in that area, especially since you're not planning to increase operating expenses significantly for next year? Additionally, are there any changes in business mix or vertical markets that could impact the margins for identity?

Let me address both of those points. First, regarding leverage in our model; you're correct. In the fourth quarter, our operating expenses decreased by around 4% while revenues increased by approximately 30%. We have reached a stage where we have fixed costs in general and administrative expenses, as well as in research and development. As we continue to grow, we can derive significant leverage from this situation. We've previously communicated that we believe we can increase revenue by 20% to 25% while keeping operating expenses steady. Even if operating expenses need to rise slightly in sales and other areas due to scaling, it will be minimal compared to the increase in revenue and gross margin. Overall, we believe we've reached that leverage point regarding operating expenses and revenue with a positive impact on our bottom line as we generate gross margin dollars. Now, specifically about the Identity sector; it's relevant to discuss this because we feel we have gone through a similar inflection point. The enhancements we've made at our facility in Singapore, along with the engineering improvements related to the technologies I mentioned, are now established. Therefore, we can leverage these as we grow our top line from both our production facility and our engineering and sales channels. We believe we are at optimal leverage points right now, and as we progress through 2021, especially as we aim for higher revenue quarterly growth, we expect to see significant improvements in operating margins.

All right. Great, thank you very much.

Thanks, Jeff.

Your next question is coming from Mike Latimore from Northland Capital. Your line is live.

Hi, this is Aditya on behalf of Mike Latimore. Could you comment on the video analytics growth; do you expect the video analytics to grow at a faster rate than the overall premise business?

Yes, that's a good question. Last year, our video business, which is heavily tied to retail, hotels, and similar sectors, faced some challenges. However, we recently launched several products, including our video surveillance as a service platform at the end of last year. We believe this will significantly contribute to our growth, particularly in the commercial sector, as preventing loss or shrinkage is becoming increasingly vital for retail warehouses. The need for integration across various use cases, such as schools and government entities, is growing, and more customers are looking for a unified video analytics and access control system instead of separate platforms. We anticipate this will drive growth for us. It remains to be seen how quickly verticals like retail and hotels will recover, but other sectors, including schools and government, are already showing signs of investment.

All right, great. Great. And is there any plans for acquisition on goods?

I'm sorry, acquisition in general or somewhere specifically?

In general, in general. Do you have any interest in making acquisitions in the near future?

We are not specifically targeting anything; we are fully focused on managing our own growth. We are always open to opportunities, particularly if they can enhance our leadership in RFID. However, we have a comprehensive portfolio of technologies and products, a solid channel in place, and we are just beginning to scale. Our priority is to effectively execute with what we have, as we believe this will yield a high return on investment and keeps us quite busy. I don't want to say we will never consider acquisitions, but our main focus is on execution and capitalizing on the business opportunities currently in front of us.

All right. All right, fine. That's it from my side. Thank you.

Thank you.

Your next question is coming from Jeff Kessler from Imperial Capital. Your line is live.

Hi, thank you. One area we just discussed is access control and integrated video. Currently, the industry is experiencing significant consolidation as companies aim to offer video and access as a service. Companies like Bravo and Ricarda are merging their basic cloud access features with their video capabilities, or the other way around. I'm curious if there is cooperation among these players or if it's strictly competition. Where do you position yourself as a provider of one of these subsystems? Are you able to collaborate with others in this field, or are you primarily competing against these companies?

We offer a variety of products, and in the small and medium-sized business sector, there is more collaboration and competition, where we discuss partnerships for technology and integration. However, in the enterprise sector and especially in our primary federal government area, we believe our position is so strong that it’s strictly competitive. We will not yield any of that market, and we recognize the real benefits of having a fully integrated system rather than just basic connections between access control and video. For instance, the personnel database integrated with the access control system is always accurate and can provide context to video events, allowing us to identify employees, understand their roles, and track their locations. This level of integration offers substantial advantages, and we intend to maintain our leadership in this aspect.

Okay, great. Thank you very much. I appreciate it.

Your next question is coming from Jay Chung. Your line is live.

Hi. Can you hear me okay?

Yes, we hear you.

Perfect. You talked about the unit opportunities out there. I was just wondering if you could give an update on your capacity and what the plans are I guess for future capacity build?

We increased our capacity throughout last year and even at the beginning of this year, allowing us to handle about 50% more volume than we did last year. The great thing about our capacity is that it is easily scalable; adding an additional 30% to 50% capacity compared to last year requires an investment of around €600,000 to €700,000 for new machinery. We have already completed the necessary facility build-out, so we are well-positioned to expand our capacity in a straightforward manner, well beyond our current levels. Right now, we have capacity for approximately 50% more than what we achieved last year.

Great. That's great to hear. And then, there seems to be shortages in the industry. I just wonder how you are mitigating that and making sure you'll be able to fulfill your client orders?

Yes, that's a good question. First and foremost, everything is under control. However, the situation is quite challenging at the moment. We have strong customer relationships that help us communicate the need for early order placements, particularly when chip vendors are offering lead times of 26 weeks. Customers understand they need to place orders six months in advance for their fall launches. We’re not pushing them; it's just a necessary approach. Additionally, we have solid relationships with chip vendors, allowing us to sometimes access parts faster than the typical lead times. This capability provides extra value to our customers and reinforces their trust in us, especially since we've been in this industry for years. It's crucial to have built these relationships during tough times. We manage by planning and ordering ahead, and with these connections, our performance exceeds the average in the current landscape.

That's great to hear. Lastly, regarding the new Vice President of Marketing, Lee Dao, could you share more about the focus? Is it primarily on RFID or more on the premises side? Additionally, what are some of the initial projects you plan to address?

Good question. It is both, and that's one of the reasons we were impressed with Lee's background. She worked at Honeywell, dealing with large systems and building controls, which relate to premises. However, her longest experience was at Intel; she understands semiconductor marketing, which is quite similar to RFID marketing, where you need to engage engineers to adopt and integrate products. Moreover, she began her career in a Senator's office, giving her insights into government, so we have someone skilled in government infrastructure and chip marketing. She covers the entire spectrum. With her expertise in digital tools, she is very familiar with digital platforms; her marketing team can specifically target engineers involved in medical device design, sending tailored messages. She has already revamped our marketing platform with a new automation system, updated our web store, and redesigned our website, significantly enhancing our marketing efficiency as a go-to-market lead generation tool. As you can see, I can't say enough about her; she aligns perfectly with our goals and addresses areas where we haven't excelled. Our approach has been overly technical and sales-driven, and having targeted leverage in digital marketing will be a valuable asset for our growth that we previously lacked.

Great. Thank you so much.

Thank you.

Thank you for joining us today. You may now disconnect.