Impinj, Inc. (NASDAQ:PI) Q2 2023 Earnings Call Transcript

Impinj, Inc. (NASDAQ:PI) Q2 2023 Earnings Call Transcript July 26, 2023

Impinj, Inc. misses on earnings expectations. Reported EPS is $-0.32 EPS, expectations were $0.3.

Operator: Welcome to the Impinj Second Quarter 2023 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask a question. [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 second 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 second quarter 2023 financial results and third 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.

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 the 12th Annual Needham Virtual Industrial Tech, Robotics, and Clean Tech one on one Conference on August 4th; the Oppenheimer 26th Annual Technology, Internet and Communications Conference on August 8th; the Canaccord Genuity 43rd Annual Growth Conference on August 10th in Boston; the Jefferies Semiconductor, IT Hardware and Communications Technology Summit on August 29th and 30th in Chicago; the Goldman Sachs Communicopia and Technology Conference on September 6th in San Francisco; the Piper Sandler Growth Frontiers Conference on September 12th in Nashville; and Lake Street’s Big 7 Conference on September 14th in New York. 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. Second quarter revenue set a new record, with record systems revenue more-than-offsetting weaker-than-anticipated endpoint IC revenue. The primary driver of the systems revenue strength was the loss-prevention deployment at the visionary European retailer. The primary driver of the endpoint IC weakness was larger-than-anticipated retail apparel inventory destocking. We expect the impacts of that inventory destocking to persist at least through the third quarter. Focusing first on endpoint ICs, second quarter revenue declined sequentially, coming in slightly below our expectations. The magnitude of the retail inventory destocking became apparent late in the quarter, not just to us but also to our inlay partners, some of whom had requested upside ICs as recently as April.

That destocking more than offset sequential IC growth at our second large North American supply chain and logistics enterprise customer and us seeding several hundred million Impinj M775 ICs into multiple authentication applications. Looking to the third quarter, our endpoint IC share at our enterprise customers remains strong. At the same time, we and our inlay partners now anticipate softer-than-expected third-quarter retail demand recovery. Those partners built IC safety stock anticipating a stronger recovery, and as our wafer supply has grown, they are burning down roughly a month’s worth of ICs, primarily in the third quarter but with a tail into the fourth. Also, the curve of new-program launches, shifted to the right by the 2022 product shortfalls, created an adoption air pocket that the industry is still working through.

Our enterprise wins are insufficient to overcome these headwinds and, as a result, our third-quarter endpoint IC revenue will decline sequentially. Importantly, despite these headwinds, we do not know of a single end user who has pulled back from RAIN RFID. Said another way, our long-term opportunity remains strong, and we expect growing adoption to drive demand after these corrections are behind us. We also expect greater than 25% 2023 endpoint IC unit-volume growth. Turning to systems, second-quarter reader and gateway revenue exceeded our expectations, driven by better-than-anticipated component availability. The additional supply allowed us to deliver more gateways into the visionary European retailer’s self-checkout and loss-prevention deployment than we had expected, as well as fulfill our prior-period reader backlog.

It also allows our team to shift their focus to new opportunities for our solutions offerings. Regardless, for the third quarter, we expect a sequential decline in reader and gateway revenue due to delivery timing to the visionary European retailer and our return to typical reader and gateway backlog entering the quarter, the latter after nearly two years of component supply constraints. Our second-quarter reader IC revenue remained healthy, with robust demand for printer-encoders in North America offsetting weak macro demand in China. Looking to third quarter, we see the printer-encoder demand mostly fulfilled while China remains soft. Our Chinese reader partners built Indy reader IC inventory ahead of our planned end-of-life, and are today focused on selling Indy-based product inventory rather than ramping Impinj E-family-based designs.

That Indy focus will drive a sequential decline in third-quarter reader IC revenue. Like for readers and gateways, our reader IC supply has normalized and we enter the third quarter with typical reader IC backlog. Turning to new products, last week we launched the Impinj M800 series RAIN RFID endpoint ICs. The first ICs in the series, the Impinj M830 and M850, are the most advanced in the market, with performance and features designed to help enterprises read the right tag, at the right place, at the right time. In addition to 25% more die per wafer than the Impinj M700, the M800 has 30% lower power consumption, allowing businesses to use a single, small tag across a broad range of items. With enhanced tag reliability, manufacturability and drop-in compatibility with M700 antennas, we expect the M800 to drive additional RAIN adoption.

It is also a key component of our long-term growth and margin targets. Turning to intellectual property, we are the innovation leader in our industry, with more than 300 issued and allowed patents. I am pleased to say we successfully defended our leadership position by prevailing in two separate trials. In June, a federal jury in Washington found that Impinj endpoint ICs do not infringe an NXP patent. In July, a federal jury in California found that NXP endpoint ICs do infringe two Impinj patents, one willfully. The California jury awarded Impinj approximately $18.9 million in damages and lost profits, and we have asked the court for injunctive relief. We now turn our attention to the upcoming Texas trials against NXP. In closing, from today’s vantage point we see several headwinds driving lower third-quarter revenue.

Photo by Christian Wiediger on Unsplash

At the same time, our long-term opportunity remains strong, and we see some green shoots in retail apparel. We as a company have been through industry cycles before, and have come through those cycles stronger. With confidence in our growing opportunity and our leading position in it, I have no doubt we will do so again. Before I turn the call over to Cary for our financial review and third 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 second quarter financial results and third quarter financial outlook. Second quarter revenue was $86 million, up slightly sequentially compared with $85.9 million in first quarter 2023 and up 44% year-over-year from $59.8 million in second quarter 2022. Second quarter endpoint IC revenue was $64.9 million, down 3% sequentially compared with $67 million in first quarter 2023 and up 51% year-over-year from $42.9 million in second quarter 2022. Looking to the third quarter, we expect a sequential decline in endpoint IC revenue, driven by inlay-partner safety-stock reductions and weak retail apparel demand more than offsetting growth from our platform wins.

Second quarter systems revenue was $21.1 million, up 12% sequentially compared with $18.8 million in first quarter 2023 and up 24% year-over-year from $16.9 million in second quarter 2022. Second quarter systems revenue exceeded our expectations, driven by better-than-anticipated component availability allowing us to service reader and gateway demand. On a sequential basis, reader revenue increased while reader IC and gateway revenue decreased. On a year-over-year basis, gateway revenue increased while reader IC and reader revenue decreased. Systems included Voyantic revenue starting second quarter. Looking ahead, we expect a sequential decline in third-quarter systems revenue, with declines in all product lines. Second quarter gross margin was 53.3%, compared with 52.4% in first quarter 2023 and 54.7% in second quarter 2022.

The sequential increase was driven by endpoint IC product mix. 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 third quarter we expect our gross margin to decline. Total second quarter operating expense was $35.9 million, compared with $36.4 million in first quarter 2023 and $28.8 million in second quarter 2022. Research and development expense was $16.8 million. Sales and marketing expense was $7.7 million. General and administrative expense was $11.3 million. Litigation expense was $4.3 million. Despite litigation expense being similar to second quarter we expect a sequential decline in third quarter operating expense, as we tighten our belt on spending.

Second quarter adjusted EBITDA was $10 million, compared with $8.6 million in first quarter 2023 and $3.8 million in second quarter 2022. Second quarter adjusted EBITDA margin was 11.6%. Second-quarter GAAP net loss was $8.1 million. Second-quarter non-GAAP net income was $9.3 million, or $0.33 per share on a fully diluted basis. Turning to the balance sheet. We ended the second quarter with cash, cash equivalents and investments of $114.9 million, compared with $164.7 million in first quarter 2023 and $183.7 million in second quarter 2022. Inventory totaled $112.3 million, up $26.5 million from the prior quarter, with wafer-delivery timing and the initial M800 ramp contributing to the increase. Net cash paid for Voyantic totaled $23.4 million.

Second quarter net cash used by operating activities was $22.5 million. Property and equipment purchases totaled $5.7 million. Free cash flow was negative $28.2 million, including $25.3 million for inventory growth. Before turning to our third-quarter guidance, I want to highlight a few items unique to our results and outlook. First, we anticipate third quarter gross margin to decline by approximately 300 basis points, due primarily to lower revenue on fixed costs and less reader ICs. As our revenue recovers, we are confident that our gross margin will recover with it. And we remain confident in the long-term margin targets I outlined at our investor day. Second, we have updated our non-GAAP net income to include estimated taxes based on statutory tax rates.

Given our NOLs, we expect our cash tax payments to remain well below this estimated rate at least for the next few years. Please see our trended file for a retrospective view of our non-GAAP net income following this revised tax treatment. Third, we have reduced our wafer purchases, adjusted our wafer-delivery timing and are focused on better aligning our inventory to our outlook. We expect those efforts to impact fourth quarter inventory. We currently expect third quarter inventory to be similar to second quarter. Finally, based on our revised view of market demand, we believe our inlay partners have roughly a month’s worth of excess IC safety stock. Our third quarter guidance assumes progress right sizing that safety stock, with a tail into the fourth quarter.

Turning to our outlook. We expect third quarter revenue between $63 and $66 million, compared with $68.3 million in third quarter 2022, a 6% year-over-year decline at the midpoint. We expect an adjusted EBITDA loss between $3.3 and $1.8 million. On the bottom line, we expect non-GAAP net loss between $3.2 and $1.7 million, reflecting non-GAAP fully diluted loss-per-share between $0.12 and $0.06. 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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