Impinj, Inc. (NASDAQ:PI) Q1 2023 Earnings Call Transcript

Impinj, Inc. (NASDAQ:PI) Q1 2023 Earnings Call Transcript April 26, 2023

Impinj, Inc. misses on earnings expectations. Reported EPS is $0.3 EPS, expectations were $0.33.

Operator: Welcome to the Impinj First Quarter 2023 Financial Results Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask a question. Please note today’s event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Strategic Finance. Please go ahead.

Andy Cobb: Thank you, Operator. Good afternoon and thank you all for joining us to discuss Impinj’s first quarter 2023 results. On today’s call, Chris Diorio, Impinj’s Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj’s CFO, will follow with a detailed review of our first quarter 2023 financial results and second quarter outlook. We will then open the call for questions. Jeff Dossett, Impinj’s CRO, will join us for the Q&A. You can find management’s prepared remarks, plus trended financial data, on the investor-relations section of the company’s website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today.

Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995. While we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking statements except as required by law. On today’s call, all financial metrics except for revenue, or where we explicitly state otherwise, are non-GAAP. Balance sheet and cash flow metrics are GAAP. Please refer to our earnings release for a reconciliation of our non-GAAP financial metrics to the most comparable GAAP metrics.

Before turning to our results and outlook, note that we will participate in the UBS Global Industrials and Transportation Conference on June 6th in New York; Baird’s Global Consumer, Technology and Services Conference on June 7th in New York; and Roth’s London Conference on June 21st. Also, we will host an Investor Day on June 13th in Seattle. We look forward to connecting with many of you at those events. I will now turn the call over to Chris.

Chris Diorio: Thank you, Andy. And thank you all for joining the call. Our first quarter set a strong start to the year. Revenue hit a new quarterly record. Our multi-quarter endpoint IC backlog, underpinned by our solutions engagements with enterprise end users, is very strong. And our wafer supply is finally improving, allowing us to use our balance sheet to begin building inventory to support that backlog as well as anticipated future growth. Starting with endpoint ICs, first quarter revenue exceeded our expectations, setting a record for the 7th consecutive quarter. That performance was driven by underlying demand, increasing IC supply and our inlay partners rebuilding their safety stock. Coming off that strong first quarter, we see several crosscurrents that should drive second quarter endpoint IC revenue to be flat sequentially.

First, enterprise program expansions and new use cases, the latter built significantly on our solutions efforts, are the main drivers of our endpoint IC growth. From today’s vantage point, even though every meaningful enterprise deployment with which we are involved is progressing, each is also delayed relative to our expectations by several months, all for their own reasons but most traceable back to prior supply disruptions and our inability to predict the precise timing and pace of large deployments. Second, product shortfalls stalled many early opportunities and restarting those opportunities will take time. And finally, as our IC supply recovers, we see our inlay partners slowing their safety-stock growth. In summary, our demand remains healthy, our backlog remains very strong and we expect robust full-year endpoint IC growth but see a second quarter pause.

Beginning with those enterprise deployments, we received a PO for the third phase of the loss-prevention deployment at the visionary European retailer. This phase is roughly 75% the size of the prior phase, starts in second quarter, spans several quarters and will drive incremental endpoint IC volumes. We continue to be excited by the self-checkout and loss prevention use case and see expansion opportunities at this retailer and at others. In retail general merchandise, we expect strong second half 2023 endpoint IC demand growth from category expansion at the large North American retailer. And on the supply chain and logistics front, we see very strong partner demand for our reader ICs, used in printer-encoders, for our second large North American end user.

We expect that end user to drive large endpoint IC volumes in second half 2023 and beyond. Turning to the early opportunities, I am pleased by our progress with Impinj Authenticity and expect meaningful second quarter Impinj M775 endpoint IC volumes for tax tracking as well as healthcare and specialty foods. I am also excited about book and magazine tracking in Japan, a use case we pioneered years ago, that we expect will consume several hundred million endpoint ICs in 2023. We are well positioned to capitalize on these early opportunities. On the supply front, wafer availability will finally catch up to demand in the second quarter. Between support from our foundry partner and our post-processing investments, we look to avoid a repeat of our painful 2021 and 2022 shortfalls by building appropriate inventory.

For readers, we entered the second quarter with significant backlog, but stubborn tightness in a few components means we will likely carry significant reader backlog into third quarter. For reader ICs, demand for our legacy Indy products was strong, even as our partners began ramping 65 announced E-family-based products to production, with more than 75 new products in development. Turning to our organization, in April we acquired Voyantic, the industry leader in solutions for inlay design, measurement and test. With leading end users relying on our platform to transform their operations, this acquisition expands our solutions footprint to advance the quality, reliability and readability of the partner inlays used in those enterprise deployments.

Perhaps most important to a successful integration, the cultural fit between the two teams is very strong. I have worked closely with and trusted the Voyantic leadership for the better part of 15 years and am thrilled to have them, and the very experienced Voyantic team, as part of the Impinj family. I am also thrilled to welcome Miron Washington to Impinj’s board. Miron has 25 years’ experience in business-to-consumer and business-to-business e-commerce, global supply chain operations, digital transformation and multi-billion-dollar P&L ownership. His knowledge and experience in our target market verticals will pay dividends on our journey to connect every item in our everyday world. Miron, welcome to the Impinj family! Before I close, I’d like to thank every member of the Impinj team for your unflagging effort on so many fronts, from new product development to scaling our operational capabilities to delighting our many customers.

I feel honored by my incredible good fortune to work with you. In closing, from today’s vantage point I see first half 2023 as a transition from product shortfalls and project delays to timely shipments against growing opportunities. Looking to second half 2023, I see secular market growth, strong Impinj backlog and our platform solutions efforts paying dividends. As we continue driving our bold vision, I remain confident in our market position and energized by the opportunities ahead. I will now turn the call over to Cary for our financial review and second quarter outlook. Cary?

Cary Baker: Thank you, Chris, and good afternoon, everyone. On today’s call, I will review our first quarter financial results and second quarter financial outlook. First quarter revenue was $85.9 million, up 12% sequentially compared with $76.6 million in fourth quarter 2022 and up 62% year-over-year from $53.1 million in first quarter 2022. First quarter endpoint IC revenue was $67 million, up 14% sequentially compared with $58.7 million in fourth quarter 2022 and up 73% year-over-year from $38.8 million in first quarter 2022. Improving supply drove first quarter revenue above our expectations. Looking to second quarter, we expect the project timing and first quarter strength Chris mentioned to now result in similar endpoint IC revenue to first quarter.

First quarter systems revenue was $18.8 million, up 6% sequentially compared with $17.9 million in fourth quarter 2022 and up 31% year-over-year from $14.3 million in first quarter 2022. First quarter systems revenue exceeded our expectations, driven by strong reader IC, reader and gateway shipments. On a sequential basis, reader and reader IC revenue increased, while gateway revenue decreased. On a year-over-year basis, gateway and reader IC revenue increased, while reader revenue decreased. Looking ahead, we expect a slight sequential decrease in second quarter systems revenue, as stubborn component shortfalls more than offset Voyantic revenue. First quarter gross margin was 52.4%, compared with 53.8% in fourth quarter 2022 and 57% in first quarter 2022.

The sequential decrease was driven by both endpoint IC product margins, specifically indirect costs related to ramping 300 millimeter post-processing, and systems product margins, specifically the lower mix of E-family reader ICs. The year-over-year decrease was driven by lower endpoint IC product margins, specifically a smaller specialty and industrial IC mix. Looking to second quarter, we expect our gross margin to return to the 53% to 54% range. Total first quarter operating expense was $36.4 million, compared with $29.5 million in fourth quarter 2022 and $26.8 million in first quarter 2022. Research and development expense was $17.3 million. Sales and marketing expense was $7.7 million. General and administrative expense was $11.4 million.

We expect a slight sequential decrease in second quarter operating expense. First quarter adjusted EBITDA was $8.6 million, compared with $11.8 million in fourth quarter 2022 and $3.5 million in first quarter 2022. First quarter adjusted EBITDA margin was 10%. First quarter GAAP net loss was $4.4 million. First quarter non-GAAP net income was $8.7 million, or $0.30 per share on a fully diluted basis. Turning to the balance sheet, we ended first quarter with cash, cash equivalents and investments of $164.7 million, compared with $192.9 million in fourth quarter 2022 and $193.4 million in first quarter 2022. Inventory totaled $85.8 million, up $39.4 million from the prior quarter, with endpoint IC raw materials and WIP driving the increase. First quarter net cash used by operating activities was $26.6 million.

Property and equipment purchases totaled $7.6 million. Free cash flow was negative $34.2 million, including $39.4 million for inventory growth. Before turning to our second quarter guidance, I want to highlight a few items unique to our results and outlook. First, as Chris mentioned, we acquired Voyantic, our first acquisition in many years. This tuck-in deal advances our solutions efforts and will both grow revenue and expand gross margin. Second, although we began rebuilding wafer inventory in first quarter, we do not anticipate having a sustainable amount of 300 millimeter endpoint IC finished goods inventory until at least third quarter 2023. Today, our unit backlog significantly exceeds our inventory. Finally, from a profitability standpoint, first quarter operating expense exceeded our expectations due to litigation spend ahead of our scheduled trial dates.

That $4.2 million spend was $1.3 million more than we expected, pushing our first quarter adjusted EBITDA below the low end of our guidance. Looking ahead, we expect second quarter adjusted EBITDA margin expansion and anticipate third and fourth quarter operating expense to be below the first half run rate. Turning to our outlook, we expect second quarter revenue between $84 and $87 million, compared with $59.8 million in second quarter 2022, a 43% year-over-year increase at the midpoint. We expect adjusted EBITDA between $8.8 and $10.3 million. On the bottom line, we expect non-GAAP net income between $8.2 and $9.7 million, reflecting non-GAAP fully diluted earnings-per-share between $0.28 and $0.33. In closing, I want to thank the Impinj team, our customers, our suppliers and you, our investors, for your ongoing support.

I will now turn the call to the operator to open the question-and-answer session. Operator?

See also Kevin O’Leary’s Stock Portfolio: 10 Stock Picks for 2023 and 25 Cheapest Countries in the World.

Q&A Session

Operator: Thank you very much. We will now begin the question-and-answer session. Today’s first question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Harsh Kumar: Yeah. Hey, good afternoon, Chris, Cary and the Impinj team. I had two questions, Chris, when I listened to your commentary, it seems like the end demand is fine. You’re going to what I would call as growing pains kind of fixing a few things. How would you characterize the end demand? And then historically, we’ve always thought of Impinj as a 25% to 30% grower at least in this phase of its life cycle. Do you think with a flattish first and second quarter that number is in jeopardy or would you still be in a position to be able to talk about that kind of growth rate for the year?

Chris Diorio: Okay. Thank you, Harsh. Thank you for the question. So to take the first part of your question, the end user demand remains strong. We have not seen any pullbacks of any significance in any of the programs we’ve been working with. What we have seen is just due to the difficulty in predicting the pace and timing of those deployments. And just for many of them, given their sheer size we see a bit of a push to the right. That said, our backlog remains strong. Our backlog which is going into those programs remains strong. And we see that backlog driving multi quarter growth at those large programs. So that’s why in my prepared remarks, I use the word pause. It’s a bit of a pause in the second quarter as we see a growing demand into the third quarter.

For the latter part of your question, in terms of overall – overall unit revenue growth for the year, we do see a strong year, we only guide one quarter at a time. We do see robust full year endpoint IC growth. And the industry unit volume CAGR going back over the past decade has been between 25% and 30%. And we don’t see any reason why that unit volume CAGR is going to change given the demand we still see out in the market.

Harsh Kumar: Understood, Chris. Thank you for the clarity. And then for my second and, I guess, last question, I’ll get back in the queue. I wanted to ask about the second logistics customer, presumably, they’ll be taking billions of ICs. So why, I guess, would we not see the benefits sooner than later? I guess I’m asking about the lag between depletion of inventory for that customer and the inlay partners and the resumption of orders that you might see from the inlay partners. And then another question we get is how much share do you keep at these kind of applications, let’s say, the second Logistics customer?

Chris Diorio: Sure. So to answer the first part of your question, the timing of the deployment is currently a ramp. So it’s early days for that deployment. There are significant systems efforts going on now. As I mentioned in my prepared remarks, the printer encoder side to put printers in the facilities to be able to encode the labels, there’s other efforts around other parts of the reading infrastructure. So you should really be thinking of that deployment as ramping. And we are a bit delayed relative to our expectations in terms of where the ramp is, in terms of our share at those deployments. As you know, we have been working very hard to advance our entire platform to enable solutions for these enterprises. And that solution includes many elements of our platform, including our endpoint ICs, to basically use our know-how, our entire platform, the better together combined performance of our overall systems to advance our platform and our ability really to meet the end customers’ needs.

And to the extent that we can deliver against those end customer needs and outperform the competition, I expect us to maintain very good share of those accounts.

Harsh Kumar: Understood. Thank you, Chris.

Chris Diorio: Thank you, Harsh.

Operator: The next question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

James Ricchiuti: Hi. Thank you. I just wanted to go a little bit more deeply, if we can, into the delays that you’re noting with respect to some of these enterprise deployments. Can you get a sense how many customers we’re talking about and how confident are you that these delays are partly a function of supply chain challenges that you’ve experienced, I think, there’s obviously some macro headwinds out there. How confident are you that it’s not the latter?

Chris Diorio: Thanks, Jim, for your question. To answer your question, we are confident in those deployments. We see no indication that they’re pulling back and, in fact, we see strength in systems and in systems demand to be able to service the infrastructure needs for those deployments. And as I mentioned in our prepared remarks, we just won the third phase of the deployment at the visionary European retailer. We’re seeing significant reader IC demand into the second large North American supply chain and logistics customer to build out some of the infrastructure. So we are confident those programs are going forward, and we’re confident in our position at those accounts. But the delays are built on many factors, one of them being just the headwinds we faced earlier in terms of product availability.

And it’s not just the endpoint IC product availability, it’s systems product availability as well. So delays in that product availability certainly impacted the timing of those project ramps, as stated I’ve just answered for Harsh, the sheer size and scale of what these enterprises are attempting. I feel very good about the opportunities. Of course, we’re in regular engagement with these end customers. We are confident in the future. As I said just a minute ago, we still expect to see significant full year endpoint IC growth. But just given the timing and pace of some of these large deployments, things have moved to the right just a bit. And the move to the right is measured in months. We’re not talking a huge move to the right. We’re not talking multi quarters here.

We’re talking months.

James Ricchiuti: Got it. And my follow-up question is just regarding the 300 millimeter post-processing. How satisfied are you with the pace at which you’re scaling this? Because it also appears to have been one of the nagging issues, that’s been holding you back a little bit.

Chris Diorio: Correct. And we have built out our post-processing capability to get ahead of the demand from these enterprise deployments. And I do not anticipate us being limited by post-processing capacity in the second half of this year. We’re getting caught up on wafers. By the end of the quarter, 300 millimeter wafer availability will finally have caught up to demand, and our goal is not to be limited by post-processing or by wafer availability in the second half of the year. And I believe we will achieve that goal.