Impinj, Inc. (NASDAQ:PI) Q3 2023 Earnings Call Transcript

Impinj, Inc. (NASDAQ:PI) Q3 2023 Earnings Call Transcript October 25, 2023

Impinj, Inc. misses on earnings expectations. Reported EPS is $-0.58551 EPS, expectations were $-0.09.

Operator: Welcome to the Impinj call and webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this 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, MJ. Good afternoon, and thank you all for joining us to discuss Impinj’s third 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 third quarter 2023 financial results and fourth 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 company’s Investor Relations website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today.

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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 non-GAAP financial metrics to the most comparable GAAP metrics.

Before turning to our results and outlook, note that we will participate in Baird’s Global Industrial Conference on November 9th in Chicago. We look forward to connecting with many of you there. I will now turn the call over to, Chris.

Chris Diorio: Thank you, Andy. And thank you all for joining the call. As I reflect on our results, while I am disappointed that 2023 has been far more challenging than we anticipated entering the year, I am pleased with our execution this quarter. We beat our revenue guide midpoint and exceeded our profitability guide. Looking forward, we see green shoots in the fourth quarter, expect our full-year 2023 endpoint IC volumes to be consistent with our industry’s historical 29% unit-volume CAGR, anticipate a market rebound in 2024 and remain a growth leader despite the difficult macro. We also continue improving our demand forecasting and inventory management. To quote Winston Churchill, we are not letting a good crisis go to waste.

Challenging periods have always made us a stronger company, and I have no doubt this one will as well. Focusing first on endpoint ICs, third quarter revenue slightly exceeded our expectations but declined sequentially. Weakness in the overall retail apparel market and softness in the general merchandise ramp at the large North American retailer eclipsed strong unit volume growth at our second large North American supply chain and logistics customer. And while IC inventory at many of our inlay partners declined, the aggregate decline was less than we had anticipated. Looking to the fourth quarter, green shoots in retail apparel are driving improving demand at our inlay partners. While it is too early to call a bottom, it appears that, at least in North America, the worst of the retail inventory destocking is behind us.

That said, we expect our inlay partners to continue reducing their IC inventory in the fourth quarter even as they deliver into that improving retail demand. Looking into 2024, we see secular growth in both parcel tracking and retail, the latter buoyed by self-checkout driving 100% tagging and a general merchandise expansion. Turning to systems, third quarter reader and gateway revenue was slightly below our expectations, due primarily to macro headwinds slowing partner-led deployments. Our enterprise engagements continued to be a bright spot, led by expanding parcel tracking at the second supply chain and logistics end user, self-checkout and loss-prevention at the visionary European retailer and a successfully concluded self-checkout deployment at the Asia-based global retailer.

Looking to the fourth quarter, we expect a sequential decline in reader and gateway revenue due to continued weakness in our partner-led reader deployments and unfavorable delivery timing to our enterprise end users. Looking farther out, we will continue investing in solutions that leverage our entire platform, working hand-in-hand with lighthouse enterprises to solve their previously unsolvable business problems. Those efforts paid dividends in 2023, both in systems and recurring endpoint IC volumes, and we expect that trend to continue in 2024. I remain confident that our focus on enterprise solutions will yield further dividends in the years ahead. Third quarter reader IC revenue declined as we expected, due primarily to weak macro demand in China and our partners continuing their transition from our older Indy product line to our new Impinj E-family.

Looking to the fourth quarter, we see similar reader IC revenue to third quarter, with China demand remaining soft and our partners focused on selling down their Indy-based product inventory before fully ramping sales of E-family-based designs. That said, we are pleased with the pace of our E-family design wins and our traction with emerging opportunities. Turning to our intellectual property dispute with NXP, we prevailed in Washington, California and China. The California Court issued post-trial rulings instructing the parties to agree on a monetary award to Impinj, upholding the jury verdict in our favor on one patent but denying our request for an injunction, and ordering a retrial on a second patent’s validity while upholding its infringement and willfulness verdicts in our favor.

We appealed the injunction denial, requested an ongoing royalty and are pursuing further damages from NXP’s Dutch affiliate. The first of three Texas trials, involving three Impinj patents versus two patents NXP recently licensed from a third party, starts next week. Overall, we remain confident in our position and anticipate seeing the litigation through to a successful outcome. In closing, despite the macro headwinds impacting our fourth quarter outlook, we see signs of retail demand improvement, expect strong annual endpoint IC unit-volume growth and remain optimistic for the future. As I said earlier, we as a company have been through industry cycles before and have come through each of them stronger. With excitement for the future, our leading market position and the strength of our platform and strategy, I have no doubt we will do so again.

Before I turn the call over to Cary, for our financial review and fourth quarter outlook, I’d like to again thank every member of the Impinj team for your constant effort driving our bold vision. I feel honored by my incredible good fortune to work with you. Cary?

Cary Baker: Thank you Chris, and good afternoon everyone. On today’s call, I will review our third quarter financial results and fourth quarter financial outlook. Third quarter revenue was $65 million, down 24% sequentially compared with $86 million in second quarter 2023 and down 5% year-over-year from $68.3 million in third quarter 2022. Third quarter endpoint IC revenue was $48.6 million, down 25% sequentially compared with $64.9 million in second quarter 2023 and down 5% year-over-year from $51.2 million in third quarter 2022. Looking forward, while we typically see fourth quarter endpoint IC revenue decline sequentially, this year we expect improving inlay partner demand to drive an increase. Third quarter systems revenue was $16.4 million, down 22% sequentially compared with $21.1 million in second quarter 2023, and down 4% year-over-year from $17.1 million in third quarter 2022.

Third quarter systems revenue was slightly below our expectations, driven by weakness in our Speedway reader business. On a sequential basis, revenue decreased across all product lines. On a year-over-year basis, gateway revenue increased while reader IC and reader revenue decreased. Looking ahead, we expect a sequential decline in fourth quarter systems revenue, led by weakness in our partner-led reader business. Third quarter gross margin was 50.5%, compared with 53.3% in second quarter 2023 and 56.9% in third quarter 2022. The sequential decrease was driven by lower revenue on fixed costs. The year-over-year decrease was driven by lower endpoint IC product margins, specifically a smaller specialty and industrial IC mix, and lower systems product margins driven by increased costs.

Looking to the fourth quarter, we expect our gross margin to increase. Third quarter operating expense was $32.6 million, compared with $35.9 million in second quarter 2023 and $29 million in third quarter 2022. Effective spend management across all major functions drove the lower-than-expected operating expense. Research and development expense was $15.5 million. Sales and marketing expense was $7.3 million. General and administrative expense was $9.7 million, including litigation expense of $3.4 million. We expect a sequential increase in fourth quarter operating expense, due in part to increased litigation spend. Third quarter adjusted EBITDA was $300,000, compared with $10 million in second quarter 2023 and $9.8 million in third quarter 2022.

Delivering positive adjusted EBITDA despite the significant revenue headwinds this quarter is a testament to both the strength of our business model and the execution of our team. Third quarter GAAP net loss was $15.8 million. Third quarter non-GAAP net income was $100,000 or zero cents per share on a fully diluted basis. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents and investments of $113.2 million, compared with $114.9 million in second quarter 2023 and $201.1 million in third quarter 2022. Inventory totaled $106.8 million, down $5.5 million from the prior quarter. Third quarter net cash used by operating activities was $1.7 million. Property and equipment purchases totaled $2.8 million. Free cash flow was negative $4.5 million.

Before turning to our fourth quarter guidance, I want to highlight a few items unique to our results and outlook. First, as Chris mentioned, our partners made progress reducing their endpoint IC inventory in third quarter. We expect them to continue reducing their endpoint IC inventory in the fourth quarter. That reduction will position us well to capitalize on the large number of partner M800 inlay designs currently in certification and to begin ramping M800 in 2024. Second, our third quarter inventory decreased, with lower endpoint IC inventory more than offsetting higher systems inventory. Looking to the fourth quarter, we anticipate further reducing our overall inventory, again with declining endpoint IC inventory more than offsetting a small increase in systems inventory.

We are confident inventory will normalize as demand recovers. Finally, we recently launched our first ESG materiality assessment, surveying a cross-section of our investors, customers and employees on ESG matters that are important to them. Impinj is strongly committed to ESG. At the same time we view our journey as a partnership with all our stakeholders to build a strong ESG roadmap for the future. Turning to our outlook, we expect fourth quarter revenue between $65.5 million and $68.5 million, compared with $65 million in third quarter 2023, a 3% quarter-over-quarter increase at the midpoint. We expect adjusted EBITDA between a loss of $900,000 and a profit of $700,000. On the bottom line, we expect non-GAAP net income between a loss of $1.2 million and a profit of $300,000, reflecting non-GAAP fully diluted earnings per share between a loss of $0.04 and a profit of $0.01.

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. MJ?

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Q&A Session

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

Harsh Kumar: Yes. Hey, Chris, Gary and the team at Impinj. You guys sound a lot better this time around. Looks like looks like progress is in site. Had a quick question.

Chris Diorio: Thank you, Harsh.

Harsh Kumar: Thanks, Chris. Had a quick question. Could you give us, I know you guys were working on destocking your inventory at the Inlay partners, and I know you talked about it in the script. But could you give us a sense of how much is left in the system and how much do you think you might have left in the December quarter? How much you want to take out in the December quarter? In other words, if none of this had happened, where would your real revenues have been in the December quarter?

Cary Baker: Yes. Hey, Harsh. Thanks for the question. This is Cary. I think I’ll take that one. Our progress in burning down channel inventory in Q3 was mixed. We had some partners on-track or ahead of schedule and some behind. In aggregate though, we burned down less than I expected going into the quarter. Based on our estimated demand, we will take out more channel inventory in Q4 and anticipate our large partners exiting the year reasonably healthy, our smaller partners, however, may take a little more time to get healthy. We’re not giving a specific number of weeks of channel inventory, because those are based on our estimates of demand. And that demand environment remains very fluid at this point. So but at the end of the day, we’re making good progress on reducing channel inventory.

Harsh Kumar: Great. Thank you. And it’s good to hear you. You think it’ll be done by December, which is the original plan. And then I had a second one. Your largest — one of your largest customers reported this afternoon, and they also seem to imply that we’re close to bottom in the retailer panel issues and things are actually starting to look up just kind of like you mentioned. But I was curious, I can get you thoughts on the topic, how believable do you think this is, this time around using independent validation of this outside of what your partners are telling you. And then also they seem pretty excited about food as a category as well. Could you also comment on that? And I’ll get back in line.

Chris Diorio: Yes. Thanks, Harsh. So we and our largest customer are seeing roughly the same thing. We obviously talked to our direct Inlay partners, but we also talked to end users. I was just at a wireless IoT event in Germany last week, met with several of our end users. And although, although the macro environment is still difficult, and as we said in our prepared remarks, it’s still too early to call bottom. We do see improving demand out there. Our direct — our end users are starting to stimulate. They see things picking up at a little, import data and sales out data at least in the U.S. are starting to normalize. And so we’re feeling those green shoots. So like we said, it’s too early to call bottom. I guess I’d like to add that, North America seems to be a well ahead in terms of the correction.

Europe feels behind and certain parts of Asia are mixed, obviously, because Asia is large, but China is behind as well. So, time will tell, but I’m personally feeling pretty good that, that things are improving out there in the market. On the food side — yes.

Harsh Kumar: Okay.

Chris Diorio: Go ahead. I’m sorry.

Harsh Kumar: No. No. No. That was it.

Chris Diorio: Okay. On the food side, we do see food as an opportunity. There are two aspects to food. One is, one is tracking items at the pallet, carton and case level. And we have been categorizing those food opportunities in what we call supply chain and logistics because it’s primarily moving the food items around. There are also food opportunities in direct item tagging. And those opportunities are moving forward. I — we have not commented on them directly on our calls because I personally feel it’s a little bit premature to be citing some of these opportunities when they’re just starting to get going, but they are certainly out there. And as they come forward, I can guarantee that some of them are going to be quite large.

But our preference is to focus right now on where we actually see the movement, which is on the, on pallet, carton and box. And, it kind of keep our powder dry on the individual food opportunities, which, of course, like I said, can be much larger, but I think it’s premature.

Harsh Kumar: Thanks, Cary and Chris. Thank you.

Chris Diorio: Thank you.

Operator: The next question comes from Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari: Hi, good afternoon. Thank you so much for taking the question. I wanted to follow-up on how to think about inlay partner inventory and I guess, your selling going forward. Cary, I think you mentioned that, you expect your large partners to exit the year with relatively healthy inventory, but perhaps some of your smaller partners, to have maybe excess inventory at the end of the year. Did I catch that right, first of all? And then second of all, assuming your large partners exit the year, in a healthy spot, and you’re selling into, I guess, sell through starting Q1. How should we think about the sequentials in your endpoint IC business in Q1? And I guess any preliminary thoughts on 2024, for your endpoint IC business, would be super helpful as well.

Cary Baker: Yes. Thanks, Toshiya. This is Cary. So, yes, you got it right. The larger inlay partners, we expect to exit the year reasonably healthy, the smaller inlay partners are going to take a little bit more time. As I think about the first quarter, we’re going to stick to our knitting here and guide just one quarter as time. The market remains very dynamic. We’re just now starting to see improvement in endpoint ICs while our systems are remaining soft. And that’s not unlike what we saw as we exited COVID. The endpoint ICs recovered before systems did. But we’re still in the early stages of what we hope to be a recovery. So we’re not going to lean too far forward on our guidance for beyond Q4 at this point.

Chris Diorio: I — Toshiya, I will point you to my prepared remarks, where we lean in about as far as we want to, where I said, looking into 2024, this is with respect to our end policies. Looking into 2024, we see secular growth in both parcel tracking and retail. And then cited the self-checkout driving 100% tagging and the expansion in general merchandise. Of course, we anticipate seeing a pickup in retail apparel as well, driven by more than just 100% tagging due to self-checkout, but that is a driver as well. And so we are guardedly optimistic for 2024, but I think that’s as far as we want to go right now.