Impinj Inc (PI) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Impinj second-quarter 2016 conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Maria Riley, Investor Relations for Impinj. Please go ahead.

Thank you, operator, and thank you all for joining us to discuss Impinj's second-quarter 2016 financial results.

On today's call, Chris Diorio, Impinj's Founder and Chief Executive Officer, will provide a brief overview of our performance and our market. Evan Fein, Impinj's Chief Financial Officer, will follow with a detailed review of financial results and the outlook for the remainder of the quarter. We will then open the call up for questions. Impinj's President and COO, Eric Brodersen, is on the call and join Chris and Evan in the Q&A session.

Before we start, note that we may make certain statements during this call that are not historical facts, including those regarding our plans, objectives and expected performance. To the extent we make such statements, they are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements represent our outlook only as of the date of this conference call.

While we believe any forward-looking statements we make are reasonable, our actual results could differ materially because any statements based on current expectations are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Also during today's call, all statement of operations results, with the exception of revenue or where we explicitly state otherwise, are non-GAAP financial measures. Balance sheet metrics and cash flow metrics are on a GAAP basis.

I will now turn the call to Chris Diorio, Impinj's Founder and Chief Executive Officer. Chris?

Thank you, Maria, and thank you all for joining the call. I am delighted to be here with you today on Impinj's first earnings call as a public company. To recap our initial public offering, we priced on July 20 and raised $69.2 million in net proceeds.

Turning now to the second quarter, we delivered strong results. Revenue grew 36% year over year to reach a record $26.0 million. Demand for our end point ICs was the primary driver behind that revenue growth, which we believe is also an indication of market growth.

We enabled connectivity for 3.8 billion items in the 12 months ended March 31 of this year, and that growth is accelerating as Evan will highlight in his revised estimate for overall 2016 endpoint IC volumes. In a few minutes, I will share with you some recent examples of our successes, and the progress we're making to capitalize on the accelerating market growth. But because this is our first earnings call, I would like to first review some key aspects of our vision, platform and growth strategy.

Impinj's vision is digital life for everyday items. Our mission is to wirelessly connect those everyday items and deliver to the digital world each item's unique identity, location and authenticity. Our platform is the backbone of that connectivity and information delivery.

We are literally extending the reach of the internet by a factor of 100 from today's powered electronic devices, to everyday items like retail apparel, airline luggage, pharmaceuticals, automotive parts, food, really everything.

We are the only RAIN RFID company with an integrated platform spanning end points, connectivity and software. This platform, which we built on 16 years and more than $160 million of investments in innovation and development, is integrated, easy to deploy and use, versatile, and applicable to nearly any use case and we believe delivers unmatched performance.

Our two core verticals are retail and healthcare. But our platform's versatility allows end users like Coke to use it for managing syrup cartridges in their freestyle soda fountains, and McDonald's Europe to use it to provide direct to table food service. It also enables many other applications spanning airline baggage handling to data centers.

Our multi-tier solution selling model leverages our global ecosystem of more than 500 distributors, systems integrators, bars and software partners, giving us market reach, penetration and scalability. Our growth strategy includes enhancing our platform's reach and breadth, enabling ubiquitous item connectivity, expanding into new vertical markets, and increasing our solutions attach across verticals.

Now let me share with you a few of our recent innovations. In the second quarter, we launched a new endpoint IC, Monza 4i, targeting automotive applications. We enhanced our ItemSense operating system by adding system health monitoring, a management console that streamlines system setup by automatically discovering readers and gateways and auto setting configurations and enhanced ItemSense's item location monitoring.

We also launched a developer website that provides documentation and tools to help our ISV partners build software applications on top of ItemSense. We introduced an IoT connector that links our platform to the SAP Hybris Commerce Suite, delivering accurate real-time RAIN-based inventory data to retailers. Helping them reduce inventory, decrease markdowns, and improve shopper experiences online and in store.

We also released four new joint solutions, including with 6PM for patient file tracking, with Data2 and Nedap for jewelry store inventory visibility, with Terso for monitoring medical and scientific products, and with Accruent for mobile medical device tracking. The solution we developed with Accruent automates medical device management, giving hospitals visibility into medical equipment utilization.

In total, we have announced 12 solutions in the last nine months. These new solutions, along with our SAP Hybris IoT connector, highlight our efforts developing and delivering solutions for our end customers.

We are also expanding our collaboration with Intel to address the needs of today's modern retailers. For example, Intel's retail sensor platform relies on the Impinj RS2000 Reader System-in-Package for its RAIN functionality. The combination has the potential to help retailers transform their businesses by enhancing their store operations.

Turning now to the Company itself, Theresa Wise joined our Board of Directors in May. Theresa is an information technology veteran who served as Senior Vice President and Chief Information Officer for Delta Airlines from 2008 to 2016. Her expertise will be instrumental as we further diversify our solutions, and expand our footprint across many industries including airlines.

Finally, we won the IDTechEx Internet of Things Applications award for connecting more than 13 billion everyday items using our platform. IDTechEx presented our award at their Internet of Things Applications conference in Berlin. In summary, we are incredibly excited to see our platform and our solutions efforts extend network connectivity to so many billions of everyday items truly enabling the Internet of Things.

Our investments and strong execution are enabling us to capitalize on this massive market opportunity. We delivered a great second quarter, and I'm excited to have you join our journey. I would like to thank our team, partners and shareholders for their support and contribution in making Impinj what it is today.

I will now turn the call over to Evan to give you a detailed look at our financial results, and outlook for the third quarter of 2016. Evan?

Thanks, Chris. Before I review our second-quarter 2016 financial results, I want to remind you that, with the exception of revenue or unless explicitly stated otherwise, today's statement of operations is on a non-GAAP basis. All balance sheet and cash flow metrics are on a GAAP basis. Please see the Investor Relations portion of our website for how we define non-GAAP metrics, and a reconciliation of each non-GAAP metric to the nearest GAAP metric.

As Chris mentioned, our second-quarter results were strong. We achieved revenue of $26.0 million, representing 36% growth over the second quarter of 2015 and 20% growth over the prior quarter. Our growth this quarter was driven by continued increasing demand for our endpoint ICs.

Our gross margin for the second quarter was 53.4%, compared with 52.6% in the prior quarter and 54.4% in the second quarter of 2015. Depending on product mix, gross margin can fluctuate from quarter to quarter, in this case up 70 basis points compared to the prior quarter.

Total operating expense in the quarter was $12.6 million or 48.3% of revenue, compared with $12.2 million or 56.4% of revenue in the prior quarter. R&D expense was $5.4 million or 21% of revenue.

Sales and marketing expense was $5.0 million or 19% of revenue. G&A expense was $2.3 million or 9% of revenue. We ended the quarter with 224 employees, compared with 208 at the end of last quarter.

GAAP net loss for the quarter was $254,000. On a non-GAAP basis, we achieved net income of $868,000 or $0.06 per share using a weighted average diluted share count of 13.9 million shares. Adjusted EBITDA was $1.3 million or 5% of revenue.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $14.4 million. Accounts receivable increased approximately $3.3 million on a sequential basis to $15.6 million. Inventory increased sequentially by $5.5 million to $19.2 million to accommodate our growing customer demand.

Working capital increased to $19.9 million from $15.4 million. We used approximately $6.3 million in cash to fund operations in the quarter.

As Chris mentioned previously, we raised approximately $69.2 million in net proceeds in our IPO by issuing approximately 5.5 million shares of common stock, which includes the underwriter's option to purchase additional shares. We used $5 million of these proceeds to retire our mezzanine debt. The proceeds from our public offering and debt repayment will be reflected on our Q3 balance sheet.

Turning now to our outlook. We expect revenue for the third quarter to be in the range of $27.4 million to $28.9 million, reflecting 36% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA to be in the range of $0.3 million to $1.8 million.

On the bottom line, we expect non-GAAP net income to be in the range of $0.2 million to $1.7 million, and non-GAAP EPS to be between $0.01 and $0.09 per share, based on a weighted average diluted share count of approximately 18.6 million shares.

Given the accelerating demand for our endpoint ICs, we are increasing our 2016 estimate of endpoint IC sales. We now expect endpoint IC volumes for the full year to be between 4.9 billion to 5.1 billion units, up from our prior estimate of 4.3 billion to 4.5 billion units.

With that, I will turn the call over to the operator to open the question-and-answer session.

(Operator Instructions) Mitch Steves, RBC Capital Markets.

Great quarter overall. So I just had two quick questions on the guide.

First from just a modeling perspective, it looks like revenues are going to be up sequentially about 8% at the midpoint, but it looks like EBITDA is maybe down a tad or at least flattish. So just from a modeling perspective, is that due to a little bit of a lower gross profit margin or is that more higher OpEx?

Thanks, Mitch. I'm going to ask Evan to take that question.

Thank you, Mitch. The Company's stated strategy is to invest our incremental gross margin dollars into our strategic initiative, and so the margin that we gave -- the guidance margin we gave reflects those investments.

Got it, that's helpful. And then secondly, it looks like, at least according to the press release, the upside was on the Monza chip side, at least for the June quarter, which is good because the margins went up. So I'm just wondering what was the difference between March and June in terms of the business mix since the margins were up about 60 basis points or so.

Mitch, this Evan. The gross margins can fluctuate on a quarter-to-quarter basis based primarily on product mix, even within the family, and that's what drove the margin increase from Q1 to Q2.

Got it. Thank you very much.

Thank you, Mitch.

Brad Erickson, Pacific Crest Securities.

Hi there, thanks for taking my questions. First, just competitively, particularly for your retail end markets, what specifically has been driving this tag IC acceleration you're seeing right now? Is it performance, you're more competitive on price? Just any color there of the recent market dynamics would be helpful?

Brad, this is Chris. Really what we are seeing is broad-based growth and accelerating adoption. We've seeing adoption in the core retail market segment and healthcare market segment, but really broad based across many industry verticals.

I used as an example, again, Delta Airlines recently announced that they're going to be connecting all airline luggage amounting to -- they manage 120 million bags per year. So broad-based growth is really the driver in the industry.

Got it. And then can you just quickly talk about where you are or how you're feeling about inventory levels in the channel and just your visibility heading into the back half of the year there? Thanks.

So again, this is Chris. In terms of inventory levels in the channel, we maintain and work on maintaining visibility into our channel partners, and we don't see any unusual activity in inventory levels. In fact, we see normal growth and normal business activities going forward.

Got it. And then one more if I could. Just wanted to touch on if you're seeing any uptick in terms of the fixed reader adoption versus the historically stronger, I think mobile handheld. And just how we should be thinking about that relative to your opportunities to hopefully at some point down the road drive better adoption of the ItemSense software. Thank you.

Eric, would you mind taking that question?

Thanks, Brad. As we highlighted, significant growth on the endpoint side of the business, but I can just comment on the platform base, solution selling motion. We feel great about the traction of the sales organization and their performance in driving the pipeline and business at the platform and reader and software side, so we feel very comfortable and are pleased with our progress.

Great. Thanks for taking my questions.

Thank you, Brad.

Troy Jensen, Piper Jaffray.

Congrats on a really solid quarter, gentlemen.

Thank you.

Chris, I would love to hear how this IPO has worked as a branding event for the Company.

Can you repeat the question again, Troy, I'm sorry?

Yes, sure. How has the IPO worked as a branding event for the Company? Have you seen an acceleration of hits on your website, or conversations with customers now that you're public versus private?

So for me personally and from my engagements with the sales team and talking to folks out in the field, the IPO has really elevated our brand and our visibility out in the market with our partners, with end customers -- with some of the larger end customer's opportunities we're seeing an uptick in the overall opportunity.

That uptick is both I believe representative of the overall growth in the market, as well as our presence in the market. And the IPO has really ? really has, as you're pointing to, has accelerated and made us better known out there in the marketplace not only in terms of who we are as a Company but in terms of the vision that we are driving. The vision of giving digital life to everyday items.

And just to follow up on Brad's question, one of the big concerns on the IPO was your visibility and your customers. And not as much the inlay partners but the end customers beyond them.

So I'd just be curious to know what you guys are doing to get visibility and how much inventory they hold. And my sense is there's really no big concentration at the end, but if you could just touch on that, that would be helpful.

Eric, would you like to take that one?

Sure, so, Troy, a couple things. From a model standpoint, know that our sales teams really work to make sure that they've got three levels of visibility into overall inventory. Specifically, I think as you said in that endpoint IC portion of the business.

Not only do we work to stay very close to the operational support of our inlay and tag and labeling customers, but we also work with that same OEM sales organizations to stay connected at the end-user level creating affinity for our endpoint ICs at the end user level. So we have the ability to track endpoint ICs at a project basis from an end customer level, but then also through the tagging ecosystem. So that's a key point.

But then, also remember our platform team is out setting and selling the full platform and creating -- get more visibility for us on end customer projects. I think I would just characterize -- I'd go back again to our uplifting guidance on endpoint ICs, we see the market accelerating and this is really about us making sure that we are prepared to support our customers as they see that same growth. So from an inventory visibility standpoint, as Chris said, very consistent with what we expect.

All right. Perfect, guys. Keep up the good work.

Thank you, Troy.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Hi, thanks, good afternoon. Wanted to just go back to the guidance in terms of full-year endpoint ICs, a fairly significant increase. And I know you talked about it coming from being fairly broad based.

But just given the amount of exposure in retail, what are you seeing or hearing either from your -- the end users or maybe the inlay customers? Are you seeing a broader deployment from existing customers? Are there some new programs that have come on or potentially some new retail customers? Just trying to get a sense within retail what might be driving the endpoint IC growth.

Jim, I think the answer to your question really is both. We are seeing increased adoption within existing end users as they expand to new categories and get enhanced usage models out of the categories that they are tagging, and we also see adoption with new retailers.

So we see broad-based growth existing and new across retail, but it's not just retail. We are seeing the same thing in other markets as well and among the ones I mentioned everything from healthcare to data centers to automotive. We're just seeing broad-based adoption with existing end customers as well as with new.

Chris, is that adoption the strength in the market, is it -- are you seeing anything in any particular geography, or is this fairly broad based again by region, geographic region?

Although we don't report geographic results, what we see today is the typical trend where we provide our products primarily to the point of manufacturing, that being again primarily, although not exclusively, into Asia. And of those products, the endpoint ICs or the reader ICs that go into or onto those products get deployed to end customers in Europe and North America.

And then we see our connectivity layer, our readers and gateways and our ItemSense software getting deployed primarily at the end customers, being again, primarily although not exclusively in Europe and North America.

One final question from me just on the competitive landscape. It's early, but I'm just wondering if you're seeing any repercussions from the AMS, the acquisition of the AMS reader IC business by STMicro.

We haven't seen any immediate repercussions. As you can imagine, we face competition on a regular basis and we have continued in investing in all layers of our platform including the reader IC. We have number one market share and I see significant growth in opportunities out in that business. So we are going to continue competing and we feel good about our market position today.

Thanks a lot. Congrats on the quarter.

Thank you very much.

Mike Walkley, Canaccord Genuity. Mr. Walkley, your line is open. Is it possible your own phone is on mute?

Can you hear me now?

Yes, we can hear you, Mike.

Okay, sorry, I'm not sure what happened on that. Just a follow-up question for me. First, congrats on the strong guidance.

With the endpoints really driving strong results now, did you look at your increased sales effort? Maybe you could talk about how you see this business mix changing over say a one to three year horizon just in terms of going after these customers using your endpoints and how that might pull through more readers, gateways and even the software? So how should we think about that mix changing over the next two years?

Evan, would you mind taking that one?

Good question, Mike. So the endpoint layer is growing rapidly. As you know, we sell a platform. And in fact when you sell endpoints, you sell more products in the connectivity layer and when we sell products in the connectivity layer we also sell more endpoints.

On a long-term model basis, we continue to think endpoints will represent greater than 60% of our revenues and the connectivity layer will represent greater than 30% of our revenues.

Great, thanks. And, Evan, (inaudible) is there any seasonality where you see maybe a greater mix of endpoints as retailers build inventory in Q3 for the holiday season and then maybe more of the readers, gateways are stronger in other quarters? Anything to think about in a seasonal mix?

And then also just while I'm on the seasonal mix, are you seeing anything with strong pull in early ahead of retail? And should you think that your business could be up again in the December quarter given how strong your last two quarters are from June to September?

Mike, this is Evan. So from a seasonality perspective, there may have been seasonality in our business as we look backwards. But as we look forward with regards to both your questions, if the mix is more in one quarter or another and if we'll see more endpoint IC sales in a given quarter. We think that seasonality is not a material portion of our business because we're so early in the adoption phase and it's growing so fast in many other verticals.

Okay, great. So as we look at business trends, you feel like it's normal demand with just overall adoption and you should continue to see a strong close to year end with your updated endpoint guidance?

That is what we expect, Mike.

Okay, great. And then, Chris, just a follow-up question for you on the big picture. Could you just update us on some of the projects you're working on in terms of end customers and feedback on your end-to-end solutions and some of the new solutions you talked about on the call, just how those are being received and those pilots are going?

I'm going to say a few words, and then I'm going to hand it over to Eric. We see, as I said before, continued broad-based adoption for all layers of our platform and our platform as a whole.

We have now paying ItemSense customers as well as more than 50 active POCs for ItemSense, and we feel that that growth in that layer is critically important, but again, we see broad-based growth across all layers of the platform. With that, I think I will hand it over to Eric.

I think keeping the note particularly about the solutions that we've launched as we highlighted over 12 in the last 9 months. The key for those solutions is really to provide tight linkages and partnerships for us with our ISV partners to really solve strategic and important end customer problems, and gain efficient end customer access for our sales organization as they sell as part of the ecosystem.

So I would say that while it's a relatively new selling motion for us, we feel great about our progress. Our POC traction from ItemSense through the connectivity layer all the way down to endpoints, that population of POCs and traction for the full platform we feel very, very good about.

Okay, great. Well congrats again, and thanks for taking my questions.

Thank you, Mike.

Mitch Steves, RBC Capital Markets.

Just a quick technical question or more value proposition. Since McDonald's is mentioned as a material customer, can you just walk us through what they gain by using the Impinj product line just from a high level, and how it could potentially be used for other restaurants in the future as well?

Eric, do want to take that one?

Sure. So McDonald's is utilizing our platform for direct-to-table food service. So it allows an end customer to order at a kiosk, take their receipt or card and go to their seat, and then be located by our platform in the McDonald's point-of-sale application, and allows them to bring meals directly to you at your seat.

So that's the use case that they are utilizing. From a progress standpoint rollout continues; good progress there. So we think it's just another example of how our platform is solving just a wide range of use cases and key problems for our end customers.

Got it. Thank you very much.

Thank you, Mitch.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Diorio for any closing remarks.

I would like to thank everybody for joining the call today, again our first call as a public company. I'm excited about our progress to date, and again thank you for joining us. And I hope everybody has a great rest of the week and a great weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.