Identiv's Q2 Earnings Show Strong Growth, Likely Acquisition In Time

SUMMARY
§ Late last year, Identiv brought in an entirely new senior management team to turn company around.
§ In Q4 2013 and Q1 2014, the company’s new management took steps to reorganize its business structure.
§ Identiv’s growth strategy is to partner with multiple large companies to unlock shareholder value. After listening to earnings call, I believe company will be acquired within the next year.
§ Company Chief Executive Officer (CEO) Jason Hart believes the company worth $400M now, but has not realized this valuation because of missteps by prior management.

Yesterday after the bell, Identiv Inc (NASDAQ:INVE) reported its Q2, 2014 earnings. As I have remarked prior, the company is under an entirely new senior management team, replacing the old team that lost trust with the market and executed poorly. New management has shown strong progress in restructuring the company’s business model as revenues have increased. I had the pleasure of being on the conference call, with CEO Jason Hart answering a few of my questions. I highly encourage small cap investors to listen to the call as I believe there is a very promising investment opportunity here.

Some highlights of Identiv’s call includes:
§ Total revenues for continuing operations of $22.3 million, compared to$18.2 million, year over year (YOY) reflecting growth of 23%
§ A 65% increase in credentials segment from Q2 YOY to meet demand for electronic game toys and other Internet of Things applications
§ Retooled and retrained sales force
§ Launched new information and premise products
§ Ability to deliver strong early return in its info tech area to address the post password era. Identiv sees this area as a phenomenal growth market
§ Strong cash position giving the company comfort to execute on present activities
§ Landed large company partnerships including Verizon (NYSE:VZ) and others (company cannot reveal these partners, see below for more on this)
§ Three new patents granted in Q2 reinforcing the company’s innovation path.

Identiv is extremely well positioned by the injection of innovation and has been able to partner with some heavy hitting strategic partners. These include some of the larger gaming vendors who have implemented digital tech into their product lines.

According to CEO Hart,
"Identiv has been aligning itself with some of the heavy hitting industry trends that we have been seeing from Google with acquisitions like Nest. So, we’re right in the foray with some of the big players. Early indications from our pipeline are that we are seeing a lot more interest from more strategic accounts."

Hart went on to mention,
"We’re at an interesting situation in the market where the timing of the post password era is upon us. With the tech and patents we have, it has allowed us to position the business to be a dominant player in the space. However, we’re trying to be extremely cautious with the numbers we give to the street because of the history of unpredictability [prior management over-guidance]. For now, we’re giving same guidance. [$80M to $90M top line] Things could be wildly beyond that and things could go the other way. I’ve often remarked internally that Identiv is a $400 million dollar company when you look at comparable [companies]. It’s just that quite frankly; we’re in the penalty box because of the company’s prior performance [prior management]. My job as coach is to get us out of that penalty box and coach the team towards a victory."

Hart went on to mention that Identiv is far ahead of its competitors in innovation. This key is important as its likely companies such as Google (NASDAQ:GOOG), Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO), and Apple (NASDAQ:AAPL) will consolidate the “Internet of Things ((IoT))” via acquiring smaller companies with top innovation like Identiv. I agree with Hart when he says Identiv should be a $400M company, and I strongly believe he will “coach” the identiv team to at least that valuation or higher for acquisition. I got a strong sense that this will be the end result for Identiv from carefully listening to the call. Hart knows better than to try to go it alone which would mandate that he hires far too many people for Identiv not only to manage, but to commit capital to. In fact, Hart expressly mentions this factor on the earnings call:

"We do not have the access to capital to hire a huge sales force, so we will grow via partnering with large established companies. "
By partnering with multiple large companies, when the time is right, Identiv is likely to enjoy multiple bids for the company. I find Hart’s strategy here to be a very smart one. Companies like Identiv that are well-managed and posses cutting edge tech are virtually certain to be taken out by the larger players in this field who can lever this tech in the IoT market, estimated to be over $7 Trillion dollars by 2020.

As I remarked above, Identiv cannot at this time reveal its partnerships for many reasons. The most pertinent being that a few years ago, prior management issued a press release when it partnered with Google for providing some security for “Google Wallet.” As a result of this, Identiv stock tripled in one trading session, from a pre reverse split adjusted $20 to $60 a share.

My sources tell me that Google was upset with the company press releasing its deal without checking with them first. Because of this past event, Identiv is in the process of rebuilding the trust that prior management appeared to have abused.

At some point in the not too distant future, Identiv will likely be able to release more in this regard as it regains and builds trust, and/or its partners will press release on these partnerships — at least in part.

I have been able to confirm at least one partner, The Walt Disney Company (NYSE:DIS), and my research along with my sources indicate to me that the company is likely directly and/or indirectly involved with Google, Cisco, and Apple (for Iphone 6 NFC) via NXP Semiconductors NV (NASDAQ:NXPI).
I like how Identiv is managed, and I especially like Jason Hart. He does not pump, yet he sets a conservative and positive tone, and is optimistically cautious. He is well-aware of prior management’s mistakes and is setting a tone of conservative guidance — under promise and over deliver.
Compare Identiv’s earnings call to another company I have written about before, Volcano Corp (NASDAQ:VOLC).

When StockMatusow team member Michael Kovar and I wrote about Volcano, sources informed us that there was strong interest to acquire the company. At the time, the stock was trading for around $18 a share. Since then, Volcano’s stock price has plummeted on poor earnings.
On Volcano’s earnings call, I mostly heard a lot of excuses and a tone that would likely aggravate even the late Mahatma Gandhi. Subsequently, the following Monday, the company engaged in a conference call laying out its plan to “turn things around.”

However, this plan was laid out in general terms, with nothing specific that would be construed as a positive. As a result, the stock sold off even more, and currently trades around $12.50. This represents a large decline from the $18 level it was at a short time ago. For lack of a better and nicer description, Volcano management stinks and should be removed by shareholders as soon as possible (along with the board of directors) before they further entrench themselves, in my strongest opinion. Good and honest management matters most, because a great horse will not win a race, unless it’s being guided by a great jockey. I think Jason Hart is a great jockey, and believe Identiv has the right product at the right time, and think the company is far ahead in making in-roads into the IoT segment. It’s my opinion Identiv is a strong buy with a one year price target of $50. I arrive at this valuation based on guidance from the company at $80 to $90M in revenues for this year. This does not consider the explosive growth in the IoT segment, so the revenue numbers moving forward are likely to be higher.

Accounting for sales of $85M and using a very conservative 5x sales (10x, and is common for this segment) based on company guidance of neutral to positive EBITDA this year, valuates Identiv at a $400M market cap. This is divided by the outstanding shares of 8M = $50 a share.
I’m also expecting an analyst upgrade to come shortly and potentially additional analyst coverage, along with Identiv to “road show” the company beginning next month and continuing into next year. Additionally, Hart will likely be meeting with institutional firms, and I believe many of them are likely to make an investment here. Overall, I feel this is a very good opportunity and again, I highly encourage investors to carefully listen to the earnings call — you may very well like what you hear.