Impinj, Inc. (NASDAQ:PI) Q4 2023 Earnings Call Transcript

Impinj, Inc. (NASDAQ:PI) Q4 2023 Earnings Call Transcript February 8, 2024

Impinj, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Impinj Fourth Quarter and Full Year 2023 Financial Results Earnings 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 fourth quarter and full year 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 fourth quarter and full year 2023 financial results and first quarter 2024 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.

Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995. Whereas 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 Susquehanna’s 13th Annual Technology Conference on February 29th in New York, Loop Capital’s 6th Annual Investor Conference on March 11th, and The 36th Annual ROTH Conference on March 18th in Dana Point. 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. We exited 2023 on an upswing, with fourth -quarter revenue and profitability above both our third quarter results and fourth quarter guidance. Our focus on silicon and enterprise solutions paid dividends in strong fourth quarter endpoint IC volumes, led by our two strategic verticals; retail and supply chain & logistics. We will sharpen that focus as we enter 2024, increasing our investment in silicon and enterprise solutions, while streamlining our organization to accelerate our pace and improve our profitability. Every January, we kick off the year with the National Retail Federation tradeshow in New York. This year, RAIN RFID felt like the belle of the ball.

Solution providers across the show touted use cases from inventory visibility to self-checkout. End users cited delighting customers with just-walk-out, and retail necessities like loss identification. Coming off the significant retail inventory destocking that characterized 2023, the excitement at NRF was palpable. Although I still feel it is premature to call the retail downturn over, the green shoots I cited last quarter, feel a shade greener post-NRF, buoyed by secular growth opportunities in supply chain and logistics, retail general merchandise, apparel and a long tail of other applications. From my perspective, Impinj stood out as the leading RAIN silicon provider and enterprise solutions enabler, which is precisely where we want to be.

Turning to silicon, our 2023 endpoint IC unit-volume growth exceeded our industry’s historical 29% CAGR, with opportunity expansion and inlay-partner inventory rebuilds more-than-offsetting the retail destocking headwinds. Fourth-quarter endpoint IC revenue exceeded our expectations, as growth in retail demand outpaced headwinds from some inlay partners still dialing in their inventory levels. Looking forward, we anticipate first quarter to again deliver modest endpoint IC unit-volume growth. For reader ICs, our revenue held firm, despite continued macroeconomic headwinds in China, as partners’ transition from older Indy-based products to new E-family designs. Fourth quarter also showed strong test and measurement product deliveries to our inlay partners, as they expand their inlay manufacturing capacity.

We believe those capacity expansions bode well, for the long-term endpoint IC opportunity. Before we turn to solutions, I would be remiss in not again citing our multiple intellectual property trial wins against our primary endpoint IC competitor, NXP. With steadfast determination, we intend to pursue the dispute to a long-term successful outcome. Moving to solutions, the visionary European retailer’s ongoing rollout of our self-checkout and loss prevention solution contributed strong fourth-quarter gateway revenue. We expect this deployment, their third to-date, to conclude in the second quarter even as it accelerates their embedded-tagging ramp. We anticipate future self-checkout and loss-prevention opportunities with this retailer in other brands and geographies.

In general merchandise, the large North America retailer continued their rollout, albeit at a slower pace than they and we, originally expected, primarily due to the breadth of their supplier base and large diversity in the products being tagged. Regardless, they continue making progress. Finally, in supply chain and logistics, we expect the second large North American supply chain and logistics end user to increase their label volumes in 2024. We expect all these projects to provide a tailwind, to our 2024 endpoint IC revenue. On the product front, Impinj M800 deliveries are poised to ramp, as our inlay partners finish their quail and begin shipping production inlays. The M800 is our best performing and most feature-rich endpoint IC ever and, so far, customer feedback has been very positive.

Although we are assuming the M800 will follow a typical multi-year ramp, we remain hopeful that our hard work on product performance and market readiness will accelerate that ramp. We also continue shifting our focus away from channel readers and gateways to our reader ICs and enterprise solutions, the former as partner products built on those ICs become increasingly able to unlock channel opportunities and the latter leveraging our readers and gateways as indispensable elements of whole-platform solutions. Turning to new market drivers, late last year the European Commission and European Parliament provisionally included the Digital Product Passport, or DPP, in the EU’s revised sustainability product legislation. DPP will provide information about a product’s sustainability and traceability and help consumers and businesses make informed purchasing decisions.

We expect a phased introduction, including apparel, to start in 2027, and we already see leading European retailers planning for and investing ahead of it. We believe DPP is a pivotal opportunity for us because RAIN, already used extensively in retail apparel, can provide the information required by DPP. We also believe DPP can be the impetus for post-purchase consumer RAIN use cases. We began investing in DPP-related R&D in 2023 and will continue doing so in 2024. In closing, 2023 was another year of solid growth despite market headwinds, with annual revenue crossing the $300 million threshold for the first time. We delivered four quarters of positive adjusted EBITDA, successfully defended our IP, introduced market-leading new products and are well down the path to normalizing our inventory levels.

Looking forward, we are sharpening our strategic focus to improve our profitability and increase our competitiveness. As we continue driving our bold vision to connect every item in our everyday world, 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 first quarter outlook. Cary.

Cary Baker: Thank you Chris, and good afternoon everyone. 2023 was another year of strong revenue growth, driven by our enterprise solution wins and end-market diversification into supply chain and logistics and retail general merchandise. That said, we also navigated a fluid retail environment, marked by significant retail apparel inventory destocking that elevated our first half revenue and depressed our second half revenue as our inlay partners first overbuilt endpoint IC inventory and then adjusted stock back to healthier levels. Despite those fluctuations, our team executed well, delivering non-GAAP profitability in each quarter of the year. Another 2023 highlight was our Voyantic acquisition, which extends our solutions to include inlay test and measurement.

The cultural and financial fit between the companies is fantastic and the integration is proceeding as planned. The Voyantic test and measurement systems, used by both our inlay partners and end users, are a key element of our focus on silicon and enterprise solutions. Fourth quarter revenue was $70.7 million, up 9% sequentially compared with $65 million in third quarter 2023 and down 8% year-over-year from $76.6 million in fourth quarter 2022. Fourth quarter endpoint IC revenue was $53.9 million, up 11% sequentially compared with $48.6 million in third quarter 2023 and down 8% year-over-year from $58.7 million in fourth quarter 2022. The sequential endpoint IC revenue growth exceeded our expectations, especially when compared to typical fourth quarter declines.

Looking to the first quarter, we again expect sequential endpoint IC revenue growth, now that our large inlay partners’ inventory levels are relatively healthy. Fourth quarter systems revenue was $16.8 million, up 2% sequentially compared with $16.4 million in third quarter 2023 and down 6% year-over-year from $17.9 million in fourth quarter 2022. The sequential increase overcame our expectation of a decline, due to strength in test and measurement. Looking to the first quarter, we expect similar systems revenue to fourth quarter. Total 2023 revenue was $307.5 million, up 19% year-over-year compared with $257.8 million in 2022. Endpoint IC revenue grew 22% year-over-year, with enterprise solution wins and inlay partner inventory rebuilds more than offsetting retail apparel destocking headwinds.

Systems revenue grew 10% year-over-year, with test and measurement and gateway strength more than offsetting weakness in our partner-led reader business. Fourth quarter gross margin was 50.9%, compared with 50.5% in third quarter 2023 and 53.8% in fourth quarter 2022. The year-over-year decline was driven by higher indirect costs against lower production volumes. Full year 2023 gross margin was 51.9%, compared with 55.5% in 2022, with the decrease due primarily to lower endpoint IC product margins from less specialty and industrial ICs as well as mix within those specialty and industrial ICs. Looking to first quarter 2024, we expect gross margin to sequentially increase. Total fourth quarter operating expense was $33.0 million, compared with $32.6 million in third quarter 2023 and $29.5 million in fourth quarter 2022.

Research and development expense was $15.0 million. Sales and marketing expense was $7.7 million. General and administrative expense was $10.3 million, including litigation expense of $3.8 million. 2023 operating expense totaled $137.8 million, compared with $114.2 million in 2022. We expect total first quarter 2024 operating expense to increase sequentially, driven by annual-payroll tax and bonus-accrual resets. We expect first quarter litigation expense to decline sequentially. Fourth quarter adjusted EBITDA was $3.0 million, compared with $300,000 in third quarter 2023 and $11.8 million in fourth quarter 2022. Fourth quarter adjusted EBITDA margin was 4.2%. 2023 adjusted EBITDA was $21.8 million, compared with $28.9 million in 2022. 2023 adjusted EBITDA margin was 7.1%.

Fourth quarter GAAP net loss was $15.2 million. Fourth quarter non-GAAP net income was $2.5 million, or $0.09 per share on a fully diluted basis. 2023 GAAP net loss was $43.4 million. 2023 non-GAAP net income was $19.8 million, or $0.70 per share on a fully diluted basis. Turning to the balance sheet, we ended the fourth quarter with cash, cash equivalents and investments of $113.2 million. Inventory totaled $97.2 million, down $9.6 million from the prior quarter, with the decrease coming primarily from endpoint ICs. Fourth quarter net cash provided by operating activities was $1.4 million. Property and equipment purchases totaled $2.6 million. Free cash flow was negative $1.2 million. For the full year, net cash used in operating activities was $49.4 million.

Property and equipment purchases totaled $18.6 million. Free cash flow was negative $68 million, driven by our endpoint IC inventory rebuild. Before turning to our guidance, I want to highlight a few items unique to our results and outlook. First, in fourth quarter, our inlay partners made further progress reducing their endpoint IC inventory, and our large partners exited the year relatively healthy, leaving them well-positioned to ramp M800 volumes. Some of our smaller partners still hold elevated inventory, which we expect them to bleed down as their project-based demand returns. Second, as we conclude our E-family reader IC transition, we will end-of-life our prior generation Indy product family, with last time shipments scheduled in first half 2024.

Turning to our outlook, we expect first-quarter revenue between $72 and $75 million compared with $70.7 million in fourth quarter 2023, a 4% quarter-over-quarter increase at the midpoint. We expect adjusted EBITDA between $3 and $4.5 million. On the bottom-line, we expect non-GAAP net income between $2.2 and $3.7 million, reflecting non-GAAP fully diluted earnings-per-share between $0.08 and $0.13. In closing, I want to thank the Impinj team for your outstanding execution this quarter. We have delivered nine consecutive quarters of positive adjusted EBITDA, even as we continued investing in our business. We now turn our focus to the next goal, generating consistent free cash flow. I believe our efforts to streamline our organization will accelerate progress towards that goal.

With that, 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 very much. [Operator Instructions] Today’s first question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Harsh Kumar: Yes, hey guys. First of all, congratulations. You guys are back to beat and raise, which is fantastic.

Chris Diorio: Thank you, Harsh.

Harsh Kumar: And Chris, you sound fantastic about the prospects of the business. We appreciate that. So, on that note, Chris, my first question to you is, historically, you’ve had endpoint IC unit growth, call it, 20%, 25%. You’re coming off of a pretty healthy inventory correction, but your end markets are all looking nicely up. Is it fair for us to think about endpoint IC unit growth in the 25% range for 2024 year?

Chris Diorio: Well, first I’m going to say thank you for your kind words, Harsh. So, we guide one quarter at a time as you know, and making predictions at this point in time relative to overall 2024 is quite difficult. You’ve probably heard some of our partners talk about 2024 overall. I’d say they potentially see some macro pickup in the back half of the year. If that macro improvement actually happens, then we see strength in the back half of the year as well and the potential for gains as we have seen in other years. But a lot depends on what happens in the macro environment. I’m not willing to call yet that we’re going to see that pick up in the back half of the year because, as I said in my prepared remarks, it’s a bit too early for us to call the downturn over, but I’m guardedly optimistic for the back half of the year.

And if it picks up, we’re going to see it in the endpoint IC volumes. And as I said, you know green shoots — green shoots look greener. So let’s hope those green shoots continue growing. We’re going to do our best to water them.

Harsh Kumar: Great. For my follow-up, I wanted to clarify on what you call as your second life– your second logistics customer. Now they do, I think, $6 billion some-odd shipments a year, is it fair to think that you are now fully penetrated in 2024 with that sort of $6 billion sort of shipment number? Or you think that the endpoint IC installation within that particular customer will continue to ramp, not just for 2024, but possibly into 2025

Chris Diorio: So just — I think you mentioned 6 billion units rather than $6 billion in terms of the total number of our products they ship. You know, Harsh it’s difficult for me to speak to the pace and timing of an end customer ramp. What I said in my prepared remarks, we see increases in volumes in 2024. That said, that end user has diverse operations. And so I think it’s probably fair to say that there will be opportunities for continued gains with that end user and we will do our best to support them at every opportunity to support their deployment and make it successful. In terms of the pace and timing at which they ultimately go I think I’m going to have to defer to them and their remarks that they often make in their earnings calls.

Harsh Kumar: Fair enough. Chris, I’ll get back in line. Thank you. And congratulations, guys.

Chris Diorio: Thank you, Harsh.

Cary Baker: Thank you, Harsh.

Operator: Thank you. The next question is from Toshiya Hari with Goldman Sachs. Please go ahead.

Q – Toshiya Hari: Hi, good afternoon. Thank you so much for taking the question. I had two questions as well. The first one is on the M800, I think it was you carried toward the end of your remarks. You talked about your large partners being in a pretty good spot from an inventory position perspective and how they’re well positioned to ramp the M800. As the M800 kind of comes in, into your mix, how should we think about the penetration rate exiting the year? And how should we think about the impact that could have on both ASP expansion as well as your gross margins? And then I have a follow-up.

Cary Baker: Okay. Thanks, Toshiya. This is Cary. Customer feedback on the M800 has been overwhelmingly positive. Our partners are moving forward with the calls, and we expect some initial production shipment volumes this quarter. Historically, however, new endpoint IC ramps have taken multiple years. We’re optimistic that the excitement around the M800, we can accelerate that historical product ramp, but it’s too early to predict the pace of the ramp at this point. And I would add, in addition to the performance and manufacturability gains, the M800 also carries a significant cost advantage for Impinj given the die strength that’s built into that endpoint IC. When fully ramped, we expect the M800 to deliver approximately 300 basis points of gross margin accretion.

Given how early we are in the product ramp, however, I do not think I’ll see — or we will see the M800 impact in gross margin in the first half of this year. Give us another six months, and we’ll see how that ramp goes but we’re very encouraged by what we’ve seen so far.

Q – Toshiya Hari: Great. That’s helpful. And then as my follow-up, Chris and Cary, I think you both mentioned something about streamlining your organization,you’ve generated positive EBITDA on a consistent basis. You talked about being focused on generating consistent free cash flow. When you say streamlining our organization, like what do you mean? What are you doing today internally? And what kind of cost reductions or efficiencies can we expect in model going forward in 2024 and beyond? Thank you.

Cary Baker: Thanks, Toshiya. This is Cary again. I’ll take that one. We are streamlining and adjusting our channel reader investment to better align that portion of our reader business to its revenue profile. We’re not exiting the channel reader business, and we’ll continue supporting our partners in the market. This move will allow us to do that and support our partners in a more profitable fashion. This change is a natural progression of our strategy as our partner designs with E-family are increasingly able to unlock that channel reader business, and we are, therefore, able to focus our efforts on the enterprise solutions. We remain focused on our three financial goals that we outlined last year at the investor or the Analyst Day, long-term revenue growth, profitability and free cash flow.