Impinj Inc (PI) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to Impinj's Fourth Quarter and Year 2018 Earnings 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 for Impinj.

Please go ahead.

Thank you, operator.

Thank you all for joining us to discuss Impinj's fourth quarter and year-end 2018 results.

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

Eric Brodersen, Impinj's President, COO and Principal Financial Officer, will follow with a detailed review of our fourth quarter and year-end 2018 financial results and first quarter 2019 outlook.

We will then open the call for questions.

Impinj's CFO Consultant, Linda Breard; and Impinj's Executive Vice President of Sales and Marketing, Jeff Dossett, are also on the call and will join Chris and Eric in the Q&A session.

Management's prepared remarks, along with quarterly financial data for the last 8 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 considered 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 financial numbers we discuss, except for revenue or where we explicitly state otherwise, are non-GAAP financial measures.

Balance sheet and cash flow metrics are on a GAAP basis.

Before moving to the financial results, I'd like to announce the company will attend the Morgan Stanley Technology, Media & Telecom Conference in San Francisco in February 26, and the Annual ROTH Conference in Dana Point on March 19.

We hope to see many of you there.

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.

We delivered a strong close to 2018 with record fourth quarter revenue.

We beat the high end of our guidance on revenue, adjusted EBITDA and non-GAAP earnings per share.

We also increased our cash, cash equivalents and short-term investments on a sequential basis by $1.4 million.

On a year-over-year basis, backlog grew, inventory declined, and we grew and recast our leadership team.

I am pleased with how we ended the year and feel we have strong momentum heading into 2019.

Fourth quarter 2018 endpoint IC revenue was in line with our expectations, returning to growth on a year-over-year basis.

On a sequential basis, an 8% decline in endpoint IC revenue reflects normal and expected seasonality.

We maintained steady supply and lead times while reducing our internal inventory, marking yet another quarter of solid execution.

We also shipped our 30 billionth endpoint IC in the quarter.

Reflecting on that 30 billion number for a moment, while it is already large relative to other Internet technologies, recall our vision is to connect and give digital life to trillions of items per year.

We are at the very beginning of our journey, leading a market whose opportunity is huge and whose secular trend has been and was again in 2018 strong growth.

Fourth quarter systems revenue exceeded our expectations, delivering another quarterly record highlighted by strong reader IC and gateway sales.

Our reader IC opportunities are broad-based, and reader IC revenue showed year-over-year strength but declined sequentially due to supply-fulfilling backlog in the third quarter.

Our gateway opportunities are significantly, although not exclusively, in the supply chain, driven by solutions we enable for shipment verification.

We are energized by our system's success in the fourth quarter and remain keenly focused on execution.

Turning to the market.

Retail adoption continues to grow with new retailers and brands announcing deployments and existing retailers and brands now piloting or deploying solutions beyond inventory visibility such as frictionless self-checkout and RAIN-based loss prevention.

We even have visionary retailers publicly asking for technology advancements like Decathlon did at the most recent RAIN Alliance meeting in Xiamen, China, where they presented a wish list that included embedded tagging solutions and RAIN readers in consumer devices.

Beyond retail, the Board of Governors of IATA, the International Air Transport Association, at their annual meeting in December, announced they have completed their first step toward a global plan to add RAIN inlays to all baggage tags.

And we see significant supply chain opportunities tracking pallets and cases as they move into or out of a dock door or facility.

Impinj's technology and solutions cost effectively address this use case, providing business-critical data that verifies shipments and enable automatic contract fulfillment.

In 2019, we will build on our traction in these verticals and others as we and our partners deliver solutions built on our platform.

Last month, we exhibited at the National Retail Federation show in New York City, the fourth time in as many years.

Our progress every year we attend continues to amaze me.

In 2016, our first year, most retailers were unaware of us, our platform or how we connected items.

Some returned to our booth multiple times to see our demos over and over.

The conversations back then centered on technology, how our platform worked and how improving inventory visibility could reduce costs and increase sales.

By contrast, conversations this year focused on enhancing customer experiences by expanding proven inventory visibility programs to frictionless self-checkout and RAIN-based loss prevention.

Our booth showcased these solutions as well as smart fitting rooms, enhanced supply chain visibility, loss analytics and robotic inventory taking.

We also showed a brand protection demonstration that first registered items to an Impinj cloud service and subsequently verified the item's authenticity, our first step in enabling item-based cloud services with our platform.

We see ever-growing opportunities in retail and are focused on playing an ever-increasing role in retail innovation, building solutions that leverage our unique position as the only company with a platform spanning endpoint ICs to services.

In another exciting development, I'm pleased to welcome Hussein Mecklai as Impinj's Executive Vice President of Engineering.

Hussein has more than 20 years of experience leading engineering organizations, including most recently as Vice President and General Manager of the Product Architecture Group at Intel; and prior to Intel, as Engineering Vice President of the Wireless Division at Infineon.

He has extensive experience in systems, silicon, radio and software engineering as well as in scaling businesses and turning those businesses into profit centers.

He previously received a national award for promoting diversity from the Society of Women Engineers for his commitment to recruiting, retaining and progressing women in technical roles.

We warmly welcome Hussein to our team and look forward to leveraging his talent and experience in transforming organizations; growing people; building teams; delivering our platform and helping us achieve rapid, sustainable growth.

In summary, Impinj delivered another quarter in which we outperformed our financial targets and delivered on our vision.

We saw continued RAIN industry growth with strong endpoint IC demand and significant platform opportunities in the supply chain.

We enter 2019 confident, excited and passionate about our opportunity to connect, locate and authenticate trillions of items -- of everyday items.

I would like to thank each and every Impinj employee for their dedication, commitment to our principles and focus on truly enabling the Internet of Things.

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

Eric?

Thanks, Chris.

As a reminder, except for 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.

Recall we took a $3.2 million accounting reserve in the fourth quarter of 2017 related to a onetime product exchange, for which we recognized $3.2 million in revenue in the first quarter of 2018.

Please see the exhibit appended to the written version of this earnings script available on our Investor Relations website for revenue comparisons related to this exchange for fourth quarter and full year 2017 and 2018.

Fourth quarter 2018 GAAP revenue was $34.6 million compared with $34.4 million in third quarter 2018 and $26.9 million in fourth quarter 2017, reflecting 1% sequential and 29% year-over-year growth.

Gateway sales were the primary driver of the fourth quarter overperformance versus our guidance.

Endpoint IC revenue declined sequentially and grew 25% year-over-year.

Systems revenue grew 20% sequentially and 37% year-over-year.

Fourth quarter revenue mix was 63% endpoint ICs and 37% systems.

We are pleased with our second straight quarter of record revenue, year-over-year endpoint IC growth and system strength.

2018 GAAP revenue was $122.6 million compared with $125.3 million in 2017.

Revenue mix was 69% endpoint ICs and 31% systems compared with 73% and 27%, respectively in 2017.

Endpoint IC revenue declined 7% year-over-year, primarily due to an ASP decrease on similar unit volumes, the latter negatively impacted by the channel inventory correction we discussed on prior calls.

2018 systems revenue grew 12% year-over-year due to strength in our reader ICs and gateways.

Despite the year-over-year revenue decline, we are pleased with our results considering the challenging start to the year, and we exit 2018 with strength in both our endpoint IC and systems businesses.

Fourth quarter gross margin was 49% compared with 50% in the prior quarter and 50.5% in fourth quarter 2017.

The sequential decline was due primarily to the mix change within our systems business and higher customer attainment of volume incentives than in the prior quarter, partially offset by lower excess and obsolete charges.

We view customer attainment of volume incentives as an indicator of the strength of our business.

The year-over-year decline was due primarily to higher manufacturing overhead expenses, which include excess and obsolescence charges.

Total fourth quarter operating expense was $18.7 million compared with $18.1 million in the prior quarter and $19.3 million in fourth quarter 2017.

Research and development expense was $7.5 million.

Sales and marketing expense was $6.8 million.

G&A expense was $4.4 million.

Adjusted EBITDA was a loss of $1.7 million compared with a loss of $900,000 in the prior quarter and a loss of $5.8 million in fourth quarter 2017.

The $4.1 million year-over-year improvement in adjusted EBITDA reflects, in my view, our determined focus on business execution and cost containment.

GAAP net loss for the fourth quarter was $6 million and for the year was $35.2 million.

Non-GAAP net loss for the fourth quarter was $2 million or $0.09 per share using a weighted average diluted share count of 21.5 million shares.

Non-GAAP net loss for the full year was $14.5 million or $0.68 per share using a weighted average diluted share count of 21.3 million shares.

Turning to the balance sheet.

We ended the fourth quarter with cash, cash equivalents and short-term investments of $56.1 million compared with $54.7 million in the prior quarter and $58.1 million in fourth quarter 2017.

Our accounts receivable balance was $18.5 million, down from the prior quarter and from fourth quarter 2017.

Our total end of 2018 federal NOL was $159.5 million.

Inventory totaled $44.7 million, down $4.5 million over the prior quarter and $2.4 million from the prior year.

We expect total inventory to continue to decline through 2019.

Before I transition to first quarter guidance, I would like to remind you of the seasonality trends we typically see in our business.

In the fourth quarter, lower endpoint IC volumes are partially offset by stronger system sales.

In the first quarter, annual endpoint IC pricing negotiations typically impact both revenue and gross margin, while system sales are seasonally lower.

Also in the first quarter, expenses tend to increase over the prior quarter.

Although these are typical trends, any number of factors can mask that seasonality in any given year, including private-based systems revenue where size, timing and mix all play an important role in our quarterly results.

Turning to our outlook.

We expect first quarter 2019 revenue in the range of $30 million to $32 million, an especially strong 24% year-over-year improvement at the midpoint of the range considering the $3.2 million reserve-related revenue we recognized in the first quarter 2018.

The sequential decline is in line with our seasonality expectations.

We expect adjusted EBITDA to be a net loss in the range of $5.9 million to $4.4 million.

On the bottom line, we expect a non-GAAP loss of between $6.2 million and $4.7 million and non-GAAP loss per share between $0.29 and $0.22 per share based on a weighted average diluted share count of 21.5 million to 21.6 million shares.

Throughout 2018, we were intensely focused on execution and regaining momentum in this gigantic market opportunity.

As we exit 2018, with 2 consecutive quarters of record revenue just behind us, we feel strong momentum.

I want to thank our team, customers, our suppliers and our investors for your ongoing support as we drive our long-term vision of digital life for everyday items.

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

(Operator Instructions) The first question comes from Troy Jensen with Piper.

So maybe first for Eric, just a question on the gross margins.

You discussed some of the mix stuff pretty well in the prepared remarks.

But did ASP erosion play at all into the sequential decline?

From a gross margin standpoint and ASP erosion in our sequential decline in Q4, that's not part of our gross margin impact in that period.

Linda, did you want to add to that?

Try to just add to that.

It really is primarily related to mix within our systems business, and then the other items that sequentially was impactful was our volume incentives, which is a good thing with volumes going up with our customers.

So those are the primary drivers versus ASP.

Okay, perfect.

Good to know.

And then how about for either one of you or anyone in the room, just thoughts on tag IC growth in 2019.

Maybe what was it in 2018?

And what do you think the growth rate of tags will be here in 2019?

Troy, so we don't have the numbers yet out from the industry analysts yet or from the RAIN Alliance.

So I don't think we're prepared to speculate.

The RAIN Alliance, as you know, collects data from all the key suppliers in terms of the endpoint IC volumes, and hopefully, those data will be published soon.

We will note that historically, the trends have been growing at somewhere in the range of 25% year-over-year growth going back the past 8 or 9 years, but we're not making any predictions for 2019.

Okay, that's fair.

And then how about just to that subject line here.

What do you think the ASP erosion is on tags?

So we can kind of back into it, we could expect to see tag IC revenue growth?

Troy, as you're familiar, this is the time period where we complete our annualized pricing negotiations -- pricing and supply negotiations with our partners.

Those concluded in line with our expectations.

But from -- really for competitive reasons, we're going to remain silent on the outcomes of those negotiations.

Okay, understood.

Last question from me, then.

You guys mentioned cashier-less applications.

Just curious if there's any U.S. deployments, or are these mostly overseas?

So Troy, this is Chris.

Looking around the room, I don't know of any U.S. deployments currently.

That doesn't mean there aren't any, but I am not personally aware of any.

There's obviously deployments overseas.

And as I've spoken to my prior calls, I've actually used some of them.

But I will say that we see, as I mentioned from the National Retail Federation Show, a lot of retailer interest in what they're calling frictionless self-checkout.

And when you have that self-checkout, the retailers also want to do RAIN-based loss prevention so that they can tie the 2 together and ensure that there's not an increased step when they go to frictionless self-checkout.

Our next question will be from Craig Hettenbach with Morgan Stanley.

Can you elaborate just on some of the systems' momentum that you're seeing?

Any incremental color by geography and also kind of key verticals to watch for in 2019.

So this is Chris, Craig.

And I think both Eric and I will probably have a couple answers to that question.

So in terms of systems, in terms of strong momentum just overall, we have 2 record revenue quarters, and our discussions with our customers, partners and industry groups and others highlight significant IoT market opportunity.

So we feel good about the future.

In terms of systems opportunities, we see good opportunities in shipment verification, and I'll let Eric say a couple of additional words there.

Yes.

The overall systems business, we had strength both in the reader IC business and the gateways on a year-over-year basis.

The gateway momentum was particularly focused, primarily but not exclusively, in supply chain and logistics, really with our continued focus on shipment verification where we're really helping those in the supply chain improve operational efficiency and reduce missed shipments.

Got it.

And then just as a follow-up, Chris, if I think through last year when you made some arguably modest adjustments to OpEx but nonetheless kind of aligning for what was a more difficult environment back then.

How do you feel today in terms of kind of cost structure relative to the growth opportunities you have over the intermediate term?

I think I'll let Linda take that question.

Linda, go ahead.

Sure, Craig.

So we made a number of adjustments coming into 2018, including exiting some facilities and a headcount overall reduction of approximately 9% of our headcount.

I think we feel good about where we're sitting today.

We're very thoughtful about where we invest and where we look for opportunities to either reduce investment or move it to other things that add more value to the organization overall.

So as we head into '19, we're very thoughtful about our investments, and we will continue to be diligent as we go forward and looking forward to the year.

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

I appreciate the color on the Q4 gross margin, but I was kind of curious also on Q1.

I know you're not guiding to a specific gross margin, but it looks like it will be down.

So I guess I'm just curious, mix aside, just kind of on a like-for-like basis, what's going on there in gross margin?

And then on OpEx too, I guess I'm curious, is there anything that's sort of seasonal about it?

I think you did mention in the script there are some seasonal expenses in Q1.

If you could just speak to those and the degree of those historically.

And I've got a follow-up.

Okay.

Charlie, this is Linda.

I'll take that one.

So from a sequential perspective, as we head into Q1, we've talked about the fact that we -- in the fall of '18, we do our price negotiations with our largest customers on our endpoint IC, which is approximately 70% of our business.

So those negotiations typically is what we've seen in the past.

In past both revenue and gross margin, we see compression on a gross margin perspective.

From an OpEx perspective, you typically see a step-up, not always.

There can be things that overshadow this, but you typically see a step-up in the first quarter of the year that's related to payroll tax resets, typically health care benefits and sort of increases that you see in the market every year, and you can have some other small things that might drive up the first quarter compare.

Okay.

Great.

And then, Chris, a question for you maybe just on new product cadence.

Kind of -- how is the pipeline looking there?

And then I know you talked in the past about wanting to sort of...

Charlie, do you -- oh sorry, go ahead.

Yes, I think you talked in the past too about wanting to do things that help speed adoption.

Maybe if you could just update us on where some of those efforts are.

So we focused significantly on engaging both with our direct customers and partners in the market as well as with end customers with their partners at our side to help those end customers solve problems, deploy solutions and really grow their market opportunities.

And I think it's illustrative that as a consequence of some of those efforts that we and of course others have put into growing and accelerating the market, you see significant end customer participation in the various standard bodies, in the RAIN Alliance and things along those lines to the point where, like I mentioned, there's one specific example in the earnings script.

We have one retailer even coming to -- forward to the industry and saying, here's the things that we need in order for us to adopt more of the solutions that you as an industry are offering.

And so you should expect us to be putting significant efforts going forward into driving and accelerating growth and adoption in the industry.

And Charlie, this is Linda.

One more thing on non-GAAP OpEx and sequential increase into Q1.

We have a fair number of trade shows that we attend in the first quarter, so it's a heavier investment in the first quarter than later in the year, too, from a seasonality perspective.

Great.

If I could just tack on one more to that.

Just kind of curious, with the negative EBITDA in Q1, how you guys are thinking about cash use for the year.

So cash use.

We are definitely very focused as a company, like I said earlier, on our investments and cash balances.

As Chris and Eric both talked about, we were up sequentially in the fourth quarter on a cash and cash investment perspective.

We will be focused on continuing to manage cash the way we have this past year.

And since we're not guiding any further out than Q1, it's hard to just take Q1 and extrapolate.

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

Just building on maybe that last question.

With the industry working through inventory levels, how do you feel about your inventory level?

Is it something -- it's where you want it to be?

Or is it something you can work down as a source of cash throughout the next year?

Mike, this is Linda again.

So we definitely will look at reducing inventory further in 2019.

We're not guiding to what number, but it would be -- it would generate cash in 2019 similar to our decline in 2018.

Okay.

And then just bigger picture on the industry.

Can you just let us know kind of how you feel about the inventory levels for the industry?

Are we through the lowering?

I guess you getting some incentive volumes is a good sign that we're through the inventory clearing.

But could you maybe just comment on that?

And then also on the backdrop of that, any change in the competitive environment in the industry post this year of inventory clearing?

So Mike, as of today, we believe the inventory correction is resolved as we've said previously.

And we do expect this period and going forward a return to more typical endpoint IC volume unit growth and trends overall.

So from a channel inventory position, we believe that's been completed and corrected.

You made a -- you have a secondary question about the competitive environment.

I'd harken back a little bit to my comments with respect to the volume and pricing negotiations on the endpoint business where really that process completed in line with our expectations.

But we won't comment any further really from -- due to competitive reasons.

We want to be cautious about how we talk about the overall pricing environment.

Okay.

Maybe just more qualitatively on endpoints or systems or any change in the competitors out there, any new entrants or anything that's changed in maybe the last -- last year during the transitional period for the channel inventory?

Yes.

So Mike, this is Chris.

In terms of those metrics, we haven't seen significant recent changes in the competitive environment.

Okay, great.

Last question from me.

Just on the airline industry, how should we think about maybe the size of that opportunity?

Should RAIN be adopted across all baggage tags with the penetration today?

And how large can that opportunity be longer term for the industry?

So a couple of points there, Mike.

So first, we anticipate a multiyear rollout, which is what IATA has basically said they're going to be doing.

It's going to be a [multi rigor] rollout not only in terms of the tagging but the infrastructure build-out.

Their own numbers, and you should look at their numbers that they quoted, but it's something in the range of a little bit north of 4 billion bags a year, and that's just bags alone.

That doesn't count any other freight or anything else.

They're just talking about bags right now.

But then there also is a significant infrastructure build-out across some airports and facilities worldwide.

So multiyear rollout.

We see opportunities for both endpoint ICs and systems.

And as I said on a prior call, at least I feel really great about the fact that the airline or aviation industry is moving forward because aviation is one of those industries that's very thoughtful and deliberate in terms of the technologies they adopt.

And the fact that they're moving forward with RAIN to drive a critical piece of their operations is really a -- it really signals the strength of what we and our industry have delivered.

The next question will be from Mitch Steves with RBC Capital Markets.

I just wanted to kind of focus a bit on the gross margin side here.

It looks like the systems business is getting to be a larger portion of revenue, but then the margins came down a bit sequentially.

Can you help me understand why that was?

And secondly, if you're seeing any sort of component pricing issues here, if it's -- or I guess, why the mix wouldn't drive the margins up?

Right.

This is Linda, Mitch.

The mix within the systems business really drives margin there.

So we have a lot of different products that we sell within the systems business, and that can definitely -- and did this quarter from a sequential perspective, definitely impacts the margin.

We talked earlier about higher customer attainment on our volume incentive, which is a positive thing with higher volumes of customers.

And those are the 2 factors that primarily, from a sequential perspective, impacted Q3 to Q4.

Okay.

I guess, just as a quick follow-up there, just in terms of the mix, I guess, what products were selling better than others from a high-level basis?

The primary change, if you refer back to Q3 when we were fulfilling significant amounts of backlog on the reader ICs, I think you can understand how the mix shifted in Q4 a little bit as reader ICs played a -- were a smaller component of the overall systems mix.

Ladies and gentlemen, this concludes our question-and-answer session.

I would like to turn the conference back over to Chris Diorio for any closing remarks.

I'd just like to close by thanking everybody for joining the call today and to again thank the Impinj team for their execution this past quarter.

Thank you very much.

And thank you, sir.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.