Impinj Inc (PI) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Impinj First Quarter 2018 Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Chelsea Lish, Investor Relations.

Please go ahead.

Thank you, Gary.

Thank you all for joining us to discuss Impinj's First Quarter 2018 results.

On today's call, Chris Diorio, Impinj's Co-founder and CEO will provide a brief overview of our strategy, market and performance.

Eric Brodersen, Impinj's President, COO and Principal Financial Officer will follow with a detailed review of our first quarter 2018 financial results and second quarter 2018 outlook.

We will then open the call for questions.

Impinj's CFO Consultant, Linda Breard is also on the call and will join Chris and Eric in the Q&A session.

Please note that managements prepared remarks along with quarterly financial data for the last eight quarters are available on the company's website.

Before we start, note that we will 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.

Please see the risk factors sections in the annual and quarterly reports we file with the SEC for additional information about these risks.

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 operations results, except for 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 co-founder and chief executive officer.

Chris?

Thank you, Chelsea.

Thank you all for joining the call.

First quarter revenue is $25.1 million towards the high-end of our guidance.

Our endpoint IC sales exceeded expectations, even as our inlay partners reduced their inventory levels by several hundred million units in the quarter.

We continue to expect that our partners end point IC inventory correction will resolve mostly in the first half of 2018.

We also continue refining our views of channel inventory, taking steps to better map demand to end-customer projects.

We believe this enhanced visibility will enable us to improve inventory management and materially reduce our inventory in the second half of 2018.

Also, we successfully executed the product exchange I highlighted on our last call.

Overall, I'm pleased by how the Impinj team rallied during a difficult start to the year.

Based on our booking trends, and normalizing for the product exchange, we expect the first quarter to mark the low point for our endpoint IC sales volume.

We continue to anticipate 15% to 20% growth in 2018 end-user endpoint IC consumption, with our first half unit-volume shipments lagging end-user consumption due to the inventory correction.

Our systems business faced a difficult comparison versus first quarter 2017.

Deal timing, first-quarter seasonality, reader IC supply constraints, and an APAC reorganization led to a 40% revenue decline on a sequential basis, 29% decline on a year-over-year basis, and modest underperformance versus our expectations.

As a reminder, many of our systems deals are project based, meaning size, timing and mix are important factors in our quarterly results.

Despite the declines, we remain confident and enthusiastic about the quality and size of our systems opportunities.

Based on current projections, our reader IC supply will improve significantly in the second quarter and meet third-quarter demand.

I'd like to take a moment to expand on the systems business.

Our EMEA team continues to execute both on traditional RAIN channel opportunities and on new asset tracking and shipment-verification solutions.

A key goal of our first-quarter reorganization is to replicate those EMEA solutions-selling successes in the Americas and in Asia.

We have the right teams to execute this strategy, and we expect those teams to ramp productivity and build pipeline throughout the remainder of 2018.

Turning to the market, our first-quarter trade show activities included National Retail Federation, HIMSS and the RAIN Connections Summit hosted by Google.

We supported METI's announced extension of the Japanese Government Electronic Tag Initiative, to include connecting items at 19,000 drugstores, beyond the original 57,000 convenience stores.

We introduced a new reader module, the RS1000, targeted at embedded applications.

We implemented a new channel-partner program to help partners win business, deliver success and create value for their end-users.

We ended the quarter with 239 issued and allowed patents, which we view as a key asset and a core strength of our business.

And we published several case studies including 2 platforms deployments that incorporate ItemSense, xArrays and Monza-based tags.

The first, with Parkland Memorial Hospital, tracks hospital assets.

The second, with the University Teaching Clinic, improves visibility, procedure duration, and patient flow.

Finally, at the Connections Summit, our partner Aware Innovations highlighted a successful IT asset-tracking deployment at the U.S. Patent and Trademark Office, using our readers and gateways.

Bart Ivy, Chief Solutions Officer for Aware Innovations said, "We always test our equipment prior to installation in our customer's facility to ensure we get the best product to meet our customer needs.

Through this testing, we've learned that Impinj products are the most reliable, easiest to use and best value for our customers."

In summary, despite the first-quarter revenue decline, we took positive steps on internal and partner inventory, sales execution, platform development and strategic realignment that we believe position us well for the long term.

Based on positive bookings trends, and a second quarter starting backlog that is up sequentially, our second quarter revenue outlook is between $25 million and $27 million.

We remain vigilant about our use of cash.

We believe we are on track to make the first half of 2018 a turning point for our business.

Our CFO search is ongoing, focused on finding the right candidate to scale our business.

In closing, I would like to thank all the Impinj employees for their hard work and dedication this quarter and for their efforts towards our vision of digital life for everyday items.

I will now turn the call over to Eric for our detailed financial review and second quarter outlook.

Eric?

Thanks, Chris.

Before I review our first quarter 2018 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.

A reconciliation between our non-GAAP and GAAP measures, as well as how we define our non-GAAP measures is included on our earnings release available on our website.

First-quarter 2018 revenue was $25.1 million, compared with $26.9 million in the prior quarter.

We concluded the one-time product exchange we discussed on our prior earnings call and received payment in full.

Our first-quarter revenue mix, including the product exchange, was 77% end point ICs, and 23% systems.

As a reminder, the latter includes readers ICs, readers, gateways and software.

This mix compares with 65% and 35%, respectively, in the prior quarter.

Excluding the one-time product exchange, endpoint IC revenue was down 22% and systems was down 40% compared with the prior quarter.

First-quarter gross margin was 49.2%, compared with 50.5% in the prior quarter.

Revenue mix was the primary cause of the sequential decline.

Total first-quarter operating expense, excluding the impact of the restructuring, was $19.5 million, compared with $19.3 million in the prior quarter.

Research and development expense was $6.9 million, sales and marketing was $8.0 million, and general and administrative expense was $4.6 million.

We ended the quarter with 284 employees, consistent with our restructuring plan.

Our adjusted EBITDA was a loss of $7.1 million, compared with an adjusted EBITDA loss of $5.8 million in the prior quarter and in-line with our guidance.

GAAP net loss for the first quarter was $14.4 million.

Non-GAAP net loss for the first quarter was

$8.0 million, or $0.38 per share, using a weighted-average diluted share count of 21.1 million shares.

Turning to the balance sheet.

We ended the first quarter with cash, cash equivalents and short-term investments of $57.9 million compared to $58.1 million in the prior quarter.

On a cash basis, our net loss was offset by an $11 million increase in the long-term debt and a $5.2 million reduction in accounts receivable.

In March 2018, we increased our term loan to $20 million, refinancing approximately $9 million in term and equipment loans, and extending the maturity date to March 2022.

We also amended our senior credit facility to extend the maturity date of the $25 million revolving credit facility to March 2020.

We have not drawn on the $25 million revolver.

Our accounts receivable balance was $17 million, down from $22.2 million in the prior quarter.

Our balance sheet remains strong and we have sufficient capital to execute our plans.

Inventory totaled $54.7 million, up $7.6 million from the prior quarter.

As a reminder, on our fourth quarter earnings call, we forecasted total inventory growth at roughly $10 million to $12 million in first quarter 2018, declining sequentially through the remainder of 2018.

We now expect inventory to increase approximately $2 million in the second quarter, due to receipt of some systems inventory in the second quarter rather than the first.

We continue to expect inventory to decline meaningfully through the second half of 2018.

As we noted on last quarter's earnings call, most of this quarter's inventory growth is in WIP rather than finished goods.

We remain confident that our inventory does not have material obsolescence risk.

Turning now to our outlook.

We expect second quarter 2018 revenue in the range of $25.0 million to $27.0 million.

We expect adjusted EBITDA to be a net loss in the range of $7.75 million to $6.25 million.

On the bottom line, we expect a non-GAAP loss of between $8 million and $6.5 million, and a non-GAAP loss per share between $0.38 and $0.30 per share based on a weighted-average diluted share count of 21.3 million to 21.6 million shares.

On last quarter's call, we announced a restructuring plan in light of our reduced revenue outlook.

In first quarter 2018, we completed that plan by reducing our global workforce, tightening our product development focus, halting our Seattle office expansion, working to sublease the facility, and closing several remote offices.

As Chris noted, we remain vigilant about our uses of cash, with a leaner team intensely focused on executing our strategy.

I will now turn the call to the operator to open the question-and-answer session.

(Operator Instructions) The first question comes from Mike Walkley with Canaccord Genuity.

Chris, you talked about you refining your channel inventory view as you better map demand to end-customer projects.

Can you maybe walk us through what you're seeing for end-customer projects and if -- what gives you that confidence industry is still growing 10% to 15% despite the change in channel inventory?

So we engage with both our inlay partners and our end customers to understand -- to better understand channel inventory.

We see growth at the end customer level in retail segment and in other segments.

We are aligned with what others have stated -- cited in terms of inventory expectations of 15% to 20% growth in overall end customer consumption about those unit volumes.

And our data roughly match what you've been hearing from others in this space.

Great.

And then, just on the systems sales, a little softer than expected.

You listed some regions -- reasons.

Can you talk about -- it sounds like Q3, you're going to see a recovery on the component side.

But is this the business you expect to pick up sequentially in Q2 and then stronger into Q3?

Or just how should we think about what's going on that piece of your business?

Mike, this is Eric.

From a systems business standpoint, you talked about Q3.

I think we can talk about the idea that, we experienced a mix on the systems business that was modestly below our expectations.

I -- we can say that we expect the systems business to improve in Q2, but as I -- as Chris highlighted on the call, really there's a range of factors, including IC supply on the reader side, APAC restructuring.

But also, deal timing, as we've said before, these are project-based deals, and so the timing can play a factor.

And then Mike, just to answer the last part of your question regarding the reader ICs, we expect -- we had a supply shortfall in first quarter.

We expect to catch up significantly in the second quarter, and be fully caught up by third quarter.

Okay, great.

Last question for me, and I'll pass it on.

Just in terms of your overall inventory reduction, I think you talked about several hundred million unit reduction.

Can you kind of walk us through where you think it is relative to finishing that reduction?

I think you talked maybe can be upwards of a billion units.

So how far do you think we are in terms of that inventory correction?

And then what could that mean for your future end point growth, exiting 2018 versus the run rate now?

Mike, why don't I -- I'll stay focused right on the current assessment of what's happening in the channel inventory.

We know that our partners have burned down several hundred million units of channel inventory.

And we believe that keeps us on track for that channel inventory correction to be mostly completed in the first half of '18.

We know there's always going to be pockets of inventory that we need to continue to work.

But that's our current assessment of the inventory position that we highlighted on our previous call and the inventory correction work that we've yet to complete.

The next question comes from Nick Johnson with Piper Jaffray.

I'd like to hear more about your new channel partner program you had a press release on.

I'm trying to understand if this is going to help reduce sales and marketing by, may be turn it over more in the hands of your partners?

Or could it -- or is it maybe going to do the opposite and increased S&M, and you have to add training to help out the partners?

Nick, this is Eric.

The updates to our channel program, really are designed around better aligning our overall go-to-market and support of our channel through our overall extended channel team and channel partners.

And so we've implemented a tiered system that best aligns overall support from Impinj and overall capabilities of our team to those partners appropriately based on tier.

I think it will represent not a -- we don't expect it to be an increase from a sales and marketing OpEx standpoint.

We actually think it'll be more of an efficiency driver, as we optimize support around the core partner base.

So we're excited about that.

We've gotten great feedback from our partners.

And the key is about continuing to grow leverage through our channel partners into our target verticals and in verticals that they specialize in.

Okay.

Now taking a look at your -- the competitive environment for end point ICs, kind of talk through some competitive dynamics there.

And then when you receive their contracts or purchases from customers, how long do prices lock in for?

And is it different per customer, or is it at a yearly rate you have across your entire business?

So Nick, this is Chris.

From our standpoint, the competitive dynamic in the industry hasn't changed significantly at the end point IC level.

We continue to see NXP as a competitor, primary competitor, but we continue to be -- to be the -- really the market leader in this space.

We're the only company with an integrated platform, with strong intellectual property.

And we continue to drive the RAIN RFID business overall.

It's the only thing we focus on, and it's really what we focus on doing.

Can you add -- tell me again the second part of your question?

Yes.

Just wondering kind of how you lock in the prices for end point ICs with your customers, whether it be on a yearly terms, or if it's the same for all customers across the year or if it's different by customer?

Okay.

Yes, so it's generally the same for all customers.

We typically do pricing negotiations in the fourth quarter and those pricing negotiations generally last throughout the year.

Okay.

And then last question for me.

If you would just talk through your vertical performance versus expectations.

I know obviously, retail is #1, but maybe something that came up this quarter that was a bit of surprise?

So when you say verticals performance, you mean in terms of performance in other verticals, for example retail versus the other verticals?

Correct.

So we see -- we continue to see strong growth, especially in end point ICs in retail.

But we do see retailers beginning to pilot fixed infrastructure solutions, as they move -- as they begin to investigate alternatives to handheld reading.

We also see retailers investigating broader categories of products.

For example, cosmetics and beauty products and in many cases, food products.

At the same type, we see growth in other verticals healthcare, health care asset tracking significantly, and supply chain and logistics, those are our 2 core focus areas.

And then the other verticals our partners track, which include everything from automotive to healthcare -- I mean automotive to airlines to industrial to everything even all the way up to marijuana tagging.

Our partner base goes after those opportunities and they deploy our platform into those opportunities.

The next question comes from Craig Hettenbach with Morgan Stanley.

Chris, just question on framing kind of the first half of the year, as a bottoming process.

As you look out in the second half of the year, can you talk about what's your visibility is like today, and just maybe even at a high level, what you're expecting from the trajectory of the recovery into the back half?

So Craig, in terms of how we're seeing the market unfold, we're seeing the market unfold really according to our expectations.

And in terms of our execution, we're executing one quarter at a time against our plan and against our guidance.

Okay, understood.

I mean is there anything from a growth initiative, I know the dynamics of inventory you're kind of getting through that or hopefully getting through that from an inventory depletion.

But what are some things we should be watching for into the back half of the year again for the recovery?

I think you should just look at our overall performance relative to the expectations that we set.

You should look at continued growth of our overall platform sales, not just Monza, not just our end point ICs, but the overall systems business.

You should look at opportunities that we're going after in our strategic verticals, not only retail, but also healthcare and supply chain.

And you should measure against it -- you measure us against our ability to deliver against those opportunities.

Got it.

And then if I can follow up on the Japan Electronics Tag Initiative.

Can you maybe just at a high level talk about that initiative, and when you see something like that kind of where Impinj fits in?

Where potential competitors could be there and what's your advantage, if you will, to really leverage an opportunity like that?

Well, as you look at an initiative like that, which is -- even in the original METI announcement which was just convenience stores, it was 100 billion -- connecting 100 billion items per year, and now that the initiative has been expanded.

Obviously, there's many companies looking at that initiative and that opportunity.

For us, being the leader in our space, having the fully integrated platform, being traditionally a step ahead of our competition in terms of our innovativeness, and also our continued presence and efforts in Japan, which go back more than a decade, I think, position us well to be a key driver of the kind of the thought processes underlying that initiative.

I can't say whether -- how soon or one of them is going to ultimately be successful, but I can say is that there are many large initiatives to drive connectivity for everyday items and I think we're very well-positioned to go after, deliver solutions for, and win those opportunities.

The next question comes from Charlie Anderson with Dougherty & Company.

I wanted to start with gross margins.

I know it sounds like mix was a big factor there.

But if you could just speak to may be like -- the margins on for like-for-like products, their year-over-year sequential basis.

And any view on gross margins going into Q2 and back half of the year?

And then I've got a couple of follow-ups?

Okay, Charlie.

This is Eric.

I'll start by highlighting this.

On a like-for-like basis, the gross margins on our business performed according to our expectations.

It's the mix that's been our challenge on the overall gross margin in Q1.

So it's really that -- the mix as we highlighted the underperformance relative to our expectations around systems.

As it relates to the go forward, we're really expecting systems as a percentage of our business to increase in Q2, and that for us will be a driver of gross margin.

Okay, great.

And then, Chris, you had highlighted couple of calls, and then even last call to how important new products were going to be, the whole ecosystem approach.

I didn't hear anything in the script this time about new products.

I wonder if you could maybe update us there.

Is that something that's still going to be part of this year and can potentially help this year, or is it more of a next year type dynamic?

Any update on new products would be helpful.

Okay, sure Charlie.

So we did mention the RS1000 which is a new reader module that we introduced this quarter.

So that's one of the new products we introduced.

I guess what I want to say is we continue innovating across all layers of our platform.

We see -- we are the market innovator, we continue innovating, and we're going to introduce marketing-leading products as they become available.

But as we said on the last call, we don't expect new products to be a material percentage of our revenue in 2018.

Got it.

And then last one for me.

You gave a good overview of some of the end markets.

But I wonder maybe specifically on the grocery opportunity and food.

I think some of your partners sort of highlight that with a little bit of an increasing pace.

I just wonder what you're seeing as far as that is concerned and may be how you have any unique ways to get out that market relative to competition throughout your product set mix.

Yes.

So like our partners have said it, we see significant opportunities in food.

Whether it happens to be for example the METI initiative in Japan around convenience stores to perishable food products, to things going on in other parts of Asia, for example, in smart refrigerators.

So we see food products as being really the biggest long-term opportunity.

We don't -- we expect that opportunity to grow and mature over time.

But given its size, we don't expect a gigantic immediate ramp.

It's just going to take time to deliver against those opportunities.

What we're seeing very early on is some growth in the areas around food that deliver directly to consumers.

For example, fast food and fast foods type products.

We look at it as part of the retail space because it's primary -- primarily retailers that are selling those opportunities, and don't think -- just think retailers as in U.S.-type retailers, but thinking about worldwide retail.

And so, we continue to pursue it in terms of our overall retail initiative.

The next question comes from Mitch Steve with RBC Capital Markets.

Guys, just had a question on the second half commentary.

Since you're implying an end point guide, that's going back to mid-teens, if I look at the numbers and you breakout and imply that you're going to be doing about $20 million just on that.

So is it fair to assume just from modeling perspective that you'll see revenue growth in the back half of the year?

Just a second, Mitch.

So Mitch, when you think about our guidance methodology, really were -- as Chris said, we're focusing on executing and delivering against our guidance one quarter at a time.

And so from a second-half commentary standpoint, we want to stay really focused just on the same guidance we just outlined with respect to Q2, and continue to prove ourselves as we deliver on each quarterly guide.

Okay.

I guess one follow up then just to clarify here.

So is there any reason why the unit growth shouldn't mirror the end point revenue growth?

Meaning that if the units are up 15%, then end point shouldn't be 15%, in terms of revenue?

Well, there are obviously pricing reductions that happen in the beginning of the year, especially as we enter into our reduced price.

And as Eric said, there may remain pockets of inventory.

There always are pockets of inventory that we're dealing with, but overall, we expect end point IC consumption to increase at our direct end customers, a 15% to 20% for the year, and as we burn through our inventory correction, we expect our volumes to grow in the second half of the year.

And the key is the inventory correction is mostly in the first half as we said already.

(Operator Instructions) The next question comes from James Ricchiuti with Needham & Company.

I think in the last call, you talked about ASP erosion in the 8% to 10% range, or at least in a range that was similar to what you saw in the second half.

Is that what you're seeing thus far this year?

Jim, this is Eric.

We haven't seen any material changes in the pricing environment in the market since our last call.

Okay.

And Chris, I wonder if you could talk a little bit about these pilots regarding the fixed infrastructure in retail.

What's your sense as to how long these pilots could go on?

And I wonder if you could just elaborate a little bit about some of these pilots?

Because it does seem like that longer term that's the opportunity for you on the systems side?

Sure.

And Jim, as you know, we can talk for hours about this topic.

I guess I'm going to lead in and say that, in terms of fixed infrastructure, as I've said it previously, the more immediate opportunities are in the healthcare and supply chain verticals, because there isn't a pre-existing hand held model in those verticals, and in many of the use cases there, and most of the use that I can think of handheld aren't appropriate.

So the going in position is with fixed infrastructure whether it happens to be for tracking the location of boxes or pallets or items or assets, for example, in the case of USPTO.

And so there are significant opportunities in fixed infrastructure, and those are the key verticals.

Now turning to the retail space, what we see, as I have said it before, is that in general as a retailer gets closer to a 100% tagging and gets significant benefits in terms of inventory visibility, they want to look at either additional use cases, for example, maybe loss prevention or supply chain visibility for their items.

Or they want to free up their store labor to focus more time on customers and less time on doing inventory, in which case they look at using fixed infrastructure to give them either a fill in or complete inventory visibilities to what's in their stores.

Retail environments are very complex and dense.

And so as a consequence, those pilots tend to take a reasonable amount of time, relative to the other types of verticals.

But we of course do see that fixed infrastructure opportunity in retail as just a big opening, a gigantic promise for us on the future, and we continue to pursue it.

And really, the net upside of it is that at the end of the day, retailers want to enable omni-channel replenishment.

And we believe that it truly is that fixed infrastructure that will enable and allow them to go after omni-channel replenishment.

Are these pilots that you have underway in retail, are more of them in Europe or are they in the U.S.?

Are they split, mainly department stores, specialty stores?

I am just trying to get a sense as to where the activity is.

I know it is going to take a little while, but just in terms of where the activity that you are seeing.

You know what Jim, my best answer to that question is, yes.

Everywhere I go around the world there's opportunities.

I was just in Asia a week and a half ago, opportunities in Asia.

I visit Japan a lot, Europe, across North America.

The answer is just a straight up yes.

And I don't think I can go further beyond that.

We see opportunities worldwide.

Okay.

Well, lastly.

Is there any update you can provide us on ItemSense?

Sure.

Eric, you want to take that one.

Yes, so Jim, we (inaudible) on ItemSense in Q4 of '17.

And have more than 40 active ItemSense and full platform deployments and pilots underway.

And I would encourage to check out our website and review our most recently published case studies.

They're both in healthcare.

The Parkland and prestigious University Teaching Hospital instances and asset tracking are couple of important examples.

That said, work continues at pace on those platform deployments, but ItemSense as a percent of our revenue is still a small fraction.

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 just like to close by thanking everybody for joining the call today.

And I like to again thank the Impinj team for the execution this past quarter.

Thank you.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.