Identiv, Inc. Q1 FY2021 Earnings Call

Good afternoon. Welcome to Identiv's Presentation of its First Quarter 2021 Earnings Call. My name is John, and I will be your operator this afternoon. Joining us for today's presentation are the company's CEO, 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 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 CEO, Steve Humphreys for his comments. Sir, please proceed.

Thanks, operator, and thank you all for joining us. In the first quarter of 2021, our momentum continued to grow, especially in our RFID business. Overall, our revenues grew 22% year-over-year, our Identity business grew 38% in total, led by over 59% growth in our RFID business. Our other key growth and profitability metrics also made strong progress. We shipped 40 million RFID units in Q1 versus 26 million units in Q1, 2020, an increase in units of 53%. Total backlog at the end of Q1, 2021 grew 50% versus the end of Q1, 2020. And our orders booked quarter to date the first month of Q2 are up 45% from the year prior. We also showed more leverage in our business model. Expenses in the first quarter were down 6% from Q1, 2020, while revenues were up 22%, clearly showing leverage from our operating expenses as we scale. Our core growth strategies of gaining new customers with new design wins, moving customers through the production cycle, expanding new and more complicated designs, and bringing second and third generation designs to production, all made progress in the first quarter. So, here's some specifics in each of these growth drivers in the first quarter. Starting with customer launches and expansions, several of our existing customers expanded the number of designs we've done for them, and now we've committed to volume orders for the second-half of this year on the new designs. For example, we doubled the number of designs for one major mobile device provider from four designs to eight. We started production on the first four designs last year. Two more are now under contract with committed volumes to ramp in the second half of this year, two more are nearly complete, and another design is already under discussion. We've also been introduced to two other product groups within the customer, with completely different use cases. Our expectation is that revenues from this customer will keep growing in upcoming years. Another customer use case that's completed design is in self-test drug kits. With self-testing, a test must work only with the right chemicals, and the data must be secured and encrypted, ensuring no false results, and that the data remains private, which our devices do. A product is planned to launch soon. The third is prescriptions for the visually impaired, where another pharmacy chain is now in mass market pilot for RFID-enabled prescriptions. A related update in this category is one of our early customers CVS tell us anecdotally that pharmacists are finding RFID programming processes easy for them, and that acceptance among visually impaired customers is going well. While we can't disclose numbers, customer and market feedback is positive for what could become a half-billion unit use case across all prescriptions for visually impaired people. Our fourth customer use case is in consumables for high-end appliances. This design has been running, but volumes are growing, because as we've all stayed at home, many people have bought new high-end appliances. These different use cases present numerous opportunities across various markets, each of which can drive our growth as they scale. We anticipate continued growth in new customer launches and expansions in volumes and designs. Now let's look at design wins in the first quarter. Again, the pipeline is strong, so I'll describe a couple with good volume potential and higher price points for more complicated technology. The first is in wristbands for theme parks and other event venues. These are starting to reopen, but with lower density. The need to maximize revenues from each visitor is more critical than ever. Therefore, a multifunction, wearable RFID device is a low-friction means to achieve this. Consequently, we're working through a range of design options with different features. Another design win in Q1 was for consumables for robotic floor cleaners. A third, and one of the most exciting design wins is in high-end syringes. These are super precise autoinjectors for cancer, autoimmune, and other treatments that need to be dispensed in exact amounts, at the right temperature, at the right dispense rate, and through precisely the right needle insertion. This design incorporates multi-sensor features, including temperature and fluid dispensing measurements, as well as authenticity and data protection. This means our RFID device will retail in the $1 to $1.50 range. It will take some time to reach production since we're discussing FDA-approved devices, but the customer projects volumes of 100 million units. Whenever it hits production, the business opportunity is substantial. Switching costs will be very high, so we expect to grow alongside the customer for the foreseeable future. Additionally, others in the industry will have to respond with similar features, presenting more opportunities for us. With designs like these, we foresee continued expansion in AUPs, gross margin expansion, and a strong competitive position as devices become more complicated. We also continued our new technology launches, developing a radiation-proof RFID device for medical applications in X-ray environments, including CT scanners, PET scanners, X-ray, and devices that need to operate around these systems for specific customer use cases. Beyond our high-growth RFID segment, our premises segment began a growth cycle toward the end of the first quarter. I'll provide more details in our forward-looking comments, but it's worth reiterating that the first quarter of 2020 was pre-COVID for nearly the whole quarter. In Q1 2021, premises grew about 3% year-over-year, which indicates premises is now back above pre-COVID levels. We saw momentum build as we exited Q1, leading us to expect premises growth in Q2 of around 30% year-over-year. This is driven by strength in the Federal government, commercial businesses making up for deployments that were postponed last year, and our new product launches. These trends will likely position us ahead of the growth we've been projecting in premises for 2021. Our third strategic focus is on revenue repeatability and predictability. In RFID, predictability is driven by customer retention and a focus on consumable products. In Q1, we maintained our track record of 100% customer retention in RFID. We also continued to expand the use of consumables, as you've heard in appliances, syringes, prescriptions, and other use cases. In premises, predictability is influenced by software services and recurring revenues. In Q1, we grew this category of software service and recurring revenues to 24% of our premises revenues. So in Q1, our growth showed strength even in our seasonally lowest growth quarter. Importantly, we experienced a wide range of customer launches and expansions, design wins and technology launches that support a strong 2021 and beyond. The focus areas of RFID leadership and growth, the Federal market and recurring revenues, and customer retention remain our priorities, and we made great progress on all fronts in Q1. Before discussing the next quarter and the rest of this year, I'll turn the call over to Sandra to cover the financial highlights for the first quarter. Sandra?

Thanks. As Steve mentioned, our financial results reflect our business strength exiting the first quarter, and put us on track for double-digit growth in the remainder of 2021 and beyond. We closed out the first quarter of 2021 with $22.2 million in revenue, up 22% compared to the first quarter of 2020, and down 11% compared to the fourth quarter of 2020. Our first quarter growth year-over-year was driven by a 59% increase in our RFID devices, with over 40 million units shipped to customers, and the 3% growth in our premises business, powered by 30% growth in our Federal business, partially offset by the continuing impact of COVID on certain select verticals during 2021 Q1, versus largely pre-COVID Q1 2020. Our recurring revenue remained stable at 6% for both our first quarter and trailing 12 months. For the first quarter of 2021, our GAAP and non-GAAP adjusted gross profit margins were 35% and 36%, respectively, compared to 35% and 36% in the fourth quarter of 2020, and 41% and 43% in the first quarter of 2020. For the trailing 12-month period, our GAAP and non-GAAP adjusted gross profit margins were 37% and 39%, respectively. Changes in gross margins resulted primarily from mix across and within our segments, and we continue to expect margins to revert to historical levels within 2021. Our non-GAAP adjusted EBITDA margin was positive 2% in the first quarter, reflecting results of $0.4 million, compared with negative 2% in Q1 2020, and positive 6% in Q4 2020. For the trailing 12-months period, our non-GAAP adjusted EBITDA margin was positive 6%. Our Q1 GAAP net loss was $1.5 million, or a loss of $0.09 per share, compared with a loss of $2 million, or a loss of $0.13 per share in Q1 2020, and a loss of $0.7 million, or a loss of $0.05 per share in Q4 2020. In summary, we met and exceeded expectations on the top-line, saw the continued impact of segment mix with an overweighting of growth in our RFID devices, managed costs, and delivered $0.02 better on the ETF line versus external expectations. We've 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 Identity. Revenue from our Identity products totaled $13.7 million or 62% of our total revenue in Q1 2021, which is an increase of 38% from Q1 2020, and a 14% decrease from Q4 2020. The sequential decrease was primarily driven by normal seasonality of lower sales of RFID transponder products and access card sales, partially offset by higher sales of smart card readers compared to Q4 2020. The year-over-year increase was primarily driven by higher sales of RFID transponder products, as well as higher sales of smart card readers and access cards. Our Q1 2021 Identity segment GAAP margins increased to 25%, compared to 22% in Q4 2020, while lower than Q1 2020 at 30%, due to the rapid growth from customers at the early stages of their RFID deployment strategies, which are driving a higher proportion of RFID revenues. Turning to the premises segment, this segment accounted for $8.5 million or 38% of our total revenue, representing an increase of 3% from Q1 2020, and a decrease of 6% compared with Q4 2020. The year-over-year increase in revenues from the premises segment reflects the continued strength of our Federal business and select recovery in other verticals. The sequential change in revenue was due to normal seasonality. GAAP margins for premises in the first quarter were 51% compared to 56% in Q4 2020 and 55% in Q1 2020, due to the mix of products within the segments. Now moving to our operating expense management. Our GAAP operating expenses for the first quarter were $8.9 million, compared with Q4 of 2020, and down $0.4 million compared to the first quarter of 2020. Our non-GAAP operating expenses adjusted to exclude restructuring and severance costs, and certain non-cash charges normally excluded from our non-GAAP results, such as stock-based compensation and depreciation and amortization, totaled $7.6 million in the first quarter of 2021. This compares to $7.5 million in Q4 2020, and $8.1 million in Q1 2020. Bringing all the pieces back together, our non-GAAP adjusted EBITDA was $0.4 million in the first quarter of 2021, a $0.7 million increase compared to Q1 2020. Turning to the balance sheet, we exited Q1 2021 with $11.5 million in cash, a net increase of $0.1 million from Q4 2020, and a $2.8 million increase from Q1 2020. The key drivers of our cash activity for the quarter were that we invested $1.1 million in our Singapore factory as the next tranche of capacity was delivered in Q1 to support the planned expansion to approximately 220 million units. Under financing activities, we had $2 million in net cash provided, driven by a $2.2 million increase in net borrowings under our EastWest Bank revolver, offset by $0.3 million used for tax payments related to RSU releases. Additionally, given the success of our recent follow-on offering, we were able to issue an additional 3.8 million shares of common stock for gross proceeds of $40.3 million. We have paid off the last growth promissory note and reduced our interest expense on the current line of credit. This additional working capital will provide agility to flex for growth, as we track the trajectory of our business going into the second half of 2021. In our 10-Q filings, we will be providing a full reconciliation of year-to-date cash flows. For completeness, we've included the full balance sheet for the earnings release in the Appendix. Due to the operational momentum exiting the first quarter of 2021, we are confident with our previous guidance for the lower end of full year 2021 at $100 million. We will share metrics as we continue this growth journey. Exiting Q1 2021, as of March 31, our Q2 backlog was $10 million. As customers finalize their schedules as of April 30, we have seen our Q2 backlog for shipments increase over 30% from the same period last year. Our total new orders booked for the second quarter to date is $9.8 million, representing a 45% increase over the same period in the previous year. Normal seasonality is expected to continue with momentum building quarter-over-quarter. We have strong confidence in our guidance for 20% to 25% revenue growth in the first half of 2021 over the first half of 2020. As we continue to monitor the second half of the year, we will be able to assess that number more accurately and will provide updated guidance as appropriate. This concludes the financial discussion, and I'll pass it back to Steve.

Thanks, Sandra. As our financials show, we're on track for 2021. Just as we hit our goals in Q1, we think we're in a strong position for the second quarter and the rest of the year, with upsides both in the near term and for the second half. In RFID, our growth drivers of customer launches, design wins, and new technologies were robust in Q1, and indications suggest they will keep strengthening. Beyond our core competitive advantages, we have several initiatives to drive growth. I want to focus on two of these that we're launching this quarter, and discuss others in future calls. The first is our RFID developers' kit, featuring RFID devices with various chips and features, demo code, sample NFC-enabled mobile apps, and direct support from our customer engineering team. Our goal is to be the go-to solution provider for every engineer considering high-end RFID integration into their products. We're building a community of developers with ongoing support from our RFID experts. Since we're one of the few in the industry that does small prototype and production runs, we're leveraging that to allow engineers to obtain samples of their designs. It's crucial for us to be in front of whoever might have the next big hit. Our developers' kit and the surrounding community are critical strategies to widen our market leadership while the field is still open. Another investment we are making to accelerate our growth is in our production technology. RFID devices are complicated, being mixed analog and digital systems. As we integrate sensors for temperature, humidity, and acceleration—components that are inherently analog—they must be incorporated into products that convert these analog values into digital information. Our aim is to enable more analog sensors to be integrated with our RFID devices, which would enhance average prices and margins while bolstering customer retention and accelerating the adoption of multi-sensor RFID subsystems. We've always planned on incorporating production equipment and automation software designs to support multi-component and multi-device systems. I talked in a prior earnings call about our sensor capabilities launched last year, including use cases for pressure sensors in bike wheels, capacitive feel sensors, and temperature sensors. With some of the capital we raised last month, we've accelerated this program, starting the process of specifying, developing, and customizing automated systems for these products. It may take a few months to get up and running, but we can begin marketing, selling, and designing systems now, as long as our customers are aware that private prototypes will only be a few months away, and particularly if they see existing production capabilities in place. This significantly enhances their likelihood of trying complicated designs sooner. Cases like bike and scooter tire sensors, syringes, and running shoes with accelerometers present multi-sensor needs, all of which have the potential to scale to hundreds of millions of units. Getting a head start on high-volume capabilities for devices like these creates a competitive moat for us during the early market development phase. To be clear, even initiating customer projects to utilize multi-component RFID designs will take several months to see in motion, given the standard six to eight month cycle from design to production. However, being able to start now means we're ahead of our competition and ensures deeper design lock-ins with customers. The RFID developers' kits and multi-device automation are two strategic drivers that we believe will provide upside over our baseline for 2021 and particularly our outlook for 2022. I focused mainly on RFID because it's our core growth driver. Our premises side of the business is also set for strong growth in the near term, especially in Federal, State, and local government sales, as well as our recurring revenue products. There's significant demand in the physical security market at both Federal and state/local levels. Even states we expected to have financial difficulties due to the pandemic are performing well. Coupled with a need for enhanced physical security, increasing federal spending, fiscal health at the state level, and infrastructure investments, we see multiple drivers for growth and market share. As I noted in my opening remarks, we're trending toward 30% year-over-year growth in premises for the second quarter. This supports an overall growth rate that might exceed the 20% to 25% we projected for the first half. The foundations of our strategy were bolstered in Q1, and the outlook for the year appears better than anticipated. Many of the significant use cases previously mentioned are progressing. These include a major national cannabis program, where we've delivered sample volumes, among others, like the syringe and prescription bottle projects I mentioned earlier. The cannabis program is forecasted to exceed a billion units. Syringes for just one vendor are projected at over 100 million units, commanding a high price point, while prescription bottles account for a potential half-billion unit opportunity for the visually impaired. We believe we will sustain our leadership because, in a market with thousands of designs and a potential for hundreds of billions of units, there are substantial first-mover advantages. We're amplifying these advantages with the developers' kit and the multi-sensor automation platform I previously discussed, which establishes robust barriers against competitors. Besides our core technology prowess, we recently raised capital successfully for three main reasons. Firstly, this financial strength allows us to invest in initiatives like multi-technology automation. We previously operated with a reactive mode, securing customer contracts to fund investments, but we are now taking proactive steps to forge an even larger competitive lead. This means establishing capabilities ahead of immediate needs, which promotes faster adoption by customers because they recognize that we're prepared. We're also intensifying our inventory investments to encourage customer launches and swift scaling, as well as to insulate ourselves from the component shortages affecting many companies. Lastly, there is a particular use case that could drive demand for up to a billion units, requiring domestic production in Canada or the U.S. With this capital, we can plan for expansion as necessary. Given all these factors, we expect the capital raised will accelerate our growth this year and significantly boost our performance in 2022 and 2023. The second reason for the capital raise was to enhance the visibility of our business opportunity, and it seems we have succeeded in this regard. By presenting our business opportunity to the investment community, we discovered demand for nearly ten times the equity being raised, prompting us to increase the raise amount from $25 million to $35 million. We are immensely grateful for the support from the investment community. This also raises our visibility in the industry, facilitating talent acquisition, builds confidence with customers, and sends a message to competitors that we plan to be far more aggressive. Now is certainly the time to assert leadership in our market. The capital we've secured strategically positions us to leap ahead. In closing, here are some growth indicators from just the last few weeks. As Sandra mentioned, we are now over $9 million in new bookings quarter-to-date for the second quarter, up 45% compared to the same time last year. We have designs underway with over a dozen additional RFID customers, several with multi-million to 100-million-unit potential. We are launching cross-industry marketing programs to replicate solutions for medical devices, prescriptions, bicycles, personal transportation, controlled substances like alcohol and cannabis, and more. Federal spending is clearly on the fast track, and our revenue predictability is strengthening due to the expansion of consumable use cases, repeat customers, and recurring revenues. We anticipate that the second quarter and the remainder of 2021 will maintain these positive trends, positioning us to project higher growth rates as visibility into the balance of 2021 and into 2022 improves. With that, I will open the floor to questions and discussions. Before I do so, I want to mention that Dr. Manfred Mueller, who leads our RFID business, is on the line as well. Should there be RFID-related questions, we can address them in greater depth from the individual driving the business. Operator, please open the lines for discussion.

Thank you. We will now take questions. Your first question is coming from Jaeson Schmidt from Lake Street. Jaeson, your line is live. Please proceed.

Hey, guys. Thanks for taking my questions. I just want to start with guidance and just want to make sure I fully understand it. I mean, the previous range was for $100 million to $102 million, and you feel confident about that $100 million figure. We shouldn't take that to mean there has been any sort of downshift in expectations. Is that correct?

No, the opposite. In fact, what we said in our prior guidance was we were moving up the bottom of the range that had been $96 million to $102 million. And we said the bottom, we are confident is not going to be below $100 million. We'll update the top of the range as we gain more visibility into it. So we're confident in that $100 million bottom. And from right here, do we believe there's room beyond that $102 million? Of course. But it's essential that we gain very clear visibility since micro-cap and small deals can influence movements in either direction. We want to be cautious about when we raise that specific upper end. Does that clarify what you're asking?

Yeah, that's very helpful. Thank you. And then just moving to that potential 1-billion-unit opportunity, any additional color you can provide there from a timeline perspective, a potential end market?

So, I think, the cannabis one you're referring to, which is in the public domain, is a significant opportunity. We mentioned that we've provided sample roles to them. It's very advanced, but it's a government program, so you would presume they would want to drive it as fast as possible to increase tax collection capabilities and certainty. But government programs operate at their own pace. So, it should be hitting in the relatively near term. However, if we say it will fall in the third quarter or fourth quarter, and then there's a delay, that could shift expectations. We're on track, and comfortable with our position there. It's progressing and they're evaluating samples, but precisely when it becomes mandatory is not certain, probably in the range of three to six months.

Okay. And then just the last one for me, and I'll jump back into the queue. In the RFID business, I know it's going to vary depending on product or customer, but just given the well-known supply constraints out there, are you seeing increasing inbound interest in securing wins simply because of your ability to supply? Is that becoming a larger priority for customers compared to performance and other applications?

Yes, absolutely. We're capitalizing on that in a couple of areas of our business. As I mentioned, we're making inventory investments so that we can be the ones who can supply. Some companies are either facing financial challenges or are tightly held by private equity and have limited working capital, making them unable to secure inventory positions. Consequently, we're being proactive and aggressive about this, which customers appreciate since most of our products are essential for their production. Our supply is crucial to their operations, and our ability to sustain them when many of their other suppliers are unreliable creates a great opportunity to develop trust while driving revenues.

Okay, appreciate the color. Thanks, guys.

Thanks, Jaeson.

Your next question is coming from Mike Latimore from Northland Capital Markets. Mike, please proceed.

Great. Thanks. Yeah, congratulations. It looks like a great quarter, great outlook.

Thanks, Mike.

I think it's just two clarifications. One is, so you're essentially reiterating $100 million to $102 million, then you're saying that you're confident in the $100 million. Are you extra confident in the $100 million bottom? Is that the way to think about it?

Yes, that's for sure. And again, even the $102 million, what we said is that we're not bounding the top of the guidance; we're just not setting another new number on the top yet until we have some clarity on that. So it's $100 million and up is the way to think about it. We'll refine that number as we get there because saying we have a range of plus or minus $2 million now isn't a likely characterization given our growth rates.

Okay, got it. And then, I guess back on this cannabis, 1-billion-unit opportunity. It almost sounds like you won the technology bake-off there. Is that a fair characterization, or is that still ongoing?

In terms of compliance and ability, yes. I want to avoid overstating anything because nothing is awarded yet, but we're certainly at the forefront compared to others who need to comply. We meet and often exceed everything they're seeking.

Got it. Okay. And you're winning a lot of significant deals, and you have large ones in the pipeline. Do you track win rates?

We do track our win rates. There's a range. For complicated devices like auto-injector syringes and mobile devices, the win rate is exceptionally high. I won't provide a specific number, but it's rare that we don't win. With more commoditized products, the win rate can be lower. In fact, we're now aiming to avoid bidding in categories without differentiation. The overall win rate remains quite high. We noted in our release that we're expanding our technical team, largely field application engineers and program managers to handle these numerous programs as we fill up with designs and quotes. In fact, we're mandated to increase our team by 50% by June 1, which gives you some sense of the scale of our pipeline.

As you rightfully stated, hi Mike, it's been a while since we talked. The win rate is quite decent for the deals we're securing. The design-in timeframe is lengthy, particularly in the medical field, and once they break through, we're there. We aim to focus on projects with significant entry barriers that utilize our intellectual property, which reduces competition and explains our high attach rate. We also have to maintain those relationships and ensure we can supply mass volumes when projects proceed.

That makes sense. Okay, great. Also, regarding the gross margin for Identity, I believe you mentioned you expect to return to normal levels. Can you indicate if that will be around third or fourth quarter, and what that level might be?

Sure. What we indicated is that we'll see our consolidated gross margins return to historical levels, and we expect this will revert to the low 40% range in the second half of the year.

I would imagine a lot of that improvement comes from the Identity segment. Is that correct?

It's going to be a combination of factors. We saw some improvement in Q1 as we grew into our capacity investments, and we will also benefit from the Federal government year-end and third quarter spending in premises driving our gross margins in that quarter. So it will be a combination of both.

Great. Thank you.

Thanks, Mike.

Your next question is coming from Craig Ellis from B. Riley Securities. Craig, please proceed.

Thanks for taking the question, and team, thank you for all the information so far. I just wanted to follow-up on some earlier comments. It's clear that the team is executing really well in engaging with customers to secure those next arch programs. We talked a lot about cannabis in the Q&A, and I wanted to revisit some of your earlier comments on smartphone programs and see if you could provide additional color. Help us understand what the unit and volume opportunity in that area might look like as we progress through '21 and into '22.

Absolutely. To frame it a bit, we had completed four different designs with one major mobile device company last year, and now have two new designs entering production. Our statements for the upcoming year include continued development with that customer for a total of up to eight designs. Discussions are ongoing about entirely different use cases and applications as well. In total, we expect something in the range of 15 million to 20 million units for this product line. I don't wish to disclose more specifics, as they are somewhat proprietary for the customer at this stage.

It's also important to note that we're managing multiple contract manufacturers while adding a few more. Therefore, these designs—both from last year and the new ones—will be distributed among several contract manufacturers, which entails a necessary onboarding process. In terms of volume, we're observing a steady flow as these various projects phase in and out. Our 2021 contribution to the overall volume is expected to be greater than what we observed last year, creating a reliable baseline for our business.

That's helpful. Two follow-up questions. Manfred, we've never interacted before, so it's a pleasure to meet you even if only over the phone. I look forward to meeting you in person as things normalize. My first question is directed to you. Pertaining to the development kit and multi-device capabilities, given its importance for design engineers seeking to utilize your technology, how do you plan to disseminate that through a distribution network? Will it be available as with most companies via the website, or will there be additional mechanisms through direct sales? What are your plans for promoting that kit to quicken uptake of your solutions?

Definitely, this is an essential focus of our discussions on how to effectively bring this to industry use. Our objective is for this to act as a feeder technology, not necessarily turning it into a revenue source outright, but expanding interest and the number of mobile app developers implementing RFID technology, whether general RFID or specifically NFC. Our goal is to ease them through the various building blocks needed to achieve this. We plan to make the development kits accessible now via our website and through our existing distribution networks. In addition, they'll be accessible in various standard sizes, form factors, chipsets, and other features, allowing users to experiment whether they require significant memory or only a small amount, or whether they want to install the sensor on metal or glass. Also, part of our strategy to succeed in this area involves capitalizing on our full marketing strength, leveraging social media and networks to reach the right community. Engaging with maker fairs and the maker community is part of this strategy. We have good pathways established and are working on unconventional methods to ensure broad dissemination.

That's helpful. Steve, reverting back to your points about the volume dynamics on the smartphone customer wins. The smartphone industry often functions in a manner where one entity adopts technology, creating a cascading impact through the ecosystem. Does your winning of this technology with your current customer suggest downstream opportunities? Are there any indications that other ecosystem customers are exhibiting interest?

Definitely, that cascading dynamic is occurring, and it overlaps in this scenario as companies strive for parity and differentiation since the competitive environment is heightened. We're currently witnessing cross-platform interest. One prominent mobile player is really leading the way in various areas, which has, for the first time in the mobile device industry, prompted others to strive to catch up and maintain competitive positioning. Accordingly, many positive discussions are ongoing. I believe some of that cross-pollination and viral interest will continue to occur as you mentioned. Bear in mind that the design cycle for mobile devices is generally around eight months, followed by several months to integrate into the supply chain. It takes time, but decisively, they are all working diligently not to lag.

Got it. Lastly, Sandra, I have a question for you. Given the current market conditions, we've heard some companies report impacts from expedites and other unique factors. For certain companies we track, this has minimally—not significantly—impacted gross margins, but it remains a consideration. How might similar conditions shape your outlook for the back half of the year? Are there any fulfillment and COGS dynamics that we should anticipate?

Great question. We've put considerable effort into addressing this throughout the year. Currently, we don't observe any significant impacts affecting us. However, extensive planning is ongoing in the background regarding the relationships we maintain with our chip suppliers. We have robust relationships that allow us to influence priorities in placing longer frame purchase orders to secure supply, while also expanding our planning window into 2022 to give our suppliers greater confidence to act on our behalf. As Steve mentioned, our additional working capital helps us, as we aren’t constrained by immediate contract needs. This enables us to procure inventory slightly ahead, ensuring we can pivot when orders start coming in. We remain vigilant, but thus far, we haven't seen detrimental impacts.

Got it. Thank you. I'll re-enter the queue.

Thanks, Craig. John, are you there?

Your next question is coming from Jeff Kessler from Imperial Capital. Jeff, you are live.

Thank you for taking my call. Regarding the channels you serve, we had conducted a survey of some of the largest electronic integrators both in Europe and Asia recently, and their current plans appear to indicate dramatic growth in backlogs and pipelines for larger electronics, particularly in access solutions. This demand is significantly above pre-pandemic levels. My question to you is whether you believe there is existing capacity to take advantage of this in the second half of this year, when some projects seem ready to be awarded and revenues will flow? Additionally, how about the capacity to cross-sell your premises technology as well?

Absolutely. You've touched on a resurgence in activity as a result of pent-up demand, particularly regarding access control since every facility's requirements are shifting. Maintaining access in a more dynamic way is becoming critical, leading to interest in flexible systems and credentials. Therefore, we foresee heightened interest in technologies related to physical security and access control, leading to cross-selling opportunities across the board. I believe we'll see increased engagement both commercially and from federal government sectors.

Great. We've observed some exceptionally high valuations on companies specializing in access control recently, with some valuations reaching multiples of 70 or 80 times revenue. Given this context, I’m curious if your conversations with integrators or end-users show an interest in multi-factor identification beyond access? Post-pandemic, entities will require ensuring that individuals not only present credentials but also verify their well-being.

You're right. There’s growing momentum to incorporate RFID technologies to monitor individuals and leverage that information in operational settings. This precisely aligns with our strategy, as we've been developing and refining these capabilities over time. Some companies are gaining traction, but traditional players may slow to adapt due to legacy business models. Companies like Apple deploying UWB platforms for access control suggest an exciting future for technologies like NFC and RFID in identity management. This transition is just beginning, and market adoption is increasing.

At this time, I’ll turn the call back to Mr. Humphreys for closing remarks.

Thank you all for joining us tonight. We appreciate your support and engagement. This is undoubtedly a fast-moving industry with new milestones every week. We'll maintain open lines of communication, including press releases and other updates. Additionally, we have several fireside chats lined up and will be attending various investor events going forward. Once these schedules are finalized, we will post them on the website. We're committed to ensuring transparency and providing metrics that reflect the progress of both our company and the industry overall. Thank you again, and have a good evening.

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