Impinj Inc (PI) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the Impinj third-quarter 2016 earnings 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. Please go ahead.

Thank you, operator. Thank you all for joining us to discuss Impinj's third-quarter 2016 financial results. On today's call, Chris Diorio, Impinj's founder and Chief Executive Officer will provide a brief overview and our performance and our market. Evan Fein, Impinj's Chief Financial Officer, will follow with a detailed review of financial results and outlook for the remainder of the year. We will then open the call for questions. Impinj's President and CEO, Eric Brodersen, is also on the call and will join Chris and Evan and 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 from 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 statements of operation, 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.

Before moving on to the financial results, I would like to remind you that management will attend the RBC Technology Internet, Media and Telecommunications Conference on November 9 in New York. We hope to see there. I will now turn the call to Dr. Chris Diorio, Impinj Founder and Chief Executive Officer. Chris?

Thank you, Maria, and thank you all for joining the call. I'm delighted to be here with you today. We delivered a strong third quarter, exceeding our revenue and earnings guidance. Revenue grew 50% year-over-year to reach a record $31 million, driven primarily by accelerating demand for our endpoint ICs followed by growing demand for our connectivity products.

We view endpoint IC volumes as an indicator of RAIN market adoption and are excited by the accelerating demand we are seeing. On our August earnings call, we increased our estimate for 2016 endpoint IC volumes to 5 billion units at the midpoint. Today, we are again increasing our estimate for 2016 endpoint IC volumes, and now expect those volumes to be between 5.6 and 5.8 billion units, representing 63% year-over-year growth at the midpoint.

I'd like to spend a minute reviewing Impinj's vision and mission, then discuss that accelerating RAIN market adoption and our strategy to capitalize on it. Impinj's vision is digital life for everyday items. Our mission is to wirelessly connect those everyday items to applications. We are extending the reach of the Internet by a factor of 100 from today's powered electronic devices to items and delivering to the digital world each item's unique identity, location and authenticity, which we call item intelligence.

Our platform enables connectivity to those billions of everyday items and delivers that item intelligence to business and consumer applications. We see our vision of digital life for everyday items validated by accelerating RAIN adoption across many industries. For example, in automotive, Daimler is using RAIN to optimize their supply chain, record airbag assembly, as well as for kanban. Audi is using RAIN to track transport racks for vehicle doors, hatches and hoods, verifying delivery to the production line.

When I was at a RAIN alliance meeting in Japan a few weeks ago, one of our partners, 7iD, gave a wonderful talk about how Ford is using RAIN to automate vehicle delivery. At the same conference, another partner, Evanhoe & Associates, spoke about using RAIN for enterprise IT asset management. You can find this talk, the 7iD talk, and others highlighting the benefits of RAIN and it's growing adoption on the RAIN Alliance's website.

As yet another example in the retail market, Macy's recently announced that by the start of 2017 they now plan to have more than 60% of all items in most of their stores RAIN connected. And by the end of 2017 to have 100% of all items in all stores RAIN connected. While these examples highlight the broad-based adoption, we are driving our vision of digital life for everyday items by continuing to deliver joint solutions with our go-to-market partners.

We introduces three new joint solutions in the third quarter. In retail, our joint solution with TexTrace enables garment anti-counterfeiting and product authentication. In healthcare, our joint solution with Intelliguard automates managing and replenishing pharmacy medicine kits and trays. In transport and logistics, our joint solution with HID Global tracks returnable transport items. In total, we have announced 15 joint solutions in the last 12 months.

We also continue enhancing and marketing those joint solutions we previously announced. For example, on our second-quarter call, we highlighted a healthcare solution with Accruent for mobile medical device management, giving hospitals visibility into medical equipment utilization. Since then, we and Accruent have engaged in joint go-to-market activities around hospital workflow, generating sales opportunities in multiple hospital systems. These joint solutions are part of our strategy to capitalize on existing market opportunities and create new ones.

Another part of our strategy is to enhance our platform's reach and breadth. And on that front, we introduced a key new connectivity layer product in the third quarter. Our xSpan gateway is tailored to deliver the real-time identity of endpoints, passing through doorways, portals and entryways while moving down hallways or corridors. XSpan also has the aesthetics to blend into high-end retail stores and hospitals, yet is rugged enough for warehouse logistics and shipping environments. XSpan complements our existing xArray gateway which is tailored to deliver the real-time identity and location of endpoints on a store or factory floor.

Finally, I'm happy to note that Impinj won two awards this past quarter. We won the IoT Evolution Asset Tracking Award, which honors excellence in utilizing IoT technologies to automate asset tracking to increase efficiencies, reduce theft or optimize utilization. And we won the Seattle Business Magazine 2016 Tech Impact Award for emerging technologies, a notable regional award.

In summary, we delivered a strong quarter and we are incredibly excited to see our platform and our solutions efforts extend 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 the massive market opportunity. 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 fourth quarter of 2016. Evan?

Thanks, Chris. Before I review our third-quarter financial results, I want to remind you that with the exception of revenue or unless explicitly stated otherwise, today's statement of operations information is on a non-GAAP basis. All balance sheet and cash flow metrics are on a GAAP basis. A reconciliation between our non-GAAP and GAAP measures, as well as how we define our non-GAAP measures, is included in our earnings release available on our website.

As Chris mentioned, we delivered a strong third quarter. We achieved revenue of $31 million, representing 50% growth over the third quarter of 2015 and 19.3% growth over the prior quarter. Our growth this quarter was driven primarily by increasing demand for our endpoint ICs followed by growing demand for our connectivity products. Our gross margin for the third quarter was 53.6% compared with 53.4% in the prior quarter and 52.5% in the third quarter of 2015. Depending on product mix, gross margin can fluctuate from quarter to quarter. In this case an increase of 20 basis points compared to the prior quarter.

Total operating expense in the quarter was $14.4 million or 46.4% of revenue compared with $12.6 million or 48.3% of revenue in the prior quarter. R&D expense was $6.1 million or 19.5% of revenue. Sales and marketing expense was $5.1 million or 16.6% of revenue. G&A expense was $3.2 million or 10.3% of revenue. We ended the quarter with 230 employees compared with 224 at the end of last quarter.

GAAP net income for the quarter was $808,000. On a non-GAAP basis, we achieved net income of $1.9 million or diluted earnings of $0.10 per share using a weighted average diluted share count of 18.6 million shares. Adjusted EBITDA in the quarter was $2.2 million or 7.2% of revenue. As we have said previously, we plan to increase our investment level and in the near-term maintain EBITDA margins in the low single digits to enhance our leadership position and capitalize on the massive market opportunity.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of $62 million. Accounts receivable increased approximately $1.9 million on a sequential basis to $17.5 million. Inventory increased sequentially by $1.3 million to $20.5 million. Working capital increased to $85.3 million from $19.9 million in the previous quarter. This increase includes approximately $69 million in net proceeds from our IPO, offset by $18 million of debt repayment. For the three and nine months ended September 30, 2016, we used approximately $3.2 million and $9.5 million, respectively, in cash to fund our operations.

Turning now to our outlook, we expect revenue for the fourth quarter to be in the range of $31.5 million to $33 million, reflecting 43% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA to be in the range of $750,000 to $2.25 million. On the bottom line, we expect non-GAAP net income to be in the range of $750,000 to $2.25 million, and non-GAAP EPS to be between $0.04 and $0.11 per share based on weighted average diluted share count of approximately 20.2 million shares.

As Chris previously mentioned, given the increasing demand for our endpoint ICs, we are increasing our 2016 estimate of endpoint IC sales. We now expect endpoint IC volume for the full year to be between 5.6 billion and 5.8 billion units, an increase from our prior estimate of 4.9 billion to 5.1 billion units. With that, I will turn the call over to the operator to open the question-and-answer session.

(Operator Instructions) Brad Erickson, Pacific Crest.

Just to start on Macy's, you called out in the prepared remarks -- given that they're going to 100% penetration for RAIN over the next few years, it seemed like there a pretty good candidate for software to effectively optimize their utility for these RFID investments. Can you talk about Macy's or other, similar customers that are more deeply penetrated now as a prospect for ItemSense? And what the progress update is there? Thanks.

Thanks, Brad. So I'll take the lead-in to that question and then I'll hand over to Eric to talk a little bit more about it. We believe the Macy's announcement speaks to overall industry growth and opportunities. And within the retail market, but just within the broader market in general, it really validates the vision that we've expressed previously of when a retailer or another end customer starts adopting, they tend to expanded and grow and increase the items that they connect and the scope of the usages that they see for that growth.

So in terms of ItemSense, we see opportunities for a variety of customers going forward as they expand their use cases to leverage the data that we provide with our endpoint layer, our connectivity layer, and our operating system software layer, which is ItemSense. Eric, anything to add?

No, I think the main points I'd highlight is as you think about the retail space, Macy's and other customers are among our most long-standing deployments, deployment customers for RAIN generally. And that industry today is in the midst of really an evolution towards utilizing, always-on connectivity and fixed infrastructure for always-on connectivity to their items. That for us is the primary transition point retail customers to deployments that utilize software specifically, along with our gateway products. So that's really the transition point that will make retailers prime targets for that transition to software and fixed infrastructure.

Got it. And then maybe just by vertical, any more color you can provide on what drove the raise in the endpoint IC unit volume growth? Or guidance I should say, rather.

Really we see broad-based demand across multiple verticals. In the remarks we mentioned automotive, we mentioned ITS [tagging], we mentioned retail. And obviously other sectors are increasing as well. So there is no one particular vertical to point to. The growth and adoption is broad-based with existing customers and new customers as they deploy RAIN RFID to solve their business pain points.

Got it. And then one last one if I could. Just in terms of inventory levels, how are you guys feeling? The volumes have obviously come up significantly. Just maybe talk about your confidence level in terms of some of these new customers who've placed orders and not -- and guarding against taking on too much product, too fast, et cetera. Thanks.

I'll let Evan take that question.

Hi, Brad. We use several methods to conduct inventory levels. The primary one we use is by working closely with our largest inlay customers, and we're in a position now where our customers are desiring their endpoint ICs in very rapid fashion, so we feel comfortable that inventory levels are low.

And I guess I'll add that that visibility we've got, combined with the short lead time orders we're seeing from many of those customers, give us real confidence in the strong demand.

Got it. Thanks very much.

Troy Jensen, Piper Jaffray.

Thank you. This is Austin Bohlig on behalf of Troy. And first congratulations, gentlemen, on a very nice quarter.

Thank you.

Yes, first of all, just start with maybe for Chris or Eric, sticking with Macy's. Just wondering now what you guys are seeing with other customers doing full adoption? Do you feel many people are leaning that way and going beyond apparel?

So, I don't think we can speak to any particular customers in terms of the nature of their deployments, other than with what they've disclosed publicly. But as you know, Marks & Spencer's has talked previously a lot about their expansion. A couple of other retailers have talked about expansion; for example, Decathlon. And I would just get to the point that I said previously, which is that when a retailer or other end-user deploys RAIN, you tend to see the benefits, expand the connecting they do to more and more items, expand the number of categories, and then gain more and more value from connecting those items as they build out applications within their store. Eric, anything to add?

I think that's perfect.

All right. And then just one follow-up for Evan. Around gross margin, just wondering if the uptick this quarter how to do more with mix or volume or maybe a little bit of both?

Sure, yes, it's a little of both. Gross margin has increased for two reasons. One is that as customers adopt newer parts, newer products of our platform, maybe Monza R6 as an example, the gross margin profile of the Company tends to increase. And second, when the software and connectivity layers of the revenue grow relative to the rest of the platform, that also is a driver of margin and both of those were contributors this quarter.

All right. Well, good luck, gentlemen, in the fourth quarter.

(Operator Instructions) Jim Ricchiuti, Needham and Company.

Wonder if you could just talk a little bit about the competitive environment. Are you seeing any changes out there in either of the main parts of the business? I know software is a lot more fragmented, but just in general?

Yes, Jim, thanks for joining us. In terms of the competitive environment, we are seeing a similar competitive environment to what we have seen in the past. Some competition at all layers of our platform, but we retain our -- we believe we retain our strong market position and are continuing to drive and be very competitive in those segments. You've seen some other things going on in the industry; for example, QUALCOMM's proposed acquisition of NXP, and other things that are going on. But from our perspective, we are maintaining our focus on our business, our industry, being competitive, maintaining our market share, and growing our overall business.

Chris, you may have touched on this in the presentation, but I apologize if you did. But I wonder, can you talk a little bit about headcount and where you see it going? Where it ended the quarter and areas that you're looking to invest, expand in?

Evan had those comments, so I'll let him take it.

Jim, this is Evan. Headcount for the quarter ended at 230 employees. On our website today we have an additional 20 open requisitions. We will continue to hire beyond those 20 into 2017 and to fund some of the strategies that we've talked about previously on our calls. Those include R&D strategies like enhancing the platform and ubiquitous reading, and sales and marketing strategies like expanding verticals and developing joint solutions.

Okay. And it's -- you're still in clearly a very rapid growth phase, and I'm wondering, though, are you seeing any signs of increased seasonality around the business?

Jim, this is Evan. We're not seeing any increased signs of seasonality. As you know, we are in the very early stages. It's tough to know on an ongoing basis exactly what that is, but today we don't see much seasonality.

Okay. Thank you.

Mike Walkley, Canaccord Genuity.

Congratulations on the strong business trends. Chris, just kind of building on the last question about competition, it seems like not too long ago you just crossed 1 billion endpoints shipped. And now, based on your updated guidance, you're going to be closing in on 2 billion not too far from now. So given that big ramp, is it just broad RAIN adoption? Or do you think within that, you're expanding on your 60% plus market share for endpoints.

So, Mike, thanks for joining us. I can't really speak to share right now. We feel that our market position remains strong and we are being very competitive out there in the market. What I can say is that we really see broad-based adoption, whether it's via the Macy's announcement or the things I said about automotive. We see adoption across a range of verticals. We see large end customers jumping in and being excited about the opportunities that RAIN affords them to improve their business operations.

And so, the growth you should see -- the growth that we are showing really is significantly a consequence of growing market demand. There may be some share shift in there, but right now it's not clear either way. All I'll say is we're maintaining a strong market position.

Okay, thanks. And then just building on your opening comments, given the endpoints are inflecting and growing so strong, how do you think about the pull-through of your connectivity business over time? I know you talked about it as a laggard, but do you think that it hits peak type of growth rates over time given your increased sales opportunities? Thank you.

Absolutely. We see growth in the connectivity layer, following growth in the endpoint layer. We see continued significant opportunities in the connectivity layer. As we noted, we just introduced our xSpan product, which we believe is ideal for transitions doorways, dock doors, and even for hospital rooms, for example, to scan hospital rooms across two -- one bed on one side, one bed on the other side. And those kind of opportunities that we see out there in the market are causing us to introduce more and more products.

So we see accelerating demand for our connectivity layer and we'll continue to invest and push that layer. As you think about it, endpoint ICs are going out there, they're going out on products. And there needs to be more and more connectivity products to read those, to get data from those endpoint ICs, and then the value proposition of our ItemSense software on top to extract the item intelligence and deliver it to applications becomes more and more important.

Great, thanks. With QUALCOMM buying NXP and QUALCOMM so big in the smartphone area, maybe you can discuss how you see RFID maybe entering the 1.5 billion smartphone market over time, if you think that's an opportunity?

We think that there is a significant opportunity for ubiquitous connectivity for readers, as part of your everyday world, and to be connecting to tags that are part of your everyday world. And whether the entry point for those next-generation readers is going to be in light fixtures or in doorways or in consumer mobile devices, it's hard to predict right now.

The end goal is to have reading capability or connecting capability to connect RAIN items in all of them. So I can't say anything specifically about smartphones here now, but just know that the -- think about what the future holds. And the future really holds connectivity: connectivity devices, ubiquitous connectivity to those items that are tagged in our everyday world.

Okay, thanks. And another question for me just on the market sizing. I think at some of these RAIN Alliance meetings, Amazon is starting to participate. So anything you can say maybe about them as a new RAIN member and the opportunities with that local company to you longer-term?

Yes, I can speak a little bit to that, because Amazon was at the RAIN meeting in Japan and I participated in a panel discussion with them at the meeting. I will note that not only did Amazon join but Lenovo Motorola joined, CNA, which is a large European retailer, joined. We have a lot of major end customers joining the RAIN Alliance. And those companies are tend -- at least going forward tend to be fairly active.

So they've spoken up at the meetings, talked about the positions and the things they need. And have really helped us growth the RAIN Alliance as a marketing alliance driven to deliver solutions for those types of end customers, whether it happens to be Amazon, CNA, or anybody else.

Great. Thank you for taking my questions and best of wishes for continued success.

Mitch Steves, RBC.

Thanks for taking my question and great quarter. So I'll first start off on a really big picture question here. You guys have essentially beaten your expectations pretty materially twice now, so the compares next year are going to be a lot harder. So I'm just wondering, first, are you still going to be able to grow at 25%, 20-25% in 2017? And then secondly, just for modeling purposes, can you maybe help us out with some seasonality throughout the year? Just generally, or if you think it will be roughly the same type of growth throughout 2017.

This is Chris. I'm going to start off and then I'm going to hand off to Evan. And I'm just going to start by saying that we are very excited about the market opportunity ahead of us. We really do see broad-based adoption, excited about our prospects and I'll hand it off to Evan to talk about the details.

Sure. Hi, Mitch. So as you note, demand for our products and our platform remains very strong. We give guidance quarterly. And so we are -- for example, gave guidance today on the fourth quarter. In February we will give guidance on the first quarter, but we will give an annual endpoint units shipped range for all of 2017. That will then shed some light on how we're thinking about 2017.

On the long-term model basis, we continue to believe in the 25% revenue growth rates that we have cited previously on our S-1. On the seasonality question, as I stated earlier, we do not believe there are material seasonality trends in our business today, since there are so many new verticals, new use cases and new customers adopting all the time.

Got it. Thank you. And then secondly, turning to profitability here. So, I remember when you guys first tried to go public, you were talking about breakeven, maybe $1 million in profit for the full year, but you're essentially running at that run rate now. Is there a certain level that you guys want to keep the operating margins at or do you think you can continue to expand? Because I think 7.2% was a lot higher than I think a lot of people were modeling.

Yes. It is our goal to continue to invest our incremental gross margin dollars in this massive opportunity that we see growing today and to enhance our leadership position. Those investments would occur in R&D and sales and marketing and on the G&A side now that we are a public company. We think that will keep EBITDA as a percentage of sales in the near term in the low single digits.

Got it, makes sense. And then one last one, just a bigger picture, broad question. So, Delta announced they are using RFID technology, a $50 million investment there. Can you maybe just talk through how Impinj would see revenue when a large customer -- maybe it doesn't have to be Delta or somebody else -- decides to purchase a bunch of both chips and connectivity readers? So can you just walk through how the sales cycle works for you guys in that case?

Yes, I'm going to let Eric take that one.

So, I think it's probably best to think in terms of Delta and that rollout as -- from a customer and Impinj technology usage standpoint. We are part of that deployment. I can't articulate specifics about that customer per se, because we really are not at liberty to do so. What I'd emphasize is that on our platform deployments, when we engage with customers and are selling into that solution sales motion, or engaged with an ecosystem of application partners and deployment partners, we will continue to sell and fulfill in an indirect fashion via those fulfillment partners.

And we will recognize revenue and monetize each layer of the platform. So, if the customer is deploying our fixed infrastructure, we'll sell our connectivity layer, our software layer. And then as well that will then in turn pull through our endpoint ICs. So it's really about a deployment model that can span everything from application integration via software layer to connectivity layers to endpoints. But also don't forget our reader IC business as well. We can participate in deployments as part of partner reader solutions as well.

Did that answer your question, Mitch?

Yes, that was great. Thank you very much. I'll jump out of the queue now.

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

I'd like to thank everybody for joining the call today and have a wonderful weekend. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.