Identiv, Inc. Q1 FY2022 Earnings Call

Good afternoon. Welcome to Identiv's presentation of its First Quarter 2022 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, Steven Humphreys, and CFO, Justin Scarpulla. 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 guidance, 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 future financial results, future business and market conditions, and future plans and prospects is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in 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 Steven Humphreys for his comments. Sir, please proceed.

Thanks, Operator. And thank you all for joining us. Our first quarter was a strong start to a pivotal year for our business. We're on track on all of our key metrics and business activities behind the numbers continue to be ahead of our plans. Our gross margins, in particular, strengthened faster than we projected, up almost 300 basis points over last quarter with non-GAAP gross margins of 37.1%. This was a key goal that we expected to reach mid-year and we got there in Q1. The progress on gross margins is important for three reasons. First, it reflects broad customer demand, so we can balance our mix. Second, it reflects the strength of the market itself, because higher margin specialty RFID devices are the fastest growing segment, driving growth as well as margin expansion. Third, it reflects the strength of our financial systems. We track gross margins on each customer order. This lets us optimize our business model while also supporting customer account development. We'll go into more details later, but I wanted to focus on gross margin because it reflects key factors, including demand strength, customer diversity, specialty RFID growth, and internal information visibility to manage our business model as we scale. Our other metrics for Q1 were also on or ahead of plan. Revenues in our premises business were up strongly 23% year-over-year. We again fulfilled every key customer demand despite the supply chain pressures we're all dealing with. Our Identity segment grew 7%, led by 13% year-over-year growth in RFID, on track over a high growth comparable quarter in Q1 2021 that grew almost 60% year-over-year. Now, more importantly, our backlog at the end of Q1 for shipments in Q2 is up 32% versus the year prior, giving us confidence that we're on target for our 2022 plan. Our unit volumes were 48 million units, up 20% versus Q1 2021. And our average unit prices in RFID expanded, up 16% sequentially. Overall, our revenues grew to $25.1 million, a record for our first quarter and up 13% versus Q1 of 2021. Our forward indicators grew strongly with total backlog up 24% year-over-year. Now, in addition to these growth metrics, our business model progressed while increasing gross margins, we held operating expenses tight, resulting in EBITDA and net income ahead of plan and solidly on track for the year. Behind the financial and operational aspects of our first quarter results, we continued our track record of 100% customer retention in RFID and our other growth drivers made strong progress. These include existing customer launches and expansion, new designing often with nonrecurring engineering, or NRE, and technology launches. Among existing customers, a wide range of customer use cases are growing strongly. These encompass several dozen customers in the $100,000 to million-dollar annual revenue range. So I'd like to highlight some of these with an additional perspective of gross margin on these products. In the healthcare and medical device category, projects for test kits and surgical accessories shipped to six different customers, all with margins of over 55% and a couple with margins over 70%. Wine bottle, gas bottle, and other intelligent tamper-proof devices sold to five more customers, all with margins ranging from 40% to 60%. High-end authenticated consumables for robotic cleaners, printers and a couple of others with margins in the 40% to 55% range. So our wide base of smaller growing customers continue to expand with margin profiles that support our expanded margin expectations. Turning to our transformational RFID initiatives, each made progress. Both of our cannabis initiatives progressed. As expected, the U.S. is moving faster and we're now getting a very clear view of volume potential. We're delivering 50,000 units to TrueGreen for their retail pilot. The pilot is now formally set for July with all the systems at the MSOs, data flows, infrastructure deployment, and training going on over the next six to eight weeks. Our solutions expanded to include our specialized dual frequency RFID device and we're also doing all the converting and data encoding. This expands our margin by increasing our value-add and obviously expands our mode. Despite the scope expansion we're on track for a four-week delivery cycle to support the retail pilot schedule. They've also begun rollout projections that give us more specific volume visibility. Now, you might recall that Cresco Labs bought Columbia Care, expanding our customers' reach in the cannabis MSO market to 17 states. Discussions for pricing and allocations are in various stages across all 17 states and specific projected volumes in just the four states of Maryland, Virginia, Delaware, and Pennsylvania are about 150 million units annually. This gives us our first bottoms-up look at potential volumes overall in state-by-state detail. And these states represent about 11% of the populations of the states where marijuana is legal for medicinal or recreational use. So that translates to a total U.S. cannabis market of about 1 to 1.5 billion units for our devices. Our customers cover 17 of the 33 states where cannabis is legal. So our specific opportunity with this customer is around 500 to 750 million units. Now, we know that's a lot of data, but it's the first U.S. volume data we've gotten directly from the companies in the market, talking directly to their customers, so we wanted to share it. Now, the cannabis program in Canada also is progressing with about 2,000 of our test units delivered and in-test production programmer tuning and converting is going well, including hologram inclusion in the finished product, which is a new Canada-specific requirement we've incorporated. Now, we'd go into more details in Q&A, but this billion-plus unit program is moving as we expected. Our auto-injector project is still on track for 2022 ramp-up, with scale volumes still projected ultimately to be in the 100 million unit range. We're continuing to work intellectual property agreements, which is fundamental for medical device companies. Also, the critical first 25% of the 20,000 unit pilot run have been delivered and signed-off, putting us on track for a 100,000 unit production pilot mid-summer. With this deeply engaged process underway, as you can probably tell, our relationship is very strong, creating a solid margin price and volume opportunity that's also on track. Turning to our devices for prescriptions for the visually impaired. Through our direct sales and partners, we've now got four pharmacy chains in various stages of pilots and deployments. Now, nobody's as far along as CVS, but the broad adoption is underway. As for CVS specifically, they're increasing their marketing push. I mentioned the joint award we've received and we expect another at RFID Journal Live! in a few weeks. This gives the solution more visibility and puts more pressure on more pharmacies to adopt our solution. Lastly, our largest mobile device customer has a new design ramping right now with higher volumes than we originally expected, over 10 million units of that design over the next six months. Most of their prior designs are continuing, resulting in more total demand than we had projected. So in addition to these transformational opportunities, we've got over two dozen nonrecurring engineering projects underway and finished about a half dozen in Q1. I won't go into all of them, but one with major volume potential that we completed in Q1 was for the world's largest multinational clothing producer and retailer. We've designed a specialty tag for asset tracking in their stores using our best-in-industry RFID on Metal technology. This is now going into pilot in Austria and Germany. This also got a lot of help from our partnership with NXP. They routed a special wafer to us for development and the pilots really giving us a boost to hit the customers’ goals. With this progress in Q1 RFID is positioned as our main growth driver in 2022 with upside volumes in just a few accounts that can transform our business. Our premises business also had very strong results growing more than three times the industry's growth rate. So what drove it and is it sustainable? In physical and converged security, we've always been strong in the federal market. Last year, we launched actions to strengthen our commercial presence, and this really paid off with Q1 Premises growth that's entirely driven by commercial markets. Security has become a priority for every business and institution, and our combination of high security and cost-effectiveness and complete solutions from a single vendor delivered growth and market share gains. With this strength in commercial markets established, we're in a solid position to continue to grow at a multiple of the industry's rate as the seasonally strong federal cycle in the second and third calendar quarters drive growth in our federal state, local, and education markets. This gives us high confidence in our 20% to 25% growth expectations for premises in 2022. Hitting well in this range in the first quarter, which is always the seasonally toughest quarter, clearly has us on track for 2022. If our commercial market strength continues, on top of increasing federal budgets for security, we could see premises growth even above our initial expectations for 2022. In addition to technology leadership, our supply chain management became a real competitive advantage in Q1 across both RFID and premises. In premises, we're taking advantage of competitors’ shortages, especially HID and companies that use Mercury hardware. In RFID, our strong supply relationships give us an advantage, like the leading clothing producer that we're going to pilot with helped a lot by NXP supply support. Our engineering expertise also let us offer alternate solutions to customers, get them accepted, and bringing into market far faster than our competitors. The combination of these supply chain strategies lets us take share in both our segments. Now one last area we hit hard in Q1 is our technical and thought leadership in our industry. We've kept a fast pace of industry rewards, recognition, announcements, and engaging in the main discussion forums in the industry. In Q1 we got awards for our Eco tags, our Tag On Metal devices and I mentioned the aim joined towards the CVS. We also launched a podcast series called humans in tech. We've already got 15 episodes up with titles like cannabis quality control from farm to fingertip, IoT connected collectibles and consumables and securing area 51. So you get the idea. They give us a unique social media voice in our pretty technology-centric markets. And this really builds our reputation as the industry thought leader from mass adoption of RFID based IOT. So our RFID business is on track with our transformational projects moving along ahead of plan in some cases, and volume outlook is getting clearer as the programs progress. Demand is growing fastest for our specialty RFID devices, driving up margins and unit prices also faster than we expected. Design wins are growing with our increased technical sales and engineering teams and our marketing investments are driving even more opportunities that our expanded sales team is converting. Our production capacity continues to expand to meet the higher demand and our systems are in place to manage customer lifecycles as more and more customers and projects come into our revenue streams every month. In premises, we've proved our ability to take market share aggressively, growing at three times the market rate and winning in the commercial market, just as security is getting more focus and budget allocation than ever. And just as the seasonally strong federal, state, and local government buying cycle ramps up. So before getting into the next quarter, and our outlook for 2022 and beyond, I'll turn the call over to Justin to review the financial highlights for the first quarter. Justin?

Thanks, Steve. As Steve mentioned, our financial results reflect our continued strength exiting the first quarter of 2022, with the delivery of year-over-year growth in revenues, sequential and year-over-year increases in gross margins and future backlog, and a sequential return to positive non-GAAP adjusted EBITDA. We believe these results, paired with our continued investments in the RFID organization and its capabilities, position the company to achieve its growth and profitability potential in the remainder of 2022 and beyond. We closed the first quarter of 2022 at $25.1 million in revenue, which was above consensus estimates and up 13% compared to the first quarter of 2021. The trailing 12 months’ revenue was $106.7 million, up 17% versus the comparable prior year period. The sequential change in revenue was due to normal seasonality. Recurring revenues came in at 6% of total revenue and an increase of 1% sequentially. First quarter 2022 GAAP gross profit margin was 36%, an increase compared to 33% in the fourth quarter of 2021, and 35% in the first quarter of 2021. For the first quarter of 2022, non-GAAP adjusted gross profit was 37%, which was above consensus estimates, and an increase compared to the 34% in the fourth quarter of 2021 and 36% in the first quarter of 2021. Non-GAAP adjusted gross profit margin changes resulted primarily from our product mix, as well as a focus on tracking and prioritization of higher margin products. We remain committed to a long-term non-GAAP adjusted gross margin target of 40% to 45%. In the first quarter of 2022, our GAAP and non-GAAP adjusted operating expenses, including research and development, sales, and marketing, and general administrative costs were $10 million and $9 million respectively compared to $11.3 million and $10.5 million in the fourth quarter of 2021. And $8.9 million and $7.6 million in the first quarter of 2021. Our non-GAAP adjusted EBITDA margin increased 4% from Q4 2021 to a positive 1% in the first quarter, which was above consensus estimates and we're continuing to deliver leverage in our operating model. We remain committed to a long-term non-GAAP adjusted EBITDA margin of 15% to 20%. Our Q1 GAAP net loss was $1 million or a loss of $0.06 per share above consensus estimates of $0.08 per share. This compared to a loss of $1.9 million or a loss of $0.10 per share in Q4 2021, and a loss of $1.5 million or a loss of $0.09 per share in Q1 2021. 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 Identity. Revenue from our Identity products totaled $14.6 million or 58% of our total revenue in Q1 2022, which is a 7% increase from Q1 2021. The year-over-year increase in Identity revenues was primarily driven by higher sales of RFID transponder products. These increases were driven by current customer expansion, new customer wins, and our ability to deliver product versus competitors constrained supply chains. The sequential decrease in Identity revenue was due to normal seasonality. Our Q1 2022 Identity segment non-GAAP adjusted gross margin increased to 23% compared to 21% in Q4 2021. The sequential increase in margins was due to a greater proportion of higher-margin specialty RFID products sold in Q1 versus Q4. We do believe we have the systems in place to pass through our component cost increases timely, and this combined with our ability to track and focus on higher margin customers should allow us to sustain and expand this margin going forward. Quarter-to-quarter margins can fluctuate, but we expect long-term margins to trend upwards from current levels as we expand and deepen our existing customer and technology partnerships. We believe the move to more complex devices and relationships with our customers will further strengthen our margin profile for new opportunities. Any temporary exemption must be signed off by top management should we deem our relationship to be strategic to the future success of Identiv. We remain committed to a long-term gross margin target of 35% to 40% in our identity business. Now turning to the premises segment. This segment accounted for $10.5 million or 42% of our total revenue in Q1. Representing an increase of 23% from 8.5 in Q1 2021, and a 5% decrease compared to Q4 2021. The year-over-year increase in premises segment revenue was in our commercial business, which has been a key focus area for us to expand our market share, and we did it. The sequential decrease in segment revenue was due to our normal seasonality. Non-GAAP adjusted gross margins for premises in the first quarter of 2022 were 57% compared to 52% in Q1 2021 and 54% in Q4 2021. The sequential and year-over-year increases were primarily due to product mix, price increases, as well as operational efficiencies, which was a key area of focus for us in Q1 and going forward. We remain committed to a long-term gross margin target of 55% to 60% in our premises business. Moving now to our operating expense management. Our non-GAAP operating expenses in the first quarter of 2022 adjusted to exclude restructuring and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization was 36% of revenue compared to 37% in Q4 2021. This resulted in the return to positive non-GAAP adjusted EBITDA in the first quarter of 2022. In summary, we continue to demonstrate operating leverage in our business while successfully reinvesting for growth within our current cost envelope. Now turning to the balance sheet, we exited Q1 2022 with 28.7 million in cash and cash equivalents and restricted cash of $1.1 million decrease from Q4 2021. We remain debt-free and we've maintained our strong working capital position. In our 10-Q filings, we will provide a full reconciliation of the year-to-date cash flows. For completeness we have included the full balance sheet in the appendix of this earnings release. As we move to the second quarter, a total backlog for all future shipments was $32.4 million exiting Q1 2022, up 24% versus Q1 2021, which provides visibility into the current business momentum we anticipate continuing through 2022. Momentum exiting the first quarter, combined with this strong backlog, gives management confidence that the business is on the right track to meet the company's growth expectations for 2022 and 2023. As a result, we are reaffirming our full year 2022 guidance today with expected revenues between $130 million and $135 million reflecting year-over-year growth of approximately 25% to 30%. We're also reaffirming our guidance for 30% to 35% year-over-year revenue growth in Fiscal 2023. Normal seasonality is expected to continue. With that, I will conclude the financial discussion and pass the call back to Steve.

Thanks, Justin. Our Q1 financials indicate continued growth and strengthening margins, moving closer to our long-term operating model. We have strong visibility for 2022 and are reaffirming our guidance for this year and next. This year focuses on execution, supported by an expanded sales team, top engineers for NRE projects and design wins, and robust relationships tied to several transformational programs and production capacity expansion. Everything is in place to achieve our vision and targets. Our premises showed target growth rates in Q1, and the seasonal trends of RFID programs, such as mobile devices and consumer products, align with our projections. Another key metric is our backlog and committed customer forecasts in RFID. Committed forecasts come from industries like mobile devices where purchase orders are issued when supply chains are ready, but they provide strong forecasts months in advance. Combining our backlog with these forecasts, over 85% of our RFID revenues for this year are covered, which means we only need to secure new business for about 15% of our budget to hit our targets—a favorable position with two-thirds of the year remaining. In fact, about 95% of our RFID plan for the next six months is covered by this metric. We expect to exceed our goals and drive further growth into 2022 and 2023. Near-term, 2022 is primarily about executing our plan with key strategy components in place. The backlog and pipeline are growing, and customer demand positions us well to meet our targets. I will now discuss how we are executing our plan. We recently hosted an investor webinar that outlines our strategy for enabling RFID-based IoT growth and how we fit into achieving our target business model and scale. Design wins at the corporate level are crucial; leading in design wins assures customers will turn to us because we have demonstrated our ability to deliver. This creates more scale, experience in intellectual property, and a reputation that enhances our market position. We believe we are expanding our first-mover advantage as the market grows. Regarding design wins, in addition to previous mentions, we have projects with eBay, Life Fitness through Promate, iRobot, a medical device for orthopedic surgery, and several industrial applications and million-dollar-plus medical testing products. These high-margin, high-ASP devices for IoT are key growth drivers across medical devices in healthcare, specialty retail, and industrial applications where higher margins and switching barriers exist. Our partnerships are exceeding initial growth expectations, particularly with ultra-low-power passive and active Bluetooth RFID devices. We have some intriguing joint developments in this space that will be announced at the RFID journal live event in Las Vegas soon, potentially game-changing for our industry. Embedded devices take time to design and deploy, but being at the forefront of innovative technology helps solidify our long-term leadership. New programs are also rolling out with partners like CollectID and others, and we can discuss these further during Q&A. Our growing industry profile is another aspect of our execution strategy. I'll highlight awards we've received and our leadership at upcoming conferences, as well as our expansion of the NFC developers' community. While I won't detail capacity and team expansions, we've shown our ability to build top-tier teams rapidly. We can discuss these in Q&A as well. On the topic of supply chain, we're successfully meeting demand amid market challenges, capturing share from competitors unable to manage supply or alternative technologies. We believe this situation will persist next year, benefiting us. Our proactive RFID orders and in-house hardware and production provide more flexibility than most competitors who outsource. When paying premiums, we have strategies to pass along costs while maintaining margins. Customers are willing to accept these costs, valuing our reliability. This approach contributed to our Q1 performance and will remain central to our business model going forward. Additionally, should inflation impact the economy, our established systems and strong customer relations will help sustain and expand margins. Overall, our execution in RFID is exceptional, encompassing design wins, partnerships, industry leadership, capacity scaling, team growth, and supply chain management. These elements support our confidence in achieving our gross margins and operating margins targets for 2022 and 2023. In terms of premises, we've addressed growth drivers earlier. Our presence in commercial markets is solid as seasonal government buying cycles approach, particularly for secure platforms where we excel. Our velocity vision product is gaining traction across government and commercial sectors, with significant deployments expected soon. Our latest velocity update introduces true AI in converged security and enables holistic data integration, crucial for predictive security. With these growth drivers and the momentum we've anticipated, we remain confident in achieving 20% to 25% growth in premises, potentially exceeding that in 2022 and 2023. Before concluding, I want to discuss macroeconomic trends and our position amid potential risks. We believe we can thrive, even in a recession, as our primary growth drivers—medical devices and federal government budgets—are resilient during downturns. We also anticipate being well-prepared for fluctuations in the semiconductor market. Should chip prices fall, our costs would decrease as well, which historically has encouraged RFID adoption and margin growth. Demand in key verticals should remain strong, and chip vendors might be supporting us now in anticipation of our growth. Therefore, we believe we can navigate challenges like recession and semiconductor cycles successfully, potentially enhancing our growth, margins, and strategic positioning. In summary, we’ve outlined how we're executing towards our plans. Our industry standing and execution give us a clear path to achieve our 2022 goals and prepare for 2023. We expect revenue-generating projects to ramp up later this year, and we will provide updates on tangible progress. Our Q1 performance established the desired pace, with some areas exceeding expectations. We will continue to refine our outlook as business develops, but favorable growth, gross margins, and conditions are promising as we proceed through 2022. We will now open the floor for questions, and I invite Dr. Manfred Mueller, our COO, and Amir Khoshniyati, VP and GM of our transponder business, to join the Q&A. Operator, please open the lines for questions.

Thank you. We will now take questions. The floor is open for questions. If you have any questions or comments, our first question is coming from Jaeson Schmidt with Lake Street Capital Markets. Jaeson, your line is live.

Q1 results. I know you mentioned prioritizing some products in Q1, but was there any demand you actually couldn't fulfill?

No, there wasn't unfulfilled demand. Frankly, we held back some orders because prices are increasing in Q2. So there were some, but nothing that was related to the supply chain, if that's what you're asking.

Okay. That's helpful. And just looking at the clothing opportunity, there seems to be sort of an application you guys haven't really played in, in a big way in the past. Just curious if this was a customer using a competing technology or competitors’ product or if this is a new initiative. And I guess relatedly, how should we think about the potential size?

Yeah, I'll turn that over to Amir because he's been working at that from the transit.

Thanks, Steve. And this particular retailer, they are not new to RFID, but they are new to custom RFID for specialized application. So specifically, this is for asset management within their stores. And they needed a specialized tag for adherence to basically on metal. And that was why they turned to us. And they are right now looking at a pretty rapid ramp to 10 million units, and we're just basically looking at when that strike time is going to come, 10 million in start and it could be even much more upside.

Okay. And then, just the last one for me and I'll jump back into queue. Gross margin had a nice snapback here in Q1. I know you said you achieved that mid-year target earlier than expected, but should we expect gross margin to at least remain stable here in Q2?

Yes. We believe that gross margins will stay stable for the remainder of the year.

Okay. Perfect. Thanks a lot, guys.

Okay, next we have Anthony Stoss with Craig - Hallum. Your line is live.

Hi, guys. I'll echo my congrats on the impressive snapback in gross margins. Really nice to see.

Thanks, Tony.

Steve, it sounds like you continue to have significant design momentum. Do you have the figures available, such as the number of new customers or design wins from the current quarter? Additionally, I would like to hear your thoughts on the complexity of some of these new designs, particularly those planned for 2023. What can you share about average selling prices for 2023 or 2022? Any extra information would be very helpful. Thank you.

I'll address that and then let Amir and Manfred add their input. Regarding new designs, we typically receive between one and two dozen new designs into the pipeline. As we acquire more, we plan to grow the engineering team. However, we don’t disclose the specific number since it can vary greatly from quarter to quarter. One design could lead to a million-unit opportunity, while another might represent a fifty-million-unit opportunity, so we prefer to avoid focusing too heavily on exact figures. The important aspect is the growing number of designs moving through the team. Also, concerning average selling prices, we anticipate they will increase throughout the year. On a quarterly basis, they should generally rise, but there will be fluctuations based on the demands of major customers. Overall, we expect this year to see a general increase, though that won’t always hold true quarter by quarter. Amir and Manfred, would you like to share more about the design wins and average selling prices?

Sure, Steve, maybe I'll take it first. I'll start on the ASP side. Having a standard ASP going up is probably not a fair assessment because the ratio, it really all depends on the complexity of antenna design, how we're designing in and definitely the chip capabilities that we're using. So as you move up to chip capability metrics, the ASP is going to go up and then it's going to be a higher-priced finished pack. Looking at the NRE projects overall, we've been prioritizing the queue of NREs based upon what's going to move first and then also dependent on when availability for certain chips are going to be. So sometimes the NRE designs that we're working on are focused more on a complex chip that may not be rolled out and really didn't mature enough in the market. For example, we have one that we took on this last quarter and it's not going to be ready until Q1 2023. So what we're doing we're working really closely with the supplier to make sure that when they do launch, that we have the first access to the prototype and then we can be the first to really translate the best technology. So NRE and the quantities just echoing what Steve is saying, they're vast and wide from the volume standpoint, but also they're in the priority queue based on when the demand is going to pick up. And then also when we're going to really be able to deliver for optimal results for the customers.

Yes. Just one sentence with regard to the questions related to the complexity of the design-in wins. I would say they are decently complex, but that's what we're living and breathing, so from that point of view, there's not that many out there that can do it. And most of these guys know where to go to. Most of these kinds of opportunities also are directed to us by some of the chip vendors because we can deliver accordingly. And there is one there particularly element that is adding complexity more and more going forward, which is the programming and coding requirements for some will be higher end ICs that are very popular in the meantime.

Then if I could sneak in one more for Steve, or maybe Amir, on your 30% to 35% revenue growth goals for next year. Working closely with NXP, as you have, are you confident that you're going to have ample supply to kind of hit those targets for what you see right now?

Yeah, we are also because there is the diversity, certainly NXP is core to it. And we ordered well ahead. But this year and we're doing the same thing, in fact, we're already ordering through most of 2023. But also you get a diversity of chips and some of these designs that sometimes it's in the thing sometimes zesty, sometimes it's other specialized. So we've got both that give us some confidence that we can fulfill the demand with the growth on it because of the diversity of supply as well as ordering ahead as well as pretty supportive partners. Because it's an allocation game right now. Question of how much they're going to route to you. And we're getting a pretty favorable allocation treatment and we sure think that's going to keep going into '23.

Really want to add anything to that? Just the line that we have our Tier-2 and Tier-3 behind NXP as well. And what we've done as for are really our macro customers, we've honed in and made sure that they're starting to cross-qualify other IT as a backup. So if there is an unforeseen situation where we don't get the right level of allocation, we have a backup in place and then they're ready to go with that antenna design that was already been stepping.

Thanks for all the color, guys.

Thanks, Tony.

Okay. Up next, we have Mike Latimore with Northland Capital. Your line is live.

Yes, thank you. Steve, I believe you mentioned that 95% of the RFID revenue is covered, backlogged, and committed. Is that correct, and is that a new figure? I don't remember hearing that before.

Yes. No, that's a new number. And that's over the next couple of quarters. I said six months specifically. And yes, it's a new number to give some visibility because backlogged represents some of it, but a lot of it is both good and challenging sometimes. With the forecast, is we'll get the forecast and then, like some of these mobile device companies, if they up their forecast, they still expect to you to deliver to it. So that's the part that could go from there. But yes, the point is that it really is doing the production, doing the designs, doing the engineering. The team that Amir's built is really filling the pipeline quite nicely.

Has that number improved year-over-year? Did you track that number last year?

We haven't begun tracking it yet. We've just started monitoring the supply situations to ensure we are looking at six to eight quarters ahead to guarantee coverage. It's not only about backlog; we also need to account for firm forecasts and the new deals being pursued. We've been focusing on this much more in the last couple of quarters.

Yeah. And then the backlog growth of 24%, that's a little slower than the last few quarters. I guess any just sort of general color on that change?

I think just as I said, a number of our customers do firm forecasts versus backlog. You can do the math of backing into it that with the growth that we've got, if there's that much in forecast and backlog, then the forecast must have gone up a fair bit. So that's another reason for giving the combined number because we get the visibility, but some of the customers that are more forecast driven than backlog driven are giving it to us that way. But our experience has been that the forecast numbers tend to be the baseline that we get, and then they ramp it up from there.

And then I think you mentioned sort of normal seasonality which would imply I think a second half growing well over 30%, I guess. One, am I interpreting that correctly? And then two, what would be like is that broad-based acceleration or are there a couple of key projects that really has in the second-half?

It’s really widespread. There’s also seasonality to consider. We discussed earlier the consumer products and mobile devices, along with some product launches that took place in the latter half of the year. Many factors influence this seasonality. Additionally, we expanded our sales team significantly in the last few months of the previous year. This new team is currently establishing a pipeline, which typically requires two to three quarters for conversion. This contributes to the overall situation. Lastly, there is a known seasonality in the federal government’s purchasing cycle, which also contributes to the effects we see. Therefore, numerous backorders typically influence our seasonality. However, the primary factor driving the increase is the expansion of the sales team and the sales cycle. Amir, do you have anything to add on this topic since I’ve spoken a lot about your sales team?

Sure Steve just to add color from Q4, we had our highest level of NRE projects. And those NRE projects typically in our cycles, they usually take nine to 12 months to really see some level of from designs to prototype to some level of delivery to the customer. What we're seeing from a lot of the design feedback through this last quarter is that we're approaching the right level of the second half of the year. Some of these actually hit some true volume. And are multiple work streams. So it's not one or two eggs in the basket that was going to be banking on. It's really a broad scope hitting our main segment focuses, but there's going through the standard cycles from really true design all the way through to volume.

Okay. Sounds good. Thank you.

Thanks, Mike.

Okay. The next question is coming from Brian Ruttenbur with Imperial. Your line is live.

Thank you very much. Two quick questions. First of all, back to the gross margin real quick. We should see a seasonal drop in the fourth quarter. Is that correct on the gross margin side?

No. Well, versus Q3 or are you talking about?

Yes, versus Q3. So if we're holding things, let's say a ballpark is 36% for first, second and third quarter, will there be a drop, a little bit in Q4?

I don't think so. Not at this time.

Okay.

It will hold as relative. We don't usually give quarterly guidance, but flat I think would be best.

Okay. No. No. That's a great deal color. Thank you. Next question is on the access control side, maybe Steve, when we spoke, I think of IFC West, you're launching some new card readers that were comparable with some of the larger competitors out there. Can you talk a little bit about traction that you've gotten in that area and what you see happening?

Yeah. In the reader area, in particular, there has been a lot of traction and it's coming, of course, out of the gorillas hide for the most part, which I did for three different reasons. One is supply. They've had a real challenge supplying and we've been filling that in the very aggressively. Number two is their proprietary technology, which customers are just getting more and more sensitive to being locked into proprietary technology. And ours, obviously interoperate with theirs is both everything else. And then the number three is the fact that the interoperability with the back-ends with all of the panels is a lot stronger with us. And then the other thing is we're actually starting to OEM our readers. And two out of the top three non-harsh access control companies will be OEMing our readers. One already is. Another will be bringing them on in a couple of months. And so we'll be selling readers through three out of the top four access control companies. And obviously, the most competitive reader to the biggest provider out there right now.

Will you talk a little bit more about that in the future and future calls on what kind of traction you're getting specifically in that access control area, because I don't believe you've historically talked about that?

Yes, we've talked about it, but less so. But yes, we certainly will keep updating. And as you heard in this update, we focused on it a little more. We want to keep our focus on RFID and the growth driver there. But there's really interesting stuff going on in the physical security side, on our product side, and on the market is really very receptive to exactly the way we're positioned. So we'll keep updating.

Great. Thank you.

Thanks, Brian.

Okay. Next we have Craig Ellis with B. Riley. Craig, your line is live.

Yes, thanks for taking the question and congratulations on that nice execution and appreciate some of the additional information that you provided, especially around those customer confirmed orders. I wanted to start by just inquiring about one of the projects that you mentioned, the mobile customer 10 million unit project. Can you provide some further color on what's different about that project versus some of the others? And is there other activity at that customer that is possible beyond this incremental one that you're working on?

I'll discuss it briefly before handing it over to Manfred for his comments. This is, I believe, the ninth design for this customer, but Manfred can correct me if I'm wrong. I wanted to emphasize that this is a new design that is ramping up, and our projections are looking better than we anticipated, even though several other designs are still in progress. We expect to continue developing more designs and achieving further growth. The devices these designs are intended for are gaining traction. It seems important to highlight this, especially since we typically see seasonal growth cycles in the second and third quarters, which are particularly strong this year. Manfred, would you like to add anything?

Yes, it's basically two-folds, Craig. First is the continuation of the relationship with the fourth program that we are ramping right now. And again, as Steve rightfully stated, we're hitting 10 designs very soon with them. And then with some of the, let's say previous ones which typically has a lifetime of like two to three years still in production. We are basically adding all the new ones on top. So it's a very, very nice run rate growing at steady-state.

That's really helpful guys. The next question I have is for Justin, so I wanted to come back to gross margin, maybe push on it a little bit so great to see the strong progress quarter-on-quarter. And I think equally impressive with the result was the details, Steve, that you provided and Justin you provided around the various initiatives that are driving gross margin improvement. So the question really relates to that with the company having a number of different levers and with it so focused on gross margin expansion. Why would gross margins stay flat sequentially? From here why wouldn't the initiatives that the company's working on result in rising gross margins through the year?

I think if you're looking at premises in Q1 as a percentage of total revenue, it came in around 42% of total revenues. We expect that will go to its more historic levels of the 39%, 38% and it has this overall higher margin associated with it. So as we start to balance that out, as Identity takes off, as we expect it to being in a lower-margin we're saying overall total company margins are going to be relatively stable and flat. So hopefully that gives you the color you need.

I noticed that the premises reached a strong 57%, which is great for the team. My second question pertains to the operating expenses quarter-on-quarter. Can you clarify how much of the increase, excluding the charge from the previous quarter, is attributed to increased sales from the ongoing global opportunities versus factors like typical annual compensation increases? Additionally, what is your outlook for operating expenses for the rest of the year? Should we expect them to remain flat or could there be upward pressure in certain areas?

So the vast majority of it is in sales, SAEs, sales engineers that categories you would expect. And do we do that hiring in the fourth quarter of last year? So you would expect that tend to be normalized through the year. And so there will still be a little trending up as you go quarter-to-quarter-to-quarter, as we continue to add in some of your customer-facing areas. But at a, percentage-wise, lower rate. I think that's the right way to say it. And talking about numbers, I should be turning it over to Justin to coming on that to please clarify any I got. Yeah.

I think in the first quarter, compared to the fourth quarter, Steve really highlighted the situation. We'll see the full impact of hires from the fourth quarter, along with a few new hires in the first quarter. This impact will be fully felt in the second quarter, especially in research and development and selling, general, and administrative expenses. Travel is increasing as COVID restrictions ease. We are analyzing our expenses, particularly in APEX, and noticing a rise in travel costs as we return to in-person events, which is putting some pressure on APEX. We anticipate this trend to continue.

Sure. I understand. Steve, you provided excellent insight into the opportunities in Canada, particularly regarding how you're connecting with both U.S. and Canadian entities and assessing that potential. My question is this: as you collaborate with U.S. and Canadian organizations, do you believe that RFID will be the sole method for implementing their tracking and ensuring security and control, or are there other technologies they might consider alongside RFID?

Yeah, let me turn that over to Amir because he's been working the closest with them, so might as well get it straight from him since he's on the phone.

Sure. The indications and trends suggest that they are fully committed to RFID. The existing bar code technologies require a line of sight, which becomes problematic as volume increases and the supply chain faces more pressure. Currently, the readers they use need each package or vial to be aligned correctly to read the bar codes effectively. RFID resolves this issue since it does not require a line of sight, allowing for traceability regardless of how the package is positioned. Additionally, they gain value from the consumer side through authentication, knowing who the consumer is, and all the benefits that come after a purchase. Overall, it appears they are fully invested in RFID, addressing both the supply chain and consumer aspects.

Got it. Thanks, team.

Thanks, Craig.

At this time, this concludes the company's question and answer session. If your question was not taken, you may contact Identiv's Investor Relations team at INVE@gatewayir.com. I'd now like to turn the call back over to Mr. Humphreys for his closing remarks.

Alright. Thanks, Operator. And thank you all for joining us this evening. To keep connected with our progress, we've actually got several events coming up in the next couple of months. Well, of course, be a major presence at RFID Journal Live in Las Vegas in a couple of weeks. And anyone who can make it out there really is a good way to get it since the industry and how it's moving it also our position in the industry. Also among investor events, we will be at the B. Riley conference on May 25th in LA. The Craig Hallum Institutional Investor Conference is June 1st, which is virtual. And then that's difficult cross-sector insight conference on June 7th, is in Boston. So we are trying to get our business opportunity message out there fairly proactively. And we will also probably do some other investor outreach and events and we'll certainly keep you posted as we implement those. And of course, please reach out to the Investor Relations or Justin if you have any other questions. Thanks everybody for joining us and have a good evening.

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